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Addressing Country-Level Fiscal and Financial Sector Vulnerabilities


Proactively reducing fiscal and financial sector vulnerabilities and strengthening frameworks and institutions for crisis management can make the difference between whether a country bounces back quickly from an unexpected shock or struggles for years to regain its footing.

More than a decade has passed since the global economic and financial crisis rocked the world. A clear lesson that emerged from it was the importance of identifying and addressing country-specific vulnerabilities ex ante to build resilience when a shock occurs. The passage of time has given the Independent Evaluation Group (IEG) the opportunity to assess the extent to which the World Bank Group has internalized the importance of addressing country-level vulnerabilities during good times to withstand exogenous shocks when they come.

The 2020 global economic and health crisis caused by the coronavirus (COVID-19) pandemic serves as yet another stark reminder of the importance of proactively managing vulnerabilities to shocks. Immense global public health, demand, and supply shocks hit all countries hard and at nearly the same time, precipitating the deepest peacetime global economic crisis since the Great Depression.

The purpose of this evaluation is to assess Bank Group support to client countries to build resilience to exogenous shocks through the systematic identification of fiscal and financial sector vulnerabilities and through efforts to support the reduction of these vulnerabilities. Given the importance of protecting the most vulnerable from shocks, this evaluation also looks at the extent to which the Bank Group has helped client countries adapt their social safety nets so that they can be effectively scaled up in a crisis.

The evaluation looks at the period between 2010 and 2019, after the global recession. It assesses the extent to which the World Bank has been able to assist clients in identifying and reducing fiscal and financial sector vulnerabilities to build resilience to shocks. It aims to inform the design of future Bank Group strategies, operations, diagnostics, and knowledge products that can help reduce country-level fiscal and financial sector vulnerabilities. Its lessons may also help the effort to “build back better” after the COVID-19 pandemic through contributions to increasing resilience by strengthening fiscal and financial buffers and institutions.

The evaluation covers the three main Bank Group institutions: the World Bank, the International Finance Corporation, and the Multilateral Investment Guarantee Agency. Given the criticality of country context to understanding vulnerabilities, these questions are answered by drawing primarily on case studies of seven countries with which the Bank Group has been continuously engaged over the review period: Bangladesh, Benin, Jamaica, Morocco, Mozambique, Tajikistan, and Ukraine. The case study approach comes with inherent challenges, including ensuring that insights and lessons have sufficient external validity. These challenges have, in part, been mitigated through the careful selection of case studies reflecting diverse degrees of engagement, consistent implementation of the evaluation strategy, and the convergence of findings and patterns.

Main Findings

Identifying Fiscal and Financial Vulnerabilities

A country’s ability to respond to major shocks promptly with appropriate policies depends to a large extent on the adequacy of its preexisting fiscal and financial buffers and the quality of its fiscal and financial sector institutions. This evaluation finds that the Bank Group has generally carried out timely and relevant analyses at the country level to better understand emerging risks and sources of fiscal and financial sector weaknesses. Identification of financial sector vulnerabilities has been, in general, consistent and comprehensive. Identification of fiscal vulnerabilities has been good, although the consistency and completeness of those assessments has varied, especially with respect to quasi-fiscal pressures from state-owned enterprises and contingent liabilities.

Financial sector work is perceived as less politicized by many counterparts, in part reflecting the nature of programs like the Financial Sector Assessment Program (FSAP) and related technical assistance. This can give an easier entry point for discussions with authorities. Fiscal analysis, however, tended to be more political, and World Bank advice was subject to greater discretion at the country level.

The World Bank’s core fiscal and financial sector diagnostics, when available, were of high quality. Its ability to conduct diagnostics was sometimes constrained by a lack of good quality data and insufficient country-level transparency, including with respect to the reliability of debt data in countries with weak disclosure practices. This was a significant constraint on the World Bank’s ability to accurately assess fiscal vulnerabilities.

Debt Sustainability Analyses (DSAs) are central to gauging low-income country risk of debt distress. However, underlying assumptions were sometimes overly optimistic, or downside risks were sometimes underestimated, particularly with respect to the contingent liabilities of state-owned enterprises or in assessing the potential impact of a compounding of vulnerabilities. Our case studies cover the period from 2010 to 2019, with the revised International Monetary Fund (IMF)–World Bank Debt Sustainability Framework for Low-Income Countries only introduced in 2018. As a result, many of the case studies make use of the prereform DSA, which has, at times, contributed to the underestimation of fiscal risks.

Identification of fiscal vulnerabilities did not always take a whole-of-government perspective, thereby missing important links among vulnerabilities (for example, state-owned enterprises; state-owned banks; contingent liabilities; and large public investment projects). Among our case studies, we observed that this has led to an understatement of fiscal risks in Bangladesh and Tajikistan.

In most case studies, the World Bank’s diagnostic work on the financial sector was comprehensive and credible. This, in part, reflected the rigor of the FSAP and associated technical assistance. However, the need to coordinate with the IMF on FSAP work, and the IMF’s prioritization of scarce technical resources on systemically important economies, sometimes constrained the availability to the Bank Group of timely financial stability assessments of smaller or less systemically important economies.

Addressing and Reducing Fiscal and Financial Vulnerabilities

The evaluation finds 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 today than previously. Earlier IEG work found that the Bank Group was generally effective in helping countries respond to fiscal and financial sector crises. This evaluation finds that, outside the context of stabilization efforts, it was less effective in working with clients to proactively expand buffers, strengthen institutions, and build capacity for better crisis management.

The reasons for this are several. Earlier IEG evaluations on crisis response have shown that the focus of Bank Group and country efforts postcrisis was often on growth, building buffers and strengthening institutions, and improving the quality of public investment tended to be a lesser priority. In some cases, governments may be less prepared to undertake difficult institutional reforms without the pressures of a crisis.

However, 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.

Building Resilience by Making Social Safety Nets More Adaptable to Economic Downturns

Fiscal and financial crises have distributional consequences and, therefore, require flexibility in safety net systems to cushion the impact quickly and efficiently. Although the World Bank’s direct support for social safety nets increased during the evaluation period, especially in low-income countries, it tended to focus more on expanding access to chronically poor people than on building adaptable systems to respond to cyclical or more severe downturns.

But the World Bank is increasingly working with clients to incorporate an “adaptive social protection” approach to reduce the vulnerability of poor and near-poor populations to shocks by building household resilience and enhancing safety net preparedness through flexible and scalable program designs and dynamic delivery systems.

Despite progress to strengthen social protection delivery systems and social safety net programs, important challenges remain. Coverage of social safety nets is limited, especially in low-income countries, where automatic stabilizers tend to be limited as they do not generally extend to the informal sector. Financing and institutional issues constrain the intake of beneficiaries, registration, and targeting.

Is the Bank Group Equipped to Help Clients Strengthen Fiscal and Financial Sector Resilience?

Building resilience requires knowledge and timely diagnostics, which can be difficult to undertake in the middle of a crisis. To be prepared, clients need to systematically and frequently consider the potential impact of exogenous shocks of various magnitudes. The Bank Group can, as part of its country-level macrofinancial monitoring, make reducing fiscal and financial sector vulnerabilities a more central part of its activities.

The Bank Group has strong staff skills, motivation, and capacity to support clients in identifying and helping reduce fiscal and financial sector vulnerabilities. However, larger countries often absorb the most experienced and skilled staff, at the expense of attention to smaller, lower-income countries. Moreover, the division of labor with the IMF on financial sector issues constrained the Bank Group in its ability to provide timely financial sector support to smaller economies that are not deemed systemically important.


This evaluation proposes five lessons on how the Bank Group can improve the identification of and response to fiscal and financial sector vulnerabilities, and support countries in reducing them.

First, up-to-date, accurate, and timely knowledge is the foundation of effective Bank Group support to its clients. It is therefore important for the Bank Group to remain engaged in regular and systematic monitoring and core diagnostics of fiscal and financial vulnerabilities even when client countries are not ready to confront them. This includes attention to the quality of data and to transparency.

Second, the Bank Group is better able to support countries in reducing vulnerabilities when building fiscal and financial resilience is fully and explicitly integrated into Bank Group–supported country strategies, with a clear articulation of priority challenges. 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 risks (for example, from state-owned enterprises and contingent liabilities), including in DSAs, is needed to inform policy dialogue with clients.

Fourth, with the IMF increasingly concentrating its financial sector surveillance on systemically important countries, the Bank Group should consider how best to give adequate attention in its financial sector diagnostic work to financial stability issues in less systemically important but potentially vulnerable economies. 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 and institutional strengthening. To help build domestic demand for better preparedness, Bank Group staff should seek to more regularly undertake 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.