Coping with the global economic crisis: Support by the World Bank to ECA countries and Armenia

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 IFI - International Financial Institutions; EBRD - European Bank for Reconstruction and Development; EIB – European Investment Bank; IFC – International Finance Corporation Closer work with IMF and EU—programs 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.

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. Government’s 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. Bank’s 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 Armenia’s 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