Key points:                                  Chapter 6 (473 KB) | Full Report (9 MB)
With the global crisis and the development emergency that now confronts many countries; the international financial institutions (IFIs) are facing an unprecedented rise in demand for financing. With the slump in private capital flows, estimates of developing countries’ financing gap could reach as high as $1 trillion.
Recognizing that the IFIs will need to fill some of this gap, G-20 leaders committed in London in April 2009 to support:
A tripling of resources available to the IMF to $750 billion; as well as a general allocation of Special Drawing Rights (SDRs) equivalent to $250 billion to boost global liquidity, $100 billion of which will go to emerging market and developing countries ($19 billion to low-income countries).
An increase in Multilateral Development Bank (MDB) lending of $100 billion to a total of around $300 billion over the next three years; a 200 percent general capital increase for the Asian Development Bank (ADB); and reviews of the need for capital increases at several other MDBs.
In their ongoing effort to counteract and mitigate the global private credit crunch and recession, two key priorities for the IFIs are:
Meeting the sharply increased needs of developing countries for balance of payments financing and budget support for critical public spending such as social safety net programs and key infrastructure investments
Shoring up the private sector by supporting trade financing, bank recapitalization, and financing for small and medium enterprises (SMEs).
The IFIs have responded with agility so far to country needs to stabilize the balance of payments. The IMF has provided $49 billion since mid-2008, and the MDBs had record gross disbursements of $55 billion in 2008.
While MDB disbursements of concessional funds were relatively flat in fiscal 2008 at nearly $12.5 billion, disbursements may pick up as the crisis unfolds in low income countries. Existing resources may not be enough for the needs of poor countries. The World Bank Group’s President Robert Zoellick has called for a Vulnerability Fund with a focus on poor countries.
G-20 leaders agreed in April 2009 support the World Bank’s Vulnerability Framework, which funds infrastructure projects, safety nets programs, and financing for small and medium enterprises.
The MDBs have made some progress in the effectiveness of their interventions, but still fall short in areas such as the predictability of aid. Efforts will have to be geared up considerably to meet the Paris Declaration targets set for 2010.
The IFIs have a key knowledge role to perform in informing policymaking, including warning against trade protectionism and financial mercantilism. The IMF has a key role in surveillance of risk in globalized financial markets.
The crisis has highlighted the need for reform of the Bretton Woods institutions. There is agreement to enhance and expand the voice and participation of countries with the greatest needs, and also to give greater weight to the emerging economies.
The MDBs have stepped up coordination of support to countries affected by the crisis. A recent example is a €24.5 billion program of support to the banking sector and bank lending to businesses hurt by the crisis in Central, Eastern, and Southern Europe announced jointly by the World Bank Group (WBG), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).
IFI strategies to respond to the crisis and support the private sector
Growth is central to poverty reduction and private sector development in a properly regulated environment is the main engine of growth. The crisis has only reinforced the IFI focus on private sector activity.
The MDBs have sharpened the policy rationale for supporting private firms, and have adopted a broader approach toward private sector development, by:
Extending the reach of markets, through risk mitigation, improving the enabling environment, and supporting pilot projects, and
Improving basic infrastructure and social service delivery through introducing private sector management and incentives to speed up implementation and expand access of the poorest segments of society.
G-20 leaders called the MDBs to review existing financial instruments and constraints on capital use to make their responses more flexible and to make capital go further.
An important MDB role in crises is to protect public assets and the most vulnerable households so that welfare and economic losses are minimized. One estimate suggests that $45 billion in road asset value in developing countries was lost between 1970 and 1989 for lack of $10 billion in maintenance spending. The MDBs need to provide resources to support priorities like essential infrastructure.
In response to the funding gap for new infrastructure projects (which has risen by about $20 billion a year), the World Bank is launching a new Infrastructure Recovery and Assets (INFRA) Platform.
Public-private and other partnerships hold the potential during tight budget times for finding new resources for development, dividing labor according to comparative advantage, identifying innovative and scaled-up approaches, and tackling issues related to global public goods.
Promising examples of MDBs reaching out to large corporations include the Global Alliance for Vaccines and Immunizations; and the Global Fund to fight AIDS, Tuberculosis and Malaria.
In 2008, the IFIs played an important role in extending the reach of markets:
The IMF helped with additional fiscal stimulus in countries with healthy balance of payments and public debt profiles.
With a modified Exogenous Shocks Facility, the IMF was able to quickly commit $261 million by end-2008 in response to high commodity prices.
The World Bank’s Global Food Crisis Response Program has already committed $856 million for 29 countries, including $325 million to Africa.
The World Bank’s new Vulnerability Financing Facility will help pool resources to expand social safety nets and protect other critical programs.
MDB gross disbursements reached a record $55 billion in 2008, up from $48.7 billion in 2007. Of this, $42.5 billion was non-concessional lending (which has sharply accelerated) and $12.5 billion was concessional (up just 3.5 percent).
MDB direct support to non-sovereign entities (largely private sector) increased by about $2 billion in 2008 to $15 billion. These flows have grown nearly fourfold since 2000. There has been an increase in flows to Africa. The IFC committed $1.4 billion in fiscal 2008 across 25 African countries, matched by the AfDB’s private sector operations which reached $1.5 billion in 2008.
Between 2003 and 2007 investment commitments to infrastructure projects with private participation in developing countries grew almost 1.5 times to $158 billion in 2007—10 percent higher in real terms than the previous peak in 1997.
Besides the World Bank’s INFRA Platform, the AfDB, along with others, is responding to the shrinking share of infrastructure in total development assistance to Africa (which dropped from 23 percent in the mid-1980s to 13 percent by 2006)
The World Bank’s target under the Africa Action Plan is to connect 2.5 million more people to clean water by 2015. However, more than 300 million Africans currently lack access to clean water.
The IFC’s Infrastructure Crisis Facility ($10 billion over the next three years) will help ensure that viable privately funded infrastructure projects in emerging markets can weather the financial crisis.
.gif)
RSS