The World Bank Group’s Response to the Global Economic Crisis
Independent Evaluation GroupWorld Bank / IFC / MIGA
Anjali KumarLead Economist, IEG
February 2012
1
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; 17 received crisis support during 1993–2003
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IEG has Evaluated the WBG Crisis Response
The mandate of the Independent Evaluation
Group is toUnderstand, 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, instruments,
design and results in key sectors
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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 insufficient
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Lessons from WBG Response to Past Crises
Speed of response mattersQuality and focus are crucial for good
outcomes It is vital to attend to poverty
dimensions from the outset
Financing modalities matterAdditional instruments may be needed
Coordination with partners is critical, both external and internal Some quality issues were noted in the
reviews of past crises
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WBG Response to the Global CrisisPhase 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 guidance and monitoring
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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 response
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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
Phase II Findings: Some Reaffirmations
WBG Response to the Global CrisisPhase 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 further In line with other political risk insurers
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Volume and Distribution of Support- WB
Large increase in support Consistent with G20 strategy Reflected previous lending patterns Low correlation with severity of crisis Most results remain robust separating
IBRD /IDAMany factors explain these findings
Country demand, country performance, other IFIs
Signals to calm markets – especially, systemically important large borrowers
Quality of dialogue and engagement A credible counterfactual at the country
level is virtually impossible to establish Difficult to assess stress or support
needed in the midst of the crisis 10
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Growth Decline
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Incremental Lending Relative to Levels of Crisis: World Bank
Volume and Distribution of Support - Other IFIs / MDBs
Increased WB financing resembled other MDBs Bank response was somewhat greater Other MDBs also increased fast-
disbursing funds, mostly to MICs IFC’s Global Trade Finance Program
mirrored other MDB trade programs
Lending increases of other IFIs / MDBs were more correlated with crisis severity Excluding the IMF, which has a mandate
to respond to crises Also excluding the EU and the EIB:
focused on crisis-affected Europe
Do not analyse other MDBs’ overall response Comparisons limited to countries that
were common borrowers11
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Other Major Donors (incl. IMF)Other Major Donors (excl. IMF/EIB/EU)World Bank
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Incremental Lending Relative to Levels of Crisis: Comparisons with Other Donors
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 use The Special Development Policy Loan (higher
rate and shorter maturity) was scarcely used12
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 crisis
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Phase II Findings–WB Financial sector
Loans with some financial sector content doubled ($53 billion compared to $25 billion )
Little overall difference in focus between crisis-related and non-crisis lending
Few Bank clients suffered acute financial stress - such as systemic bank failures Partly reflecting pre-crisis Bank support
In deeply affected financial systems, the Bank’s policy loans had relevant content Financial role of the Bank was small relative
to overall support, and sometimes late
In credit constrained countries, lines of credit were sometimes slow to disburse
FSAPs had often provided early indicators But could not provide ongoing monitoring 14
0% 20% 40% 60% 80%
Loan components aimed at improving medium / long term access to credit/
financial services
Loan components in the financial sector designed to address longer term
structural issues in the banking system
Loan components designed to address short term liquidity / credit shortages in
the context of the crisis
Loan components designed to address bank / securiti es mkt impairment in short
run
High Financial Stress Moderate Financial Stress Low Financial Stress
Levels of Financial Stress and Areas of Bank Intervention
Short Term Bank Impairment
Short Term Credit Shortages
Medium Term Banking issues
Medium / long term access / inclusion
Phase II Findings : WB Fiscal Management
The Bank provided $23.3bn in 67crisis support fiscal management DPOs to 48 countries About 54% went to countries with
moderate fiscal stress
Relevant fiscal objectives included: Strengthened macroeconomic
management, fiscal sustainability, public expenditure efficiency and improved public financial management
Though in about half the DPOs, sector focus was not related to the crisis And about half supported measures
to protect social and infrastructure expenditures
Content of Crisis Related Fiscal DPOs
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Other sector focus
Macro mgmt fiscal stability
Public fin mgmt and procurement
Cost effectivness of public expenditures
Social expenditure protection
Tax policy /Tax Administration
Administration / Civil Service reform
0 10 20 30 40 50 60 70 80 90 100
Phase II Findings –WB Social Protection
Social Protection support increased dramatically from FY09 and is still above pre-crisis levels.
Lending was concentrated in middle-income countries in the most affected regions of LCA and ECA
Only a small share went to countries with severe crisis impact as support was a continuation of long-term engagement
The bulk of lending was for poverty-targeted safety netsThe Bank could not easily protect workers from labor market
contractions Due to the limited availability of flexible risk-
management programs Especially in countries with high informality
The Bank helped some countries by scaling up unemployment insurance and public works
And provided some others with medium support for institutional development
Readiness of countries’ social protection systems was a binding constraint In terms of available programs And relevant crisis data
Commitments for Social Protection Lending
by Approval Year (US$ millions)
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1,418 1,196 1,069 599
4,067 3,919
1,805
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1,000
2,000
3,000
4,000
5,000
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Committments, US$ millions
Phase II Findings –IFC
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IFC’s response: a series of global initiatives Pre-existing initiatives such as the Global
Trade Finance Program were successful Newer initiatives, though well designed,
faced initial difficulties E.g., the Bank Recapitalization Fund, the
Debt and Asset Recovery Program and the Infrastructure Crisis Facility
Facing initial constraints, IFC did not ramp up the volume or increase the risks of its investments But took significant steps to protect its
portfolio It intensified risk monitoring, undertook
stress tests, and took measures to contain costs
Its crisis contingency plans, based on past scenarios, may have been too conservative
2,250
3,000
2,000 2,380
3,460
2,840
FY09 FY10 FY11 as of end Feb. 2011
B. GTFP Target and Actual Commitments(US$ millions)
Target Actual
GTFP; BRF Target and Actual Commitments
N/A
1600
1200
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373529
FY09 FY10 FY11 (as of March 31, 2011)
Recap commitment by fiscal year (US$ millions)
Target Commitments Actual Commitments
Phase II Findings –MIGA
MIGA’s crisis response, concentrated in 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 countries
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MIGA’s New Business Compared to Berne Union Insurers, 2005–10
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 periods
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Going Forward
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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 development And geographic asset diversification