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Addressing Country-Level Fiscal and Financial Sector Vulnerabilities

Chairperson’s Summary: Committee on Development Effectiveness

The Committee on Development Effectiveness met to consider the Independent Evaluation Group (IEG) evaluation entitled Addressing Country-Level Fiscal and Financial Sector Vulnerabilities. An Evaluation of the World Bank Group’s Contributions and the draft World Bank Group management comments.

The committee welcomed the evaluation, remarking on the timeliness of the discussion in the context of efforts to build back better after COVID-19–related crises. They noted that this evaluation is one of a cluster of four undertaken on interrelated macroeconomic and macrofinancial issues: the public financial and debt management evaluation discussed by the committee in February, 2021, and the upcoming evaluations on domestic revenue mobilization and the sustainable development finance policy. Members welcomed the quality of the report and the rigor with which the case studies were conducted. Members appreciated management’s recognition that lessons learned would inform the Bank Group’s initiatives to support client countries’ efforts to face adverse fiscal and financial risk and build resilience to external shocks.

Members were pleased to learn that the Bank Group’s work on addressing fiscal and financial sector vulnerabilities in client countries is both relevant and effective; that the Bank Group’s diagnostic work on the financial sector was comprehensive and credible, reflecting the rigor of the Financial Sector Assessment Program; and that countries that received and acted on Bank Group support to address fiscal and financial sector vulnerabilities were generally better prepared to respond to a major shock. At the same time, members expressed concern about IEG’s findings that the Bank Group needs to consider fiscal and financial compound shocks more systematically as part of its macrofiscal monitoring; that the Bank Group’s ability to produce timely and comprehensive assessments of the financial sectors of smaller economies is constrained by the division of labor with the International Monetary Fund on Financial Sector Assessment Program work; and that Debt Sustainability Analysis was sometimes overly optimistic giving a misleading impression of vulnerabilities or underestimating of fiscal risks. Members asked IEG about views on how to overcome these challenges and encouraged management to address challenges to strengthen social protection delivery systems and social safety net programs.