In the decade following the global financial crisis, the World Bank Group helped many of its client countries identify and address macroeconomic vulnerabilities. IEG recently evaluated these efforts, studying the Bank Group’s support for crisis preparedness to Bangladesh, Benin, Jamaica, Morocco, Mozambique, Tajikistan, and Ukraine.
In this blog post we draw from IEG’s latest evaluation and present some lessons and findings related to detecting and reducing vulnerabilities in the fiscal and financial sectors.
Five things we learned studying World Bank Group support for crisis preparedness
- First, up-to-date, accurate, and timely knowledge, including data and transparency, is the foundation of effective World Bank Group support to its clients. It is, therefore, important for the Bank Group to remain engaged with regular and systematic monitoring and core diagnostics of fiscal and financial vulnerabilities even when client countries are not ready to confront them.
- Second, the World Bank Group is better able to support countries to reduce vulnerabilities when building fiscal and financial resilience is fully integrated into Bank Group-supported country strategies. Where knowledge is incomplete, analytical, and diagnostic needs should be clearly articulated and planned for.
- Third, more systematic consideration of the impact of large and compound fiscal and financial sector shocks, including in Debt Sustainability Analyses (DSAs), is needed to inform policy dialogue with clients.
- Fourth, with the IMF increasingly concentrating its financial sector surveillance on systemically important countries, the World Bank Group should consider how best to give adequate attention to financial stability issues in less systemically important but potentially vulnerable economies, as part of the Bank Group’s financial sector diagnostic work. This may have implications for the division of labor with the IMF on financial sector work as well as resource costs that should be clearly identified and managed.
- Fifth, addressing fiscal and financial vulnerabilities is intensely political, with vested interests sometimes opposing appropriate policy reforms. To help build domestic demand for better preparedness, World Bank Group staff should seek to regularly undertake broader outreach and dialogue – with parliamentarians, civil society, and local think tanks – to foster an understanding of vulnerabilities and their potential costs in an effort to build support for critical reforms.
Minding your Cs and Qs: Contingent liabilities and Quasi-fiscal risks
Proactively detecting and reducing fiscal and financial sector vulnerabilities can make the difference between whether a country bounces back quickly from an unexpected shock or struggles for years to regain its footing. On top of the lessons outlined above, IEG’s evaluation found that the World Bank Group has generally carried out timely and relevant analyses to better understand emerging country level risks and sources of fiscal and financial sector vulnerability. It has been able to do so by drawing on a relatively robust set of diagnostics, tools, and analyses.
Identification of fiscal vulnerabilities has been good, although the consistency and completeness of those assessments has sometimes varied with respect to quasi-fiscal pressures from state-owned enterprises and contingent liabilities as well as compound shocks. This has been in part a result of data limitations, especially on debt transparency, and sometimes overly optimistic assumptions about future growth.
Boosting support for smaller and low-income economies
The World Bank’s diagnostic work on the financial sector was comprehensive and credible, in part, reflecting the rigor of the Financial Sector Assessment Program (FSAP) and associated technical assistance. However, the need to coordinate with the International Monetary Fund (IMF) on full FSAP modules, and the IMF’s prioritization of its scarce technical resources on systemically important economies, sometimes constrained the ability of the Bank Group as a whole to provide timely financial stability assessments of smaller or less systemically important economies.
More success in responding to crisis than building resilience in normal times
Countries that received and acted on World Bank Group advice on addressing fiscal and financial sector vulnerabilities were generally better prepared to respond to a major shock when it occurred.
Our latest evaluation, however, finds that outside the context of stabilization efforts, the World Bank Group was less effective in working with clients to expand buffers proactively, strengthen institutions, and build capacity for better crisis management. But even when conditions were not supportive of comprehensive reform, the Bank Group was generally able, often in coordination with development partners (and the IMF in particular), to build understanding and awareness of challenges and vulnerabilities through analytical work and policy advice.
Image credit: adapted by Luísa Ulhoa from Shutterstock/eamesBot