|**Box 3. Hurricane Ivan in Grenada**<br>Grenada provides a good example of the difficulties faced by a small island states hit by a major disaster. Hurricane|
|---|
|Ivan struck Grenada on September 7, 2004. Classified as a Category 3 hurricane with sustained winds of 120 mph<br>and gusts of up to 135 mph, Ivan left tremendous devastation in its wake. A damage assessment jointly conducted|
|by the Organization of Eastern Caribbean States (OECS) and the United Nations Economic Commission of Latin<br>America and the Caribbean (ECLAC) estimated damage over US$800 million or twice Grenada’s Gross Domestic|
|Product (GDP).|
|Following the passage of Hurricane Ivan, Grenada experienced a dramatic decline in revenues combined with|
|immediate needs for liquidity to finance relief, cleanup and emergency rehabilitations. Between September and|
|December 2004, the revenue shortfall was approximately 5 percent of GDP. The Government which had only|
|limited reserves quickly faced serious problem financing the public service bill. It also became evident that the<br>country would not be able to meet its debt obligations as they fell due.|
|To face this situation, the country engaged in a three prone approach to try to find the necessary liquidity:<br>**_Donor Assistance_**– Following the damage assessment, the Government convened a donor conference pledged in<br>excess of US$150 million to assist in the reconstruction of the island. These pledges included a US$10 million from<br>DfID to support payment of salaries in the education sector and US$ 2 million from the World Bank for the|
|financing of critical imports. While these contributions were particularly generous, it is interesting to note that these<br>were the only two donors able to provide immediate liquidity to the government despite the urgent needs expressed<br>at the conference. The remainder of the funds was earmarked for reconstruction project that were implemented over<br>the following two years.|
|**_Debt restructuring_**– October 4, 2004, less than one month after Hurricane Ivan, the Ministry of Finance issued a<br>press release on announcing Grenada’s intention to seek the cooperation of creditors in light of the economic crisis<br>precipitated by the hurricane. . With financial and legal assistance financed by USAID and DfID, the government<br>developed an exchange offer to its creditors to restructure over 85 percent of the Government commercial debt<br>(approx. US$265 million) had agreed to an exchange offer.|
|**_Tax increase_**– The government also passed revenue-enhancing measures yielding over 2 percent of GDP. These<br>included: (i) an increase of about 45 percent in the retail price of fuel; (ii) an increase in excise taxes on alcohol and<br>tobacco; (iii) a special levy on incomes over US$375 per month for a five year period; and (iv) improved tax<br>administration.<br>Despite all these efforts, Grenada’s fiscal situation remained challenging and the country still faced a financing gap<br>of 4.5percent of GDP for 2005 with total debtprojected to increase to 150percent of GDP.|

# 4. Sovereign Insurance for the Caribbean Islands

Caribbean countries are highly exposed to adverse natural events, which can result in disasters affecting their entire economic, human, and physical environment. On average, at least one major hurricane and numerous tropical storms cross the Caribbean each year. Other types of catastrophic events including earthquakes, volcanic eruptions, and tidal waves are less frequent can be as devastating, as demonstrated by the near total destruction of the island of Montserrat by a volcanic eruption in 1995. For many reasons, ranging from the growing concentration of assets to poor environmental management, the loss burden from natural disasters is increasing. Because of their small size, Caribbean countries have limited financial capacity to respond to adverse natural events. Larger countries can generally absorb the impact of these events by subsidizing the affected region with revenues from unaffected regions. This type of geographic diversification of risk is limited in the small island states of the Caribbean. The inability to respond effectively, physically and financially, often slows recovery, which exacerbates the poverty impact of natural disasters.

While Caribbean countries have limited capacity to spread risk geographically, their constrained borrowing capacity also prevents them from spreading their risk over time by accessing credit. An analysis of economic statistics from Caribbean Community and Common Market (CARICOM) indicates an average ratio of external debt to GNI of 86 percent, compared to 34 percent for low-income countries, and 20 percent for middle-income countries. Caribbean countries affected by natural disasters generally 17