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

2

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

3

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

4

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

5

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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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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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