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IEG evaluates World Bank response to financial crisis

By Amir Makar CAIRO: In spite of facing some macro-economic hurdles, countries that were better prepared to engage in the World Bank’s crisis-related financial sector operations were less affected by the global financial crisis, according to a recent report by the Independent Evaluation Group (IEG). IEG, which reports directly to the World Bank Group’s boards of …


By Amir Makar

CAIRO: In spite of facing some macro-economic hurdles, countries that were better prepared to engage in the World Bank’s crisis-related financial sector operations were less affected by the global financial crisis, according to a recent report by the Independent Evaluation Group (IEG).

IEG, which reports directly to the World Bank Group’s boards of executive directors but conducts studies independently, released late February the second part of a two-phase evaluation of the institution’s response to the global economic crisis that began in 2008.

The study “delves into the financial sector support provided by the World Bank Group to Egypt, which ranked among the top 10 countries in stress indicators regarding both financing needs and financial market stress,” according to an IEG statement.

“The immediate effect of the support was a positive impact over government finances which helped the stabilization effort, and its long-term objective was to assist further development of the enabling environment for financial intermediation, access, and increased private sector participation in the provision of financial services,” it added.

According to IEG, Egypt was the eighth largest beneficiary worldwide of net commitments by the International Finance Corporation (IFC) — a member of the World Bank Group — with $516.5 million, during the period of the crisis.

Moreover, the World Bank provided Egypt precautionary fiscal support with a $500 million credit line, “which the report highlights for having being prepared, approved, and disbursed swiftly,” IEG said.

Along the same line, the IFC provided the country with $300 million in credit targeted towards facilitating access to finance for small and medium enterprises.

Economic stress

“The majority of countries suffering high levels of stress benefited from World Bank lending, supporting relevant financial sector and fiscal management policies in response to the crisis,” IEG said.

Facing obstacles such as reductions in exports, growth, employment and capital flows from abroad — often compounded by large credit expansion before the crisis — these countries did not suffer a financial crisis, according to the evaluation report.

Countries such as Turkey and Mexico, where World Bank operations often covered several sectors with single development policy loans (DPLs) “tended to build incrementally on existing dialogue and were medium term in orientation rather than crisis related.”
“This reflected the speed with which these operations were prepared, as well as the absence of immediate crisis impact on these countries’ financial systems,” IEG said.

In addition, such operations proved — in some cases — to support useful medium-term reform.

However, IEG said, when it came to crisis-related fiscal management operations, “policy content did not always bear directly on the crisis,” where it sometimes did not reflect the necessary attention “to fiscal space where countercyclical programs were put in place,” and also fell short of medium-term engagement

Meanwhile, other countries which were neither prepared nor had any prior engagement, but nevertheless attempted to implement the short-term crisis response policies, experienced limited or negative results.

This category of countries included Egypt, India and Nigeria, where “opportunities for financial sector strengthening in key areas were not seized,” and also lacked significant medium-term reform content, likely reflecting the difficulties of focusing on this in times of crisis.

“Most countries were affected by a high degree of market turbulence and a significant increase in sovereign debt spreads, sometimes, as in Egypt, compounded by the fact that a portion of public debt was dollarized and faced significant reductions in nonresident holdings,” the report added.

Financing needs

“Support for countries’ gross financing needs, sometimes precautionary, and signals of support to markets were arguably the [World] Bank’s major contributions in these operations, and the precise sector vehicle was probably a lesser issue,” said the report.

The report explains that support in social protection “was hampered by limited country capacity to specifically target those who were made poor by the crisis,” namely by not being able to increase knowledge, data, and pre-existing social protection mechanisms.

As an effect, this was a factor among others that led to the bulk of social protection-related Bank support going to social safety nets targeted to the chronically poor.

The report concluded that in the face of continuing global uncertainties and slow recoveries, the need to improve future crisis preparedness was imperative, and specified that a clear priority was needed to prepare and endorse a “roadmap for crisis engagement.”

Caroline Heider, director-general of evaluation at the World Bank Group, said, “The unprecedented global crisis and scale of the World Bank Group’s response offer lessons for the Bank and the international community. What we need now is a roadmap for future crises. This will help provide better calibrated support to address the specific needs of severely and less-affected countries when necessary.”

“Such a roadmap would include a systemic analysis of stress factors and a decision-making process for blending country-level responses within a global strategy to apply scarce resources where they are most effective and could include a coherent package of lending and AAA support,” it said.

The roadmap could also review the extent to which headroom could be maintained to restore the Bank’s ability to respond to crises.

“Partly as a result of the magnitude of its lending response, the International Bank for Reconstruction and Development (IBRD) — the part of the World Bank that works with middle-income and creditworthy poorer countries — now has less headroom to accommodate similar levels of expanded crisis response were it to become necessary in future,” IEG said.

The sharp decline was reportedly “driven by declining global interest rates, a pre-crisis reduction in IBRD’s lending spreads and its predominant use of traditional instruments.”

Under these conditions, the rapid lending increase led to a considerable decline in the Bank’s equity-to-loan ratio that is projected to gradually decline further given the long repayment periods of IBRD loans, it added.

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