Coping with the global economic crisis:

1

• Coping with the global economic crisis
• Support by the World Bank to ECA countries and
  Armenia
• Aristomene Varoudakis
• The World Bank
• AIPRG Conference
• Yerevan July 2009

2
Outline

• Europe and Central Asia Policy challenges in the
  face of the global economic crisis
• World Bank Support to ECA countries
• Supporting Armenia to cope with the crisis The
  new Country Partnership Strategy

3
ECA region hit hardest

• ECA entered the crisis vulnerable
• With macroeconomic and financial indicators
  showing more vulnerabilities relative to other
  emerging regions (dependence on external
  financing, remittances, commodities, higher
  private sector debt)

GDP growth (annual percent change)
CEE - Central and Eastern Europe CIS -
Commonwealth of Independent States
4
The impact of the crisis across ECA countries has
been uneven

• Depending on the transmission channels, the
  strength of fiscal positions, and the quality of
  financial policies

5
What ECA countries can do?

• Fiscal policy options during the crisis are
  limited
• Many countries do not have sufficient fiscal
  space for stimulus packages
• Keeping trade channels open is the most promising
  way for ECA countries to benefit from global
  recovery
• Financial measures are necessary
• Stabilizing banking systems (not individual
  banks)
• Keeping capital market linkages strong is the
  only way for ECA countries to finance some of
  their financing needs
• Social policy actions should be a priority
• Social protection needs to target the poor and
  vulnerable
• Countries facing large increase in poverty need
  to increase effectiveness of public expenditures
  to address emerging social risks
• Medium-term issues should not be neglected
  Governance, energy security, ageing, Climate
  change

6
World Bank support to ECA countries

• Increased lending
• Expanded analytical advisory work
• Improved IFI coordination for better
  effectiveness of support

7
increased lending

• Total lending more than doubled, from 4.2
  billion in (fiscal year) 2008 to 9.3 billion in
  2009 and projected at 11.5 billion in 2010
• Quick disbursing development policy loans (DPLs)
  to address immediate financing needs and support
  structural reforms
• Credit lines (Financial Intermediary Loans) to
  provide medium term resources for private bank
  lending
• Project loans to maintain financing for essential
  investments, particularly in infrastructure, and
  support job creation
• Partial Risk Guarantees to attract private
  capital
• Increase in IFC lending and MIGA guarantees of
  shareholder loans by parent banks to subsidiaries

8
expanded analytical advisory work

• Focus on financial sector, public expenditure,
  and social protection issues
• FSAP follow-up and bank restructuring frameworks
• Public Expenditure Reviews to reflect need for
  re-allocation within reduced fiscal envelope
• Assessment of social assistance programs to
  improve targeting and scaling up

9
. improved IFI coordination

• Closer work with IMF and EUprograms on bank
  restructuring and social expenditures
• Joint EBRD, EIB and World Bank Group Action Plan
  pledged up to 24.5 billion to support banking
  sectors and to fund lending to businesses in the
  region
• Vienna Initiative dialogue between IFIs and
  commercial banks active in the region so as to
  ensure coordination on cross-border issues and
  continued lending to the region.

IFI - International Financial Institutions EBRD
- European Bank for Reconstruction and
Development EIB European Investment Bank IFC
International Finance Corporation
10
Helping Armenia cope with the crisis

• Armenia was hit hard by the global economic
  crisis

• Hard landing in Q4 of 2008
• GDP growth turned negative
• Growth of remittances fell to zero (from 40
  percent in mid 2008, further deteriorating in
  early 2009
• Exports shrank and FDIs declined
• The outlook for 2009 and beyond presents serious
  challenges
• In 2009 Armenia will experience a substantial GDP
  contraction
• Recovery in 2010 will be slow
• Poverty will rise by 5 to 6 percentage points in
  2009/10

11
the crisis has exposed key economic
vulnerabilities

• Narrow economic and export base (27 percent of
  GDP produced in construction, exports at just 10
  percent of GDP and highly concentrated)
• High dependence on remittances (17 percent of
  GDP)
• Narrow fiscal base, tax revenues at less than 17
  percent of GDP
• High concentration of population just above
  poverty line
• Limited domestic competition in key sectors,
  especially in import of food and fuel
  commodities, and narrow-based FDI

12
but Armenia entered the crisis with some
strengths

• Well-capitalized and liquid banking system with
  strong prudential regulation
• Prudent fiscal policies and small fiscal deficit
• Low public debt

13
Governments Crisis Response Program

• Mobilization of additional funding (more than 2
  bn USD)
• Letting Exchange Rate adjustment take place
• SME support
• Additional (big and small) construction projects
• Budget revision (spending cuts)
• Protection of social safety programs
• Tax/customs reform Action Plan
• No protectionism

14
Banks new partnership strategy with Armenia
(2009-12)

• A Two-Pillar Approach
• Mitigate the impact of the global economic crisis
  and help protect the poor and vulnerable
• Address key structural and governance challenges
  identified in Armenias Sustainable Development
  Program (SDP), to help improve competitiveness
  and position Armenia for post-crisis rapid growth
  

15
Pillar 1 Addressing Vulnerability

• Lending
• 3 new projects aimed at job creation through
  small scale infrastructure
• SME Credit Line
• Rural and Social Infrastructure (Irrigation,
  water)
• Social Protection administration
• Series of budget support credits to help maintain
  financing for safety net programs and pro-poor
  expenditures
• Advisory Poverty and vulnerability, macro and
  financial sector analysis, fiscal stimulus
  advice, Health care, Disaster Risk Management

16
Pillar 2 Promoting Competitiveness and Growth

• Lending
• Series of budget support credits focusing on 2nd
  gen. reforms and public sector governance
• Public sector modernization project
• Education project
• Road transport and energy infrastructure projects
• IT sector project
• Agricultural competitiveness project
• Advisory public sector governance, competition,
  selected areas of infrastructure (energy
  efficiency, taxation of extractive industries,
  private participation in roads), higher
  education, agriculture competitiveness, Forestry
  and Livestock

17
What is new in the partnership?

• The Bank is scaling up lending in the transition
  from IDA to IDA/IBRD status
• - Previous 4-year CAS period lending was 217
  million
• - New CPS envisages 545 million (150m IDA
  395m IBRD)
• Higher share of lending will be for
  infrastructure
• Enhanced partnership with IFC

18
Thank you