Assessment and diagnostics: Risk

The COVID-19 pandemic has underscored that development must be risk-informed to be sustainable. The initial public health shock and the cascading socio-economic effects triggered by the pandemic are undermining and reversing previous development gains. As shocks, disasters and crises are becoming more frequent, intense, and interconnected, a thorough understanding of a country’s risk landscape is an indispensable element of sustainable development efforts.

In the context of INFFs, such risk assessments aim to bring a risk-informed perspective to financing policy decision-making, with a view to help policy makers better understand, manage and address risks to a country’s ability to sustainably finance, and ultimately achieve, national development objectives.FN The ‘system at risk’ is made up of the institutions, mechanisms and actors that mobilise, allocate, spend or invest financial resources. They are affected by a range of shocks that cause risks to materialize: economic and non-economic shocks, such as fiscal and financial shocks, climate, environmental, biological and technological (including cyber) hazards (e.g. COVID-19 and the global recession it triggered, or slow onset hazards such as droughts or sea-level riseFN . Risks can also emanate from within the ‘system at risk’, e.g. political and institutional risks, or from specific financing instruments or policy choices.

COVID-19, ecosystem collapse, and the climate crisis also demonstrate the increasing complexity of the risk landscape, with shocks interconnected, cascading effects, and the systemic nature of risks. The accumulation of risk within environmental, social, political, and economic systems threaten countries’ ability to finance sustainable development, and ultimately to achieve the SDGs. Such systemic risks must be part of the INFF risk assessment.

When these risks materialize, they can destabilise part or all of the ‘system at risk’ and have a disproportionate impact on vulnerable people, increasing inequalities. To be sustainable, financing strategies must thus be risk-informed: able to finance the reduction of existing risk, ensure future investments do not create new risk, and providing instruments to cover the remaining residual risk and build resilience. The COVID-19 pandemic may have increased governments’ appetite for developing such strategies, and may help to reverse the tendency of underinvestment in prevention and preparedness.

This module presents approaches and tools to assess major risks to sustainable financing, with a view to identify policy actions that can prevent and reduce risk and improve the system’s resilience, including by assessing their feasibility and cost-effectiveness. It should pave the way for a risk-informed and risk-sensitive approach to financing for sustainable development in the context of INFF design and implementation. 

A regular and comprehensive risk assessment within an INFF helps governments strengthen and safeguard their ability to finance sustainable development outcomes over time, in the presence of increasing interdependencies, systemic risk, uncertainty and shocks.

More specifically, risk assessments help policy makers:

• Identify the biggest risks to the country’s ability to finance sustainable development, including systemic risks and related cascading effects;
• Identify the drivers of risk, and identify and prioritize measures and resources to address them;
• Understand the transmission channels through which different risks can impact the country’s ability to finance sustainable development, including the differentiated impacts they may have on different segments of the population (e.g. given existing vulnerability and structural inequalities) and financing implications;
• Assess existing capacity to manage identified risks;
• Identify opportunities for risk reduction policies and investments, enable innovation to prevent and reduce risks, enhance resilience and minimise the impact of shocks on the country’s ability to finance sustainable development in the future;
• Internalize externalities within financial decision-making for realistic financing and investment and extend the time-horizon of financing strategies, by encouraging a forward-looking perspective;
• Enhance coherence and facilitate more effective alignment between investments and policy interventions today and sustainable development outcomes envisioned for the future.

Together with findings from the financing needs and financing landscape assessments as well as the binding constraints diagnostic, risk assessments can inform strategic prioritisation of policy reforms – focusing them not only on financing gaps today, but also on potential losses and future resilience.    

In line with the broad understanding of ‘financing for development’ set out in the Addis Ababa Action Agenda, the ‘system at risk’ within an INFF includes the institutions, mechanisms and actors related to: public finance; private finance and the financial system; and the wider ability of the economy to grow in a way that is sustainable, inclusive and that avoids the creation of new risk while generating access to financing to meet development goals.

Both economic and non-economic shocks and disasters can affect the functioning of this system. Economic or financial shocks, such as an increase in global interest rates or a sudden change in commodity prices, have direct impacts on all aspects of financing sustainable development. Non-economic shocks and hazardsFN can also have a substantial impact on financing for sustainable development. It is critical to understand that non-economic risk creates economic risk and vice versa. Figure 1 provides an illustration of how a global public health crisis (the COVID-19 pandemic) can quickly become a multi-dimensional crisis, reaching far beyond the health sector and affecting need for, availability of, and access to, different types of finance – through both its direct effect on the health sector and its socio-economic consequences.

The nature of shocks and risks determines who is best placed to address them and the set of possible policy responses. Generally, the focus here is on public policy makers, as they have primary responsibility for financing sustainable development, and for creating an enabling environment for other actors, including the private sector.

For some shocks, considered endogenous to the ‘system at risk’ (e.g. those related to macroeconomic policy choices, political instability or institutional weaknesses), national policy makers can reduce (or even eliminate) likelihood of their occurrence, and mitigate their negative consequences (e.g. by improving the domestic enabling environment for investors or strengthening macroeconomic policies and regulation).

Many risk drivers and shocks, be they economic or non-economic in origin, are outside the sphere of control of domestic actors, or exogenous (e.g. a rise in global risk aversion, sudden changes in commodity prices, climate change), particularly in developing countries. In these cases, national governments can still invest in risk reduction and preparedness (e.g. by investing in resilient infrastructure) and manage residual risk. Reducing the likelihood of exogenous shocks on the other hand generally requires coordinated global action. When shocks are idiosyncratic, or not correlated to one another, national governments may be able to share residual risk (e.g. through insurance and hedging when markets are deep enough); some risks (such as currency risks) may be idiosyncratic from a global perspective and thus lend themselves to diversification by multilateral actors, such as regional or multilateral development banks.

In an increasingly interconnected world and complex global risk landscape, many risks are systemic, characterized by contagion and proliferation processes across domains, with the result that single events are able to cause system collapse. Unlike idiosyncratic risks, systemic risks are not diversifiable. In addition, there can be a high degree of uncertainty. Options to mitigate systemic risks or address uncertainty are more limited, calling for investments in the overall resilience of a system, and enhancing its ability to deal with different shocks and stresses (such as by strengthening social protection systems as further detailed in Box 4).  

Risk assessments undertaken in the context of INFFs consider and assess all these possible shocks (see Table 1). They thus inform domestic policies to address risk. They can also inform asks of development partners and global policy processes, with a view to strengthen development cooperation and create a more enabling international environment for financing sustainable development.

Depending on country circumstances, risk profiles and thus the focus and scope of risk assessments, will differ. Country-specific underlying factors – such as GDP composition, the level of openness of the economy, the size of the financial sector, levels of inequality such as gender inequality, the political context, institutional capacity to understand and manage risk, the socio-demographic situation (e.g. youth bulge, ageing society, urbanization trends), or geographical location – can increase exposure and vulnerability to shocks such as those illustrated in Table 1. Understanding these factors will help determine the drivers of risk and the type of policies that may be best suited to prevent, reduce and manage residual risks.

Independent of the context, a number of limitations can affect the depth and scope of risk assessments. They include:

• Uncertainty. Financing policy decisions are undertaken in a context of risk and uncertainty. Not all events can be anticipated, or their potential impact fully quantified. Technologies and instruments such as enhanced projections and early warning systems can help to close knowledge gaps and to better deal with inherent uncertainty, in addition to investing in system resilience more broadly.
• Varying understanding of different types of risk. Diagnostics tools may be more developed for some types of risks than others. There are also limited tools for understanding and addressing the systemic nature of risk or to explore interlinked, long-term effects. Improved coordination, common methodologies, terminologies and metrics for the analysis of risk data between sectors is much needed, including interoperability between systems to collect and analyse data across sectors, e.g. between climate transition risk, disaster risk, and financial risk assessments.
• Limitations in risk information. For example, large gaps in data and information on vulnerability (both social and environmental) are widely recognised as limiting factors in risk reduction as they prevent a thorough understanding of patterns of vulnerability and exposure to risk. Local stakeholders’ experience and insight can often supplement available evidence and help fill gaps in relevant data and information.
• Global systemic risks. National risk assessments can guide domestic policy action, but they cannot reduce all risks faced by a national economy, nor reduce globally systemic risks. Risk assessments at the national level must be complemented by regional and global systemic risk assessments and measures, with an emphasis on the needs of the poorest and most vulnerable countries.     

The suggested approach mirrors principles and approaches developed in the disaster risk reduction, resilience and economic/financial risk communities. Figure 2 illustrates the steps that countries can take to undertake risk assessments to inform the design and implementation of INFFs. These steps recognize that different policymakers and experts may be aware of the range of risks that are relevant to their country and specific policy area contexts. Thus, in the first instance, the INFF risk assessment helps bring this knowledge together.FN It then supports policy makers to identify those risks that are most relevant to the functioning of their country’s financing system, and policy solutions that could be pursued as part of a forward-looking, risk-informed financing strategy (see building block 2 guidance).

Box 1 provides an overview of principles emanating from the Sendai Framework for Disaster Risk Reduction and how they could guide effective consideration of risk in an INFF.     

Step 1: Understanding the country’s risk landscape

The first step in an INFF risk assessment is to identify risks that the country is exposed and vulnerable to, and to understand the key underlying drivers. The aim is to look at the country’s risk landscape in as comprehensive a manner as possible, by drawing on a wide range of existing risk assessments and knowledge – looking across the spectrum of different risk types, and considering how exposure and vulnerability differ across sub-national areas or population groups.

Identifying relevant risks

No single assessment methodology exists that comprehensively assesses all risks or captures exposure and vulnerability to the full range of relevant shocks and crises. But this is neither necessary nor desirable (e.g. due to the differences in methodologies and approaches used to analyse different risks.FN Most countries regularly assess a variety of risks – e.g. in relation to public finances and debt sustainability, financial stability, disasters, or climate change related risks. To complement and support domestic efforts, the international community offers and applies a range of tools and approaches (see Section 4.2 for an overview of existing assessments of economic and non-economic risks, and cross-cutting assessments). These existing assessments, both domestic and international, provide a starting point and will ensure that already existing knowledge, systems and processes are utilised.

For example, the IMF fiscal risk toolkitFN facilitates a comprehensive and integrated understanding of potential shocks to public finance, including their scale, sources, and likelihood. Figure 3 shows common sources of fiscal risk that are covered by the assessment. It also illustrates the systemic nature of many risks, by reporting the fiscal cost of non-fiscal shocks, such as financial sector shocks, disasters and PPPs. The toolkit provides policy makers with a holistic picture of risks to public finance, a core part of the ‘system at risk’ in an INFF (see also Step 2).

Country contexts will determine which tools will be most relevant and which stakeholders should be involved. Building Block 1 Assessment and Diagnostics: Overview provides a list of public, private and civil society actors that may be involved. Consulting with them will be crucial to ensure that the perspectives, needs and experiences of risk of all relevant stakeholders are considered and to arrive at a comprehensive and shared understanding of the country’s risk landscape. It will also be helpful in assessing and understanding the links among findings from different types of risk assessments. 

The financing landscape assessment (see building block 1.2 guidance) can also provide useful input. Analysis of the trends and distribution of current and potential financing can flag whether the country may be (or may become) exposed to particular types of economic risk. For example, dependency on specific types of external financing can flag exposure and potential vulnerability to volatility and external price shocks; low tax revenue capacity can flag vulnerability to endogenous fiscal risks; or low FDI may signal high perceived risk on behalf of investors resulting in low investment. Insight from financing landscape analysis can be used to identify whether additional tools (e.g. from those listed in Section 4.2) may be useful to complement existing knowledge.

Subnational risks

Exposure as well as vulnerability to identified risks will likely not be homogenous across the country. Specific geographical locations and/or population groups may be more exposed and/or vulnerable than others. To the extent possible, understanding of the country’s overall risk landscape should include an assessment of differentiated exposure and vulnerability levels, to leave no one behind. In the case of data limitations, consultations with relevant actors at the local and community level can provide relevant insight and should be encouraged (in line also with the principles set out in Box 1). 

The INFORM index (a collaboration between the Inter-Agency Standing Committee Reference Group on Risk, Early Warning and Preparedness and the European Commission) provides sub-national pictures of exposure and vulnerability to disasters at the province and village levels (Figure 4). Tools such as the UNDESA-UNCDF handbook on infrastructure asset management for local and national governments, can also be used to deepen a government’s understanding of the sub-national risk landscape of the country (see more detail in Section 4.2). While comparisons among sub-national areas may not always be possible, it can be used to assess exposure of critical assets and essential services to shocks and the vulnerability levels in municipalities where it is applied. 

Understanding underlying drivers of risk

Underlying risk drivers specific to a country can provide insight into the root causes of exposure and vulnerability to risk. Their identification can help pinpoint factors that may be increasing exposure and vulnerability across multiple risks.

Risk drivers include:

• Economic factors, such as GDP composition; levels of savings and investment; level of diversification of the economy; level of openness of the economy; exchange rate regime; size and composition of the financial sector (including the insurance sector); underinvestment in asset protection (including by private sector and households); digital inclusion; unemployment rates; infrastructure quality and availability.
• Geographical, climatological and environmental factors, such as physical location of the country; land use; urbanisation trends; climate change and variability; environmental degradation and biodiversity loss.
• Institutional factors, such as limited understanding of risk; limited capacity, resources and/or systems to address risk; non-risk informed policies that unintendedly create risk; gaps in risk governance (including lack of clear roles and responsibilities around who ‘owns’ different risks and who should share responsibility in managing them, corruption, non-accountable and non-inclusive decision-making process); limited information sharing between relevant agencies (e.g. between economic and disaster/ environmental agencies); lack of incentives to ‘reward’ pro-active risk-related action (prior to shocks and disasters); or broader political factors, such as political stability, representation, and related issues.
• Social factors, such as demographic profile and trends (e.g. youth bulge, ageing population); health and education and literacy levels; participation of civil society; e-participation; protection of civil and political rights; levels of poverty, discrimination and inequality (e.g. in relation to income, gender, ethnicity, race, disability).

Some of the tools listed in Section 4.2 include guidance on how these underlying factors can be identified. For example, credit rating agency reports usually consider structural features that affect sovereign creditworthiness, such as governance and political capacity and GDP levels, and show how external investors view risk in a country. The Intergovernmental Panel on Climate Change (IPCC) has published guidance related to factors that can increase countries’ exposure and vulnerability to climate change hazards in particular. The UN Common Country Analysis (CCA) guidance includes steps that can be used to identify economic, environmental and institutional factors that can influence exposure to a wide range of risks.

Step 2: Assessing the potential impact of identified risks on the country’s financing system and prioritization

Understanding the potential impact of identified risks on the financing system is at the core of INFF risk assessments. It enables policy makers to avoid or reduce future disruptions to their ability to finance sustainable development.

Assessing the potential impact on financing of all risks identified in Step 1 will likely not be possible. In these cases, focus may be placed on high probability and/or high impact risks.

Identifying high probability/ high impact risks

Risk matrices. Risk or hazard matrices can support comparison across risk assessments and identification of the highest likelihood/ highest impact risks (Figures 5a and 5b). Such matrices classify risks by likelihood and impact and are common in both economic (e.g. IMF Art IV consultations or FATF national IFF risk assessments) and non-economic (e.g. UN DRR national disaster risk assessments) risk assessments.    

Risk indices. Where direct comparisons between risks are possible, index-based approaches can also be used to support prioritisation (being mindful of the methodologies used, including in relation to the weights assigned to different indicators). The INFORM risk management index, for example, can be used to assess exposure, vulnerability and coping capacity related to a range of natural and man-made disasters, such as earthquakes, floods, tsunamis and tropical cyclones. UNCTAD’s Financial Conditions Indicators Index provides insight on key aspects of financial stability, by bringing together information on different financial and macroeconomic indicators, such as prices, volatility, foreign exchange rates, debt service ratios and capital flows, in a single assessment.

Having established a more limited number of major risks, the analysis of the potential impact on the country’s financing system can be narrowed down accordingly.

Linking risks to their potential impact on the country’s financing system

While some risks are already incorporated into existing economic and financial assessments, others will require additional analysis. For economic risks, impact on financing should be straightforward to infer and may be explicit in existing assessments. For example, risk matrices included in IMF Article IV Consultation reports highlight links to fiscal and financial sustainability. Risk assessments related to the use of specific financing instruments, such as PPPs, tend to focus on their potential fiscal implications. Countries also apply a range of approaches to quantify contingent liabilities related to fiscal risks, including assessments of historical data, where available, market information, and stochastic simulations or option pricing models.FN         

For non-economic risks, dedicated risk assessment tools and approaches often employ a broader lens and focus on the potential impact of shocks and hazards on sustainable development outcomes at large, which then need to be incorporated into economic and financial analyses. However, examples exist of how the economic impact of non-economic shocks and hazards may be assessed, especially in relation to disaster risk. For example, damage and loss databases (such as DesInventar Sendai) can provide useful insight into the monetary impact of past disasters. In 2015, the Global Assessment Report on Disaster Risk Reduction outlined an approach to assess the macro-economic and public finance repercussions of disasters, via the use of models that take into account major interlinked transmission channels (such as the decline of production capacity due to capital loss on the supply side, the decline in income and asset value on the demand side, the increased need for public expenditure in response, recovery and reconstruction combined with decreasing public revenues due to reduced taxes and fees, and the resulting worsening of the fiscal balance which in turn can further negatively impact the macro-economy via for example increasing debt).

To bring together analysis of different types of risk and support prioritisation, information can be compiled in a simple format such as that proposed in Table 2.FN Identifying the most relevant transmission channels (through which different shocks may impact the financing system) will encourage consideration of interlinkages between risks and the additional costs to the state, including through their differentiated impact on different segments of the population.FN The higher such costs, the stronger the case to invest in policies to address the risk.

Step 3: Identifying possible policy solutions

Some risks can be prevented, some reduced. Residual risks may be transferred or may have to be managed and absorbed once they are realized. In some cases, this can be accomplished by discrete policy interventions (for clearly identified risks with no systemic impact), in other cases it will require more complex approaches, focused on enhancing overall resilience of a country’s financing system. 

A mapping of existing policies to deal with risk in all sectors may have been undertaken as part of the initial scoping exercise within the INFF inception phase; if so, it should be referenced here, especially in relation to policies and measures related to the risks prioritised in step 2. Table 3 provides an illustration of relevant policy measures, but not all will be relevant or feasible in all contexts. They include policies related to the use of specific financing instruments as well as broader risk-related policies, such as investing in resilient infrastructure and setting up strong, risk-informed, adaptable and shock-responsive social protection systems (see also Box 3).

Measures are grouped in three broad categories:

• Preventing or reducing the likelihood of shocks occurring and of hazards turning into disasters, such as measures that address underlying risk drivers and that help avoid the creation of new risk;
• Reducing the negative and cascading consequences of shocks and hazards when they occur, such as preparedness measures that support countries to more effectively anticipate, respond and recover from shocks, crises or disasters;
• Managing or transferring residual risk, such as measures that ensure the system retains critical abilities during a shock, crisis or disaster and can recover afterward

A decision tree (see Figure 6 for an illustration) can guide the identification of gaps in existing capacity to deal with risk, and to determine policy options and requests for support. Priority should be given to risk prevention and reduction measures, especially those that address the underlying drivers of risk specific to the country context (in line with principles in Box 1). Gaps in both institutional capacity and policy gaps should be considered when assessing the system’s current resilience.    

In identifying possible solutions, countries will have to determine the feasibility and cost-effectiveness of their implementation. It will depend on available resources and capacity, and societal risk aversion/ appetite. Eliminating all risk will be neither possible nor desirable, and trade-offs must be considered; for example, very high levels of deposit insurance and capital requirements may stifle credit creation and growth.

Assessments of likely costs and benefits (e.g. cost-benefit analysis) allows for evidence-based policy decisions. Such analysis typically involves: i) setting out alternatives (including comparing action and no action); ii) estimating benefits (transmission channels identified in step 2 could be a starting point for estimation of benefits, which can be defined as avoided damages, losses or extra costs); iii) calculating benefit to cost ratios; iv) carrying out a sensitivity analysis to account for uncertainties; and v) measuring impact on society (distributional or stakeholder analysis). In the disaster risk community, cost-benefit analyses have been applied in several cases to help choose among different disaster risk reduction measures.FN

Policy makers may also identify policy solutions that do not require substantial financial resources to implement, bearing in mind these may incur non-financial costs to specific actors and thus still require time and political capital to be pursued (e.g. changes to regulatory frameworks). As part of the financing strategy (building block 2), consideration may be given to how additional financing may be mobilised or made available to support expanded risk measures.FN

This section provides an overview of existing risk assessment tools and approaches from the international community. For ease of reference, they are grouped according to risk areas they cover (economic risks, non-economic risks, and cross-cutting).

Examples of existing economic risk assessment tools    

IMF Country Risk Assessment Approaches    

Risks covered: Fiscal, Financial, Real, External, and Contagion (latter includes exposure through trade channels and cross-border financial sector exposure)

The IMF Country Risk Assessment Approaches are used as risk assessments for emerging markets (EM) and low-income countries (LIC), based on a common signal extraction approach, which assesses vulnerability to a crisis by establishing thresholds for key indicators and aggregating the indicators that exceed their thresholds. Depending on the country context different models are used. For example, for EM, a sudden stop model is used, which defines crises in terms of capital flows and emphasizes external indicators; for some LICs the food decline vulnerability index is used which examines natural events paired with declines in food production, food-dependence and governance indicators.

IMF Fiscal Affairs Department (FAD) Fiscal Risk Handbook 

Risks covered: Fiscal (including at the instrument level in relation to guarantees and PPPs)

The IMF Fiscal Affairs Department Fiscal Risk Handbook includes tools and diagnostics for the assessment and management of risks for SOEs, public guarantees, quasi-fiscal activity, and public-private partnerships.

IMF Fiscal Transparency Evaluations (FTE)

Risks covered: Fiscal

The IMF Fiscal Transparency Evaluations tool includes a pillar focused on fiscal risk analysis, management and disclosure, which provides ratings across 12 areas of fiscal risk management, including subnational risks for natural disasters, and is also used as basis for targeted, country level fiscal risk assessments by the IMF Fiscal Affairs Department.

Joint World Bank-IMF Debt Sustainability Framework (DSF) for Low-Income Countries 

Risks covered: Fiscal, External

This tool is used to guide borrowing decisions in LICs so that financing needs are considered alongside current and prospective repayment ability. Under the DSF, DSAs (see below) must be conducted regularly. The DSF analyses both external and public sector debt, focusing on the present value of debt obligations. Countries are classified into one of three debt-carrying capacity categories (strong, medium, weak) depending on their respective policy and institutional strengths, macroeconomic performance and buffers to absorb shocks. Indicators used draw on historical performance and outlook for real growth, international reserve coverage, remittance inflows, state of the global environment, and the World Bank’s Country Policy and Institutional Assessment (CPIA) index. Depending on the debt-carrying capacity different thresholds are used to establish level of risk. 

IMF Debt Sustainability Analysis (DSA)

Risks covered: Fiscal, External

The IMF Debt Sustainability Analysis tool includes: i) an analysis of a country’s projected debt burden over the medium-term (5 years), and its vulnerability to economic and policy shocks, based on stress test scenarios; ii) an assessment of the risk of external and overall public debt distress, based on indicative debt burden thresholds and benchmarks that depend on the country’s macroeconomic framework and other country-specific information.

Credit Ratings Agency Reports on Sovereigns

Risks covered: Fiscal, Financial 

The Credit Ratings Agency Reports on Sovereigns provide insight on default probabilities/ creditworthiness and assess future capacity and willingness to honour debt obligations, by looking at indicators of macroeconomic performance, public and external finances, as well as underlying structural factors that affect the country’s vulnerability and resilience to shocks, including political risk and governance factors.   

IMF Financial Sector Assessment Program (FSAP) 

Risks covered: Financial

The IMF Financial Sector Assessment program provides a comprehensive and in-depth analysis of a country’s financial sector (IMF and WB jointly responsible in developing and emerging economies; IMF alone in advanced economies). The analysis involves assessing the resilience of the banking and non-banking financial sectors; conducting stress tests and analysing systemic risks; examining micro and macro-prudential frameworks; reviewing the quality of supervision and financial market infrastructure oversight; and assessing development aspects such as inclusiveness, competitiveness, the quality of legal framework and of payment and settlement systems, and the financial sector’s contribution to economic growth and development.

IMF External Balance Assessment (EBA) Model    

Risks covered: External

The IMF External Balance Assessment Model estimates the average current account balance of an economy and compares it with a current account norm (derived by including desired, instead of actual, policies into the EBA model and refined to include country-specific factors not captured in the model). The difference between the actual and the norm, represents everything that drives an economy’s external balance away from its appropriate level – from inadequate macroeconomic policies to domestic distortions. If it’s greater than +/- 1% of GDP then the country’s external position is considered not to be in line with fundamentals.

IMF Art IV Consultations especially the Risk Assessment Matrix (RAM)    

Risks covered: Fiscal, Financial, Real, External (depending on context not all may be covered)

Article IV consultations provide an overview of key external and financial vulnerability indicators and include a risk assessment matrix (RAM) showing events that would materially alter the baseline path (which is the scenario most likely to materialize according to IMF staff). The RAM covers global and country-specific risks and includes an assessment of their likelihood and impact (low-medium-high) as well as related policy responses.

IMF-FSB Early Warning Exercise (EWE) (see also here)

Risks covered: Systemic tail risks

This tool assesses low-probability but high-impact risks to the global economy and identifies policies to mitigate them, including those that would require international cooperation. Draws on a range of quantitative tools and expert consultations. While the scope is global, vulnerability indicators that assess individual country risks to macro, financial, fiscal and external crises are monitored, and findings can also inform the design of national level mitigation policies.

UNCTAD Financial Conditions Indicators    

Risks covered: Financial

The UNCTAD Financial Conditions Indicators tool provides data on leading indicators of financial stress that allows policymakers to assess financial stability in real time before financial shocks are transmitted to the real economy. Can provide early warning of financial turmoil and inform a better understanding of likely and country-specific causes of financial shocks.

IMF-World Bank Public Private Partnerships Fiscal Risk Assessment Module (PFRAM)

Risks covered: Fiscal risks related to use of PPPs

This tool assesses the costs and risks arising from PPP projects, with a particular emphasis on the medium- to long-term fiscal implications.

Financial Action Task Force (FATF) guidance on national risk assessments for anti-money laundering/ countering the financing of terrorism 

Risks covered: Financial

This tool sets out approaches and guidance for assessing risks related to money laundering (ML) and terrorism financing (TF). Organised around three steps: i) identification of threats and vulnerabilities that may be the causes, sources or drivers of ML/TF risks; ii) analysis of nature, sources, likelihood and consequences of identified risk factors; iii) evaluation to determine priorities/ strategies around prevention or avoidance, mitigation or reduction, acceptance/ contingency (for lower risks).

World Bank ML/TF Risk Assessment Tool

Risks covered: Financial

The World Bank ML/TF Risk Assessment Tool is a methodological tool that enables countries to identify the main drivers of ML/TF risks. It can support both diagnostics and decision-making around policy design, including through scenario analysis. It comprises several interrelated modules, built around input variables which can relate to threats or vulnerabilities, at a sector or national level.

Tax Justice Network Illicit Financial Flows Vulnerability Tracker  (see also here)  

Risks covered: Financial

This online tool can support an understanding of a country’s vulnerability to illicit financial flows and of the channels responsible for such vulnerability (including imports, exports, banking deposits, direct investment, and portfolio investment). Enables comparisons across countries and over time.

Examples of existing non-economic risk assessment tools    

UNDRR/ISC Technical Report on Sendai Hazards Definitions and Classifications

Risks covered: Systemic risks, natural and man-made hazards

This tool provides an overview of hazards to be taken into account for comprehensive risk management and reduction, including risk assessments, scenario building, stress testing and policy, legal and regulatory frameworks.

UNDRR Global Risk Assessment Framework (GRAF)    

Risks covered: Systemic risks, natural and man-made hazards, climate change

The Global Risk Assessment Framework (GRAF) is a network for integrated assessment of systemic risk and to facilitate partnerships for the generation and sharing of data across disciplines and geographies as a basis for the development of policies and actions. GRAF provides a coordinated and integrated approach to address systemic risks through multi-hazard and multidisciplinary assessment and understanding of risk. It supports the achievement of global targets across post-2015 agreements (including the Sendai Framework, 2030 Agenda, Paris Agreement, New Urban Agenda) and informs and focuses action at the local, national, regional and global levels, within and across sectors and geographies.

UNDRR National Disaster Risk Assessment

Risks covered: Systemic risks, natural and man-made hazards, climate change

The UNDRR National Disaster Risk Assessment tool supports a holistic assessment of the different dimensions of disaster risk (hazards, exposures, vulnerabilities, capacities); the direct and indirect impacts of disaster (physical, social, economic, environmental, institutional); and the underlying drivers of risk (climate change, poverty, inequality, weak governance, unchecked urban expansion). It includes guidance on the various methodologies that can be used to aggregate and compare risk from all hazards.

CCORAL Risk Management Tool    

Risks covered: Climate change related disasters

The CCORAL Risk Management Tool provides an online support system for climate resilient decision-making. It supports policy makers to better understand how to manage the impacts of climate (through legislation, strategies, policy, planning and budgeting) and how to apply a climate risk management process in their specific country context. The CCORAL toolbox includes a variety of tools including vulnerability and risk assessments which users can choose from depending on their specific objectives.

UNDESA-UNCDF Managing Infrastructure Assets for Sustainable Development: A handbook for local and national governments   

Risks covered: Climate change and public health 

This tool provides guidance for local and national governments to undertake vulnerability and risk assessments related to the impact that climate shocks and/or infectious disease outbreaks may have on critical assets and related essential services. Dedicated climate chapter outlines a methodology for developing risk-informed adaptation and mitigation strategies based on the unique exposure, adaptive capacity, risk tolerance and risk appetite of the local landscape. Specific health chapter focuses on how to create and implement an “Emergency Response Asset Management Action Plan” by enhancing existing precautions and protocols with affected service delivery from critical assets in mind. Entire handbook emphasizes the value of risk assessments in maximizing sustainability of public infrastructure investments for current and future generations.

INFORM Index for Risk Management    

Risks covered: Disaster

The INFORM Index for Risk Management tool is a global, open-source risk assessment for humanitarian crises and disasters. Ranks countries according to three dimensions of risk: hazard and exposure (natural and man-made, e.g. earthquakes, floods, conflict); vulnerability (socio-economic and of particular groups); and lack of coping capacity (institutional and infrastructure).

WFP Integrated Context Analysis (ICA)

Risks covered: Disaster and climate change (mainly droughts and floods)

The WFP Integrated Context Analysis (ICA) tool is used to look at the intersection of food security and natural shock risk. Resulting analysis can contribute to identifying strategies for resilience building, disaster risk reduction and social protection, with a particular focus on the most vulnerable and food insecure populations.

Africa RiskView Model  (see also here)

Risks covered: Disaster (drought)  

The Africa RiskView Model is software used to estimate the number of people affected by a drought event during a rainfall season and the financing necessary to respond and support affected people in a timely manner. Combines crop monitoring and early warning, vulnerability assessment and mapping, operational response, and financial planning and risk management disciplines.

Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI)    

Risks covered: Disaster; climate change

This tool aims to provide Pacific Island Countries with disaster risk modelling and assessment tools and to facilitate dialogue on financial solutions for the reduction of their financial vulnerability to natural disasters and climate change. Specific tools include probabilistic hazard models; a risk information system; risk-based framework to direct resources of countries and development partners; and financing solutions related to fiscal risk exposure, financial disaster risk management and regional risk pooling. 

Secretariat of the Pacific Regional Environment Project (SPREP) community-based climate change vulnerability assessment    

Risks covered: Disaster; climate change

This tool is a bottom-up, ‘learning-by-doing’ vulnerability assessment approach. It focuses on current vulnerability to climate and non-climate related factors and on current adaptive capacity, and combines this with an evaluation of future climate related risks to support the formulation of strengthened adaptation policies.

Central American Probabilistic Risk Assessment (CAPRA) Platform    

Risks covered: Disaster (earthquakes, tsunamis, cyclones, floods, landslides, volcanic hazards)

The Central American Probabilistic Risk Assessment (CAPRA) Platform provides free-to-access software for probabilistic risk analysis. The platform calculates risk based on multi-hazard mapping exposure and physical vulnerability data; it makes use of cost-benefit analysis tools to support pro-active risk management and the design of risk-financing strategies.

Insurance Development Forum CatRiskTools catalogue

Risks covered: Disaster

The Insurance Development Forum CatRiskTools catalogue is an online searchable catalogue of catastrophe risk assessment tools.    

International Institute for Applied Systems Analysis (IIASA) Catastrophe Simulation (CATSIM) model    

Risks covered: Disaster

This tool provides an interactive simulation model consisting of five modules: i) direct risk assessment; ii) fiscal resilience assessment; iii) fiscal and economic vulnerability; iv) economic impact assessment; v) risk management/ reduction option assessment. Support policy makers estimate and reduce public sector financial vulnerability in the face of catastrophes, and evaluate possible risk management options.

UNDG Conflict and Development Analysis (CDA)    

Risks covered: Political stability

The UNDG Conflict and Development Analysis (CDA) tool assists with analysing a specific context and developing strategies for reducing or eliminating the impact and consequences of violent conflict. It provides a deeper understanding of the driving factors of conflict and the dynamics that can promote peace.

Examples of existing cross-cutting risk assessment tools   

UN Common Country Analysis (CCA)  

Risks covered: Most relevant to external economic risks; environment and climate change; and political stability/ governance risks

The UN CCA represents the UN’s independent, collective, integrated, forward-looking and evidence-based analysis of the development context at the country level. While broader in scope compared to INFFs and while not exclusively a risk assessment tool, the new generation of CCAs are based on multidimensional risk analysis and methodologies and approaches can be used to inform analysis of particular country-level risks and vulnerabilities – namely those arising from:

• The structure of the economy (part of the political economy analysis approach);
• The environment (with a focus on environmental pressures and their drivers, health of marine and terrestrial ecosystems and biodiversity, and their respective linkages to climate change and environmental degradation)

Governance and institutional structure (including areas related to perceived credibility of electoral systems; perceived legitimacy of the government; transparency levels; independence and inclusiveness of state institutions and administration – all of which can provide valuable insight into political stability and governance risk factors).

Source: 20 Dec 2019 Draft CCA Companion

OECD Resilience Systems Analysis (RSA) 

Risks covered: Economic, Disaster, Political, Environment/ Climate Change   

This tool takes a multi-hazard, multi-stakeholder approach to address the complexity and interlinkages between different risks (e.g. how disasters can also trigger economic shocks); ensures resilience is vertically integrated at national, subnational, community and household layers; and promotes cross-sectoral approaches. The typical process involves:

• Understanding the risk landscape in the particular context
• Looking at how identified risks affect society’s systems (national, provincial, community, household, individual)

Determining how resilient these systems are and what needs to be done to boost resilience.

UNESCWA SDG Financing simulators

Risks covered: Economic, non-economicESCWA’s national SDG Financing

Simulators employ a set of econometric methods to simulate and assess the potential financing that can be mobilized and directed towards financing the SDGs (including from public, private, domestic, international, and innovative means of financing). The SDG Financing Simulators analyze the scale of revenues and resources alongside the potential to generate additional financing to meet national sustainable development plans and strategies associated with any given growth in output at the national level. The simulators allow policymakers to simulate economic and non-economic shocks and their possible impacts on particular financing channels (e.g., remittances, FDI, etc.), thus enabling consideration of risks to be factored in the SDG financing strategy. By doing so, the national simulators can guide policymakers in identifying the domains that need further anticipation and mitigation to enhance the resilience of the financing landscape.

Sections 3 and 4 above already reflect on how the scope and focus of risk assessments will be influenced by specific country characteristics. In addition, the approach suggested in section 4 may need to be adapted depending on the following factors:

• Range and depth of risk assessment tools and systems already in use. In some countries, governments will have risk reduction processes and systems in place and will be familiar with the risk assessment tools and approaches listed in Section 4.2. In others, the range of existing insight on risk may be insufficient or limited to particular types of shocks – in these cases, governments can seek support from development partners, such as the IMF and UN agencies, to undertake additional multi-sectoral and multi-hazard assessments that could help facilitate a more holistic understanding of all relevant threats to their financing system and related vulnerabilities.
• Capacity and resource availability. Undertaking comprehensive risk assessments requires technical expertise, time and financial resources, both for the initial exercise when first designing an INFF and for ensuring continuous revisions to findings, as risk drivers, national capacity, and contextual factors change. In light of this, and in the face of potential limitations in capacity and resources that government may face, the scope of the exercise could be narrowed to focus on the most critical shocks and hazards, identified in consultation with experts familiar with the country’s context and financing system. However, in doing so, caution should be taken not to be reductive and overlook how risk changes over time, how economic, environmental, social, and political risks interact, and what new risks may emerge in future for which a country has no past experience. As above, development partners’ support may be sought to undertake the exercise.    

Key lessons from implementing comprehensive national risk assessments highlight the need for:

• High level political support and government leadership to ensure the assessment exercise is sufficiently scoped (including time scale and range of different scenarios to be considered), adequately resourced (e.g. through guaranteed commitments of expertise, staff, time), and that findings can be translated into action (overcoming issues related to short-termism);
• Coordination and engagement with national entities from as early as possible in the process to strengthen buy-in and ensure support for resulting policy actions;
• Coordination with development partners to avoid siloed assessments;
• A robust planning phase, including a review of learning from previous risk assessments, to ensure past experiences on what worked and what did not may be taken into account, and mistakes not repeated.

Country experience also shows that the process of bringing together information related to different types of risk can raise awareness of the links between them, increase collaboration across sectors (including within government), and promote new forms of cooperation (e.g. between policy makers and experts). It can encourage more effective and integrated planning at the sector level and support particular stakeholders (e.g. private sector actors) to take action for improved overall resilience.