March Assessment of ADB s Response to the Global Economic Crisis

Transcription

1 March 2011 Assessment of ADB s Response to the Global Economic Crisis

2 ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund BOP balance of payments CSF countercyclical support facility DMC developing member country EBRD European Bank for Reconstruction and Development EGP employment generation program GDP gross domestic product GFC global financial crisis IMF International Monetary Fund MDB multilateral development bank OCR ordinary capital resources PBA performance-based allocation PESF public expenditure support facility PPP public private partnership SDPL special development policy lending SMEs small and medium-sized enterprises SPL special program lending SSNP social safety net program TA technical assistance US United States NOTE In this report, "$" refers to US dollars. Director General Director Team leader Team members K. Sakai, Strategy and Policy Department (SPD) I. Bhushan, Strategy, Policy, and Interagency Relations Division, SPD K. Takamiya, Senior Planning and Policy Economist, SPD M.J. David, Strategy and Policy Officer, SPD G. Jorge, Strategy and Policy Assistant, SPD J.W. Kang, Senior Economist, SPD E. Pike, Strategy and Policy Officer, SPD V. Reppelin-Hill, Principal Planning and Policy Economist, SPD G.A. Sevilla, Strategy and Policy Analyst, SPD G.M. Umali, Senior Strategy and Policy Officer, SPD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page I. BACKGROUND OF THE GLOBAL ECONOMIC CRISIS II. OVERVIEW OF ADB S RESPONSE TO THE CRISIS... 3 A. Loan Approvals 3 B. Loan Disbursement 8 III. USE OF SPECIFIC ASSISTANCE MODALITIES A. Countercyclical Support Facility 10 B. Precautionary Financing Option 11 C. Program Lending 12 D. Trade Finance Program 14 E. Knowledge Products and Services 14 IV. DEVELOPMENT PARTNERSHIP V. CRISIS RESPONSE BY OTHER MULTILATERAL DEVELOPMENT BANKS VI. LESSONS AND CONCLUSIONS A. General Observations 16 B. Steps Forward 16 APPENDIXES 1. Country Case Study of ADB s Crisis Response: Bangladesh Country Case Study of ADB s Crisis Response: Indonesia Country Case Study of ADB s Crisis Response: Kazakhstan Country Case Study of ADB s Crisis Response: Mongolia Country Case Study of ADB s Crisis Response: Tonga Crisis-Related Knowledge Products and Services Evaluation of Crisis Response by Other International Financial Institutions 54 The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

4 I. BACKGROUND OF THE GLOBAL ECONOMIC CRISIS 1. The 2007 subprime financial crisis, which originated in the United States (US), rapidly spread to financial markets of the rest of the world as the global financial crisis; the resulting great recession in the real economy had global outreach. 1 The history of post World War II financial crisis episodes reveals striking similarities in the pattern of their making and impacts of their aftermath. Each crisis is preceded by a rise in home and equity prices, acceleration in capital inflows driven by optimistic investors, a rapid buildup of debt, and slowdown of growth. The typical financial crisis also leads to a prolonged downturn of the real economy. The capital and asset market bubbles following the high US current account deficit exhibited this typical pattern. 2 However, this crisis was different from most others in one important aspect its global outreach. Unlike major crisis episodes in the latter half of the 20th century, where adverse impacts were mainly contained in the host country or a few other countries through market contagion, this crisis was transmitted rapidly across borders to reach not only financial markets but also the real economies of the entire world. The magnitude of global impacts was precedented only by the early phase of the Great Depression of the 1930s. However, on a positive note, the crisis was different from the Great Depression in another important aspect the speed of the recovery. The unprecedented response of governments, central banks, and international financial institutions (Box 1) helped bring the great recession to an end much quicker than the Great Depression (Figure 1). 3 Figure 1: World Industrial Production, Then versus Now Source: B. Eichengreen and K.H. O Rourke. A Tale of Two Depressions. Available at: 1 In this paper, the financial aspect of the global economic crisis is referred to as global financial crisis and the real economy aspect as great recession, while the latter does not necessarily reflect technical definition of the term. Interaction between the two (macro-financial linkages) would be an important theme for future research. 2 C. Reinhart and K. Rogoff This Time Is Different: Eight Centuries of Financial Folly. Princeton and Oxford: Princeton University Press; C. Reinhart and K. Rogoff The Aftermath of Financial Crises. NBER Working Paper Cambridge: National Bureau of Economic Research; C. Reinhart and K. Rogoff Is the 2007 U.S. Subprime Financial Crisis So Different? An International Historical Comparison. NBER Working Paper Cambridge: National Bureau of Economic Research. 3 See discussions in P. Krugman The Great Recession versus the Great Depression (20 March); Green Shoots, 1930 (23 June); The Story So Far, in One Picture (3 November). The Conscience of a Liberal. B. Eichengreen and K.H. O Rourke. A Tale of Two Depressions: What Do the New Data Tell Us? In VOX: Research-Based Policy Analysis and Commentary from Leading Economists. A.S. Blinder and M. Zandi Stimulus Worked. Finance and Development. December. pp

5 2 Box 1: Global Solution for the Global Crisis: G20 Calls for Countercyclical Actions by International Financial Institutions The global outreach of the crisis required global resolution, with countercyclical response from all regions of the world. At the 2 April 2009 summit in London, at the height of the crisis, Group of 20 (G20) members urged multilateral development banks (MDBs) to step up their countercyclical efforts in respective regions, to offset capital flight and maintain demand by providing finance for fiscal expansion, support to social safety nets, trade financing, bank recapitalization, and infrastructure investment in emerging markets and low-income countries. They emphasized MDBs countercyclical role in supporting their longer-term development mandate, and called for the adoption of flexible, fast-disbursing, and front-loaded instruments designed to substantially and quickly assist developing countries. MDBs swiftly responded to the G20 call. Asian Development Bank s crisis-related lending assistance amounted to about $8.6 billion for This includes $5.3 billion for program and project lending, grants, private sector loans, and guarantees; $2.5 billion for countercyclical support facility, and $850 million for the Trade Finance Program. ADB also provides crisis-related support through grants for policy analysis and capacity building. The African Development Bank established a $1.5 billion liquidity facility and the Inter-American Development Bank a $6 billion facility. The World Bank enhanced term-setting flexibility for its special development policy lending. The International Monetary Fund established the flexible credit line and called on G20 countries to mobilize fiscal stimulus accounting for 2% of the global gross domestic product, while tripling its lending capacity. Asia, particularly East Asia, received the largest fiscal stimulus of any region of the world. This was made possible as most Asian countries entered the economic downturn with a relatively sound precrisis fiscal status. Source: Asian Development Bank 2. Asia, that was initially forecasted by some observers to have been de-coupled from the crisis, 4 had been hard-hit by early 2009, but its V-shaped recovery led the global growth thereafter. By the first quarter of 2009, adverse impacts of the crisis were transmitted to Asia through various channels. First and foremost, the great recession in the real economies of industrialized countries and resulting collapse of global trade affected exports, 5 which were important sources of aggregate demand in export-oriented Asian economies. In 2009, global trade decreased by 12.2%; for most developing countries, this crisis was a trade crisis. 6 Secondly, this real economy impact of the recession was preceded or accompanied by crossborder contagion of the global financial crisis in some parts of Asia. While the region was relatively less exposed to toxic financial assets, the loss of confidence in global markets tightened Asia s financing conditions in capital markets, trade finance, and even remittance. For instance, the credit spread of offshore bonds of Asian issuers shot up rapidly, depriving governments of these countries of crucial resources for developing expenditures. However, from the second quarter of 2009 onward, Asia rebounded rapidly. A number of economies badly hit by the early phase of the crisis soon recorded double-digit quarterly gross domestic product (GDP) growth, partly supported by aggressive use of fiscal and monetary stimulus. At this time, the Asian Development Bank (ADB) substantially expanded its assistance. 4 To the contrary, ADB was assessing in the early phase of the crisis that there is no evidence pointing to decoupling, on the ground that Asia s regional integration remained structurally linked to final demand from major industrial economies. See ADB Asian Development Outlook 2007: Growth amid Change. Manila. 5 World Trade Organization World Trade 2009, Prospects for 2010 (Press Release on 26 March). Geneva. 6 R. Boldwin, ed., Great Trade Collapse: Causes, Consequences, and Prospects. London: Centre for Economic Policy Research.

6 3 3. The rest of this paper assesses 7 relevance of ADB s assistance in the Asia-Pacific region, in the context of its V-shaped drop and recovery of the regional growth during the fouryear period of The relatively small amount of ADB s resource vis-à-vis the sheer size of the Asia-Pacific economies makes it difficult to quantify its direct contributions to the region s recovery. Rather, the paper tries to assess if ADB mobilized its limited resources effectively in response to and to suit the context of the crisis. II. OVERVIEW OF ADB S RESPONSE TO THE CRISIS A. Loan Approvals 4. During , ADB s resource mobilization in support of Asia s recovery closely corresponded to the unfolding impacts of the crisis. ADB responded promptly to help its developing member countries (DMCs) cope with the impacts of the global economic crisis. With the completion of the fifth general capital increase (GCI V) and successful ninth replenishment of the Asian Development Fund (ADF X), ADB was able to provide much more assistance in a countercyclical manner. When regional growth dipped to its lowest level at 5.4% in 2009 from the decade s peak of 10.1% in 2007, ADB s total operations reached a historic high of $16.1 billion to support the Asian economy s impressive recovery toward the end of the year. As the region s recovery path became increasingly more solid in 2010, the amount of assistance declined (Figure 2). Figure 2: Crisis Timeline and ADB s Response Notes: (i) Data on Asian Development Bank (ADB) total operations for are net of cancellations, while the 2010 figure is based on gross approvals; and (ii) Data on ADB total operations for exclude official loans and commercial cofinancing. Sources: ADB Asian The views Development expressed Outlook herein 2010 are Update: those of The the Future consultant of Growth and in do Asia. not Manila; necessarily and ADB. represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature. 7 This paper serves as a self-evaluation of ADB s crisis, mainly focusing on policy-based lending. ADB s Independent Evaluation Department is conducting an independent evaluation on the broader spectrum of ADB s crisis response separately.

7 4 5. The increase in ADB loan approvals from the early phase ( ) of the crisis to the recovery phase ( ) is apparent across all country groups (Table 1), partly due to incremental resource generation from both ordinary capital resources (OCR) and ADF. In volume terms, incremental resource mobilization for OCR borrowers (Groups B and C) was substantial. It was partly made possible through short-term resource mobilization of $2.5 billion through establishment of the Countercyclical Support Facility (CSF). 8 By setting the spread of 200 basis points over the London interbank offered rate (higher than 20 basis points applicable to conventional loans from OCR, while lower than 400 basis points applicable to special program lending established in 1999 mainly to cope with balance-of-payments [BOP] crisis 9 ) and shorter maturity of 5 years (rather than 15 years applicable for standard program lending), the CSF generated additional resources without hindering ADB s risk-bearing capacity. 10 Capital headroom, although trending to deplete (even with the general capital increase) as a result of rapid loan growth prior to the crisis, was adequate in the short term. It enabled ADB to extend time-bound crisis response with short-term instruments and higher prices as compared with the standard OCR loan. 11 The crisis response to ADF-only countries (Group A) averaged $1.3 billion from 2009 to 2010, recording the largest increase over the precrisis period. Part of this expansion used the excess ADF liquidity of $400 million (through the legacy conversion option for special drawing rights, reducing the required provision for foreign exchange volatility). 12 Both the CSF for OCR-eligible countries and the ADF excess liquidity for ADF-only countries were time-bound arrangements for Item Table 1: ADB Assistance by Country Group ( ) (annual average) (annual average) Increase (%) ADB 11,208 14, Group A 791 1, Group B 4,197 5, Group C 6,159 7, Regional ,225 Notes: (i) data is based on gross approvals; and (ii) the 2009 regional figure includes the regional trade finance program of $1 billion. Source: Asian Development Bank. 6. ADB assistance concentrated on the recovery phase of the Asia and Pacific economies. The CSF and ADF excess liquidity, both established with approval by the ADB Board of Directors in June 2009, supported Asia s strong recovery since the second quarter of the year ADB Enhancing ADB s Response to the Global Economic Crisis: Establishing the Countercyclical Support Facility. Manila; ADB Countercyclical Support Facility: Annual Report Manila. 9 ADB Review of ADB s Program Lending Policies. Manila. 10 The time-bound budget support instrument with shorter maturity enabled ADB to expand its lending within the capital adequacy framework as measured by the preshock equity-to-loan ratio. While the pricing was set at precrisis credit spreads of dollar-denominated offshore bonds of Asian issuers, it helped rationalize the size of the modality vis-à-vis anticipated demand. A commitment charge was included as an incentive for quick utilization in line with the countercyclical mandate. Indeed, $2.5 billion of the $3.0 billion CSF was taken up followed by quick disbursement. 11 At the time of the crisis, ADB s credit quality, while lowered, was not affected significantly as the credit condition of sovereign members in the region was generally sound. ADB s nonsovereign exposure was still a small portion of the total outstanding portfolio. 12 ADB Crisis Response of ADF Allocation of Additional Liquidity. Manila. 13 History shows that premature withdrawal of expansionary macroeconomic policy was the cause of prolonged economic downturns in other parts of the world, including the Great Depression in the 1930s. C. Romer. 2009, The Lessons of The Economist. 18 June. ADB s countercyclical actions in the recovery phase of the crisis reflect this important lesson from history.

8 % Change in PBA b/w and In this connection, ADB s interventions to this crisis certainly helped DMCs sustain fiscal stimulus until the V-shaped recovery path was truly confirmed by However, the CSF and ADF excess liquidity did not exist when the impact of the crisis began to materialize by the first quarter of Having permanent crisis response mobilization instruments available would have better prepared ADB to help mitigate the worst of the crisis immediately upon a DMC s request, provided that its risk bearing capacity in terms of the equity to loan ratio is well managed. 7. Allocation of incremental OCR under CSF was determined on the basis of eligibility criteria for DMCs requesting financing, comprising adverse crisis impacts, soundness of the precrisis macroeconomic management, and existence of the countercyclical development expenditure program. On the other hand, the ADF was allocated using a performance-based allocation (PBA) approach, which did not take the crisis impacts into account. Under the current PBA formula for ADF resources, the biannual lending for DMCs is determined on the basis of the country performance assessment of medium-term macroeconomic policy, structural and institutional reforms, and portfolio performance, aside from population and per capita gross national income. As a resource allocation mechanism established for a noncrisis situation, the formula does not take crisis impacts into account. Thus, the recent record does not indicate a positive correlation between the drop in a DMC s growth rate under the crisis and the increase in ADF allocation for each country (Figure 3). Unlike the case of OCR, the current PBA policy does not allow flexibility to adjust the lending level for ADF borrowers and recipients, and this issue warrants some concern when redesigning the effective mechanism for crisis response for low-income countries in the future. Figure 3: ADF Allocation under the Global Economic Crisis 250% 200% 150% ADF-only countries 100% 50% 0% % GDP growth change b/w and (%p) Note: Data excludes a postconflict country (Afghanistan). ADF = Asian Development Fund, b/w = between, GDP = gross domestic product, The views expressed herein are those of the consultant and do not necessarily represent those of ADB s PBA = performance-based allocation. members, Board Source: of Directors, Asian Development Management, Bank. or staff, and may be preliminary in nature.

9 6 8. ADB provided flexibility to ADF borrowers to front-load their allocation. However, it was not a popular option and was not used by many DMCs. Only four countries Armenia, Georgia, Mongolia, and Papua New Guinea opted to avail of the flexibility, while nine other countries front-loaded within their policy limit. ADF countries were reluctant to front-load their allocations for fear of jeopardizing their ongoing development programs. Only those countries with access to alternative form of financing, such as OCR, opted for the flexibility since they could use such financing to offset the declining ADF allocation in future years. ADB experience shows that a quick response to an exogenous shock is vital. Such shocks can significantly damage the economies of ADF countries and are beyond the control of their governments. ADF countries have limited capacity to protect themselves against such shocks. At the time of a crisis, countries need additional resources front-loading within the same envelope is not an attractive option. 9. ADB mobilized various assistance instruments for sovereign and nonsovereign operations, as well as policy advice and advocacy. While supporting DMCs countercyclical response, ADB assistance helped ensure provision of resources for critical development expenditures for long-term growth, and protected the most vulnerable from the fallout of the crisis. The focus of sovereign investment lending, which accounted for a majority of ADB operations, was to sustain development momentum in Asia and the Pacific. Assistance was provided also through quick-disbursing, policy-based lending for fiscal stimulus (CSF) and structural reforms (program lending), expansion of the Trade Finance Program and other forms of nonsovereign operations, and knowledge products and services (Figure 4). Figure 4: ADB s Overall Crisis Response Early Phase ( ): Recovery Phase ( ): OCR Commitments: $17.5 billion ADF Commitments: $4.9 billion Technical Assistance: $524 million Cofinancing: $1.6 billion OCR Commitments (including CSF and TFP): $23.1 billion ADF Commitments: $6.3 billion Technical Assistance: $594 million Cofinancing: $6.9 billion Policy Advice and Advocacy Sovereign Lending Nonsovereign Lending Policy analysis and knowledge support Strengthening of national monitoring and surveillance Demand-based support for Fiscal expansion Social protection Maintenance of development momentum Demand-based support for Easing liquidity constraints Building business confidence Regional and subregional support Countercyclical Support Facility Trade Finance Program ADF=Asian Development Fund, CSF=Countercyclical Support Facility, OCR=ordinary capital resources, TFP=Trade Finance Program. Notes: (i) OCR and ADF commitments are based on gross approvals; (ii) technical assistance (TA) includes grants from the Technical Assistance Special Fund, other TA grants, and TA cofinancing; and (iii) TA and cofinancing figures for are net of cancellations. Source: Asian Development Bank.

10 7 10. Policy-based lending accounted for a significant part of ADB s crisis response for financing and facilitating DMCs countercyclical development expenditures. Policy-based lending, including CSF loans, accounted for 26% (or $7.7 billion) of total ADB assistance during The quick-disbursing characteristics of policy-based lending turned out to be crucial for fast mobilization of resources that were necessary to sustain development expenditures. The importance of policy-based lending to support DMCs public expenditure is also reflected in the increased share of operations in the area of public sector management that accounted for 22% of the entire operations (Figure 5). The ADB-wide ceiling for conventional policy-based lending set under the 1999 policy on program lending (20% under normal circumstances) was exceeded because of the exceptional crisis situation in For ADF, the ADB Board of Directors approved a waiver to exceed its 22.5% ceiling. 14 Still, the vast majority of ADB s operations were directed for investment lending. Figure 5: ADB Assistance, by Instrument and Sector, ($ million) Guarantee, $2,379, 8% Nonsovereign Operations, $1,959, 7% TA Loan, $41, 0% Special Assistance, $199, 1% MFF- Tranche, $7,249, 25% A. By Instrument Project, $9,922, 34% Program, $5,180, 17% Countercyclical Support Facility, $2,500, 8% Public Sector Management, $6,270, 21% Water Supply & Other Municipal Infrastructure & Services, $1,570, 5% Industry & Trade, $116, 0% Health & Social Protection, $326, 1% B. By Sector Finance, $3,596, 12% Transport & ICT, $6,962, 24% Energy, $5,875, 20% Multisector, $3,082, 11% Agriculture and Natural Resources, $1,303, 5% Education, $314, 1% ADB = Asian Development Bank, ICT = information and communication technology, MFF = multitranche financing facility, TA = technical assistance. Note: data are based on gross approvals. Source: Asian Development Bank. 11. Apart from incremental resource generation, shortened processing time also contributed to the concentration of loan approvals, particularly those for policy-based lending operations during the crisis and recovery phase. The processing time for ADB s entire operations averaged 14 months in 2009, much shorter than the historical average of 2 years. By lending modality, ADB processed policy-based lending much faster than project lending, 8 months on average for program lending, compared with 16 months for project lending (Table 2). The views expressed herein are those of the consultant and do not necessarily represent those of ADB s 14 members, ADB Board Proposed of Directors, Waiver of Management, the Asian Development or staff, and Fund may Program be preliminary Lending Limit in for nature Manila; ADB Proposed Waiver of the Asian Development Fund Program Lending Limit for Manila. The program lending volume has risen sharply in Because of the averaging effect of the program lending approvals across years, the indicative 3-year moving average exceeded the ceiling despite relatively modest lending levels in preceding and succeeding years.

11 8 Table 2: Average Processing Time by Modality and Country Group, 2009 (months) ADB OCR- ADF- Modality Blend Total only Only Projects Programs Total ADB = Asian Development Bank, ADF = Asian Development Fund, OCR = ordinary capital resources. Source: Asian Development Bank Development Effectiveness Report Manila. 12. Among policy-based lending operations in particular, CSF loans were committed promptly to help recipient countries combat the crisis through timely fiscal measures. The time between receipt of the official request from DMC governments and ADB approval of the CSF loans averaged 83 days, much shorter than the record for conventional program and project lending in This is primarily due to the CSF s design feature as a special instrument for short-term crisis response, including its abbreviated business processes and absence of need to negotiate unrelated medium-term structural reforms. With the exception of the CSF loan for Bangladesh, whose processing was postponed until October 2009, this quick processing feature of CSF s business processes was fully exploited. 15 However, when the first CSF loan was requested by the Philippines on 21 May 2009, the CSF had not yet been formally established, and substantiation of loan processing had to wait for Board approval on 16 June. ADB could have acted more promptly if the CSF had existed as a regular lending instrument at inception of the crisis. Table 3: Delivery of Countercyclical Support Facility Loans Country DMC Request Receipt ADB Approval Request-Approval (days) Bangladesh 30 Jun Oct Indonesia 09 Jul Oct Kazakhstan 13 Jul Sep Philippines 21 May Aug Viet Nam 09 Jul Sep Average 83 DMC = developing member country. Source: Asian Development Bank. B. Loan Disbursement 13. Loan disbursements followed a similar trend as approvals, and peaked in Overall disbursement for the year totaled $10.4 billion ($7.9 billion from OCR and $2.5 billion from the ADF), 34% higher than the annual average for (Figure 6). The increase in disbursements in 2009 was mainly the result of fast-disbursing policy-based lending, which accounted for nearly half of total disbursements in 2009 ($5 billion or 47%). Compared with the annual average in , disbursements for policy-based lending almost doubled in Among policy-based lending operations, CSF loans were disbursed within an average of 2 months after ADB Board approval, marking a substantial departure from the typical duration of 15 The CSF loan for Bangladesh was packaged with the conventional program loan (Public Expenditure Support Facility) for structural reforms; the abbreviated business processes were not fully adopted.

12 Amount in $ million Amount in $ million 9 nearly a year for conventional ADB project and program lending operations. Disbursements of all CSF loans were completed promptly in 2009, except for Indonesia. Figure 6: ADB Disbursements by Fund Source, ,000 10,445 10,000 8,000 6,000 4,747 5,793 6,914 8,692 7,873 OCR ADF Total 4,000 2, ADF = Asian Development Fund, OCR = ordinary capital resources. Note: ADF disbursements include those for loans and grants. Source: Asian Development Bank. 14. The pace of disbursements was accelerated. Disbursement velocity is assessed by categorizing ADB s commitments into new and old groups of the active sovereign lending portfolio for New disbursements refer to disbursements made in a given year from loans approved within the same year, while old disbursements are provided in a given year from loans approved in previous years. Data shows that disbursements under new loans peaked at 44% in 2009 (compared with 24% in 2007, and 27% in 2008). The significant increase comes from the huge jump in the disbursement for policy-based lending, of which the CSF accounted for 87% (Figure 7). Figure 7: Pace of Disbursements, ,000 8,000 27% 44% 6,000 24% 4,000 2,000 The views expressed herein are those of the consultant and do not necessarily represent those of ADB s 0 members, Board of Directors, Management, or staff, and may be preliminary in nature "old" disbursements "new" disbursements Source: Asian Development Bank.

13 10 III. USE OF SPECIFIC ASSISTANCE MODALITIES A. Countercyclical Support Facility 15. The $3 billion CSF was established in June 2009 to provide support for fiscal stimulus by middle-income countries. Drawing on the recommendation made under ADB s internal review of business processes, 16 the CSF was designed as an instrument to support middle-income DMCs countercyclical development expenditures with an aim to help sustain aggregate macroeconomic demand and growth. No microeconomic structural reforms were required. While this feature was partly a reflection of the external origin of the crisis, it also benefited from critical lessons learned from the experience of the Asian currency crisis in These are (i) a crisis, once it happens, requires macroeconomic resolutions; microeconomic structural reforms have little immediate relevance (and are possibly counterproductive); 17 and (ii) a decline in aggregate demand needs to be responded to with countercyclical, not procyclical, macroeconomic policy. 18 CSF loans totaling $2.5 billion were provided to five DMCs (Bangladesh, Indonesia, Kazakhstan, Philippines, and Viet Nam) to mobilize the countercyclical development expenditure programs. Each country borrowed $500 million from the facility. Country case studies on CSF loan implementation are provided in Appendixes 1 3, summaries for Bangladesh, Indonesia, and Kazakhstan are presented in Box Box 2: Countercyclical Support Facility for Middle-Income Countries The Countercyclical Support Facility (CSF) supported social safety net programs in Bangladesh. The Asian Development Bank (ADB) provided the CSF loan to help the government of Bangladesh implement its countercyclical development program involving vastly higher spending for expanded social safety net programs, as well as a new public private partnership scheme, and a much larger allocation for Annual Development Program infrastructure projects. Implementing the expanded social safety net programs served the twin functions of immediately addressing the needs of the poor and vulnerable affected by the global crisis through income and food support, and providing strong stimulus to growth. Combined with the parallel provision of program lending from the Public Expenditure Support Facility aimed at enhancing fiscal management, the CSF loan freed up the government s resources to finance other components of the countercyclical development program, in particular, the planned scaling up of infrastructure investment. 16 ADB Review of the Implementation of ADB s Business Processes. Manila. 17 M. Feldstein Refocusing the IMF. Foreign Affairs. 77 (2). pp See discussions in J. Stiglitz Globalization and Its Discontents. London: Penguin; and K. Rogoff The IMF Strikes Back. Foreign Policy. 134 (January/February). pp As Stieglitz points out, the standard macroeconomic prescription at the time of recession should be expansionary in nature, rather than contractionary. As Rogoff argues, however, preserving sufficient fiscal space at the noncrisis time should be regarded as a prerequisite for expansionary crisis response. For this reason, CSF set a sound fiscal position and broader macroeconomic management as eligibility criteria. 19 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loans to the People's Republic of Bangladesh for the Public Expenditure Support Facility Program and the Countercyclical Support Facility Support Program. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for Countercyclical Support. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Kazakhstan for the Kazakhstan Countercyclical Support Loan. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Philippines for the Countercyclical Support. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Viet Nam for the Countercyclical Support. Manila; ADB Countercyclical Support Facility: Annual Report Manila.

14 11 The CSF loan for Indonesia enhanced budget predictability, essential for the government s countercyclical action. In the context of the real economy downturn and the emerging fiscal constraint, the government asked ADB to provide a CSF loan to support its public expenditure program for the second half of 2009 and The request for financing stemmed from the government s concerns about ensuring predictability in its budget financing, given the necessity for a temporary fiscal stimulus in 2009 and its continuation in The government had estimated a budget deficit of 2.4% in the Revised Budget 2009 with a net financing requirement of Rp129.8 trillion, a and a proposed budget deficit of 2.1% for the Revised Budget 2010 and a net financing requirement of Rp133.7 trillion. The objective of the CSF loan was to fill part of these budget shortfalls. By doing so, it supported fiscal stimulus through infrastructure investments aimed at improving the welfare of targeted groups in the social sector, competitiveness-enhancing projects in the agriculture and traditional distribution sectors, and other investments with a clear development impact. It also supported the scaling up of social assistance programs in 2009 and maintenance of spending in The CSF supported implementation of the employment generation program and the anticrisis plan of Kazakhstan. Both of these plans supported key sectors of the economy and generated additional jobs. The CSF package was designed to contribute financing for the employment generation program and leverage the government's commitment to pursue the anti-crisis plan. Counterpart funds generated from the loan proceeds were comingled with government funds to support and reimburse the government s budgetary spending for the employment generation program. The CSF support for the fiscal stimulus through these programs helped Kazakhstan mitigate the impact of the global economic crisis. GDP growth recovered to 1.2% in 2009, indicating a reversal of the recession experienced by the country during the first half of The momentum was maintained in 2010, as observed in GDP growth of 8.0% from January to June a RP9,088 = $1.00 Source: Asian Development Bank. B. Precautionary Financing Option 16. In Indonesia, where acute repercussions in the capital markets through early 2009 surfaced as a serious concern (Figure 8), ADB and the World Bank, in partnership with the governments of Australia and Japan, established the Public Expenditure Support Facility (PESF). 20 The PESF was designed as a contingency instrument, under which the country can exercise the precautionary financing option when market conditions reach predetermined triggers. By signaling availability of development partners contingent support, the PESF helped sustain recovery of confidence in the capital market that once recorded a sharp rise in international bond spread. Within ADB s existing policy, the precautionary financing option allowed a borrower to postpone drawing a loan for a defined drawdown period after the loan agreement is declared effective. 21 With the global financial system stabilizing by mid-2009 and Indonesia s macroeconomic framework sound, the drawdown triggers were not exceeded and hence no disbursements were made under the PESF. The contingent loan was financially closed on 31 December 2010 as planned (Appendix 2 provides the country case-study on Indonesia). The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature. 20 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loan to the Republic of Indonesia for the Public Expenditure Support Facility. Manila. 21 Independent Evaluation Group The World Bank Group s Response to the Global Economic Crisis: Phase 1. Washington, DC: The World Bank Group.

15 12 Figure 8: Indonesia: Market Development (credit default swaps) Source: Asian Development Bank Asian Development Outlook 2010: Macroeconomic Management beyond the Crisis. Manila. C. Program Lending 17. ADB s program lending in the precrisis period helped OCR-eligible middle-income DMCs to create some fiscal space for countercyclical response. It also helped advance reforms in lowincome ADF countries. Asia s active countercyclical response during the crisis was made feasible by sound macroeconomic management in the time preceding the crisis, 22 to which some of ADB s program lending made crucial contributions. For instance, in the Philippines, consolidation of public finance implemented under the Development Policy Support Program since 2004 has created fiscal space that enabled the government to mitigate the poverty impact from the crisis in The sense of emergency at the time of the crisis also enabled ADB to seize the opportunity to accelerate structural reforms. This was important in low-income countries where needs to advance structural reforms were still prevalent to prepare a sufficient foundation for receiving incremental assistance, as was the case for the Economic Support Program for Tonga and the Social Sector Support Program for Mongolia, both financed by the ADF (Box 3 and Appendixes 4 5). 22 As recovery took hold and the economic crisis receded in 2010, ADB called for the region to remain faithful to sound and sustainable fiscal and monetary policy, while adapting those policies appropriately. ADB Asian Development Outlook 2010: Macroeconomic Management Beyond the Crisis. Manila. 23 See ADB. 2010: Completion Report: Development Policy Support Program Cluster in the Philippines. Manila.

16 13 Box 3: Program Lending for Low-Income Countries The Economic Support Program for Tonga (2009) helped sustain overall reform momentum. The Asian Development Bank (ADB) provided $10 million of budget support financed by the Asian Development Fund (ADF). The program was designed to lessen the economic downturn while paying special attention to the needs of the vulnerable. It was underpinned by solid diagnostics, communication, awareness-raising initiatives, and a commitment to a longer-term engagement. Proceeds from the program were scheduled for release in two tranches of $5 million each. Learning from the lessons of past programs, care was taken to work within country-led approaches and to build on areas of historical involvement (in particular, reforms of state-owned enterprises and economic management). The program was designed to achieve the objectives of (i) providing budget support to protect the vulnerable, (ii) maintaining fiscal sustainability and reform momentum, and (iii) promoting local stakeholders ownership. The Social Sector Support Program for Mongolia (2009) enhanced the priority accorded to the country s social sectors through public financial management reform. The program, comprising a $43.1 million ADF loan and a $16.9 million ADF grant, is supporting fiscal adjustment under the stand-by arrangements of the International Monetary Fund and protecting social sector expenditure by providing budget support. The program is also implementing a set of policy measures for social welfare, health, education, and urban development to provide essential social services. In particular, policy measures are supporting long-term social sector structural reforms and long-term efficiency and sustainability of social expenditures through better targeting, rationalization, and consolidation of social transfers in the health, insurance, education, and social welfare sectors. Source: Asian Development Bank. 18. Imposing somewhat detached reforms in the midst of the crisis may run the risk of incurring unnecessary burdens on both ADB and the governments, as was observed in the initial stage of program loan processing for Central and West Asia (Georgia s Growth Recovery Program, Armenia s Crisis Recovery Program Loan, and Tajikistan s Crisis Recovery Program, all approved in June 2009). Unlike the case of the CSF loan for Kazakhstan, these conventional program loans required reform conditionality and that had undesirable impacts on the timely delivery of crisis response. One of the lessons from these operations was the need to balance requirement to impose reforms with crisis-responsiveness in the program design, especially when time is critical. Structural reforms certainly play crucial roles in the medium term, but that should not be confused with the immediate objective of protecting growth from the crisis. 19. Special program lending, ADB s permanent lending instrument for a BOP crisis, was not used, partly because of its excessively high pricing 24 and contextual mismatch in many surplus countries in Asia that did not require traditional BOP support ADB s current spread over the London interbank offered rate (LIBOR) for the special program loans is 400 basis The points. views For expressed alignment herein with the are International those of the Monetary consultant Fund s and BOP do support, not necessarily the World represent Bank reduced those its of minimum ADB s members, over-libor Board spread of Directors, 200 basis Management, points in or staff, and may be preliminary in nature. 25 Among the five regions of developing Asia, only South Asia has recorded a current account deficit in 2010; Central Asia, East Asia, Southeast Asia, and the Pacific all recorded a surplus (ADB Asian Development Outlook Update: The Future of Growth in Asia. Manila). For further assessment of global imbalance, see ADB Asian Development Outlook: Rebalancing Asia s Growth. Manila.

17 14 D. Trade Finance Program 20. The Trade Finance Program was very successful in responding quickly and effectively to crisis needs. In March 2009, following the crisis and market needs, the Trade Finance Program limit was increased to $1 billion and transaction tenor was extended to 3 years. It supported significant volumes of trade in Asia ($5 billion during the crisis period), mobilized risk mitigation resources ($3 billion), and enabled trade credit lines to remain in place. It provided liquidity to local banks, ($54 million in 469 pre-export loans) and helped develop local banks in the targeted countries (101 issuing banks). By extension, this helped reinforce the small and medium-sized enterprise (SME) sector during the downturn (612 SME transactions completed). E. Knowledge Products and Services 21. ADB provided significant support to DMCs to build their institutional capacity and support for policy analysis and advice, and other knowledge work in order to cope with the impact of the economic crisis, mainly through technical assistance (TA) grants. ADB provided TA support to improve regional, subregional, and national economic surveillance and monitoring. At the country level, support was also provided by some resident missions when requested by their government counterparts for specific and prompt policy advice. ADB convened a series of forums to facilitate discussions on the impact of the global economic crisis in Asia. For instance, the Regional Forum: Impact of the Global Economic and Financial Crisis held on January engaged DMCs across the region in knowledge sharing of in-country and global experiences to minimize adverse effects and cope with the global crisis. Participants explored mechanisms and measures that have been successful in mitigating adverse impacts, including stimulus measures, policy coordination and adjustments, and monitoring of systemic risks for maintaining financial stability; and discussed the regional dimensions of the crisis for dealing with contagion effects. It was followed by the Regional Forum: Impact of the Global Crisis on Asia, Lessons Learned, Policy Insights and Outlook held on 4 November Participants from 16 DMCs assessed the robustness of recovery, and discussed how to enhance resilience, sustainability, and inclusive growth. 22. The Asian Development Outlook and its update, Asian Economic Monitor, and other forms of research works, 27 as well special notes on crisis and recovery issued from time to time, were instrumental to the formulation of ADB s crisis response. In the Pacific, global economic crisis research, policy, and advocacy work primarily centered around three publications: (i) Navigating the Global Storm, A Policy Brief on the Global Financial Crisis; 28 (ii) Taking the Helm, A Policy Brief on a Response to the Global Crisis; 29 and (iii) the quarterly Pacific Economic Monitor, which commenced in May (Appendix 6 provides more examples of ADB s crisisrelated knowledge products and services). 26 This event was preceded by the South Asia Forum on the Impact of the Global Economic and Financial Crisis held on 9 10 March The forum brought together public and private sector representatives from seven South Asian countries to share cross-country experiences on the impacts of the crisis, and the ongoing and planned measures to preserve financial stability, stimulate growth, and ensure social protection in their respective economies. 27 For instance, W.E. James, D. Park, S. Jha, J. Jongwanich, A. Terada-Hagiwara, and L. Sumulong The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an End? ADB Economics Working Paper Series. No Manila. 28 ADB Navigating the Global Storm: A policy brief on the global financial crisis. ADB Pacific Studies Series, December. Manila. 29 ADB Taking the Helm: A policy brief on a response to the global economic crisis. ADB Pacific Studies Series. April. Manila.

18 15 IV. DEVELOPMENT PARTNERSHIP 23. ADB stepped up cofinancing efforts to keep up with the mounting needs for crisis response. As the adverse impacts of the crisis unfolded in Asia, the overall cofinancing more than doubled, from $647 million in 2007, to $1.56 billion in 2008, and to $3.32 billion in 2009; it was estimated to have declined to $2.76 billion when the recovery path continued to be solid in From 2007 to 2009, the number of development partners that worked with ADB on project cofinancing also increased significantly from 10 to 23. Apart from formal cofinancing, all of the policy-based lending operations were packaged in close contact with the International Monetary Fund (IMF). In the Pacific, key development partners committed to support a common government-led matrix of policy actions under the economic recovery support programs in Samoa and Solomon Islands. In Indonesia, close collaboration with Australia, Japan, and the World Bank was key for the success of the precautionary financing option under the PESF. V. CRISIS RESPONSE BY OTHER MULTILATERAL DEVELOPMENT BANKS 24. To date, the World Bank Group and European Bank for Reconstruction and Development (EBRD) have completed evaluation of the crisis response, both presenting favorable results. The World Bank Group s crisis response comprised (i) supporting the most vulnerable, (ii) maintaining long-term infrastructure investment, and (iii) sustaining the potential for private sector-led growth. In fiscal years , the group committed $128.7 billion and disbursed a record $80.6 billion the amount is greater than any other international financial institutions, including IMF. This was largely as a result of large financial headroom inherited by the International Bank for Reconstruction and Development. 30 The report prepared by the Independent Evaluation Group 31 concluded that the World Bank Group responded well to the nature of the crisis that called for the countercyclical fiscal expansion to compensate for sharply declining trade and private capital flow. By the end of 2009, EBRD committed 5.5 billion and disbursed 3.2 billion for 115 projects in 28 countries. Generally, EBRD s intervention focused on addressing liquidity constraints in the financial sector. The evaluation 32 recommends enhancing EBRD s crisis readiness to allow for quicker and more effective response in the future, including setting aside capital and liquidity as part of annual business planning and development of new products to address immediate liquidity needs. IMF s independent evaluation focused on the performance in the run-up to the crisis. 33 (Appendix 7). 30 In contrast, capital of the International Finance Corporation was constrained as a result of equity write-downs, an increase in nonperforming loans, and transfers to the International Development Association (IDA) from surplus. IDA s funding envelope determined before the crisis enabled a lesser increase. The assessment left an open issue on balancing the immediate crisis response and long term financial capacity. 31 World Bank Independent Evaluation Group The World Bank Group s Response to the Global Economic The Crisis: views Phase expressed 1. Washington, herein DC. are those of the consultant and do not necessarily represent those of ADB s 32 members, EBRD Evaluation Board of Department. Directors, Management, Special Study: or staff, The and EBRD s may Response be preliminary to the in nature. Crisis. London. 33 According to the evaluation, IMF provided few clear warnings about the risk and vulnerabilities associated with the impending crisis before its outbreak. IMF Independent Evaluation Office IMF Performance in the Run-UP to the Financial and Economic Crisis: IMF Surveillance in Washington, DC.