How can the World Bank Group help keep the formal private sector alive during the current coronavirus (COVID-19) crisis? Beyond its impact on public health, efforts to limit the spread of COVID-19 are taking a toll, damaging businesses and livelihoods across the world. Trade and transport are disrupted, many businesses are idle, and workers and households have lost jobs and income. By providing timely and effective support and financing, development agencies can help the formal private sector survive. Here’s what the World Bank Group’s experience in earlier crises tells us.
As international financial institutions look to help the private sector cope with the economic shocks of the coronavirus pandemic, past global crises offer valuable lessons on what works.
At the Independent Evaluation Group (IEG), we have mined our evaluations of World Bank Group responses to a range of global crises, alongside assessments of programs to support the private sector, and identified four overarching lessons to guide efforts to help businesses survive the impacts of the coronavirus .
In summary, the lessons suggest a need to find ways to act fast to support the private sector, to ensure that assistance reaches those enterprises in distress, to build on prior knowledge of business conditions and constraints, and to understand that restoration of growth and employment requires a sustained response.
1) Businesses need help quickly, so international financial institutions must act fast
Governments are often the fastest way to get support to the private sector. The World Bank’s Development Policy Loans (DPL) provide general budget financing to governments to allow spending to address the crisis and fill crisis-induced revenue gaps. Budget support allows governments to channel resources to banks and businesses to fund payrolls, provide guarantees, credit or loan forbearance to help firms survive although they cannot produce or sell.
World Bank Investment Lending can get to enterprises faster when adding finance to existing loans and when designing new simple or repeater loans.
The International Finance Corporation (IFC) of the World Bank Group, which is already engaged with private banks and businesses, can respond more rapidly to keep the private sector alive when it focuses on programs and instruments that already have a solid track record and have shown the capacity for rapid mobilization during a crisis.
Following the 2008 global financial crisis, the IFC launched several new initiatives to support businesses but their set-up time and the lags in implementation limited their short-term impact. On the other hand, IFC’s Global Trade Finance Program , an existing facility, was able to increase its support for trade finance and reach out to new banks. New instruments may be more appropriate for the medium term.
2) Make sure projects reach the businesses that need the help
Rapid project preparation is critical during a crisis, but it is vital that projects are designed with effective systems for targeting the hardest hit firms and monitoring to ensure the help has actually reached them.
The primary aim of most crisis-related World Bank Group financial intermediary loans (FILs), was to increase bank credit for private sector groups most affected by the crisis, such as small and medium enterprises, exporters needing trade finance, rural businesses, and cooperatives. FILS have been widely used during crisis -- including after the 2008 crisis. Subsequent evaluations found that few FILs were able to disburse rapidly, targeting was an ongoing problem for many of them and the monitoring of the impact of the crisis financing component was weak and often not reported.
Reaching micro, small and medium enterprises poses additional challenges due to their limited size and bargaining power. Besides loans, matching grants can be helpful and business development services appear to help improve firm performance and create jobs. Yet a better understanding of how they work and how they can be used to respond to crisis is needed. Partial credit guarantees that cover a share of the default risk of loans can also help, but their effectiveness depends on the strength of a country’s legal and regulatory frameworks.
3) Understanding the business environment is key to helping businesses
Drawing from an existing stock of knowledge or carrying out new analytic and advisory work can ensure that interventions are aimed at the most important problems faced by the private sector, and that resources are directed to their best use. During the 2008 global financial crisis, earlier analytical work provided a platform for the World Bank’s response (and sometimes that of other donors as well).
In situations of fragility and conflict, Risk and Resilience Assessments (RRAs) can complement private sector diagnostics and help guide interventions that both support businesses and address the drivers of instability.
In countries where pre-crisis engagement was low, knowledge gaps left the Bank unprepared to help map out actionable, forward-looking programs and the quality of lending suffered.
4) When the crisis is over, the private sector still needs support
Even when responding to a crisis, there is a need for longer term planning. This should be focused on an enduring restoration of growth and employment, and sustained responses.
A strategic roadmap for crisis engagement, that sequences interventions from short term to longer term can be beneficial. Such a roadmap for crisis engagement should be based on ongoing, systemic analysis of stress factors, a framework for coordination within the World Bank Group and with other international financial institutions, and a review of instruments for effective crisis support, meaningful growth and medium-term development.
For more details, please see the learning note that elaborates on each of the lessons.
Please visit the IEG Lessons Library for a range of resources relevant to the COVID-19 response