You are on page 1of 4

The global economic crisis that began in 2008 threatened to erase years of progress in developing countries.

In response, the World Bank Group (World Bank, International Finance Corporation, Multilateral Investment Guarantee Agency) increased lending to unprecedented levels. But Increases in financing volume must be matched by quality to achieve sustained economic results. Quality-at-entry indicators have generally been positive. But certain areasthe financial sector specifically and results on the ground more generallyare a cause for concern, particularly given continued tight budgets. This IEG study is a real- time assessment of ongoing activities. As such, it evaluates the immediate results and serves as an input to the WBG's continuing efforts to address the effects of the crisis. The evaluation of the development impact of WBGs response will be taken up at a later stage.

Assessment of the IFC Response


IFCs response was relevant in the needs it sought to address and in seeking to leverage partnerships. But delivery has not matched intentions. IFCs response focused on relevant areas (trade, microfinance, bank capitalization, distressed assets, and infrastructure) and appropriately sought to leverage IFCs role and capital. The initiatives initially had positive signaling effects on market psychology, in contributing to the perception of a vigorous global response to the crisis. However, IFCs catalytic role and additionality have been less than expected, since most initiatives were not ready for use and IFC ultimately prioritized portfolio protection over pursuit of new business, as in most past crises. IFC was relatively risk-averse in its core business response, with the exception of its efforts in SubSaharan Africa. Preparedness and Readiness IFC had anticipated some degree of financial turmoil and moved quickly to place a strong and effective focus on the financial health of its loan portfolio. In the early part of fiscal 2009, significant numbers of investment staff

Implementation of the IFC Capitalization Fund has faced multiple issues that were not entirely foreseen at inception. The Japan Bank for International Cooperation (JBIC) contributed $2 billion while maintaining authorization power on new investments. Given an understandable preference by JBIC to advance deals in Asia, deals in other regions were initially pursued with difficulty. Regional capitalization funds are being created to help address this issue and to raise funds from investors interested in specific regions. In addition, the fund had limited staffing at the outset, no fund manager, and severely limited delivery capacity at a time when new systems and legal structures had to be

established (particularly to avoid conflicts of interest). Deals for the fund are originated by IFC investment officers, which creates additional time pressure as they strive to meet their own department accountabilities. Moreover, at the beginning, staff had no incentive to put deals forward to the fund, and processing procedures were unclear (these elements have since been addressed). Finally, while IFC has made numerous investments in funds across the world, it had no record in management of third-party funds when the Capitalization Fund was established. The Infrastructure Crisis Facility (ICF) has been the slowest-moving of the investment platforms, with structures that take a long time to set up and weak incentives for potential partners to use the facility. The pattern of demand for this facility differed from that initially expected, in that there was little demand for rollover financing and recapitalization. This reduced overall demand for support, although new project financing needs were still substantial. On the supply side, the time needed to arrange the new structures and appoint a third-party manager was underestimated. Also, IFIs that considered participating directly did not see added value in handing over control of their funds to the ICF. They originated deals themselves and saw little incentive in turning over their implementation to the ICF. Proparco and the German agency KfW, two key potential partners, ultimately carried out the investments through their own accounts.

GeoGeorgia: A Sys temic Crisis Resp ons e by IFCGeorgia: A Sys temic Crisis Resp ons e by IFCGeorgia: A Sys temic Crisis Resp ons e by IFCrGeorgia: A Sys temic Crisis Resp ons e by IFCgia: A Sys temic Crisis Resp ons e by IFC The dual crises in Georgia in 2008 had strong adverse effects on the economy: trade fell by a third, private capital inflows dropped by more than half, and remittances and tourism were also badly affected. Growth slowed sharply, and declined in 2009. There was an initial run on deposits, and confidence in the banking sector was very fragile. IFC interventions As part of the quickly developed IFI package for Georgia, supported by the Bank-led joint needs assessment, IFC has made $182 million worth of investments (loans, interest rate swaps, and trade finance lines) to help recapitalize the countrys two leading banks, Bank of Georgia and TBC. These banks represented more than half of banking sector assets at the time, and were both IFC clients. The EBRD provided cofinancing of a similar value, alongside smaller investments by the Netherlands Development Finance Company (FMO) and the German Finance Company for Investments in Developing Countries (DEG). Early outcomes The banking sector was prevented from collapsing, and confidence has returned (deposits are on an upward path and lending to SMEs is restarting). According to one key stakeholder, IFC and the EBRD made useful public good interventions. However, foreign currency dependence remains (over three-quarters of loans are denominated in U.S. dollars). Lessons

Speed and scale. Rapid IFI responses with significant commitments of financing were important in maintaining confidence in the country and, specifically, fostering banking sector stability. Existing relationships. Country presence and existing relationships with key banking sector players (TBC and Bank of Georgia) helped IFCs responsiveness. It also meant IFC had a financial interest (ensuring sustainability of prior investments). Strong coordination. The value of a quick and comprehensive joint needs assessment, which provided a clear division of labor among IFIs (and facilitated investment front-loading), was clear. Strategic fit. IFCs corporate strategic focus on IDA and post-conflict countries fit with the country profile of Georgia. Client commitment and institutional strength. Strong government ownership and capacity, with clear objectives, had a material effect on the speed and nature of the response. Small country. It was realistic for IFC to seek to have a systemic effect. Challenges Several important challenges nonetheless remain. These include: majority IFI ownership in the banks (there is a need to divest and support long-term banking sector development); local currency/capital market development; boosting real sector lending; sound risk management in good times (through portfolio diversification in particular); and more balanced growth in the economy, away from more speculative sectors such as real estate.

global financial
Why are some global financial crises more difficult to recover from and overcome than others? What steps are necessary in ensuring that financial stability and recovery is facilitated? What kind of environment has the previous financial environment evolved to and what kind of financial products have also contributed to greater vulnerability in the triggering of systemic risks? These are amongst some of the questions which this book attempts to address. In highlighting the role and importance of various factors in post crises reforms and the huge impacts certain factors and products have contributed in exacerbating the magnitude and speed of transmission of financial contagion, it also provides an insight into why global financial crises have become more complicated to address than was previously the case. As well as considering and highlighting why matters related to pro cyclicality and capital measures should not constitute the sole focus of attention of the G20's initiatives, the is aimed at identifying other important issues such as liquidity risks and requirements which have constituted, to a large extent, the focus of international standard setters and regulators. It also aims to direct regulators, central bank officials and supervisors, academics, business and legal professionals and other relevant interested parties in the field to current and previously ignored issues such as the "cartelisation" of capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over-the-Counter) derivatives markets is evidenced by Basel III's focus. "Cartelisation" and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences. .

ACCAsnine stepsto financial stability 1. A separation of retail or at the very least deposits - from investment banking and a return of distressed banks to the private sector in a profitable way 2. A return to savings over debt and a decent State post-retirement provision 3. An effective transition to a low-carbon economy 4. Full governmental support for small businesses 5. A permanent secretariat for the G20 6. Ensuring a stable, transparent, fair and certain system of taxation. 7. The adoption of International Financial Reporting Standards 8. Ensuring safe payments and consumer protection 9. Effective corporate governance