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Côte d’Ivoire: First, Second, and Third Poverty Reduction Support Credits (PPAR)

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The Côte d’Ivoire Poverty Reduction Support Credit (PRSC) series provides an opportunity to test the hypothesis that a DPO series can effectively help restore a post-conflict country to growth and catalyze longer-term reforms when there is a sound underlying macroeconomic framework and capable administration. The PPAR adds value to the initial Independent Evaluation Group (IEG) validation of this Show MoreThe Côte d’Ivoire Poverty Reduction Support Credit (PRSC) series provides an opportunity to test the hypothesis that a DPO series can effectively help restore a post-conflict country to growth and catalyze longer-term reforms when there is a sound underlying macroeconomic framework and capable administration. The PPAR adds value to the initial Independent Evaluation Group (IEG) validation of this programmatic series by reviewing the sustainability of reforms undertaken, applying the new Implementation Completion and Results Report Review methodology for development policy financing, and incorporating views of a wider range of stakeholders to draw lessons. Ratings for these projects were as follows: Outcome was moderately unsatisfactory, Risk to development outcome wash, Bank performance was moderately unsatisfactory, and the Quality of monitoring and evaluation was moderately unsatisfactory. This assessment offers the following lessons: (i) Designing DPO series with too many unrelated prior actions may undermine achievement of results. (ii) A clear results chain is needed to prioritize critical actions and monitor results. (iii) Critical reforms that require sequencing over an extended period for effective implementation should be complemented by institutional measures for sustained implementation and technical assistance projects to build capacity. (iv) In post-conflict situations, the need for budget support provides an opportunity for introducing and accelerating reforms.

Republic of Congo: Support for Economic Diversification Project (PPAR)

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The original objective of the Support for Economic Diversification Project as stated at appraisal stage was “to promote private sector growth and investment in the non-oil sectors in the Republic of Congo.” The revised objective of the project after the 2014 restructuring was “to promote private investment in select non-oil value chains and to support SME [small and medium enterprise] development Show MoreThe original objective of the Support for Economic Diversification Project as stated at appraisal stage was “to promote private sector growth and investment in the non-oil sectors in the Republic of Congo.” The revised objective of the project after the 2014 restructuring was “to promote private investment in select non-oil value chains and to support SME [small and medium enterprise] development.” Ratings for this project were as follows: Outcome was moderately unsatisfactory, Overall efficacy was negligible for original PDO and modest for revised PDO, Bank performance was moderately unsatisfactory, and Quality of monitoring and evaluation was modest. This assessment offers the following lessons: (i) When working with low-capacity clients, especially in countries affected by fragility, conflict, and violence, design should be simple with a minimum of components and limited requirements for coordination. (ii) For investment climate reform type projects, particularly in countries with strong centralized power dynamics, a key champion at the highest level of the government and coordination among the various ministries are crucial to bringing the public and private sectors together and helping identify and implement the reforms needed to improve the investment climate and competitiveness. (iii) It is crucial for projects involving large counterpart funding, especially in countries where public revenues are highly dependent on natural resources, to consider the risk of commodity price fluctuations for counterpart funding at the time of appraisal and seek to mitigate such risk. (iv) A matching grant scheme should clearly identify the needs of the beneficiaries at the time of the project design, especially in countries similar to the Republic of Congo that lack an entrepreneurship mind-set, have a large informal sector, and lack funding from financial institutions to firms.

Will the World Bank's Sustainable Development Finance Policy lower the risk of debt distress?

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Abstract image, wave-like, with black and white and beige, with the word DEBT visible.  image credit: By Adelina ART
When asked how he went bankrupt, a character in one of Ernest Hemingway’s novels offered the now famous explanation: “Gradually, and then all of a sudden.” It could be said that the rise of debt stress in low-income countries has followed a similar pattern. For countries eligible for IDA, the World Bank’s fund for the poorest countries, the number deemed at high risk of, or in, debt distress more Show MoreWhen asked how he went bankrupt, a character in one of Ernest Hemingway’s novels offered the now famous explanation: “Gradually, and then all of a sudden.” It could be said that the rise of debt stress in low-income countries has followed a similar pattern. For countries eligible for IDA, the World Bank’s fund for the poorest countries, the number deemed at high risk of, or in, debt distress more than doubled (from 19 to 40) over the past decade. One third of these countries experienced a two-level deterioration (either from low to high risk, or moderate to in debt distress) in less than three years. On July 1, 2020, as part of its efforts to help change the trajectory on debt distress in IDA-eligible countries, the World Bank launched the Sustainable Development Finance Policy (SDFP.) Sustainable public borrowing has an important role to play in low-income countries, including to finance investments for economic growth and poverty alleviation. It is also critical for countercyclical public spending during economic downturns, such as the current downturn caused by the pandemic. Servicing growing levels of debt, however, can crowd out spending on core public services like education, health, and basic infrastructure, and choke off access to affordable finance. The SDFP aims to create incentives for both IDA borrowers and their creditors to manage debt accumulation in a sustainable and transparent manner. In view of the importance of effective debt management both to the recovery from the pandemic and to keep development agendas on track, the World Bank Board's Committee on Development Effectiveness asked the Independent Evaluation Group (IEG) to conduct an "early stage" assessment of the SDFP to identify opportunities to strengthen the policy's effectiveness. What was learned from the first year's implementation? In many ways, the SDFP is an improvement over the Non-Concessional Borrowing Policy (NCBP) that it replaced. Crucially, it takes a broader view of the types of countries at risk of debt distress, and the potential sources of debt. The NCBP applied to IDA-only countries, not IDA "blend" or "gap" countries (countries which meet some conditions for non-concessional IBRD borrowing but also some for IDA), despite the fact that a third of the IDA-eligible countries at high risk of or in debt distress by 2020 were blend or gap countries. The SDFP expands coverage to include all IDA-eligible countries. The SDFP also broadens the coverage of public debt to include domestic borrowing, which played a significant role in the rapid rise in debt stress over the past decade. Beyond broadening scope, the SDFP provides a new mechanism for dealing with the drivers of debt stress. As part of one of the policy's pillars --the Debt Sustainability Enhancement Program (DSEP) -- at risk IDA-eligible countries are required to implement performance and policy actions, known as PPAs, to correct factors contributing to debt distress risks.   In one critical aspect, however, the policy has not heeded the warning from Hemmingway’s famous character of how quickly things can go from bad to worse. The screening process the SDFP uses for excluding countries from undertaking PPAs – based on being assessed at "low risk" according to the World Bank–IMF Debt Sustainability Framework, or DSF – potentially excludes countries with significant underlying vulnerabilities. With evidence that the transition to debt stress occurs more sudden than gradual, a review of the criteria for excluding countries from PPAs is warranted. As they are at the core of the policy, for the SDFP to be successful, it is also essential that the PPAs are actually relevant – that they address the underlying country-specific drivers of debt stress. IEG undertook case studies to assess PPA relevance over the first year, and from those found that about two thirds of PPAs responded to the main sources of debt stress in their respective country. The remaining third did not. For example, non-concessional borrowing ceilings were included as PPAs across the board for high-risk countries, even where ceilings already existed or where non-concessional borrowing did not contribute to the country's rising risk of debt distress. Much like the old policy, the new one also focuses on creditors as well as debtors. The Program of Creditor Outreach (PCO), the second pillar of the SDFP, aims to use the World Bank's role as convener to promote information sharing and collective action at the creditor level, including with nontraditional creditors, to reduce debt related risks to IDA-eligible countries. While the PCO represents a well-intentioned effort to engage the broader community of creditors, a review of the NCBP found that previous efforts at creditor coordination by the World Bank have had a positive but limited impact on lending decisions, and little was achieved with respect to coordination with non–Paris Club and private creditors. It is too early to assess whether the PCO will incentivize creditor coordination, but a fundamental question from past experience is whether the World Bank is best placed, on its own, to convene non-Paris Club and private creditors, both of which are key to tackling mounting debt stress.  The debt build-up over the decade highlighted clear deficiencies in the previous policy meant to ensure debt sustainability among IDA-eligible countries. The SDFP is a positive step toward shifting the trajectory of debt distress risks downwards. At the same time, IEG’s early-stage evaluation finds there is scope for improvement and provides a number of recommendations for increasing the effectiveness of the new policy. Read: IDA's Sustainable Development Finance Policy - An Early-Stage Evaluation

The International Development Association's Sustainable Development Finance Policy

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This evaluation provides an early-stage assessment of IDA's Sustainable Development Finance Policy (SDFP), which went into effect July 1, 2020. This evaluation provides an early-stage assessment of IDA's Sustainable Development Finance Policy (SDFP), which went into effect July 1, 2020.

Evaluation of the World Bank Group’s early response in addressing the economic implications of COVID-19 (Approach Paper)

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The purpose of this evaluation is to foster learning and adaptive management to strengthen the Bank Group’s response to the economic dimensions of the COVID-19 crisis: protecting livelihoods. The Economic Implications of COVID-19 evaluation is part of the Independent Evaluation Group’s (IEG) efforts to conduct an early assessment of the Bank Group’s COVID-19 response to influence the design of Show MoreThe purpose of this evaluation is to foster learning and adaptive management to strengthen the Bank Group’s response to the economic dimensions of the COVID-19 crisis: protecting livelihoods. The Economic Implications of COVID-19 evaluation is part of the Independent Evaluation Group’s (IEG) efforts to conduct an early assessment of the Bank Group’s COVID-19 response to influence the design of crisis projects in the pipeline and to prepare for the restructuring and recovery phases of Bank Group support to protect livelihoods. Given that the COVID-19 response is ongoing, this evaluation is meant to be a process and learning evaluation primarily to address areas identified during stakeholder consultations in the Bank Group.

Here we go again: Debt sustainability in low-income countries

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Here we go again: Debt sustainability in low-income countries
Having cut my teeth on issues of debt sustainability in the mid-1990s working on the design and implementation of the Heavily Indebted Poor Countries Initiative (HIPC), I can’t help but have a feeling of déjà vu as concerns grow over debt sustainability in low-income countries (LICs). Unambiguously, the COVID pandemic has made things worse, but it is worth remembering that the resurgence in debt Show MoreHaving cut my teeth on issues of debt sustainability in the mid-1990s working on the design and implementation of the Heavily Indebted Poor Countries Initiative (HIPC), I can’t help but have a feeling of déjà vu as concerns grow over debt sustainability in low-income countries (LICs). Unambiguously, the COVID pandemic has made things worse, but it is worth remembering that the resurgence in debt stress in LICs was evident and under active discussion in policy circles well before February 2020. Since 2013, the number of countries eligible for concessional financing from the World Bank at high risk of, or in, debt distress has almost tripled (from 13 to 35 (33 in 2019)) and the average debt-to-GDP ratio has increased from about 40% to 60%. This occurred alongside significant support from the international community (and the World Bank in particular) to improve the debt management capacity of LICs.  Despite this, and against a backdrop of persistently low global interest rates, median interest payments from LICs rose 128% between 2013 and 2018. Yes, hindsight is 20/20. This blog is not an attempt to claim that the current situation should have been easily anticipated (although that proposition is subject to debate) but rather to emphasize the urgency of learning from the past. It is true that many of the factors underpinning the rise in pre-COVID debt stress such as persistently low global commodity prices were not easily anticipated. The Independent Evaluation Group (IEG) recently completed the third in a series of macro-fiscal evaluations that consider, among other things, the evolution of debt stress in LICS, and offer insights to enhance the effectiveness of Bank Group support to strengthen fiscal resilience in LICs.   IEG’s February 2021 Evaluation of World Bank Support for Public Financial and Debt Management in IDA-eligible Countries, focusing on the decade following the 2008 global financial crisis, notes that many LICs sharply increased non-concessional and shorter-term borrowing to finance “growth enhancing" public investment to close infrastructure gaps and meet global development goals. Appropriately, development partners extended significant support to enhance debt management capacity over this period, with many positive results in terms of the number of countries that met minimum standards of good practice for debt management. However, as the IEG evaluation demonstrated, this was not systematically accompanied by similar attention to the quality of public investment management (PIM), which includes the ability to systematically and transparently scrutinize the costs and benefits of public investment, in infrastructure as well as other sectors. Indeed, over the last decade, public investment management diagnostics were undertaken by the Bank for less than half of countries eligible for concessional resources from IDA, the World Bank’s fund for the poorest countries, with demand concentrated among higher-income LICs. Of the 32 IDA-eligible countries at high risk of, or in, debt distress in FY18, only 10 had received support over the previous decade from the World Bank to improve their public investment management capacity. In July 2021, IEG released its evaluation of the World Bank Group Contributions to Addressing Country-level Fiscal and Financial Sector Vulnerabilities. This evaluation sought to assess the adequacy of the Bank Group support for macro-fiscal and financial sector crisis preparedness. It found that outside the context of stabilization efforts, the World Bank Group was less effective in working with clients to proactively expand buffers, strengthen institutions, and build capacity for better preparedness and economic crisis management. It also pointed to optimistic bias in the growth assumptions underpinning debt sustainability analyses (DSAs) as well as important gaps in the quality and availability of data on the contingent liabilities of state-owned enterprises.  IEG will soon release its Early Stage Evaluation of IDA’s Sustainable Development Financing Policy (SDFP). The SDFP was adopted in July 2020 to incentivize IDA-eligible countries to achieve and maintain debt sustainability by moving toward more transparent and sustainable financing.  The core of SDFP incentives is the requirement for countries that, according to the DSA, are at moderate to high risk of debt distress (or in debt distress) to implement performance and policy actions (PPAs). PPAs are intended to enhance debt transparency, promote fiscal sustainability, and strengthen debt management. IDA-eligible countries estimated to be at low risk of debt stress using the DSA are exempt from the requirement to implement PPAs.   Noting that one-third of countries that saw an elevation in their risk of debt distress over the past decade also experienced a two-level deterioration in less than three years, the evaluation recommended that a DSA finding of “low risk of debt distress” should not be sufficient to exempt an IDA-eligible country from implementing PPAs. Given the rapidity with which debt stress can build, and the well documented optimistic tendency of the DSA, the evaluation recommended that the requirement to implement PPAs not be determined solely using the DSA.  While IEG did not suggest what other criteria might be introduced for PPA exemption, LICs currently assessed at low risk of debt stress might also be required to demonstrate a minimum standard of data transparency, including with respect to contingent liabilities associated with state guarantees and state owned enterprises. Where does that leave us now? Can we use the lessons from these three IEG evaluations to plot a path to a more resilient foundation for responsible and productive use of credit? The answer is an unequivocal “yes”.   The recent Development Committee communique shines a light directly on the importance of debt transparency and debt management capacity, calling for the World Bank Group and the International Monetary Fund “to continue coordinating efforts to strengthen debt transparency and debt management capacity, including a process to strengthen the quality and consistency of debt data and improve debt disclosure, while helping many LICs and Middle Income Countries achieve debt and fiscal sustainability“.   No one credibly disputes that greater transparency on the amounts, terms and conditions of sovereign borrowing is needed or that improvements in the ability of governments to manage their debt to minimize cost and risk is a sine qua non for responsible macroeconomic management. These are important initiatives that should continue.   But with the costs of a potential debt sustainability crisis running well into the billions, they are not enough, and IEG’s three evaluations provide some guidance on what more might be considered.  First, we need to pay greater attention to the quality of spending that is financed with official sector borrowing. Indeed, this was clearly recognized by IDA Deputies in the context of the 19th Replenishment of IDA in their statement that “the first challenge is to assist IDA countries to ensure that the benefits [of borrowed resources] exceed the costs of servicing their debt. IDA and other partners can help by supporting initiatives that enhance capacity in areas such as public finance management, public investment management… and debt management”. As a start, Multilateral Development Banks, including the World Bank, should routinely include in the set of core economic and fiscal diagnostics used to inform country strategies and set priorities, an assessment of the quality of public investment management, such as the IMF’s Public Investment Management Assessment (PIMA).  Countries receiving concessional support from the World Bank and seeking to be exempt from PPA implementation might also be required to regularly conduct (e.g., every five years) a Debt Management Performance Assessment (DeMPA) to provide clarity on where greater attention is needed on debt transparency and management, with a presumption of DeMPA publication.  There are other data transparency standards that could usefully be strengthened, including the World Bank’s Debt Reporting System (DRS), whose coverage could be expanded (to include borrowing by State Owned Enterprises) and incentives for compliance could be strengthened.     No one can say that the above actions would have prevented the pre-COVID resurgence of debt stress in IDA-eligible countries. But the intuitive appeal of proactive measures that promote higher quality public investment and better and more complete data about the borrowing behavior of governments, including state guarantees and state-owned enterprise debt, should not be controversial.  And none of these actions are pro-cyclical, which means they can be implemented even in the midst of the COVID crisis (with donor support where capacity building is necessary). They might even enhance the resilience necessary to help avert the next hidden debt crisis or resurgence of debt stress. 

So, you want to reduce fiscal and financial vulnerabilities to better prepare for the next crisis?

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Proactively strengthening institutions for crisis preparedness can make the difference between whether a country bounces back quickly from an unexpected shock or struggles for years to regain its footing.Proactively strengthening institutions for crisis preparedness can make the difference between whether a country bounces back quickly from an unexpected shock or struggles for years to regain its footing.

Addressing Country-Level Fiscal and Financial Sector Vulnerabilities

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Addressing Country-Level Fiscal and Financial Sector Vulnerabilities
This evaluation assesses World Bank Group support to client countries to build resilience to exogenous shocks. 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 Show MoreThis evaluation assesses World Bank Group support to client countries to build resilience to exogenous shocks. 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.

Benin: Ninth and Tenth Poverty Reduction Support Credit (PPAR)

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Benin was a low-income country with a gross domestic product per capita of $1,291 at the time of preparation of the Poverty Reduction Support Credit (PRSC) 9 and 10 series in 2014. Its economy was driven by agricultural production (of cotton in particular) and reexport and transit trade with Nigeria. As a result, Benin’s economy was vulnerable to trade policy changes or economic downturns in Show MoreBenin was a low-income country with a gross domestic product per capita of $1,291 at the time of preparation of the Poverty Reduction Support Credit (PRSC) 9 and 10 series in 2014. Its economy was driven by agricultural production (of cotton in particular) and reexport and transit trade with Nigeria. As a result, Benin’s economy was vulnerable to trade policy changes or economic downturns in Nigeria. The development objectives of this series were to: (i) promote good governance and high-quality public financial management, and (ii) strengthen private sector competitiveness. Ratings for the Ninth and Tenth Poverty Reduction Support Credit project are as follows: Outcome was moderately unsatisfactory, Risk to development outcome was substantial, Bank performance was unsatisfactory, and Borrower performance was not applicable. This assessment offers the following lessons: (i) Relevant lessons from previous operations need to be taken on board when designing new DPF operations. (ii) Prior actions need to be substantive, that is, be critical to reforms with value added. (iii) The World Bank should design projects with a clear understanding of the likely “winners and losers;” failure to do this makes it more likely that projects will not be implemented as planned or sustained over time. (iv) Distributional impact analysis from DPF-supported reforms should inform the design of operations.

The Drive for Financial Inclusion: Lessons of World Bank Group Experience – Approach Paper

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Financial inclusion is expected to help address poverty and shared prosperity by improving and smoothing household incomes at the same time as reducing vulnerability to shocks, improving investments in education and health, and encouraging the growth of businesses and related employment. The poor face immense financial challenges. The income of the poor is not only lower but also more volatile. Show MoreFinancial inclusion is expected to help address poverty and shared prosperity by improving and smoothing household incomes at the same time as reducing vulnerability to shocks, improving investments in education and health, and encouraging the growth of businesses and related employment. The poor face immense financial challenges. The income of the poor is not only lower but also more volatile. They often rely on a range of unpredictable jobs or on weather-dependent agriculture. Transforming irregular income flows into a dependable resource to meet daily needs represents a crucial challenge for the poor. Another challenge lies in meeting costs if a major expense arises (such as a home repair, medical service, or funeral) or if a breadwinner falls ill. Savings, credit, insurance, and remittances can each help the poor to smooth volatile incomes and expenses, providing a margin of safety when income drops or expenses rise, or providing the needed funds for children’s education or health care. Additionally, financial inclusion in the form of financial services for microentrepreneurs and very small enterprises has been guided by the intention that it can help them to survive, grow, and generate income for the poor. Nonetheless, evidence that financial inclusion directly takes people out of poverty is mixed. The main objective of this evaluation is to enhance learning from the Bank Group’s experience, including the World Bank, IFC, and MIGA, in supporting client countries in their efforts to advance financial inclusion over the period of FY14–20. It both updates and expands on a 2015 IEG evaluation, which assessed Bank Group activity for FY07–13. It not only updates an evaluation of WBG activity in financial inclusion and in support of national financial inclusion strategies, but also plans for a deep focus on the following: (i) A retrospective look at the drive for universal financial access (the UFA 2020 initiative), including outcomes achieved in its 25 focus countries; (ii) Progress and challenges in women’s access to financial services (gender); (iii) An in-depth examination of digital financial inclusion efforts and the role of digital financial services as vehicles for financial inclusion. This work intends to focus more deeply on outcomes on the ground for poor households and microenterprises. It intends to understand the relevance and effectiveness of these activities, including the outcomes and the mechanisms by which observed outcomes were achieved. The evaluation aims to identify lessons applicable to the World Bank, IFC or MIGA by obtaining evidence-based findings of what works, why, and for whom.