IFIs ‘Front-Load’ Funds in Response to Financial Crisis

A municipal development program funded by the Inter-American Development Bank in Porto Alegre, Brazil, focuses on improving urban infrastructure, among other things. Similar types of projects may have their funding "fast-tracked" to buffer developing countries from the financial crisis. Photo by: IDB

International financial institutions such as the World Bank and its regional sisters are touting their response to the widespread financial crisis and economic slowdown, which may total more than $82 billion in scaled-up or new funding commitments for 2009 through 2010.

But for consultants, contractors and job seekers, headlines can be deceiving. The IFI response will only lead to a modest number of new business opportunities and jobs, as projects for the 2009 fiscal year have already been approved and are being fast-tracked, according to sources inside the Asian Development Bank, Inter- American Development Bank and World Bank.

Many of the funding announced in recent weeks by IFIs in response to the ongoing financial crisis will come in the form of guarantees, budget support or trade financing facilities - all of which are intended to keep governments and financial markets liquid with cash.

Fast-tracking projects

In response to the crisis, IFIs are starting to "front-load" - or, fast-track - financing of work approved for this and coming years, which means a greater amount of money would be disbursed at the beginning of a project's life cycle.

"We are considering front-loading and increasing our funds to help those countries most in need," said Ursula Schaefer-Preuss, ADB's vice-president for knowledge management and sustainable development, at a Feb. 18-20 regional forum in Manila.

ADB recently previewed its actions in a report entitled "Global Financial Crisis and Proposed ADB Response." The World Bank Group, meanwhile, is creating a "financial crisis facility" to fast-track the approval processes for money from the International Development Association's $42 billion fund to some of the poorest member nations.

But front-loading may have long-term consequences for the development business, since it drains IFI coffers for future years and strains staff, a former World Bank consultant told Devex. The International Finance Corporation, for instance, has announced that it will be disbursing $31 billion in funding over the next three years, but it also instituted a hiring freeze in February due to the constraints on its current budget. These strains could lead the IFIs to hirer more short-term contractors and consultants to help manage the larger volume of disbursed funds, said the former World Bank consultant.

On the other hand, front-loading may prompt IFIs to rely more on consultants and short-term contractors to implement the expedited volume of lending and grants.

Some IFIs may try to make do with their current staff and consultants with a hiring surge unlikely. The IDB doesn't anticipate a hiring surge in response to the fast-tracking of its funding, but it will send more of its staff from headquarters into the field on a rotating basis, according to John Ferriter, the bank's external communications officer. Ferriter does not foresee an increased demand for consultants.

IDB has been making "big policy-based" loans to shore up borrowing countries' financial sectors, trade and infrastructure, among other things - all in all, to the tune of $6 billion. IDB will also focus on scaling up funding of sectors including water and sanitation, sustainable energy, and initiatives to create market-based opportunities for the poor as part of its response to the crisis, said Ferriter.

New funding

Current and proposed projects areas such as microfinance, small and medium-sized enterprises, financial management strengthening, good governance and public administration, as well as social safety-net programs have or may receive new funding commitments.

Already, the International Finance Corp. has, in cooperation with KfW Bankengruppe, committed $500 million to the "Microfinance Enhancement" financing facility to reach 100 microfinance institutions in 40 countries. The facility will be used to help microfinance institutions refinance loans and support lending to over 60 million borrowers.

The International Development Association, meanwhile, plans to disburse $2 billion in fast-tracked funds to "support public spending on infrastructure, education, health, and social safety net programs, such as school and maternal feeding programs."

Africa's regional IFI, the African Development Bank, has a $1.5 billion emergency liquidity fund and a $1 billion trade finance facility at its disposal to deal with the anticipated surge in demand from African nations.

The European Bank for Reconstruction and Development has already expanded its lending budget for 2009 by 20 percent to meet the needs of the banking sectors in Eastern Europe and Central Asia. As part of this move, EBRD is making $7 billion available to banks and small-to-medium-sized enterprises.

In a coordinated effort to recapitalize struggling banks and small enterprises in eastern Europe, the World Bank, European Investment Bank and EBRD have promised to disburse $31 billion in equity and debt financing, credit lines, and political risk insurance over the next two years.

But some question whether these large amounts will be enough to mitigate a global economic recession as "94 out of 116 developing countries have experienced an economic slowdown," according to a recent World Bank study.

With the anticipated increased demand on development banks and the uncertain length of the global economic slowdown, IFIs are already visiting the capitals of donor countries to ask for more money.

ADB President Haruhiko Kuroda met with U.S. Treasury Secretary Timothy Geithner Feb. 25 to ask for a capital increase. In May, ADB's board will meet in Bali, Indonesia, to vote on a capital increase that would allow the bank to expand its annual lending from $9 billion to $13 billion starting next year.

World Bank President Robert Zoellick has called for the creation of a global "vulnerability fund", jointly managed by all the IFIs and capitalized by donor countries setting aside 0.7 percent of economic stimulus money.

So far Zoellick's request has fallen on deaf ears. The recently enacted U.S. stimulus law, for instance, does not stipulate any additional funding for IFIs.

About the author

  • Oliver Subasinghe

    Oliver joined Devex in late 2008 as an international development correspondent and researcher. He previously served as a microfinance fellow for Kiva in Kenya and Uganda. During his tenure, he worked with Kiva’s field partners to improve their operations and governance. Oliver holds a master's in business from the College of William & Mary.