PRESS RELEASE
In Washington, D.C.:
Contact: Sona Panajyan
Tel: (202) 473-9751
E-mail: spanajyan@ifc.org
NEW EVALUATION OFFERS FURTHER INSIGHTS INTO THE WORLD BANK GROUP RESPONSE TO THE GLOBAL ECONOMIC CRISIS
Washington D.C., February 23, 2012 – Today the Independent Evaluation Group (IEG) of the World Bank Group (WBG) released the second part of a two-phase evaluation of the institution’s unprecedented response to the global economic crisis that began in 2008. Findings indicate that 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. 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.
The new study, The World Bank Group’s Response to the Global Economic Crisis: Phase II, reaffirms and extends many findings of the first phase of the report: the World Bank responded to the crisis with an unprecedented volume of lending, greater than other international finance institutions and with accelerated disbursements. The Bank’s comfortable financial position at the onset of the crisis was a key enabling element. IFC kept the overall volume of its investments constant as it focused on protecting the portfolio. It launched several innovative crisis initiatives, although the implementation of some of them was delayed. MIGA’s countercyclical support in Eastern Europe was important for key financial institutions.
The sharp decline in headroom was 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.
The evaluation shows that the Bank extended support to the majority of severely crisis-affected countries, usually in the context of broader donor support packages, where its financial contribution was relatively small. The report also finds that the bulk of crisis support was focused on countries that turned out to be moderately affected. In some cases, the policy content of crisis-response operations was limited in addressing both short-term crisis impact and medium-term development goals. “Using multiple measures of country stress, the study showed that the Bank’s new lending reflected its pre-crisis lending patterns and had a low correlation with the severity of crisis impact in countries. This does not necessarily imply however that Bank Group support to the countries that received it was unjustified,” said Anjali Kumar, the lead evaluator and author of the report.
Looking at specific sectors, this evaluation shows that in several financial sector and fiscal management operations, crisis initiatives were not sufficiently tailored to needed medium-term reform, reflecting the difficulties of focusing on this in times of crisis. The World Bank stepped up funding to social protection in response to crisis. In this area, support to specifically target those who were made poor by the crisis was hampered by limited country capacity-knowledge, data, and pre-existing social protection mechanisms. As a result, a significant portion of the Bank’s support went to programs designed to protect the chronically poor and not those made poor by the crisis.
IFC’s volume of investments remained constant, reflecting a strategic choice to protect its portfolio. The expected deterioration in portfolio quality turned out to be an overestimation. Nonetheless, IFC had some successful crisis response initiatives such as the Global Trade Finance and Global Trade Liquidity Programs. MIGA’s financial guarantees in Europe and Central Asia contributed to stabilizing and restoring confidence, though they were limited in scope.
“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,” said Caroline Heider, Director-General, Evaluation, of the World Bank Group.
This roadmap would require a review of the Bank’s lending instruments as well as its overall financial position to ensure a balance between effective crisis support and preserved headroom. For IFC, it would include review of its credit risk stress testing methodology and for MIGA, an expansion of its business development capacity to address such circumstances.
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ABOUT IEG:
The Independent Evaluation Group reports directly to the World Bank Group Boards of Executive Directors. The results of its evaluative findings are discussed by the Boards and its studies are carried out independently of the Management.
To download the report and view World Bank Group Management’s response to the evaluation, visit: http://www.worldbank.org/ieg/crisis2