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The World Bank Group's Response to the Global Economic Crisis

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This is a presentation by Anjali Kumar, Lead Economist in the World Bank Group's Independent Evaluation Group (IEG) on the World Bank Group's response to the global economic crisis.

This is a presentation by Anjali Kumar, Lead Economist in the World Bank Group's Independent Evaluation Group (IEG) on the World Bank Group's response to the global economic crisis.

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  • Multiple dimensions of stress - high frequency dataExamples – financial sector: credit growth , stock market declines, bond market spreads, deposit declinesFiscal: not only debt to DGP but also, short term debt to total debtExternal: exchange rates, trade balances, capital flows (including remittances), exportsSectoral reviews: Based on complete portfolio reviews and 16-18 in depth case studies per sector Criteria established for defining crisis lending operations: not only during the crisis period but also, with crisis support objectives. Also, loans brought forward or loans increased in size. More in-depth review of IFC crisis initiatives – based on samples of the portfolio of each initiativeReview of MIGA crisis response Relative to other providers of political risk insuranceRetains some ‘formative’ traits, but much data is now definitive
  • On a weighted basis, commitments grew from $1.8 billion per year to $6.7 billion per year. More Bank clients experienced moderate financial stress In the form of credit and market contractions Often compounded by large credit expansion before the crisisMost Bank financial sector lending went to moderately financially stressed countries Often based on areas that lent themselves to swift preparation, Through prior or ongoing engagement Some operations supported useful medium-term reform. In others, opportunities for financial sector strengthening were not seized Reflecting the difficulty of achieving medium term reform in the midst of a crisisSupport for countries’ gross financing needs, sometimes precautionary, and signalling, were arguably the Bank’s major contributionSignals of support to calm markets was another key factor Financial sector crisis lending also included large volumes of financial intermediary loans meant to directly address the needs of small and vulnerable agents These generally failed to disburse rapidly in accordance with crisis needs
  • Low: 10 ctries, 11 operations, 13.2% of commitmentsMed: 25 ctries, 37 operations, 54.3% of commitmentsHigh: 13 ctries, 19 operations, 32.4% of commitmentsBut in about half these DPOs, sector focus was unrelated to the crisis: - as in El Salvador (primary education and science and technology policy) and Costa Rica (telecommunications and insurance)About half the DPO loans included provisions for protecting social and infrastructure programs Especially in countries with low / moderate fiscal stressSeveral provided concrete measures to protect / scale up pro-poor expendituresOverall, in the 48 countries receiving fiscal management operations several DPOs provided for concrete, often costed, measures to protect or scale up pro-poor expenditures (examples include Ghana, Poland, and Romania)Measures to create fiscal space in countries with countercyclical programs were ofteninsufficientIn many cases reflecting differences in the fiscal space available to client countries at the onset of the crisis Medium term structural reforms in public financial management were often includedGiven their long-term, institutional nature, they are not easy to track in non-programmatic stand-alone crisis response operationsA question raised is the desirability of a more focused shorter term instrument for crisis lending Precautionary lending for countries not deeply stressed: India – limited short term crisis content and limited medium term contentIndonesia – short term volatility – sound fundamentals
  • Social Protection: Mexico was by far the largest borrower for social protection during the global crisis, with $3.0 billion in loans. The Mexican economy was hit through contractions in income and employment and a shortfall in fiscal revenue. The number of poor people was expected to increase to 3.6 million.Resources were channeled through well-known programs that have shown positive results. Ninety percent of commitments went to programs targeted to the structural poor (the Oportunidades CCT and Seguro Popular health insurance for the poor). The other programs were much smaller and targeted to the newly unemployed (the Temporary Employment Program and passive labor market policies). The package of social protection support by the Bank was a continuation of medium-term assistance.Targeting crisis affected groups is difficultEnhancement of social safety nets should be a part of the on-going social protection agenda
  • IFC’s programs: An important part of IFC’s crisis response took the form of global initiatives (in most cases new), including the creation of a new subsidiary.The Global Trade Finance Program, a pre-existing facility whose ceiling was raised to $3 billion in late 2008, sought to extend guarantees to international banks to cover risks relating to trade finance. Global Trade Liquidity Program, funding of more than $4 billion as of early 2010, mobilized funding from IFC and partners to fund trade finance in individual banks. The $3 billion Bank Recapitalization Fund, established in early 2009 with IFC and partner funding, sto provide banks in emerging market countries with tier 1 equity and tier 2 subordinated debt to strengthen their financial capacity. The Debt and Asset Recovery Program, established in 2009 with a target of $6–8.5 billion contributed by IFC and IFI and private partners, sought to invest in specialized companies that manage and restructure pools of distressed assets and to provide complementary advisory services. The Infrastructure Crisis Facility, which aimed to mobilize up to $10 billion from IFC and partners, to ensure the availability of long-term financing for private or public-private infrastructure projects in emerging markets. Finally, the Microfinance Enhancement Fund, with an initial IFC investment of $150 million, together with provisions for possible further contributions by IFC and partners, sought to provide refinancing to up to 100 microfinance institutions in as many as 40 countries.
  • Transcript

    • 1. The World Bank Group’s Response to the Global Economic Crisis Independent Evaluation Group World Bank / IFC / MIGA Anjali Kumar Lead Economist, IEG February 20121
    • 2. Crisis Support is an Important WBG Activity The recent global crisis had a severe impact on WBG borrowers  Global growth slowdown: 3.9 % to -2.1%  Advanced economies: 2.6% to -3.3%  Developing Bank clients: 6 % to 1 %  Europe and Latin America: 7 % to – 2 % With a lasting impact on poverty  Estimated 50-64 million more poor people Motivating a strong response from the WBG  117 countries received Bank loans during 2009-10;2  17 received crisis support during 1993–2003
    • 3. IEG has Evaluated the WBG Crisis Response The mandate of the Independent Evaluation Group is to Understand, objectively, what worked and what didn’t, in WBG support; and Identify and disseminate lessons IEG prepared a series of ‘real time’ evaluations on WBG Crisis Response Review of WBG Response to Past Crises (2009) Review of 17 Country Case studies Phase I Evaluation of WBG Crisis Response (2010) Real time evaluation focused on volume, speed, and early results Phase II Evaluation of WBG Crisis Response (2011) Motivated by Phase I findings; focused on strategy,3 instruments, design and results in key sectors
    • 4. WBG Response to Past Crises Review of Past Crises showed:  Sharp spikes in WB (fast disbursing) lending  Soon reverting to pre-crisis levels IFC’s investments in crisis countries declined, on average, by 40 percent in previous crises –  And returned to pre-crisis levels in three years Past crises were largely country specific The Bank’s contribution was 10-20 percent  Korea: $10 billion out of $58 billion – 17%  Thailand: just over 10% Loans in the past were successful in supporting financial and public sector reforms  But the poverty focus was insufficient4
    • 5. Lessons from WBG Response to Past Crises Speed of response matters Quality and focus are crucial for good outcomes  It is vital to attend to poverty dimensions from the outset Financing modalities matter  Additional instruments may be needed Coordination with partners is critical, both external and internal  Some quality issues were noted in the reviews of past crises5
    • 6. WBG Response to the Global Crisis Phase I Evaluation WBG crisis response objectives (Mar 2009):  Protecting the poor, maintaining infrastructure, sustaining the private sector Quick and sizable response, as in past crises  Accelerations in disbursement  Aided by use of quick disbursing loans  Mostly to middle income countries  IDA – frontloading and special initiatives Readiness was helped by  A strong initial WB financial position Current knowledge, ongoing dialogue Overall attention to poverty was greater than in previous crises  Although with gaps in central guidance6 and monitoring
    • 7. WBG Response to the Global Crisis -Phase II Scope of the Evaluation Review of Bank support to client countries  Multiple dimensions of stress  Relative to other IFIs and MDBs Review of lending terms and instruments  Relative to other IFIs and MDBs Design and results in key sectors:  Fiscal, financial and social protection In-depth review of crisis initiatives  At IFC and MIGA  And factors underlying IFC’s pro- cyclical response7
    • 8. Phase II Findings: Some Reaffirmations  At the World Bank:  Sharp increase of IBRD financing  Accelerations in processing efficiency and disbursement speed  Positive role of established country dialogue and country knowledge  Contribution of the Bank’s significant initial financial capacity  At IFC and MIGA:  IFC’s investment response – limited, when its financial capacity could have supported moderate counter-cyclicality  IFC’s new initiatives – creative but requiring set up time  MIGA ‘s countercyclical support to key financial institutions in Eastern Europe8
    • 9. WBG Response to the Global Crisis Phase II Evaluation Findings The WB provided support to the majority of MICs suffering high levels of stress  Where it sometimes supported relevant financial and fiscal reform Most of the Bank’s crisis support went to countries that were moderately affected  Other factors also matter Many operations in moderately affected countries had limited short term crisis response objectives  Some also fell short of solid medium term engagement  During crises, it is difficult to focus on the medium term IFC’s crisis response reflected a strategic choice to protect its portfolio  And an overestimation of portfolio deterioration MIGA could have increased new guarantees further9  In line with other political risk insurers
    • 10. Volume and Distribution of Support- WB Incremental Lending Relative to Levels of Large increase in support Crisis: World Bank  Consistent with G20 strategy  Reflected previous lending patterns 700%  Low correlation with severity of crisis  Most results remain robust separating IBRD /IDA 600% 500% Many factors explain these findings % Increase in Lending 400%  Country demand, country performance, other IFIs 300%  Signals to calm markets – especially, 200% systemically important large borrowers 100%  Quality of dialogue and engagement 0%  A credible counterfactual at the country level is virtually impossible to establish Growth Decline  Difficult to assess stress or support needed in the midst of the crisis10
    • 11. Volume and Distribution of Support - Other IFIs / MDBs Incremental Lending Relative to Levels of Increased WB financing resembled other MDBs Crisis: Comparisons with Other Donors  Bank response was somewhat greater 12 1.2  Other MDBs also increased fast-disbursing funds, mostly to MICs Increase in Other Major Donor Lending 10 1 Increase in World Bank Lending  IFC’s Global Trade Finance Program 8 0.8 mirrored other MDB trade programs Lending increases of other IFIs / MDBs were as % of GDP as % of GDP 6 0.6 more correlated with crisis severity 4 0.4  Excluding the IMF, which has a mandate to respond to crises 2 0.2  Also excluding the EU and the EIB: focused on crisis-affected Europe 0 0 Do not analyse other MDBs’ overall response  Comparisons limited to countries that were Other Major Donors (incl. IMF) Other Major Donors (excl. IMF/EIB/EU) common borrowers World Bank11
    • 12. Instruments and Pricing - WB IBRD crisis lending was based on its traditional instruments, especially, DPLs, and was extended at historically low rates  Reflecting record low market reference rates  And a pre-crisis spread reduction Adverse market forces, increased lending, and limited increase in capital and reserves have led to a decline in the Bank’s financial ratios  Its equity to loan ratio has declined from 37.5 pre-crisis to 28.0 (Sep 2011) The Bank, like other MDBs, explored crisis specific lending instruments  Pre-crisis adjustments to the Deferred Drawdown Option (DDO) increased its use12  The Special Development Policy Loan (higher rate and shorter maturity) was scarcely used
    • 13. Instruments and Pricing - Other IFIs / MDBs IBRD crisis lending was lower cost than other IFIs  Comparatively long maturities Other MDBs / IFIs: More use of crisis specific instruments Adjusted normal lending terms  IMF surcharges for above-quota borrowing  IDB spread increase, applied to existing balances – and $3 billion on special crisis lending terms  ADB: Countercyclical Support Facility - surcharge, lower maturities, no IMF program.  AfDB: Emergency Liquidity Facility Better positioned to protect their financial capacity, even as they responded to the crisis13
    • 14. Phase II Findings–WB Financial sector Levels of Financial Stress and Areas of Bank Intervention Loans with some financial sector content doubled ($53 billion compared to $25 billion ) Short Term Bank Little overall difference in focus between crisis- Impairment related and non-crisis lendingnents designed to address es mkt impairment in short run Short Term Credit Few Bank clients suffered acute financial stress - Shortagesonents designed to addressquidity / credit shortages in such as systemic bank failuresontext of the crisis  Partly reflecting pre-crisis Bank support Medium Termnents in the financial sector Banking issues to address longer term In deeply affected financial systems, the Bank’ssues in the banking system policy loans had relevant content Medium / longonents aimed at improving  Financial role of the Bank was small relative term access /long term access to credit/inancial services inclusion to overall support, and sometimes late 0% 20% 40% 60% 80% In credit constrained countries, lines of credit were sometimes slow to disburse FSAPs had often provided early indicators High Financial Stress Moderate Financial Stress Low Financial Stress 14  But could not provide ongoing monitoring
    • 15. Phase II Findings : WB Fiscal Management The Bank provided $23.3bn in 67crisis Content of Crisis Related Fiscal DPOs support fiscal management DPOs to 48 countries 0 10 20 30 40 50 60 70 80 90 100  About 54% went to countries with Other sector focus moderate fiscal stress Macro mgmt fiscal stability Relevant fiscal objectives included:  Strengthened macroeconomic management, fiscal Public fin mgmt and procurement Cost effectivness of public sustainability, public expenditure expenditures efficiency and improved public Social expenditure protection financial management Though in about half the DPOs, sector Tax policy /Tax Administration focus was not related to the crisis Administration / Civil Service reform  And about half supported measures to protect social and infrastructure expenditures15
    • 16. Phase II Findings –WB Social Protection Commitments for Social Protection Lending Social Protection support increased dramatically from FY09 and is still above pre-crisis levels. by Approval Year (US$ millions) Lending was concentrated in middle-income countries in the most affected regions of LCA and ECA Only a small share went to countries with severe crisis Committments, US$ millions impact as support was a continuation of long-term 5,000 engagement 4,067 3,919 The bulk of lending was for poverty-targeted safety nets 4,000 The Bank could not easily protect workers from labor market contractions 3,000  Due to the limited availability of flexible risk- management programs 1,805  Especially in countries with high informality 2,000 1,418 1,196 1,069 The Bank helped some countries by scaling up 1,000 599 unemployment insurance and public works And provided some others with medium support for - institutional development Readiness of countries’ social protection systems was a FY05 FY06 FY07 FY08 FY09 FY10 FY11 binding constraint  In terms of available programs  And relevant crisis data16
    • 17. Phase II Findings –IFC GTFP; BRF Target and Actual Commitments B. GTFP Target and Actual Commitments (US$ millions) IFC’s response: a series of global initiatives Target Actual  Pre-existing initiatives such as the Global 3,460 Trade Finance Program were successful  Newer initiatives, though well 3,000 2,840 2,380 designed, faced initial difficulties 2,250 2,000  E.g., the Bank Recapitalization Fund, the Debt and Asset Recovery Program and the Recap commitment by fiscal year (US$ millions) Infrastructure Crisis Facility FY09 FY10 FY11 as of end Feb. Target Commitments 2011 Actual Commitments Facing initial constraints, IFC did not ramp up 1600 the volume or increase the risks of its 1200 investments  But took significant steps to protect its 373 529 portfolio N/A 20  It intensified risk monitoring, undertook stress tests, and took measures to contain FY09 FY10 FY11 (as of March 31, 2011) costs  Its crisis contingency plans, based on past17 scenarios, may have been too conservative
    • 18. Phase II Findings –MIGA MIGA’s New Business Compared to Berne MIGA’s crisis response, concentrated in Union Insurers, 2005–10 ECA, was strategically relevant  Under its March 2009 Financial Sector Initiative, part of a wider Joint International Financial Institution Action Plan The volume of new guarantees could have  Increased further, notably in riskier countries, given its substantial capital headroom Volumes of business declined relative to  Both private and public providers of political risk insurance in developing countries18
    • 19. Overall Lessons for Future Crisis Response Although very proactive during the global financial crisis, the World Bank Group needs to give thought to its role and strategy in future crises  Benefits of the Bank’s country focus go hand in hand with the need for a cross- country, global strategy to balance needs Crisis engagement strategy requires consideration of the role of the Bank relative to its partners  Especially in severely affected countries Early warning, preparedness and timeliness, including an eye on long-term capital adequacy, are essential for the WB, IFC and MIGA  New lending instruments could be considered  The Bank’s expertise in key areas should not be allowed to decline during non-crisis periods19
    • 20. Going Forward A strategic roadmap for crisis engagement is a priority  Ongoing, systemic analysis of stress factors  A decision-making process for blending country-level responses within a global strategy to apply scarce resources where they are most effective  A clear rationale, modalities, and instruments for supporting less-affected countries A framework for coordination with other IFIs A review of instruments for effective crisis support and meaningful medium term development  In the context of possibly constrained overall capital, income and allocations. At IFC, greater reliance on pre-existing arrangements  And better assessments of potential risk At MIGA , business development20  And geographic asset diversification

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