Question: The Bank Group has just approved a financial crisis response strategy which is built around four initiatives. What aspects of the crisis have determined the choice of such a response?
Answer: The global economic crisis, coming on the heels of the food and fuel price shocks, presents the Bank’s Regional Member Countries (RMCs) and, indeed, many developing countries in other regions, with serious difficulties in achieving their goals for growth, poverty reduction and social development. Countries and investors based in Africa are increasingly finding it difficult to get access to capital to finance trade and investments, especially long-term investments in infrastructure. This is in addition to dealing with the impact of the crisis on the real and trade sectors of the economy. Lessons from earlier crises amplify the importance of addressing apparent vulnerabilities early on in the crisis through policies and mechanisms to protect and pursue long-run investments in infrastructure and social development; to maintain essential public expenditure; and to sustain economic growth—all of which are critical to achieving the Millennium Development Goals.
It is against this background that the Bank devised a set of 3 initiatives that encompass quick and flexible financial support; using streamlined Bank processes, where appropriate, for the rapid preparation and delivery of ADF and ADB resources to mitigate the impact of the global financial crisis in Fragile, Low Income and Middle Income Countries in Africa.
These 3 initiatives comprise: (1) A US$ 1.5 billion Emergency Liquidity Facility which is an exceptional multi-purpose facility providing financial support to AfDB-eligible countries and non-sovereign operations in all Regional Members Countries that are suffering from lack of liquidity due to the global financial crisis. Access has been extended to a broad range of beneficiaries, including MICs and/or their central banks, public and private financial institutions and corporations in all Bank Group RMCs. The facility will provide bridge financing, with a recommended fast-track approval process. (2) A multi-phased Trade Finance Initiative (TFI) where the Bank introduces 2 new products: a new Trade Finance Line of Credit up to US$ 500 million and a new "multi-purpose" line of credit that enables the borrower to use the proceeds for trade finance as well as long-term project and corporate finance operations. These new TFI products are expected to appeal to Tier II and Tier III commercial banks following the virtual closure of the syndicated loan market. Another key source of demand are Financial Institutions actively engaged in trade finance operations, and currently experiencing reduced availability of traditional clean confirming lines of credit from international commercial banks. (3) A Framework of Accelerated Support to ADF Countries.
Finally, given the Bank’s leading position on the African continent and its unique mandate, we aim to work closely with countries to provide technical assistance along with financial support. Consequently, the Bank’s response strategy was fitted with an Enhanced Policy Advisory Support to the institution’s RMCs. In designing our response, we have taken note of on-going initiatives launched by other development partners to maximize synergies and impacts.
Question: Given the magnitude of the needs; don’t we think that resources earmarked for emergency financing could run out very fast?
Answer: Initial results from our preliminary survey and diagnostic work with our clients indicated that the needs are immense. On trade finance for example, partial and early estimates of demand amount to approximately US$3 billion. The first phase of our Trade Finance Initiative, worth US$ 500 million, is a rather conservative figure, but it is designed to be a catalyst. Under the US$ 1.5 billion Emergency Liquidity Facility, our idea is also to use the funds to leverage other funders from the “IFI club”. The Bank cannot and does not intend to close the financing gap in all projects or financial institutions in Africa alone. There are parallel processes by other MDBs and bilateral donors designed to also help address emerging financing requirements as a result of the crisis.
Question: The depth and extent of this crisis are not yet known. Does the strategy give the Bank the opportunity to adapt its response based on how the crisis evolves?
Answer: The reality is that this crisis is still unfolding; its full ramifications are not yet fully certain. The activities of the Financial Crisis Monitoring Group, a special task force of the Bank, have enabled us to better understand the impacts, country-by-country. In such a fast moving landscape where economic performance metrics are under constant revision, it is possible and even likely that the worst is yet to come. We hope not. These proposals reflect what we know at this stage and are an attempt to meet a part of the needs, because the needs are larger and will, in all probability, grow. The Bank’s response provides for a review of the instruments based on market developments, risk implications and tenor of the crisis from time to time. The first review will take place in 6 months or earlier, if circumstances warrant it.