This evaluation finds generally high-quality diagnostics and dedicated and motivated staff across different countries contributing to helping countries identify and reduce fiscal and financial sector vulnerabilities. This broad picture is confirmed uniformly by extensive interviews with client governments, development partners, the financial sector, and other agencies and institutions. However, large programs and resources tend to attract more seasoned staff, and small programs in smaller countries often rely on periodic support from more senior staff who also devote considerable time to larger countries.

By and large, World Bank staff undertake necessary, timely, and relevant analysis to identify vulnerabilities, although this is, at times, made more difficult by the need for greater transparency in fiscal data—especially on SOEs and debt. Difficult issues are raised in diagnostic reports and during policy dialogue with client governments. Only in one case study (Bangladesh) was frankness of assessments constrained (largely by a desire to maintain good relations with country authorities).

This evaluation found differences in the rigor with which fiscal versus financial sector vulnerabilities were identified and acted on. To some extent, this reflected differences in the main diagnostic tools used and data availability. Financial sector work is perceived as less politicized by counterparts, in part reflecting the nature of programs like the FSAP and related technical assistance, giving 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.

As a general point, the Bank Group needs to consider compound shocks more systematically and regularly as part of its macrofiscal monitoring. Existing tools like DSAs raise awareness of sustainability issues with clients but can give a misleading impression of vulnerabilities when the assumptions on which they are built are overly optimistic, exclude contingent liabilities (both explicit and implicit), or fail to contemplate a compounding of shocks. This evaluation notes cases such as that of Benin, where the DSA insufficiently captured a scenario with a significant drop in economic activity, as happened in 2019 after the closure of the border with Nigeria. Similarly, the 2013 Tajikistan DSA did not consider downside risks to remittances, which fell from 40 percent to 20 percent of GDP the next year. In Bangladesh, the DSA did consider the implications of implicit and explicit contingent liabilities and widespread concerns with the quality of GDP data (which World Bank staff believed to have been systematically overestimated for political reasons).

IEG asked clients to indicate areas where the Bank Group could do better. Clients indicated that the Bank Group brings substantial value in providing quality analysis to identify vulnerabilities, which is an important public good in country-level work, but more needs to be done to support clients to strengthen data systems and capacity for generating better, timelier, and more frequent data on both fiscal (especially debt) and financial vulnerabilities, and to disseminate information and analysis more broadly within countries. Finally, clients report that the Bank Group could sometimes do better in terms of timeliness and responsiveness to their requests for technical assistance and advice, especially in smaller countries with smaller Bank Group programs.

Lessons

This evaluation identifies five lessons related to how the Bank Group can improve identification of, response to, and support for the reduction of fiscal and financial sector vulnerabilities:

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 transparency.

Second, the Bank Group is better able to support countries to reduce 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 SOEs 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.