During its response to the worst financial-economic crisis in a generation, the World Bank failed to adequately tailor its lending patterns to the severity of the downturn across nations and today finds itself with potentially insufficient headroom to respond to a second crisis of similar or greater magnitude to the one in 2008-09, should there be one.
These results were part of a phase-two study of the Bank’s crisis response, presented in a report, titled The World Bank’s Response to the Global Economic Crisis: Phase II. The study report was unveiled on Thursday by its authors at the Independent Evaluation Group (IEG), which is a member of the World Bank group of institutions but reports to the Bank’s Board of Executive Directors rather than its management.
Speaking to The Hindu on both the achievements and shortcomings of the Bank’s response Anjali Kumar, lead author of the report and a Lead Economist with the IEG, said that while the headroom that the Bank had in the previous crisis would have permitted a doubling of lending by the International Bank for Reconstruction and Development – the Bank division focussed on middle and lower-income nations – by around September 2008, “Today it would be in a position to undertake business as usual lending... [yet] anything that approaches the previous global crisis could not be handled.”
While equity-to-loan ratios of the Bank at the outset of the crisis were around 37.5 per cent, the most recent financial figures released by the Bank for quarter closing September 2011 suggested it had come down to 27 per cent, a “precipitous drop for two years, [and it was] projected to drop for next three to four years,” Dr. Kumar noted, adding that low market rates of interest had not helped in this scenario.
Regarding the inadequate change in the Bank’s pre-crisis lending patterns, the IEG suggested that in part this phenomenon was driven by country demand for Bank lending, and hence countries that were most engaged with the Bank before the crisis – its “good clients” such as India and Indonesia – tended to approach the Bank more and in some cases get loans more quickly.
Other factors affected Bank lending too, such as the limited fiscal capacity of certain countries and the fact that some countries went to other lenders such as Russia’s engagement with the European Bank for Reconstruction and Development and Ecuador and Venezuela’s reliance on the Inter-American Development Banks.
Yet when the IEG conducted an analysis of patterns of stress across countries using high-frequency data and mapped that to Bank lending patterns it was clear that low resource allocation at the start of the crisis and the assumption that all financing demands could be accommodated from existing patterns of lending had played a role in the Bank’s ultimate lending decisions, Dr. Kumar explained.
Responding to the results of the IEG’s assessment Angela Walker, World Bank South Asia Region Spokesperson said, “This evaluation properly recognizes the World Bank Group's unprecedented level and speed of help during the crisis and we agree with the finding that the majority of countries suffering high levels of stress benefited from [Bank] lending.
Yet in comments to The Hindu Ms. Walker noted, “However, we disagree with the evaluation's analysis of the Bank's total response.”
In this context Bank officials drew attention to the IEG report’s findings that “The unprecedented volume of the Bank Group’s response….accelerations in processing efficiency and disbursements….the positive role, in crisis-response, of well-established country dialogue and country knowledge, the greater need to balance country focus with a global strategy notwithstanding….and the Bank’s comfortable financial position at the start of the crisis, which was a key element underpinning its crisis response.”
Touching on some India-specific results, Dr. Kumar said that there were some delays in the response after the downturn had kicked off. In particular, the Government of India had sent a written request to the Bank in November 2008 for increased support, and although the Bank initially aimed for operations to begin by March 2009, the proposal did not reach the Bank’s Board until September 2009, and the funds were not released until April of following year.
Nevertheless India was one of the Bank’s “largest borrowers in crisis,” Dr. Kumar noted, adding that it was sanctioned $7 billion in lending during crisis, of which $5 billion was tied to crisis-specific operations. Despite these large-scale commitments, some of them remained unrealised, including $3 billion for the financial sector were cancelled.
The IEG also noted that while much of the “budget-support” lending that the Bank undertook in India had helped signal the strength of public sector banks in the country, yet many of these public sector banks had capital adequacy ratios conforming to Indian government norms at the outset of crisis.
This again raised the question of Bank lending priorities during the crisis – for example whether it was a priority for the Bank to provide precautionary buffer capital to banks that were adequately capitalised.