How Development Banks helped the Covid-19 Recovery

Research papers

“Countercyclical

Responses: How Development Banks helped the Covid-19 Recovery, and Lessons for the Future

Agence française de développement

Papiers de recherche

Les Papiers de Recherche de l’AFD ont pour but de diffuser rapidement les résultats de travaux en cours. Ils s’adressent principalement aux chercheurs, aux étudiants et au monde académique. Ils couvrent l’ensemble des sujets de travail de l’AFD : analyse économique, théorie économique, analyse des politiques publiques, sciences de l’ingénieur, sociologie, géographie et anthropologie. Une publication dans les Papiers de Recherche de l’AFD n’en exclut aucune autre.

Les opinions exprimées dans ce papier sont celles de son (ses) auteur(s) et ne reflètent pas nécessairement celles de l’AFD. Ce document est publié sous l’entière responsabilité de son (ses) auteur(s) ou des institutions partenaires.

Research Papers

AFD Research Papers are intended to rapidly disseminate findings of ongoing work and mainly target researchers, students and the wider academic community. They cover the full range of AFD work, including: economic analysis, economic theory, policy analysis, engineering sciences, sociology, geography and anthropology. AFD Research Papers and other publications are not mutually exclusive.

The opinions expressed in this paper are those of the author(s) and do not necessarily reflect the position of AFD. It is therefore published under the sole responsibility of its author(s) or its partner institutions.

Introduction

1. Important lessons for the future

2. Mapping the Covid landscape and couter-cyclical responses

2.1. The financial landscape under Covid-19 and the need for counter-cyclical lending

2.2. Counter-cyclicality – defining characteristics of scale, speed and direction

3.3. How development banks contribute to counter-cyclical support

3. How development banks contribute to counter-cyclical support

4. Conclusions

Bibliographie

Counter-cyclical Responses

How Development Banks helped the Covid-19 Recovery, and Lessons for the Future

Abstract

AUTEURS

Stephany Griffith-Jones

Central Bank of Chile

Diana Barrowclough

UNCTAD

Vaibhav Mishra

SOAS London

COORDINATION

Régis MARODON (AFD)

The objective of this paper is to shed light on the crucial and varied counter-cyclical roles played by development banks across the globe during the COVID-19 pandemic, and lessons learned for future shocks. It presents empirical evidence, case-studies and findings from a large number of in-depth interviews conducted by the authors with senior officials of development banks at the national, regional and multilateral level. The paper presents new and original data, information and analysis of how these banks helped countries’ governments, firms and households cope with the shock of ‘sudden stop’ to the normal functioning of the economy. It identifies key factors determining banks’ different and various responses, including not only acuteness of clients’ need but also the degree and nature of the development bank’s capitalization, links with existing national strategies or plans, its mandate, its ability to innovate, partnerships with other banks, historical experience and degree of political support. Different modalities of responses as well as their degree can be attributed to these factors. The paper concludes that for counter-cyclical support to be most effective, development banks needed to be able to respond at speed, at scale and with flexibility. One implication from these findings includes the need for these banks to be well capitalized during good times so as to be prepared for future crises. This made the difference between banks that could scale up massively, and those that had to leave unsupported key sectors of the economy. The paper shows various means of doing this. Another is that lowincome countries with limited fiscal space to respond to crises,

either financial or ones like COVID, need to be supported by the international community, including through capital, credit or guarantees. Different banks and countries found varied modalities to do this. One important additional source that hopefully can be implemented soon is the channelling of a part of the SDRs that will be redistributed from richer to poorer countries. Another pertinent lesson concerns the need for more information about nonperforming loans, resulting from the Covid crisis. This has important implications for future external shocks. In conclusion, the paper finds that the large majority of development banks made a big effort to respond to the unexpected challenge thrust upon them by the pandemic; there is a need to help support those not sufficiently well place to respond.

Keywords

Counter-cyclical scaling up, development banks, SDRs, Covid-19

Acknowledgements

We are grateful for the valuable support of GDN, especially Brendan Harnoys-Vannier and AFD, especially Regis Marodon, for this research. We wish to thank all the senior colleagues from development banks who were so generous with their time, information and valuable insights.

JEL Classification

E51, F34, G20, H12, H81, H84, I15

Original version

English

Accepted June 2023

Résumé

L'objectif de ce papier est de mettre en lumière les rôles contracycliques cruciaux et variés joués par les banques de développement à travers le monde pendant la pandémie de COVID-19, ainsi que les leçons à en tirer pour les chocs futurs. Il présente des preuves empiriques, des études de cas et des conclusions tirées d'un grand nombre d'entretiens approfondis menés par les auteurs avec des hauts responsables de banques de développement aux niveaux national, régional et multilatéral. Le papier présente des données, des informations et des analyses nouvelles et originales sur la manière dont ces banques ont aidé les gouvernements, les entreprises et les foyers des pays à faire face au choc d'un "arrêt soudain" du fonctionnement normal de l'économie. Il identifie les facteurs clés qui déterminent les réponses différentes et variées des banques, incluant non seulement l'acuité des besoins des clients, mais aussi le degré et la nature de la capitalisation de la banque de développement, les liens avec les stratégies ou plans nationaux existants, son mandat, sa capacité à innover, les partenariats avec d'autres banques, l'expérience historique et le degré de soutien politique. Les différentes modalités de réponses ainsi que leur degré peuvent être attribués à ces facteurs.

Le papier conclut que pour que le soutien contracyclique soit le plus efficace possible, les banques de développement doivent être en mesure de réagir rapidement, à grande échelle et avec souplesse. L'une des implications de ces résultats est la nécessité pour ces banques d'être bien capitalisées en période de prospérité afin d'être

prêtes à affronter les crises futures. C'est ce qui a fait la différence entre les banques qui ont pu se développer massivement et celles qui ont dû laisser des secteurs clés de l'économie sans soutien. Le papier présente différents moyens d'y parvenir. Par ailleurs, les pays à faible revenu disposant d'une marge de manœuvre budgétaire limitée pour répondre aux crises, qu'elles soient financières ou de type COVID, doivent être soutenus par la communauté internationale, notamment par le biais de capitaux, de crédits ou de garanties. Différentes banques et différents pays ont trouvé des modalités variées pour y parvenir. Une source supplémentaire importante qui, espérons-le, pourra être mise en œuvre prochainement est la canalisation d'une partie des DTS qui seront redistribués des pays les plus riches vers les pays les plus pauvres. Un autre enseignement pertinent concerne la nécessité de disposer de plus d'informations sur les prêts non productifs, résultant de la crise de Covid. Cela a des implications importantes pour les futurs chocs externes. En conclusion, le papier constate que la grande majorité des banques de développement ont fait un gros effort pour répondre au défi inattendu que leur a lancé la pandémie ; il est nécessaire de soutenir celles qui ne sont pas suffisamment bien placées pour y répondre

Mots-clés

Contracyclique, augmentation d’échelle, banques de développement, DTS, Covid 19

Remerciements

Nous remercions le GDN, en particulier Brendan HarnoysVannier, et l'AFD, en particulier Régis Marodon, pour leur soutien

précieux dans le cadre de cette recherche. Nous souhaitons remercier tous les collègues seniors des banques de développement qui ont été si généreux de leur temps, de leurs informations et de leurs points de vue précieux.

The COVID crisis threw millions of people, businesses and nations into ever more precarious situations, thus complicating the path toward achieving the SDGs, and undermining development. Public development banks (PDBs) reacted positively and in many ways to the COVID crisis, in terms of scale, speed, instruments and targets. Far from being in the background, they were in fact many governments’ main instrument for providing respite and guiding recovery. This recent experience is reinforcing the reappraisal of public banks already emerging since the economic crisis of 2007-2008 Post COVID, many more countries are now planning to establish new public development banks (PDBs) or to strengthen existing ones, and this paper will contribute to the debate on how best to do this.

This paper uses empirical evidence, casestudy analysis and in-depth interviews with senior officials of development banks to shed light on the critical and varied role played by development banks (especially national and regional, but also multilateral), across the globe during the COVID-19 pandemic. Drawing on the AFD-INSE data base, and other sources, including PDBs themselves, the paper presents original information and analyses to show how these banks played a key role to help countries, companies and households cope with the shock of ‘sudden stop’ to the normal functioning of the economy caused by COVID.

The paper distinguishes the response between national banks in high, middle, and low-income countries; and also examines regional and multilateral banks; asking what was the counter-cyclical COVID response during this

time of crisis. If not sufficiently counter-cyclical, what factors discouraged a sufficient response? What accounts for variation in the ability of PDBs to play a counter-cyclical role? How can these be overcome? More generally, the paper aims to show how to make PDBs more counter-cyclical in bad and good times. Factors like appropriate instruments for this purpose, as well as sufficient and timely levels of capital increases are analysed. Drawing on these findings, the paper highlights important lessons-to-learn from the COVID-19 period, for future crises and for the post COVID stage while increasing the focus on implementing the SDGs.

The timing for this review is pressing, because while some countries seem to be already coming out of the worst of the coronavirus epidemic, others especially in the developing world are still under a great deal of strain, accentuated further by the Russian invasion of Ukraine. In addition to potentially undermining the development gains achieved thus far, if nothing else the coronavirus experience has shown us that in today’s highly interconnected world, when one country or even region is vulnerable, all are vulnerable. And in times of vulnerability, it is public and development banks that have the mandate and the experience to deliver what is needed – in contrast to other financial actors. Indeed, PDBs were in many historical instances borne out of crisis, and this recent crisis has shown that institutions with a long track record and wellestablished frameworks were best able to deliver. They will also likely be best positioned to deliver for the heavy lifting that lies ahead.

The Covid-19 pandemic and associated fallout through the global economy was an extraordinarily dramatic shock to economies, companies, households and of course the health sector; governments around the world implemented massive support programs, albeit to different degrees depending on the depth of their pockets and the urgency of need. The paper shows that in virtually all countries, NDBs were a major tool to help moderate economic decline, using their capacity to grant counter-cyclical credit, often extremely quickly; they supported companies and jobs; municipal governments and the health service; and some directly supported households. However, the mere fact of being a public bank does not mean blanket success – some banks were in a better position to play this role than others and not all could achieve the results expected. Drawing out these lessons will be extremely important. As some governments are planning new banks and revisiting existing ones, others may be struggling with high levels of debt and the threat of nonperforming loans. The time is ripe therefore for better information about how these public financial institutions can best achieve their goals.

Part I of this paper highlights important lessons for public development banks (PDBs)’ ability to play a counter-cyclical role in the future –whether this should be another pandemic, external shock, or financial crisis in the context of the need to “build forward better” in a postpandemic world. It lists some major learnings from the recent covid-19 period and digs deeper into three factors that are most critical for determining banks’ ability to be countercyclical now and in the future. These are a) the

importance of reliable and sufficient sources of capitalization, and potential new sources of capital; b) the additional support that can be given by the international community to PDBs in poorer countries and c) the potential looming problem of non-performing loans during crisis lending and its impact.

Part II stands back and nests these lessons against the landscape of Covid-19 and PDB responses, painting with a broad brush to show the sudden blockages and drawing back of private financial flows, which sets in sharp relief the scale and scope of Covid-lending, how it was countercyclical and why it was so important. Part III supports the major lessons learned by showing the different contributions from different banks and reasons for this: it draws on individual bank experiences and findings gathered from a series of semistructured interviews with senior bank officials and contemporary literature and media. These bring original and timely views from practitioners working at the coal face of crisis lending, alongside the insights of economic theory. Part IV concludes with the strong message that, in times of crisis, countercyclical responses are best when they are “quick, decisive and at large scale”. It suggests several ways in which this can be achieved; including the re-directing of existing resources as well as raising new ones. It also raises concerns about the potential for non performing loans – a threat which may say more about the continued challenging environment in local and global markets than the underlying viability of borrowers, but which nonetheless will be a critical issue for the PDBs and their owners.

1. Important lessons for the future

Even before Covid-19 began in early 2020, there has been an evolution of perspectives on the roles PDBs need to play, particularly in counter-cyclical lending (see eg. TDR 2019:143-168). Much of the debate and analysis about PDBs had focused in the past on their role in providing longterm finance for important but under-financed activities such as infrastructure, innovation, and transition to the green economy. These remain essential for long-established reasons. However, the Covid crisis further strengthened the view that other roles are also key, especially providing counter-cyclical responses to crises- either financial or as most recently to the COVID caused one -, at global, regional, and country level. Indeed, Ambroise Fayolle, Vice President of EIB told us, that in the wake of the global financial crisis last decade, there was initially much debate in the EIB whether it should play an important counter-cyclical role. In sharp contrast, when the COVID crisis hit, there was clear and speedy consensus at the Board of the EIB, that this institution needed to play an important counter-cyclical role. In other countries where other financial and health crisis were still in painful memory, their banks also saw the necessity of taking a quick, counter-cyclical position. As we discuss below, this time around many other PDBs also played a stronger and speedier counter-cyclical role than in past crises. (See for example the case of the Colombian PDBs in Annex3.5 below.

After an in-depth study of publicly available empirical evidence, literature, and semi-structured interviews with senior bank management in many public development banks around the world, (see Annex), three main messages stand out. These are:

a) A number of key implications arise from the importance of PDBs’ counter-cyclical role

A central one is the need for PDBs to be sufficiently capitalized, to be able to respond well if a crisis or external shock hits an economy. In fact, it may be ideal if, as the CEO of an important PDB pointed out, that in “normal times”, PDBs had some spare capital, so they could respond speedily enough and at sufficient scale, if a crisis hit, without having to negotiate a capital increase before; thus, the PDB, could start early and help minimize harm to jobs and companies, as well as the broader economy, including investment.

Another option is for governments to rapidly increase the capital of PDBs, as soon as a serious crisis arises. This was the case for MDBs and RDBs during the global financial crisis, when after the spring 2009 London G20 summit, these banks saw an important increase in their capital; however, till now, the response of the international community has not implied an increase in the capital of most MDBs, which has limited their ability to scale up and increase lending much further than their otherwise valuable response. On the other hand, some national PDBs, such as the Uganda Development Bank and some regional ones, such as CABEI in Latin America, had their capital increased, which facilitated an important increase in lending. Furthermore, amongst MDBs, the relatively new AIIB, which had significant spare capital, as it had been planned this high capital would support a gradual rolling out of increased lending till the end of

the decade, had as a response to COVID, by far the largest increase in commitments, of 120%, between 2019 and 2020, of all PDBs we studied; this in fact illustrates clearly the point made above that the availability of spare capital facilitates a rapid and large counter-cyclical response by PDBs. Furthermore, it should be noted that this rapid increase of AIIB commitments was achieved mainly by co-financing projects and programs with other MDBs, (see Box 2). Other means by which bank capitalization could be increased include a possible reappraisal of the role of Sovereign Wealth Funds, which in many countries are not allowed by law to invest at home (Barrowclough 2022).

Naturally, though we highlight increases of capital as a key pre-condition, for increasing lending commitments in a counter-cyclical way, there are other complementary mechanisms that can be important to achieve counter-cyclical increases in lending, such as: 1) increasing other resources-such as access to private capital markets or funding from other PDBs- 2) possible need to adapt lending and other PDB instruments, and the sectors they lend to, as well as 3) -if necessary –to adapt or even change bank mandates. The provision of guarantees was cited by many banks as being important for their ability to scale up borrowing on international capital markets for on-lending to their clients in need; others cited the potential for bringing in new members as shareholders of the bank, both to improve their institutions` credit ratings (and thus their borrowing costs) or to increase the capitalization as new members paid in.

As we detail below, several NDBs were able to create new instruments for their COVID response to switch lending to the sectors that needed funds most (eg those in the service economy, where restrictions to movement and quarantines tended to hit hardest), and even in some cases to adapt mandates. Other PDBs were able to be counter-cyclical, without major changes in instruments or mandates; most PDBs, except very weak ones financially, changed their usual orientation and lent more to sectors which needed financial support most, as had been most badly hit by the impact of the pandemic.

b) The need for support for poorer countries

For those countries, such as many LICs, which have limited fiscal space to respond to crises, either financial or ones like COVID, it may be more difficult for their national governments to significantly capitalize their PDBs. In that case, it becomes desirable for the international community to step in, and provide additional resources, either to help capitalize these national PDBs, or provide them with additional credits or guarantees. As we discuss below, such international support could be provided by richer countries’ governments or their NDBs,-like KfW, AfD or others-,and by regional PDBs, like the EIB; an alternative route could be the use of SDRs, either those already allocated to all countries in 2021, or to those originated from a potential redistribution of SDRs, as discussed, and in principle supported , by the G20, from advanced to poorer economies.

As the Covid crisis demonstrated, the world is badly prepared for confronting a global crisis with significant and synchronized spillover effects across a wide spectrum of countries. As Plant, forthcoming, has pointed out, sharing access to global reserves could be an important

component of the response to any such crisis, especially as the only truly global financial response to the current crisis was precisely the issuance of SDRs; this is different from the global financial crisis, when for example important increases in the capital of MDBs and RDBs took place, which facilitated strong increases of their lending commitments (see for example, Griffith-Jones and Gottschalk, 2012). Furthermore, as pointed out, the G20 has expressed support for the redistribution of some of the SDRs allocated to richer countries that do not need them, to poorer countries that need them a great deal. A very good option seems for these SDRs (or at least part of the reallocation) to be channeled via MDBs, so they can increase their capital. This is currently possible only for selected institutions that benefit from prescribed holder status for SDRs (which does include the main MDBs), but it could be broadened in future to other institutions, if the international community so wished, and modified existing IMF Articles of Agreement.

How can the international community make the SDRs work to help poor and vulnerable countries respond better to the challenges still posed by COVID, both for economic recovery and greater spending on health, including vaccines? This could be done via transfers of SDRs from the rich countries to the multilateral development banks (MDBs), such as the World Bank and RDBs, such as the AfDB, institutions that are already authorized holders of SDRs; furthermore, countries could use the SDRs they have already received, as part of the US $ 650 billion global allocation in 2021, partly to capitalize their own national PDBs. There have been important calls for such a use of SDRs, (see for example UNCTAD TDR 2021:19-20), but little progress on action so far.

MDBs are the financial institutions well placed in principal for this role. They have broadly the ability, thanks to prudent financial management, to leverage their capital with private sector financing as well as other public co-financiers; and also the technical expertise to guide and manage it. They can act as intermediaries between the global financial system and countries in need, with low capacity and with difficult access to private capital markets. This includes both LICs and MICs that are urgently requiring increased long-term funding to finance investment essential for recovery as well as for health –for example for vaccine production.

If SDRs could be used to provide an addition to the MDBs capital base, this would be excellent, as it would allow them to expand their lending and guarantees, in a more counter-cyclical way without having to call on member countries to increase capital in other ways (which would also be a good, although different, strategy). Given the important strengths of the MDBs, this would help broadly to ensure the resources were well used; the leverage they have, especially by cofinancing with private flows, as well as other actors, would allow the positive effect on borrowing countries to be multiplied; indeed, the AfDB estimated 1 that MDBs can leverage SDR resources 3 to 4 times. Furthermore, the MDBs’ preferred creditor status may further make attractive channeling SDR resources to them. Some development banks in the low-income regions where it is already difficult to raise finance from other sources have increased resources via use of

1 At a French Treasury/CGD event on Exploiting the full power of SDRS, in Paris on 2 February 2022.

SDRs by MDBs on their radar and are hopeful for progress on the issue, as well as making proposals on how to implement them.

There are some technical challenges to reallocating SDRs to MDBs, but these stem predominantly from the requirement to retain their reserve asset characteristic (see for example, Plant op cit). But there are potentially ways of structuring any SDRs given to MDBs to both count as their capital and to maintain their reserve asset characteristic, as currently being studied by several MDBs. Similarly, it would be possible to envisage a single country’s SDRs, already received thanks to the $650 billion allocation made in 2021, being used to increase the capital base of its own national PDB, or what could be technically easier, to provide additional loans to their national PDB, so it increases its lending to companies. In an era where development banks are experiencing a Renaissance, marshaling some of the country’s SDRs to the benefit of much needed investment and/or working capital via their PDBs, might make a great deal of fiscal and monetary sense.

c) Future challenges

Will there be higher losses for PDBs in the counter-cyclical loans and guarantees made in COVID times, as companies struggle to recover in today’s continued challenging environment both in local and global markets, now accentuated by lower growth and uncertainty due to the conflict in Ukraine? Companies can potentially be expected to have greater difficulty and willingness to pay back loans than in normal times – even for firms that before the crisis were on a solid footing. What provisions are made for NPLs of PDBs, for counter-cyclical lending and for guarantees granted? It could be assumed losses will be higher, and therefore there may be a need to have higher provisioning. If provisions are not sufficient, is there a risk that these banks find themselves in problems in the future, as losses could erode their capital and thus their future capacity to lend? In that case, should they be recapitalized? One can also even turn this question around and ask, if banks have no increased NPLs,(which from a financial perspective is clearly positive), but given the extreme needs especially in some countries, does it mean they were possibly too cautious and not sufficiently counter-cyclical in their support to firms that were temporarily in crisis, due to external events, and were otherwise viable businesses. This is a matter, which may require further study, by the PDBs themselves, as well as possibly by outside experts, and bodies like the IDFC and the regional associations of PDBs.

2. Important lessons for the future

To set these important learnings above in context, Part II briefly sketches the Covid-period financial landscape to show how the actions of PDBs contributed to relief and recovery. From the start of coronavirus, lockdown, and social distancing policies in early 2020, public development banks (PDBs) played a significant role in the outpouring of counter-cyclical support to the economy. They met the need to create credit; to guide credit where it was needed; to on-lend government resources; to offer expertise and advice, including to governments; to create co-financing and collaborative partnerships with other banks, including MDBs and RDBs, and institutions; and to reach a diverse range of clients including firms, especially SMES; local authorities and in some cases households 2. Section I below sets their role within the broader financial landscape of the time, alongside other financial institutions, and government agencies. Every country was hit, even those that did not experience coronavirus or did not put in place lockdown policies as global trade collapsed, capital flows ricocheted (especially from developing countries to safer havens abroad) and firms and households suffered an immediate hit to revenues, working capital and liquidity. Longer-term investment projects such as infrastructure typically went on the backburner, and that finance which was still searching for yield was channeled into new and growing business opportunities in IT, or into financial assets such as real estate and equities as opposed to physical businesses. This section shows that public and development banks, often working closely with governments, played an essential role by going against that general trend.

2.1. The financial landscape under Covid-19 and the need for counter cyclical lending

The impact of COVID on economies was massive, due to the economic shock of travel restrictions, lockdowns and quarantines, which hit both the supply (production), but later also the demand of goods and services, as incomes fell. In the context of high uncertainty, and declines of sales by firms, the private financial system did not, on its own, want to lend, leading to a pro-cyclical response, which we illustrate below, by examining trends in capital flows to emerging and developing countries. As shown in Fig 1 net capital flows were strongly negative through 2020, if fluctuating, translating into a vicious cycle of currency devaluation for many countries, further weakening debt sustainability, in a context of reduced fiscal space, which implied governments (especially in certain regions and income categories) had difficulty issuing new debt on international financial markets and limited resources with which to meet the news needs of their people.

In this context, most PDBs (at a multilateral, regional, national and sub-national level), expanded their lending significantly; their counter-cyclical response in part helped compensate the procyclical response of the private financial sector (both national and international) and the shock

2 See also MacDonald et al 2020 and Gutierrez 2021 for reviews of this period.

of sudden-stop to anticipated revenues of companies, a dearth of working capital and tightened liquidity. Action by PDBs was complemented at national and at regional level, as clearly illustrated by the EU experience, by major support from national governments, especially in the developed countries, that had more fiscal space. Many developing country governments however had very little capacity to respond (TDR 2020); other emerging country governments did respond more, but at the cost of higher external debt levels, and increases in inflation, which is restricting their ability to continue supporting economic recovery at present.

While this experience was broadly felt across the globe, on closer inspection the shock to GDP, investment and financial flows stemming from covid-19 seems to have varied greatly across countries, sometimes even within and between regions (see Figure 2). The European Union region experienced the biggest shock to GDP since WWII with a 14% drop in output from 2019 to 2020 and falls in the primary income to households in the order of minus 7% (EIB 2021:9). Gross Fixed Capital Formation, a measure of investment, fell sharply down 14% from 2019 to 2020. In North America, GDP contracted by 3.5% with the nation also experiencing the worst recession since WWII, even as government contributed to maintaining aggregate demand with a $1.9 trillion package, some 9% of GDP (TDR 2021:31-38). Latin America was also severely hit with both a high contagion and mortality rate and a sharp economic turndown; GDP for the region fell 7% in 2020 and with low growth recovery expectations for the subsequent year to come. This has set back, or even reversed, the rather impressive social development and poverty reduction achieved in previous decades. African economies also experienced large recessions of 3.4% on average for the region, which wiped out years of development and brought tens of millions of African citizens into further poverty (World Bank 2021a and 2021b). South Africa, in particular, experienced a contraction of 7% of GDP, in 2020 alongside massive disruptions and serious setbacks to health, education and investment.

Figure 1. Net capital flows to developing countries, by type

Source: UNCTAD TDR 2021

South Asia was also hard hit with a sharp contraction of 5.6% of GDP in 2020, and deficient healthcare systems and a high level of informality magnified the health and economic impacts. South East Asia contracted by almost 4% as some of the larger economies in the region struggled, especially those that were dependent on tourism and travel. East Asia was the region showing the most resilience with a growth rate of 0.3%, where economies such as China and Korea were able to minimize the disruptive impact on economic growth; although Japan experienced an annual contraction of close to 5%. The timing and prospects of recovery for all regions are still somewhat unclear as even by mid-2022 Covid was not over, and trade and business have not recovered pre-Covid levels.

2.2. Counter-cyclicality – defining characteristics of scale, speed and direction

Before we start analyzing the counter-cyclical support provided by PDBs, we would like to highlight what a good counter-cyclical response means. As shown in Figures 1 and 2, the financial sector as whole tends to respond in a pro-cyclical fashion, accentuating and magnifying the trend whether positive or negative. Counter-cyclicality means essentially going against this, swimming upstream, or entering the financial market when others are retreating. Hence in our analyses it meant firstly, and perhaps most important, a significant scaling up and increase of lending and guarantees by the PDB, which is higher than increases in previous years. Secondly (and drawing also on our interviews), it implies accelerating the speed at which loan commitments are made and disbursed compared to previous periods, whilst trying to maintain the quality of evaluation. The use of digital technology, both by the PDB and by the borrowers, was very helpful in this. Thirdly, it refers to portfolio choices – counter-cyclical support meant allocating more funds to sectors and borrowers particularly badly hit by the COVID crisis, eg. services, and in some cases, exports; also to local authorities.

Figure 2. Net capital flows by region

All of our interviews with the senior officials of PDBs revealed a high level of awareness and sensitivity to the need to provide a counter-cyclical support and what this would entail. Some, in particular the EIB, highlighted the significance of the reappraisal of the role of PBs that has evolved in recent years and subsequent much wider acceptance of the need for PDBs in general to exercise a counter-cyclical role. As mentioned above, the EIB Board had had much debate about the need for it to play a counter-cyclical role at the time of the Eurozone debt crisis, but by the time of Covid, the need for counter-cyclical support from development banks did not have to be discussed, as the idea had become widely accepted; this also seems to be the case for several other development banks (see Boxes in Annex 3, on Colombia and the German bank, KfW, for example). Therefore, there was in many PDBs, a significant increase of lending and financial support as private lending retreated, or grew less than in the past; in particular PDBs tended to channel funds into sectors, firms and households that were otherwise not receivingor receiving less- revenues; without such PDB lending such firms could otherwise have collapsed due to a lack of sales and liquidity. In some cases where banks were not able to do this, they were severely undercapitalized for what was needed.

There is also a matter of speed, as pointed out above, – using existing mechanisms and instruments that are fast or creating new ones. All around the world these tended to be needed in sectors and firms that were strongly dependent on trade, whether as part of global value chains or because they were highly export oriented, but also in sectors relying on private domestic consumption, especially in services where movement and personal closeness is essential, which fell significantly, as a result of quarantines and in some cases, restrictions on domestic and international travel; these included transport and tourism firms impacted by the sudden stop in travel and movement and construction and infrastructure projects where working from home was not an option; furthermore, given the fall in aggregate demand in goods and services, companies invested much less.

Another particular sector where support from PDBs was crucial concerned the efforts for vaccine finance, this included the Covax program which may need public support because its activities and benefits are regional rather than national; also investment in the vaccine itself because of the risks and uncertainty (see case-study EIB, in Annex 3). Furthermore, the role played by PDBs like the EIB to help finance Bion-tech, which led to the development of the Pfizer/Biontech innovative anti-Covid vaccine made a major contribution to Covid control worldwide. (Griffith-Jones and Carrera, 2021)

2.3. How development banks contribute to counter-cyclical support

Against this backdrop, the rolling out of governments’ increasing support to companies and for maintaining jobs, as well as household protection schemes and the supportive role of development banks is clearly going in a counter-cyclical direction. PDBs responded rapidly and in a counter-cyclical direction– rapidly providing working capital, loans and ‘breathing space’ to

distressed firms and households by negotiating payment moratoriums or grace periods, restructuring existing loans and extending new ones, as well as providing guarantees and other forms of support to commercial banks to increase their lending (Macdonald et al 2020; Gutierrez 2021; World Bank 2021).) See also Appendix 2, showing increases in lending during 2020, as compared to 2019, in a number of PDBs.

Most PDBs made an extra effort to be fast and flexible in meeting urgent needs, quickly learning and adopting new digital technologies and processes in their efforts, whilst accepting higher levels of uncertainty and risk, to provide a timely support service that was distinctively different from that offered by the market. They determined to provide additional and counter-cyclical support as pro-cyclical sources of finance dried up or fell in response to the uncertain and fearful times. This section presents an overview of some of the main and salient trends.

Based on our interviews and literature studies, in Europe, DBs support helped compensate for the negative health, social and economic impact of COVID itself, going in the opposite direction from the private financial sector. In most countries economic recovery happened quite quickly when economies opened up, with GDP returning to pre-covid levels, for example, by the second quarter of 2021 for at least 20 EU members and a liquidity crisis has till now been averted (EIB 2021). In several European countries, public development banks helped support the recovery, In some banks increased lending was especially marked, including KfW (+78%), EIB (+ 65%) (See Table in Annex 2). Some individual countries however remained in pain, especially in Southern Europe: for 9 EU members, GDP did not regain pre-pandemic levels by the start of 2021 (EIB 2021). The impact of PDB lending is difficult to assess precisely, but clearly a stronger PDB response contributed to smaller economic downturns and speedier recoveries Some industry sectors also continued to be hard hit across the board – notably trade, tourism, and services in general and some public finance responses directly targeted these sectors.

Of course, the role of PDBs was complemented by other public sources of finance and this is particularly the case in Europe, where the EU governing authorities initiated a series of supportive financial measures and packages 3.In a recent 300-page report by the EIB 4 on this period there is plenty of discussion of public guarantees, subsidies, loans, grants and other forms of support.

In other regions, especially where the financial sector is less deep than in the European countries, and there is often less fiscal space for Governments to increase their spending and guarantees. the role of PDBs may be even larger, or more apparent, especially if they can leverage resources to support the productive economy and public services(especially health) when others cannot

3 The suspension of the EU Stability and Growth Pact’s deficit and debt rules at national level, enabling coordinated more expansionary national fiscal responses; secondly grants and subsidized lending facilities offered to firms and individuals at the national level, complemented by the SURE job protection facility, the European Guarantee Fund and the European Stability Mechanism’s crisis response, and above all the Next Generation EU, which combines recovery from COVID, with the long-term support to make Europe greener, more digital and more resilient. A third response was the European Central Bank’s large-scale purchases of euro area government bonds.

4 https://www.eib.org/attachments/publications/economic_investment_report_2021_2022_en.pdf

do this. They achieved it either by borrowing on the capital markets or by obtaining funds from other sources, such as multilateral and regional PDBs. While there are some broad trends emerging in each region, experiences differ at the level of individual banks, reflecting their individual contexts, structures, and resources. In Latin America, the role of bank guarantees appears to have been particularly significant, given their value for dealing with uncertainty.

More broadly, in the Latin American and Caribbean region, the response of both national development banks and regional ones was very positive, especially the former ones, as detailed below. According to CEPAL estimates, during 2020 and till February 2021, the multilateral InterAmerican Development Bank (IDB) and sub-regional development banks (the Development Bank of Latin America (CAF), the Central American Bank for Economic Integration (CABEI) and the Caribbean Development Bank (CDB)), committed US$ 8 billion and US$ 12 billion, respectively, to fight the pandemic, which in total represented 0.5% and 1.9% of regional GDP and of exports of goods and services respectively. These funds were targeted to finance emergency programs, including health-related measures, as well as the provision of contingency credit lines, especially to national governments. In the case of IDB, the expansion in lending to confront the effects of COVID-19 on the region in fact surpassed those following the global financial crisis of 2008-2009 For their part, national development banks have committed the equivalent of US$ 90 billion in financial support in the same period, which amply exceeds that provided by regional and sub-regional development banks Moreover, national banks have supplied liquidity support through a variety of instruments, including guarantees, grants and refinancing schemes, focusing on lending to the private sector, especially SMEs. The emergence of national development banks as key players in the provision of finance points to the need to foster greater cooperation and coordination between regional/sub-regional and national development banks. The lending capacity of some regional development banks was increased through increased capitalization. For example, CABEI increased its authorized capital by 40% (US$ 2 billion) in April 2020. 5

In Africa, guarantees were also important as a tool for DBs to help support their clients, and some banks further cited their dependence on sovereign guarantees for their ability to borrow on international markets. At the regional level, the African Development Bank increased lending by 36% and several national banks by a much larger magnitude.

Comparing the range of these experiences, some banks were clearly better placed to respond to the crisis conditions thrust upon them than others. Standing back and looking just at banks’ lending and other empirical evidence across all the regions, we found some examples of very significant increases in lending commitments and disbursements and in other measures of counter-cyclical support, such as guarantees. Notable examples of very large increases in commitments are, in alphabetical order, AIIB, EIB, KfW, Nigeria Development Bank, and Uganda Development Bank (see Table 1, and Annex 2). Others did not succeed in increasing lending

5 CEPAL (2021). Financing for development in the era of COVID-19 and beyond, March 2021.

https://repositorio.cepal.org/bitstream/handle/11362/46711/1/S2100063_en.pdf

commitments in 2020. In a few cases, lending commitments actually went down, signaling that the bank was unable for various reasons to play its much-needed counter-cyclical role, and was in fact pro-cyclical. (One such case was BNDES). For several banks, increases in commitments did not go hand in hand with increased disbursements (Table 2); and in others, commitments fell while disbursements actually increased (e.g., AfDB). (For more details, please see Boxes below). For others, commitments fell, and disbursements also fell, but by a lesser amount (e.g., DBSA, Black Sea). It is important to understand these different experiences because all banks aimed to be relevant and of support, especially in countries where their firms and households had few options to turn to. Also, they will all be expected to do the heavy lifting in any future crises, whether immediate ones such as the recent Covid one, the impact of the Russian invasion of Ukraine and its global effects or future financial or other crises; as well as long-term issues for resilience, climate change adaptation and mitigation.

Banks with increases in Covid-year lending commitments

More than 20% increase

Korea EXIM +23%, Korea DB +25%

BOAD +36%

Rwanda DB +42%

EIB 65%

Uganda DB +73%

KfW 78%

Industry bank Turkey +50%

Nigeria DB +99%), AIIB (120%)

Less than 20% increase

BD Canada (+4%, CAF +8%

China DB +10%

SMI (+8% CDP Italy +14%

Korea Industrial Bank +12%

Banks with decreases in commitments

More than 20% decrease

Black Sea -25%

DBSA -65%

AfDB -42%

Less than 20% decrease

JICA -4%

SIDBI -10%

IsDB -15%

Table 1. DB changes in loan commitments Year 1 of Covid-19 (% change 2019 to 2020)

Table 2. DB changes in loan disbursements Year 1 of Covid-19 (% change 2019 to 2020)

Banks with increases in Covid-year lending disbursements

More than 20% increase Bank of Nigeria +79%, AfD +36%, Uganda +32%, BOAD +32%, SIDBI +22%, BOAD +32, Exim bank of Korea +23%

Less than 20% increase Bancoldex +11% BNDES +17.37%, CAF + 3%

Banks with decreases in disbursements

More than 20% decrease

DBSA -23%

Less than 20% decrease Black Sea -8%, BNDES –10%, Rwanda DB -17%, Islamic ICD -15%

Source: Data based on annual reports of banks, websites and other available literature. See also Table in Annex 2.

3. What accounts for differences in bank responses?

As noted above not all banks were able to be as counter-cyclical in practice as others and Part III teases out some important characteristics or features that determined what banks could offer. Nonetheless, many succeeded in significantly increasing their lending from previous ‘normal’ years - as well as using new modes of operation, designing new or adapting existing instruments, and in some cases changing their mandates and business model.

a) The depth or acuteness of need. The degree of economic shock caused by COVID and its impact on output, employment, trade, investment, and other variables varied from country to country depending in part on the structure of their economy and the degree of social support and other automatic stabilisers. As shown above the degree of GDP decline was different amongst countries (in some Asian countries it was significantly less acute during 2020, whereas Latin American and European countries had the largest declines). Countries heavily exposed to exports and especially services, both international, like tourism, and those for the domestic market, were most affected; even countries that did not have covid lockdown policies still were impacted because of their exposure to global value chains or decline in demand for their exports. However, severity of lockdowns had complex effects; on the one hand, they depressed production and demand of goods and especially services; however, if more effective in controlling COVID, as in China, Taiwan, Korea, New Zealand, for example, they may have facilitated quicker and more sustained recovery. Another important feature determining the acuteness of need for support by PDBs concerns the depth or strength of domestic capital markets. In Europe when capital markets dried up, they tended to recover quicker, but it was not the same and not so speedy in many emerging and developing countries, especially the lower income ones. As indicated in Figures 1 and 2, in many developing countries there was a rapid and strong reversal of capital from their shores and even if temporarily, this would be expected to contribute to tighter credit conditions.

b) Levels of capital and other sources of funds. This is perhaps the single most important issue and as highlighted in Part I, of immense significance for the ability of PDBs to respond in the future. In our interviews, all banks emphasized the importance of having sufficient capital and resources with which to meet their clients’ needs and to fill the gap in their access to credit. While at an anecdotal level there is some question about whether commercial banks ever experienced a shortage of liquidity and of capital, or whether they were mainly unwilling to lend due to high risk and even uncertainty that companies would be able to pay back; from the public banks’ perspective their ability to respond in a counter-cyclical fashion varied greatly according to the size, source, and reliability of their funds. One bank raised the importance that banks have sufficient capital in reserve so that they can act when emergency strikes, and can be swiftly counter-cyclical, at sufficient speed and scale. For this, it said, the lesson was that a prior increase above current levels was needed. Another bank, the PDB of Uganda, said its very significant increase in recovery lending benefited from an increase in its capitalization, which was doubled by the government. The CEO said she was able to commit all the new funds gained; and saw this as an indication also of the power of having wholehearted support from its government. This bank was able to boost lending from 2019 to 2020 by as much as 75%.

Other African banks were not in the same boat. One in particular noted frustration that it could only borrow on private international markets at its relatively low governments credit rating, and hence capital costs were high; also, it needed a government guarantee as well

which was hard to get. For this bank, even though it did manage to increase lending commitments significantly, its actual disbursements were down by around 12%, meaning that despite its intentions it had not succeeded in being counter-cyclical. Businesses in the sectors most hard hit, such as tourism, could not be supported at all.

The case for the importance of robust capitalization is further made by the two banks that showed the greatest increase in lending among all we surveyed, namely the AIIB and KfW. While the AIIB is still a relatively new bank, having been established in 2016, its potential impact was clearly shown as it increased lending by 120%. In interview, the AIIB emphasized that its ability to scale up so significantly was because the capital was already there – in effect, they simply rolled out the lending sooner than had been otherwise anticipated. They also used a large part of these funds to co-finance loans mainly evaluated and partly funded by the Asian Development Bank and the World Bank, collaboration which facilitated AIIB ability to increase commitments so much and so quickly. Germany’s KFW also has significant and reliable funding, and was provided additional funds by the Government after Covid started.

Italy’s CDP gave the example of the importance of source of capitalization as well – as a post office savings bank, its regulatory framework imposes limitations on how it is allowed to lend its funds and it would not normally have had so much leeway to scale up in response to Covid; however, it could respond because of its access to significant European funds. These broad experiences are also strongly supported by literature on the importance for PDBs of having a source of capitalization that is sufficient, reliable, and appropriate for its purpose (see for example, Eurodad 2017; Griffith-Jones and Ocampo, eds., 2018; TDR 2019:143-168 ). As noted in Part I of this paper, now debate and international action needs to focus attention on how PDBs can be better capitalized for the next crises, in addition to their other roles of supporting long-term development finance, especially for funding investment for transition to a more sustainable and just economy.

c) An existing national government strategy. This was especially important for some banks because it meant they had a roadmap already set out, and in some cases lines of communication directly with ministries (especially Finance) already well established. This finding from several of the banks interviewed reflects the broader argument in the economics literature of the need for a clear developmental plan when it comes to define mandates for a PDB (see for example Griffith-Jones and Ocampo, eds, op cit; Barrowclough and Marois 2022); and it is interesting that such advance planning has big benefits when it comes to crisis response also. It was helpful for banks to know national priorities when it comes to economic sectors and to be able to see their urgent and rapidly-put together loan proposals within a broader framework. The DB Uganda had already identified priority sectors that were essential for job creation and when covid struck the same sectors were relevant, but the list was extended further. This gave the banks a strategic direction and confidence that their lending decisions were also in line with government priorities. Several banks noted they felt fortunate that government plans had been clearly set out just a short period before covid struck – indicating the importance of preparation and vision. Some banks gave advise and support to their governments on a daily basis (eg CDP). This makes communications and support between Governments and DBs a two directional road.

d) Government financial and political support for DBs (either via increased capital or loans and subsidies) is essential – for national or as in the case especially of Europe, regional sources. It was also noted particularly by the differing experiences of the African DBs interviewed; one bank that significantly increased its lending and disbursements reported being strongly supported by its government; another that saw lending commitments increase by less and disbursements actually fall, did not cite this support. Support can come

in a number of forms; one that is important concerns sovereign guarantees. Several banks that were less counter-cyclical noted the importance of these and the fact they could not always get them. “We are always looking” for this, one executive notes, as otherwise their borrowing costs are too high. Guarantees from the development bank to client banks and other borrowers were also important, especially for banks that could not do much rescheduling of loans or otherwise reduce the immediate crunch to borrowers of repayments. One element that is particularly important concerns whether government guarantees to their PDBs are registered above or below the line in the fiscal accounts as this understandably impacts significantly on the extent to which governments are willing or able to offer them.

e. What did clients actually need? In most cases, it was short-term loans for liquidity and working capital that were most needed, in the first stage, as companies’ revenues fell. In this regard it seemed to make a big difference whether banks were oriented to SMEs, in which case they could respond quite quickly, or to infrastructure where they did not/could not, though many of the banks that had increased lending, said they were able to switch from lending long-term to infrastructure to lending short term for working capital, often mainly to SMEs. In other cases, banks noted that previous lending projects, as well as portfolios of evaluated projects which did not have enough funding previously, were valuable as they could be either expanded, renewed or financed for the first time relatively quickly; although at the same time, these still had to be relevant in the current conditions: One African PDB noted that the infrastructure projects went onto the back burner; also that tourism was no longer feasible to lend to as a sector despite the fact that firms in the sector were in dire straits. Some of the other banks that also usually lend to infrastructure, such as the AIIB, also noted that long-planned projects were delayed. Other banks with more of a tradition of lending to municipal governments, health sectors, exports, and SMES seemed to be able to increase lending and quickly.

f. Modalities – related to the above – the modalities used tend to be related to whether banks typically, ie before covid, focused on long-term investment as compared to other functions such as providing export or import cover and other forms of working capital. This is where the crunch was and the center of the liquidity crisis and banks doing this kind of lending were more likely to scale up. The type of instruments used was also linked with banks’ abilities to scale up or to lend at speed. Supporting companies by buying equity in them, for example, has its attractions, but it is also heavy in terms of its capital commitment, and it takes time to organize. And the value of an equity position can be difficult to ascertain in a crisis time when markets are volatile and prices and revenue forecasts rapidly changing. Also as noted above, for some banks the modality with which they could offer counter-cyclical support was tightly regulated – some for example were not allowed to offer to reschedule existing debts or to switch modalities to provide working capital as opposed to expansion or start-up loans. However, many PDBs, for example in Latin America, had an important use of rescheduling existing debts (CEPAL 2021).

g. Internal innovations – many banks noted the challenges of working from home and especially having to respond speedily, having to very rapidly adopt new processes, including in particular digitalization. Some banks found themselves understaffed during the crisis (the Rwandan PDB we interviewed was coping on half the usual number) while others were able to scale up, taking on new staff members and rolling out digital loan applications, verifications, and disbursements. Uganda Development Bank is a good example on this - it re-organized itself, including by hiring new staff, modified the process review for loans (aiming to combine speed and cautious evaluation) and incorporating more digitalization.

h. Partnerships with other banks DBs in the high-income countries did offer important support to fellow institutions in lower income ones and this was cited as having been extremely welcome and important to their recipients as it helped provide not only much needed capital, but also contributing to speed of response and a broadening of priorities. For example, the EU gave support to Uganda tourism sector; the EIB, AfD and KfW did also provide much support. Regional banks also supported their national members, such as the AfDB, and also the newer financial institutions such as the AIIB. In the AIIB’s case, its ability to expand lending so quickly in the first months of Covid (when it raised its Crisis Recovery Facility from $5 billion to $10 billion within a month of establishing it, as requests from members were so high (Barrowclough 2020), involved in addition to the points above, adapting their operations to work closely with other MDBs and create a network of support options, especially for the most vulnerable economies. KfW gave support to many NDBs (and other actors in emerging and developing economies).

i. Mandate. The mandate of individual PDBs is so important that it may seem unusual to put it as the last point in this list, but in practice the preceding points are all either directly or indirectly related – or should be – to what a PDB is expected to do. For one bank interviewed, its mandate was clearly to be counter-cyclical and public-oriented – while at the same time it was required to focus more on long-term lending and to SMEs. It was nonetheless able to respond very quickly within this time, launching a Social Response within one week of the first national case registered of Covid, and issuing a bond two months later with further measures including additional loans and guarantees (see Box CDP and Vandone et al 2020).

Other banks that also amended their rules by allowing “fast track” lending to health systems and small businesses under strain were also able to provide an important counter-cyclical service, even when the total amounts involved were relatively small (eg the Council of Europe Development Bank, CEB; see Reyes 2020). In another example, the bank’s re-evaluation of its mandate, while keeping to the broader roadmap envisaged before Covid, enabled a massive counter-cyclical operation (see Box AIIB). The New Development Bank also had to be flexible as its existing policy framework did not support the special needs of members during the covid period, and early loans to members needed a special waiver to be allowed (Barrowclough 2020). Subsequently the Bank revised its policy on the definition of what was an emergency – which had previously been related to natural disasters and conflict. By comparison, in another bank, the mandate was not revisited even though it meant that SMES in a particularly hard-hit services sector did not get support. The reason given was the potential risk of non-performing loans, however at the same time the long-term implications for the economy, given the importance of this sector, could be far-reaching if important resources, skills and knowledge is lost.

4. Conclusions

An important conclusion of this study is that the counter-cyclical role of PDBs has increasing, as well as broad, support and consensus. This is reflected in the very large scale and extremely speedy response by PDBs to the Covid-19 crisis. For example, the EIB Board did not even debate the need for a counter-cyclical response to the Covid-19 crisis, but embraced this policy immediately and unanimously, whereas during the Eurozone crisis a decade before, the EIB Board had initially debated the need and scale of such a response. It should however be mentioned up-front that the counter-cyclical response by several MDBs (such as the AfDB) and some NDBs has been somewhat constrained by limits on their capital, or the slow speed at which such capital is being deployed. This is different from the quick and significant increase in the capital of MDBs that followed the 2008-2009 financial crisis.

Though this study emphasizes the key counter-cyclical role that PDBs do and need to play, it is of course important to stress that there are of course other key roles PDBs need to play, such as helping fund the massive investment required to achieve the structural transformation to lowcarbon and more inclusive economies so urgently needed. In these examples, public development banks still need to lend ‘against the stream’ and counter to the main direction of the rest of the financial system, but this is more a feature of the inherent and permanent features of the underlying green investments (such as scale, risk, uncertainty, and public good characteristics) than cyclical trends in the economy.

With regard to counter-cyclicality, there are three dimensions we wish to emphasise. The first one is clearly scale of response, which needs to be large, to be really impactful. The second dimension is speed, as time was of the essence in Covid-19 times, as well as in other crises, to help save private companies and jobs, as well as support governments, whose revenues were declining, but who had to fund growing traditional and new roles, such as increased health spending. Indeed, the third dimension is to have the flexibility to change sectorial emphasis, reflecting the different needs generated by the crisis; this last dimension was particularly relevant for the case of the Covid-19 crisis, where certain sectors (such as services) were particularly badly hit; especially when such hits were seen as likely to be temporary, countercyclical support, including by PDBs, became crucial.

A good synthesis of the first two dimensions was provided by KfW, when they said that their motto for their counter-cyclical response to Covid-19 had to be “quick, decisive and fund at large scale”! (see also Annex 3).

A number of key implications arise from the importance of PDBs’ counter-cyclical role. A first and central implication is the need for PDBs to be sufficiently capitalized, to be able to respond well if a crisis or external shock hits an economy. In fact, it may be ideal if as the CEO of an important PDB pointed out, that in “normal times”, PDBs had some spare capital, so they could respond speedily enough and at sufficient scale, if a crisis hit, without having to negotiate a capital increase before; thus, the PDB, could start early and help minimize harm to jobs and companies, as well as the broader economy, including investment.

Another option is for governments to rapidly increase the capital of PDBs, as soon as a serious crisis arises. This was the case for MDBs and RDBs during the global financial crisis, when after the spring 2009 London G20 summit, these banks saw an important increase in their capital; however, till now, the response of the international community has not implied an increase in

the capital of most MDBs. This has limited their ability to scale up and increase lending in a counter-cyclical way much further than their otherwise valuable response, and/or has inhibited them from continued high levels of lending, where this was necessary.

The experience of the AIIB (see Annex 3.1 below) highlighted in a positive sense the advantage of an MDB having ample capital. Because the AIIB was a relatively new bank and had been generously capitalized so it could expand lending during the whole decade, it was able to accelerate easily its lending, which resulted in the largest counter-cyclical response (of 120% of expansion of activities between 2019 and 2020) within our sample. It should be emphasized.

It should be noted that the AIIB co-financed much of this counter-cyclical expansion by cofinancing with partners such as the World Bank and Asian Development Bank, institutions that took the lead in the evaluation of programs and projects; this implied that the processes could be fast for the AIIB. One reason why this was feasible was that these banks had similar criteria for evaluating proposals as the AIIB. This illustrates the importance of close collaboration and valuable complementarities between different MDBs, in the counter-cyclical role, but of course more broadly, in other roles. There is here an important implication for the global development finance architecture; development banks can work best, when they collaborate closely with, and complement, each other.

This is not to say that all banks should be identical and there is much to be gained when the financial landscape has a broad diversity of banks, with different specialisms and expertise. Nonetheless, the Covid story we gleaned from the interviews shows that articulation between banks is an important element for success, and an area where further research is needed.

Though we highlight above increases of capital as a key pre-condition, for increasing lending commitments in a counter-cyclical way, there are other complementary mechanisms that can be important to achieve counter-cyclical increases in lending, such as: increasing other resources-like 1) obtaining or increasing access to private capital markets or funding from other PDBs- 2) possible need to adapt lending and other PDB instruments, and the sectors they lend to, as well as 3) if necessary to adapt or even change mandates. The ability of PDBs to incorporate digitalization into their processes, as well as encourage their borrowers to do so, was also an important and new factor that facilitated (or not), the ability to respond countercyclically, especially in terms of speed, but also of scale, during the Covid-19 crisis.

A second key implication of the importance of PDBs counter-cyclical function is that for those countries, such as many LICs and LMICs, which have limited fiscal space to respond to crises, either financial or ones like COVID, it may be more difficult for their national governments to significantly capitalize their PDBs. In that case, it becomes desirable for the international community to step in, and provide additional resources, either to help capitalize these national PDBs, or provide them with additional credits or guarantees. An important additional channel being discussed – and that hopefully can be implemented soon – is the channeling of a part of the SDRs that will be re-distributed from richer to poorer countries, via MDBs or RDBs. Though this proposal has to overcome some technical challenges, which seems clearly feasible, it has great potential – due to leverage – for the positive impact on the economies of some of the poorest and worst hit by Covid-19 countries. Both governments of African countries and institutions like the African Development Bank, as well as other partners in developed economies are therefore rightly supporting this important proposal.

A third implication related to the counter-cyclical role is more an issue for further research, including by the PDBs themselves. Will there be higher losses for PDBs in the counter-cyclical loans and guarantees made in COVID times, as companies struggle to recover in today’s continued challenging environment both in local and global markets, now accentuated by lower growth due to the Russian invasion of Ukraine? Companies can have greater difficulty to pay back loans than in normal times. At the same time, in our interviews several banks noted that the strong business case for lending to other banks and to firms that were illiquid but otherwise viable, noting it was important not to let them sink if one wanted future clients. Hence an important but nuanced question for the future concerns what provisions were made for nonperforming loans, (NPLs) of PDBs, for counter-cyclical lending and for guarantees granted? It could be assumed losses will be higher, and therefore there may be a need to have higher provisioning. If provisions are not sufficient, is there a risk that these banks find themselves in problems in the future, as losses could erode their capital and thus their future capacity to lend? If that is the case, should they be recapitalized?

Though up to now, we have emphasized general conclusions and implications of the countercyclical response of PDBs, it should be stressed finally, that there were important differences among countries and regions, even though Covid-19 was a global phenomenon.

Thus, for example, some countries/regions – at least initially – were less badly hit than others by Covid, largely linked to the responses they had to the pandemic, and there was a diversity of economic policy responses reflected in part by their existing institutions and resources available. As a consequence, the role that PDBs needed to play differed. Furthermore, the capacity of PDBs to respond varied, both linked to their governments’ ability to offer support but also in some cases, their political willingness to give a major role to PDBs in the counter-cyclical response; furthermore, the previously existing financial and other capacities of the PDBs themselves influenced how strong their counter-cyclical response was. However, the commitment and enthusiasm of the different PDBs interviewed (as reflected in the Boxes below), showed us the great efforts made by PDBs in general to respond as much, as quickly and as well as possible to the pandemic.

Bibliography

Barrowclough D. and T. Marois (2022)

Public Banks, Public Purpose, and Early Actions in the Face of Covid-19 (2022), with T. Marois. Review of Political Economy ROPE, Vol 34 Issue 2. https://www.tandfonline.com /doi/full/10.1080/09538259.202

1.1996704

Barrowclough D. (2020)

”South-South Public Finance: Cooperation and Resilience to face Covid-19” in McDonald, D , T Marois and D. Barrowclough.

Carreras M. and S. Griffith-Jones (2020)

“National and Multilateral Development Banks in the Pandemic: the Role of IADB and CDC in the first phase of the pandemic in McDonald, D , Marois T and Barrowclough D.

CEPAL (2021)

Financing for development in the era of COVID-19 and beyond, March 2021. https://repositorio.cepal.org/ bitstream/handle/11362/46711/ 1/S2100063_en.pdf

EIB (2021)

Economic Investment Report. https://www.eib.org/attachm ents/publications/economic _investment_report_2021_20 22_en.pdf

Eurodad (2017)

Public development banks: Towards a better model Discussion paper. European Network on Debt and Development.

Griffith-Jones S. and R. Gottschalk (2012)

“Dealing with the only certainty: uncertainty”, paper prepared for Commonwealth Finance Ministers’ Annual meeting https://policydialogue.org/file s/publications/papers/FMM12

4_Exogenous_Shocks__Dealing_with_the_Only_Cer tainty_-

_Uncertainty_Stephany_Griff ith_Jones_and_Ricardo_Gott schalk.pdf

Griffith-Jones S. and J.A. Ocampo (2018) The Future of National Development Banks. OUP. Oxford and New York.

Griffith-Jones S. and M. Carreras (2021)

The role of the EIB in the Green Transformation. FEPS https://opendocs.ids.ac.uk/op endocs/handle/20.500.12413/1 6582

Gutierrez E. (2021)

“National Development Financial Institutions” World Bank

McDonald D., T. Marois and D. Barrowclough (2020) Public banks and Covid-19: tackling the pandemic with public finance. UNCTAD, Eurodad and MSP https://unctad.org/webflyer/ public-banks-and-covid-19combatting-pandemicpublic-finance

Plant, M. (forthcoming)

“Is there a better way to use Global Reserves?”

Center for Global Development, Washington D C.

Reyes O. (2020)

“The Council of Europe Development Bank and Covid-19 in McDonald, D , T Marois and D. Barrowclough

TDR (2020)

Trade and Development Report. UNCTAD Geneva

TDR (2019)

Trade and Development Report. UNCTAD Geneva.

Vandone et al. (2020)

“Covid-19 and measures to support enterprises and local authorities in Italy: the Role of CDP in McDonald, D , T Marois and D. Barrowclough

Annexes

Annex 1. Selected PDBs, as case-studies with interviews carried out

1. The Asian Infrastructure Investment Bank (AIIB)

2. Uganda Development Bank (UDB)

3. Development Bank of Rwanda (BRD)

4. European Investment Bank (EIB)

5. Colombian Development Banks

6. Banco Nacional de Desenvolvimento Econômico e Social (BNDES)

7. Cassa Depositi e Prestiti (CDP)

8. Korea Development Bank (KDB)

9. Kreditanstalt für Wiederaufbau (KfW)

10. African Development Bank (AfDB)

Annex 2. Table of Selected Development Banks, and their counter-cyclical response

Source: For commitments and disbursements, authors’ calculations, based on data in Annual Reports of the development banks and their websites. For GDP data, source was World Bank.

Back Sea Trade

Bank (BSTDB)

1. The Asian Infrastructure Investment Bank (AIIB)

Drawn from interview with Dr Joachim von Amsberg (11 January 2022)

The AIIB increased lending by 120% in 2020, compared to 2019 (Disbursement increased 320%)

The AIIB decided from the first management discussions in Feb 2020 that Covid was not just a passing incidence. The Bank knew it faced a stark choice; it could say “we are an infrastructure bank, with a focused mandate and stick to it…” but it realized if it did this, it would suffer a decline in business, and would miss the opportunity to help our members. “We realized we needed to adjust our strategy and do things (kinds of lending) we had not foreseen.”

Scaling up for counter-cyclical lending. For the historical multilateral banks such as the World Bank, to scale up and lend counter-cyclically for such a crisis is part of their business model; however for most PDBs and for the AIIB in particular, this was a more difficult decision. It required the Bank to “move out of our usual safety zone”.

The process for doing this was quick. The Board gave approval in April 2020 for the adjustment to the business model. This was relatively straightforward as the AIIB’s clients were clear about what they needed, and the bank shifted its focus from its usual long-term infrastructure perspective to one about shorter-term needs - specifically health, budgetary support and liquidity.

The importance of having spare capacity. The AIIB was “the only one in the MDB system with spare capital, and we could do it (use it) quickly”. The Bank is well capitalized, and because its business plan prior to Covid had been for a gradual ramp up of lending over several years, it could ramp up quickly because there was spare capital already waiting. Not only could the Bank scale up quickly it could also expand the impact of that lending by helping other banks, including the WB, ADB and EBRD, as the AIIB provided the co-financing on joint projects. “We just put a line into the deal saying 500 m from the AIIB. It was simple but for the client it meant a lot.”

The initial plan for Covid recovery finance had been modest in April 2020 – at $5b. Then in response to client needs, they increased the window to $10 b and then $13b. Thus, far $11b has been committed, which is a lot given the unexpected two year timeframe.

The AIIB has spare capacity still and intends to continue to lend more next year. “We are inclined to continue, even as the crisis evolves. This was the point in history - we were set up, we were well capitalized, and had not committed our balance sheet”.

Speed of lending. The dispersal of funds was also quick. Although this was not the usual kind of lending for the AIIB, the fact that it was with partners such as the WB and ADB meant processes could be fast. One reason was that these banks had similar criteria for evaluating proposals, and so could be quick and unbureaucratic, while still meeting quality and fiduciary requirements.

Partnership with the MDBs, especially WB and ADB. In addition to the speed of disbursement mentioned above, partnership also involved more than only finance. The AIIB also learned new operational skills and worked with some new countries it had not worked with before, especially outside Asia, where they previously had little capacity. The new countries included Cook Islands (with ADB);

Ecuador (with WB); Kazakhstan, Rwanda with WB. The point was that all three sides to a collaborative deal like this can benefit. This shows not only the advantages of having spare capacity in the system, but also the benefits that can be achieved with MDBs work as a system rather than individual banks only. (The Eminent Persons report in 2018 also raised this.) In the Covid case, while the AIIB had the capital, the WB had the experience. “We all work best when we work as a system, when capabilities and intellectual capacity lie across banks. Whether this will be a permanent shift is not clear.

Covid lending in perspective. In total, the AIIB has committed already $30 b in its short lifetime, and has substantial capacity to keep growing the balance sheet. The strategy is to build up to 2030 – the scaling up in this Covid crisis was just an anticipation of that. AIIB could still carry more, until it reaches its capital limits by the end of the decade.

The lending was in part designed with this in mind - many of the Covid-related loans should be repaid by the end of the decade, some loans had only limited maturity for the purpose of not losing this future spare balance sheet capacity. As much as the AIIB aimed to be counter-cyclical in the current crisis, it did not want to take away our capacity to do our regular business.

Any trade-offs? Not so much in terms of capital, but in institutional capacity to do infrastructure lending? Initially the Bank feared there could be trade-offs but in fact there were not. If there had been demand for infrastructure the bank would have kept with its original strategy, however governments were distracted, they were not focused on infrastructure, so there was no trade off rather a natural pullback in client demand in those areas. When countries have acute pressures, there is a pause, then they will want economic recovery (and more infrastructure? but not yet?).

Impact on relationships with clients The Bank has demonstrated its relevance to clients; built relationships, and shown that it was agile and responsive. At present, it does not have a forum for regular feedback from our clients, but the sovereign clients are already present as representatives on the Board and so participate in discussions. In this way they knew the AIIB had a new strategy or programme on Covid finance. There are also bilateral discussions with Ministries where the Bank learned informally that government priorities were in the short-term; they did not cancel infrastructure but put it on a back burner.

Most lending went to the public sector. It included credit line operations with the EIB, and with national development Banks (Turkey, Ecuador, Egypt, Sri Lanka and others). Importantly, the AIIB still requires government guarantees when it does private sector liquidity loans.

The business model is clearly one of an MDB but the bank seeks to innovate also. It comes with less of a policy agenda. This has pros and cons, but it was deliberate. It has a sector focus and does not have the country policies or country agenda as do other MDBs; no partnership docs. It was felt that while this approach may suit other banks, for the AIIB it brings too strong a view on what a country should do. “We do not have a country agenda; rather we support projects if they meet our requirements. We are more flexible”. It was felt that the EIB was a bit similar; the EIB is seen as a relevant parallel and was a model that informed the AIIB when it set up. It also like AIIB has lighter staffing.

Links with national banks. In Ecuador, Turkey, Egypt, Sri Lanka and others the AIIB financed credit lines through national DBs. This is considered a natural way to meet smaller clients, and useful for the bank in the long-term, good to have national counterparts. In some cases these were pre-existing relationships, e g in Sri Lanka; others were new, such as with Jordan. Other benefits of broadening the reach included that it was a way “to show other countries we are on the map”.

Longer-term and post-Covid Green investment is a huge priority for the Bank, which has been signalling that it intends to pivot to that. In Turkey, where it had credit lines for energy efficiency already existing before Covid, it was easy to scale up once Covid hit because of existing relationships from before the crisis, with partner banks and lines already so it was easy.

Risk and counter-cyclical lending. How to deal with risk. The AIIB does not take the credit risk for the final borrowers, only the risk for the banks or for the sovereign. The banks they lend to, use the finance to expand the scope and scale of their lending to their existing borrowers, they have relationships with those borrowers, and they (and we) are helping those corporates from going under, it is also about protecting existing assets. We rely on the national bank risk assessment. “They are protecting the financial viability of the clients of their bank. We are protecting our relationship with the bank client”. Hence there are multiple, iterative layers of counter-cyclical lending…

The AIIB’s thinking is that it wants to continue to respond to the Covid recovery and note that the crisis is not yet over, the whole uneven recovery could also cause further crisis. At the same time, it does not overstate its capacity. It is small compared to what could still come… the taper tantrum this time around could be much worse than what we saw in the past… “We want to be ready, but our scaling up is still modest amount compared to the macroeconomic needs of our members, we can’t cover everything.”

2. Uganda Development Bank

Drawn from interview with Patricia Ojangole, CEO of UDB and material provided by her.

Uganda Development Bank (UDB), Uganda’s national development bank, had one of the strongest counter-cyclical responses to the Covid crisis world-wide, as its commitments increased by 73 % from US $ 69 million in 2019 to US $120 million in 2020. Disbursements also rose significantly, though less, by 32% in the same period, going up from US $50 million to $65 million. During 2021, there were further increases especially in disbursements, but also in commitments.

Political support One of the main reasons why UBD was able to respond so quickly and on a significant scale was that the Ugandan Government, including in particular the President, clearly earmarked UDB as a key instrument to respond to the COVID crisis, and took very concrete action by strongly capitalizing UDB, in fact by doubling its capital. A significant part of this increased capital (more than half) was provided as additional funding.

The Government funded this increase of capital as equity drawing on its own resources and its borrowing, including from international sources. UDB itself has been accessing international lines of credit, from regional and bilateral development banks.

The strong increase in capital of UDB was rather unique internationally, as other DBs did not receive such an increase, and in many cases, found this an important restriction to their capacity to increase their lending significantly and speedily

National development strategy. Also helpful was that the Government had recently before COVID hit, defined a new national strategy and development plan, which identified key development sectors to be supported: Primary Agriculture, Agro-Industry and Manufacturing, which were also the ones most strongly supported during the COVID period. Additional effort was made also to support sectors particularly badly hit by COVID, such as tourism, private education, and the night economy (much of which was closed during the pandemic).

The purpose of these loans was to provide initially working capital, so companies could survive and maintain their staff. In a second phase, loans were provided to support faster recovery. More generally, given problems with international supply chains, an emphasis was placed to produce as much locally (e g essential goods for citizens, including health related products, like masks). In some cases, the Bank helped guide finance provided from elsewhere, for example the EU provided a special grant to UDB, for it to make loans to the tourism sector.

Consistent with its mandate, UDB tried to support projects within the private sector that demonstrate potential to deliver high social economic value, in terms of job creation, improved production output, tax contribution and foreign exchange generation among other outcomes. According to its own evaluation, the impact of its loans during the August 2020 - December 2021 period on jobs generated was most important in primary agriculture, agro-processing, tourism and manufacturing (in that order); in terms of increased output, the main effects were achieved linked to loans to agroprocessing, primary agriculture and manufacturing, whereas both for tax and foreign exchange generation, the two key sectors were primary agriculture and agro-processing.

As with some other national banks, the crisis conditions prompted internal re-organisation and innovations. To facilitate a speedy and significantly scaled up response UDB, re-organized itself, including by hiring new staff, modified the process review for loans (aiming to combine speed and cautious evaluation) and incorporating more digitalization. The bank also proactively reached out to potential clients – it made calls to companies around the country for this purpose, to which there were very many applications in response. As a result, all the additional capital of UDB was committed.

Finally, as with many other banks interviewed, the UDB works closely with the Ministry of Finance, including to help design policies and by providing expertise.

3. Development Bank of Rwanda (BRD)

Drawn from interview with I, with Blaise Pascal Gasabira, Head of Strategy; 9 December 2021.

The BRD increased lending commitments from 2019 to 2020 by 42%; however, disbursements decreased by 17%.

The BRD was established in 1967, and since 2011 has become a Public Company, with the vision “to be innovative and sustainable provider of development finance for socio-economic impact”.

Crisis response. The bank followed different patterns of lending at different phases of the crisis. At first, it focused on working capital and allowed banks to restructure debt, while the Central Bank covered the liquidity. At the time of the Covid crisis, the bank’s borrowers “just dried up”. Rwanda had a lot of lockdowns, and projects that were just starting were all stopped. Borrowers were managing their costs, no one wanted to do it alone, and investment demand was slow. The Bank spoke to its lenders, asking for debt moratoriums and payment holidays, because it needed to restructure its outgoing loans as the borrowers could not pay. “We did a lot of restructuring. Most of our borrowers were struggling”. As noted in the Annual Report, the Bank did an “unprecedented” restructuring of loans, deferring interest payments and penalties on a case-by-case basis. The lending in 2022 was therefore mostly restructured loans rather than additional ones.

At the same time, for the Bank to be able to increase its lending capacities to clients in need, it needed to borrow more. Hence, before offering this Covid support the Bank had to check first to get new facilities from its lenders. Most responded positively, extending loans for 12 to 18 months. Some lenders

restructured the entire loan to cushion as much as they could. When the BRD saw the signs of business resuming after the worst of the Covid period, it negotiated again with its partners to see if it could get additional finances for liquidity to the economy. Some responded more quickly than others; the World Bank’s response was disbursed only in November 2021.

At the time of the interview (late 2021), when the worst of the Covid period seemed to have passed, the bank is targeting loans to manufacturing, as the sector has potential growth, lots of links to value chains and it creates rapidly jobs. It is also aligned with Government objectives; the Government has designed priorities and manufacturing is one of them (Others include manufacturing exports, energy, agriculture, housing, and the digital economy)

Sources of finance. The Bank tried leveraging funds from existing networks and stakeholders, including designing with the Ministry of Finance. This is how they arranged a $160 million loan with the World Bank, for example. The example also shows the importance of government relationships – the WB lent to the Ministry of the Government and not directly to the BRD.

The Bank also gained finance from negotiations with EIB, which they on-lent to clients and to provide commercial bank liquidity, at lower rates so they can on-lend (at lower rates also). Other support fame from the government of Rwanda, which put up two facilities including liquidity through the Central Bank, which was paid directly to the other banks in the national system; and secondly by providing working capital.

In terms of regular financing, the Bank is not a deposit taker and most of its funding comes from the shareholders, borrowing through bonds, and borrowing from the larger DFIs. The Bank’s balance sheet comprises about 70% borrowings, of which foreign borrowing accounts for 60% and local Rwandan sources about 40% (including from the domestic pension fund, the National Bank of Rwanda and the government’s Economic Recovery Fund. It received several capital injections by Government of Rwanda in recent years including 13 billion RFr, meaning the capitalization was increased by around one third.

Its high reliance on international sources of finance means it is highly exposed to foreign exchange risk, which the Government can hedge to some extent through swap operations, but the exposure is still significant. Its reliance on external sources of finance also mean that the Bank puts a high priority on trust, responsibility and proper reporting to its partners. It has tried to improve visibility on the projects it finances, to help give the necessary assurances and “more comfort” to its lenders.

Support from partners including the EIB, AfD, TDB, Shelter Africa, and KfW was considered very important. “They are good partners who understand our environment, the region”.

Institutional contexts. The Covid experience provided a reminder of the importance of history, and the existence of previous relationships for speed of Covid delivery… Pre Covid, the Bank had already several projects with the Ministry of Finance, and in the urgent conditions of the crisis, the Bank asked if we could replicate those processes, seeing it as a way to be quick in responding. Setting up new relationships can take one year with big institutions, but this one took five months because the communication channels already existed, and so could help support the need for increased lending.

Other contexts are more challenging. The World Bank, for example, deals mostly with governments not banks, but (also) what is still a challenge, other lenders who would be willing to help, are still limited in what they can offer without a sovereign guarantee. “They say ‘we’ve put capital in already, we can’t keep increasing it as debt.” The regional MDB, the AfDB, also wanted government guarantees. In this context, the Bank had to think more widely than seeking capital increases; the strategy had to be also,

how can we interest other investors, DFIs, like minded institutions, IFD and KfW who have higher ratings, and do not need the government guarantee

New sources of capital Bank has recently been upgraded by Fitch to B+ (Annual Report), but this is still not high enough to borrow on international markets at a sufficiently low rate. The Bank felt that having the Government of Rwanda as its main shareholder limits its credit rating, as the highest can only be the sovereign; which is rated B. This affects the Bank’s capacity to raise funds and to borrow, and to on-lend.

Looking forward for ways to address this, one option the Bank is considering is taking on new shareholders, as a way to increase its credit ratings and help to reduce the cost of capital. “We were thinking of it before Covid but Covid pushed us to do it rapidly, now it’s urgent. At the same time, it is not clear whether new shareholders would bring fresh bring capital, or, less ideally, whether they would just buy a portion of the capital they already have.

Similarly from the day the Bank heard of using SDRs as a possibility, it started “knocking on the door of AfDB” as it was taking the lead in the debate. However, from the BRD’s perspective things are rather vague. The Bank also approached the AfD as leaders of the Finance in Common. “We want this on the table, but there is no clear visibility”.

Concerns about NPLs? Previous debts were not sold, we still have them, not securitized, we are very traditional. In the future, the Bank may write them off if they reach a level where this needed; which would impact negatively on profits. They have sought to cover this potential problem in two ways:

a) Asking lenders to give the Bank a moratorium period, otherwise the NPLs would hit their liquidity. In this context, they have already asked EIB, TDB and Shelter Africa. Some restructured the facilities the Bank had with them. And also b) The Bank borrowed more to allow other businesses to invest in the economy. To support this objective, the Government put up two facilities. Firstly, liquidity for banks to get cash from the Central Bank, that went directly from central banks to those banks (i e not through the BDR); and secondly, to provide liquidity for restructuring and working capital. This was important, because the Central Bank portion accounted for up to 35% of some sectors’ restructuring, so it helped them reduce the cash flow and helped the economy. Mostly this support was given only for SMEs.

Counter-cyclicality. In some regards, the Bank could not be very counter-cyclical. For example, the most significantly hit sectors in the economy were tourism and transport. The Bank saw significant reductions in lending to those sectors. As there was no movement, there was no demand. Today, the firms in this sector are still struggling. All the Bank could do was to restructure loans, there was not room for them to demand (new loans). “We lend to the resilient, we continued to lend to agriculture, export crops, energy, these businesses continued at the same level during Covid.” At the same time, while the Bank could not do more for those hard-hit sectors, it did attempt to show the importance of this counter-cyclical role in its mandate. “We told the Ministry, if we don’t do it, others will not do it. Our projects are perceived as being riskier than others. Our mandate is to de-risk and catalyse priority sectors that are not currently attractive.”

4. European Investment Bank EIB

Drawn from interview with Claudia Mara, Debora Revoltella, Ambroise Favolle, Filar Solano ; 20 December 2021.

Covid Response. The first response following the start of Covid was to provide liquidity to the market. The EIB approved the projects it already had begun, as quickly as possible. Then many new instruments were added. It was a very dynamic response.

In particular, an instrument used was to provide guarantee products for firms. There was a big role for the EGF; firstly, to support corporates; also, to share risk with financial intermediaries. This procedure took more time at the start but was then very successful. Risk-sharing in particular had become the most problematic issue, because of the very strong uncertainty facing the European economy. Financial support was also combined with technical capacity support; and there was a particular focus on providing to SMEs, and to the health sector. The Bank focused its attention on sectors most vulnerable to crisis, and clients in most need.

Today, by the end of 2021, the funding situation is quite good and liquidity is no longer an issue. The EIB continues to focus on long-term issues, such as innovation, Paris alignment, and digitalization acceleration.

Mechanisms and instruments used. One way the EIB rolled out its support was to relax some lending constraints, including: 1) Eligibility, not just CAPEX constrained, but also enabling access to working capital. 2) The Bank was now able to lend more than 50% of total transaction (which was the normal constraint).

The EIB also developed some new products, that enabled it to take lending risks in a short period of time. This included by sharing risk with financial intermediaries, which provides them with capital relief. The Bank took the first loss piece; with guarantee pari-passu. It also used existing instruments, like venture debt. These approaches helped the IEB overcome what is usually the biggest constraint for Banks to do SME lending, which is capital constraint. This was alleviated by the various means described above for risk-sharing, and also venture debt for a few companies, the more innovative ones, that had prospects of high growth, and big initial cash consumption.

History matters. This time during the Covid crisis, the EIB was able to benefit from a lot from lessons learned from previous crises: One includes knowledge about what type of instruments that work. These included the advantages of Topping up existing loans. If the borrower has a problem to pay, the answer may be to reschedule. This is easily done without Board approval, and can be speedy. Hence, the lesson learned is that key for speed is using instruments already available, because new instruments take time. There is the need for agreement of MSs, also conducting processes of due diligence, etc. The EGF could be especially successfully used, once approved

A second lesson is that speed is of the essence. The EIB was quicker to move forward this time, than in previous crisis. One reason for this concerns the background, which was very different compared to the 2007-2008 crisis. This time around there was support for a EU build back better approach, based on common borrowing. This enabled countries like Greece and Italy to ask for support from this Fund.

International support. The EIB was also very active in Africa. The Covid-related shock in trade sharply impacted Africa, and implied African companies, including SMEs would suffer. To address this, the EIB instituted top-ups and an accelerating of disbursements, which much done through national DBs like TDB, BOAD, Ecobank, others. Broadly, a lesson was that it is beneficial to work through FIs you know and believe in; this included for example the EIB’s close working with European banks CDP Italy, KfW, Caisse

Regional public goods and innovation. An important role played by the EIB was to support the COVAX partnership for health sector, including the development of the coronavirus vaccines. This stemmed from a previous history whereby the EIB had been playing an important role lending to Biontech, and the initial start of research into cancer treatments, using a then unknown technology, MRNA. The research team was led by Professor of Medicine who was convinced by this project: over time the EIB lent around Euro 90 million to the research. At the time of the Covid crisis, the Biontech team said its learning could be applied to working on a Covid vaccine. The research team thought it could work and hence EIB directed another Euro 100 m to the project. It proved to be extremely successful, but the point perhaps to be made is that such research is usually very difficult to finance privately because of the inherent risks and uncertainty, and hence it was considered an important role for a bank such as the EIB.

Other projects include scientific or medical testing and diagnostics. The EIB both before Covid and after is a key institution in supporting financially health innovative projects.

Support to low-income countries The EIB is concerned about the situation in countries such as Africa, whose needs were highlighted in an African Union Summit February 2021, especially in terms of the continent’s lack of Covid vaccines. A number of countries including Senegal, Rwanda and others are very interested in manufacturing capacity of vaccines.

Counter-cyclical role. The mandate of the EIB and its contribution to playing a counter-cyclical role in times of crisis was a big debate in the Board 10 years ago. The EIB was not seen as a typical countercyclical institution. In 2020 and the Covid period however, the Bank never had this debate. There is a much more mainstream idea of counter-cyclical roles that can be played by such banks. At the same time, while the Covid experience has head to some sectorial lending being highlighted for the future, such as digitalization, and lending to municipalities; there was no overarching change in the long-term priorities of the bank. Providing support to SMES continued to be its key role; also the need to lend for greening projects.

5. Colombian Development Banks

Drawn from background paper by JA Ocampo and JD Torres

Covid-response. The Covid experience stands out for Colombian development banks, especially when compared to previous periods in history. Generally, during the last decades, Colombian development banks have not exercised the counter-cyclical function in a clear way: it was nil or very limited to mitigate the lower growth in 2009 associated with the effects of the North Atlantic crisis, and the period 2015-2016, generated by the fall in oil prices. This is observed in Graph A.1, which presents the annual variation of the loan portfolio of development banks and other credit institutions. In contrast to this previous behavior, during 2020, in the context of the COVID-19 pandemic, the credit portfolio of development banks expanded substantially, by 17%, well above that of second-tier private banks, whose portfolio grew below 5%.

Graph A.1. Annual variation in loan portfolio (%) (1993-2020)

Source: Superintendencia Financiera de Colombia.

Development banks act counter-cyclically, especially compared to private banks

The counter-cyclical behavior of the credit stock of development banks during 2020 is explained by an expansion in their disbursements. Graph A.2 shows the evolution of loan disbursements from each development bank since 2010. It is observed that although disbursements had been growing, during 2020 they accelerated. For example, Bancóldex reached disbursements of $ 6.8 billion pesos, with a growth of 25% compared to 2019. This same growth was experienced by the loans granted by Finagro, which reached $ 24.2 billion. However, in this case, most of the increase is explained by portfolio normalizations, which reached $ 6.7 trillion in 2020, with a growth of 116% compared to 2019. As for Findeter and the FDN, their disbursements grew at more moderate rates: 11.4% and 4.8%, respectively. Unlike development banks, loan disbursements by other credit institutions grew very little in 2020, and less than in the previous year, which reflects their pro-cyclical stance during the crisis.

Graph A.2. Development bank loan disbursements (billion pesos) (2011-2020)

Source: Bancóldex, Findeter, FDN and Finagro.

Instruments used. To accomplish this task, Colombian development banks worked on different fronts to compensate for the credit drop and protect the business fabric and employment. During the first half of 2020 they created special lines of credit (LEC in spanish). Bancóldex reacted quickly with the LEC “Colombia Responde” and “Colombia Responde para Todos”, which sought to provide liquidity for the payment of payroll, supplies and debt restructuring to the sectors directly affected by the measures to contain the virus. About 80% of these resources had to be transferred to Micro, Small and Medium Enterprises (MSMEs.). The delivery of resources to financial intermediaries was conditional on interest rate cuts of between 200 and 500 basis points. Similarly, nineteen regional LECs were developed, and others for early start-ups and reactivation. In 2020, $ 1.44 trillion were disbursed in 51,378 operations (see table A.1).

Note:

Amounts in millions of pesos.

* The amounts correspond to credit subsidies.

Superintendencia Financiera.

For its part, Findeter created eight LECs for territorial entities and their companies, which have longer terms, grace periods and lower interest rates. These LECs played a fundamental role in supporting the health sector (which had a specific LEC), construction, aqueducts and energy development, all strategic sectors for the fight against the virus and economic reactivation. In addition, 80% focused projects were favored in the most vulnerable municipalities in the country. Finagro substantially expanded the resources available to the agricultural sector. The creation

Table A.1. Development bank credit lines during 2020 (Millions of pesos)

of the LEC “Colombia Agro Produce” stands out, which sought to maintain the country's production and supply through a subsidy at the interest rate and longer payment terms. For its part, the LEC “Campo no para” financed support services, marketing, and machinery.

Development banks in Colombia took advantage of the situation of the pandemic to experiment with direct credit. Although this tool was abandoned since the market reforms of the 1990s, bank managers had expressed their desire to reactivate it for various reasons. In this context, the Financial Superintendency authorized Findeter and Bancóldex to act as first-tier banks until December 2020. Findeter ventured into direct credit with subsidized interest rates to support sectors widely affected by the pandemic. Later, a line was created for territorial entities. For its part, Bancóldex, by merging with its financing company, Arco, offered a portfolio of services such as the Acceso Directo line and other leasing and factoring services.

A final mechanism through which the pandemic was addressed was through credit guarantees. In this case, the national government relied on the two guarantee funds in force: the National Guarantee Fund (FNG) and the Agricultural Guarantee Fund (FAG). These funds have been complemented by Bancóldex and Finagro, respectively, to promote financial inclusion by providing guarantees directly through financial intermediaries.

In March 2020, the national government promised to assume up to 90% of the credit guarantees through the FNG to support the businessmen's credit applications through different lines. Due to the emergency of the pandemic, the coverage of these guarantees expanded beyond MSMEs. In general, loan guarantees were aimed at the most vulnerable companies, both due to their size and their impact in the face of the pandemic. During 2020, guarantees were granted for $ 11.5 billion, corresponding to 466,933 loans. For its part, the FAG issued 280,686 guarantees for $ 2.4 trillion, 25% more than in 2019. These guarantees benefited, 96%, small producers, with a greater focus on livestock and coffee production.

6. BNDES

BNDES role in responding to the 2008-2009 North Atlantic crisis

During the 2008-2011 North Atlantic financial crisis, BNDES played a very important counter cyclical role for the Brazilian government in response to the crisis. BNDES disbursements as a percentage of GDP went up by 48 % during this period from 2.9% in the year 2008 to 4.3 % in the year 2010. Reflecting this role, its share of the total credit in the Brazilian economy during the 2008-2009 North Atlantic crisis period was at a 13 years historical high ,with its share of total credit hovering around 21 % consistently for the five peak years of the crisis period i.e., from 20092015.

Drawn from background paper provided by BNDES.

Figure 1. Source BNDES

Figure 2 Source: BNDES

BNDES role in the ongoing COVID 19 Crisis

However, the scenario has significantly changed in recent years, reflecting changing views on the Bank’s role (see for example TDR2019:144), starting from around 2017 and leading to a significant and consistent drop in BNDES assets and disbursements both in terms of the share of GDP and in terms of US dollars. The aggressive counter cyclical role played by BNDES during the 2008-09 North Atlantic Crisis is not reflecting in the current COVID 19 induced economic crisis, as its assets and disbursements has already dropped by 24 % and 37 % percent in the year 2018 when the crisis has not hit. This trend continued during the present COVID 19 crisis, as BNDES Assets and Disbursement further dropped by 22 % and 11 % in 2020 compared to 2019, in terms of USD amounts. .

Hence, there has been a significant change in strategy to respond the ongoing COVID 19 crisis, and BNDES does not appear to be in the forefront to offer a counter cyclical role as government support was rather offered to all banks and not just the government-owned ones (see Reyes 2020). Based on the data available in the figure 1 and 2, BNDES disbursement as a percentage of GDP was 4.3 % in the year 2010 and its share of the total credit stood at 20.85 % during this period. However, contrary to the expectations, in the period of COVID 19 crisis BNDES disbursement as a percentage of GDP has seen a downward trend as it has significantly reduced to 0.8 % and its total share of credit in the Brazilian economy has also reduce to 12.58 % only (BNDES 2021).

Sectorial support during Covid. Compared to previous years, during the Covid time it seems that BNDES increased its support to industry and to trade and services – the sectors hardest hit by the pandemic and lockdown in most countries. Its lending to infrastructure and agriculture was little changed (Table 1). Notable also in Table 1 is the extent to which the role of BNDES has chanced since 2016, with decreased lending to all sectors of the economy except for agriculture. The Covid period therefore signifies somewhat of a change of direction in sectorial terms, even if only temporary.

Disbursements BNDES

Source: BNDES.

Disbursements BNDES (% GDP)

Table 1 Source BNDES

Conclusion

The above data reflect that the BNDES which had proven to be potent during the Brazilian government response to the 2008-2009 North Atlantic crisis and the spike in credit and disbursements resulted in a recovery of 7.5 % GDP growth in the year 2010 from -13 % in the year 2009. However, during the current crisis Brazil’s economy has not shown positive signs of recovery as yet, with its GDP growth falling from 1.41 % in 2019 % to -4 % in 2020.

In the current scenario, the Brazilian government has sought alternative strategies for financing the crisis response, compared to the tried and tested approaches of previous crises. Instead of aggressively infusing capital through BNDES into the Brazilian economy, it is exploring the route of private finance and have prioritised to mobilise the private capital in the public development space. Learning from history and the important role BNDES has played in the Brazilian economy, by virtue its strong governance policy, deep understanding of the Brazilian economy and its borrowers. There is a strong case to further utilise BNDES in response to the ongoing Covid-19 crisis. During the current crisis BNDES has been sparingly used to provide providing urgent finance to individual and companies, small and large enterprises, public and healthcare sector which has greatly assisted the government in responding and mitigating the high level of economic and social damages. There is need to infuse higher level of capital in BNDES and utilise its financing instruments on higher volumes on a larger scale.

7. Cassa Depositi e Prestiti

Interview with Enrico Petrocelli, Giorgia Prelaz, Stephan Mari

Sources of finance. The ability of CDP to respond to the Covid emergency shows the important role of political will at the highest level. The emergency reply by CDP was enabled significantly by the new EU legal framework, which compared to the past, allowed it to use our lending instruments more flexibly. This was very important, as the next generation EU plan and its multiannual framework got essential EU resources for member states, in the form of grants and loans. CDP role as advisor to the Italian government, Minister of Finance, then received the funds to implement the recovery.

Other sources of finance included the CDP quickly issuing a Social Bond, as early as April 2020. The Covid-19 Social Response Bond, to support Italian enterprises and local authorities (See Vandone et al. 2020). It raised $1 billion euros and was subscribed to by international investors as well as local ones, and offered either three-year or seven-year lending at low rates (ibid: 307). At the same time as this bond’s success, the Bank continued to seek other ways to scale up their immediate reach – including through co-financing loans with the private banking system that were counter-guaranteed by the State for some months; and implementing funds arranged by the Italian government, directed to SMEs.

Longer-term directions. After the immediate Covid crisis period, the Bank has been looking towards medium to long term recovery, and the next generation of industrial strategic plans for the next three years. This implies more targeted lending, that is more strategic and selective lending; and also an increased use of equities. The need to be able to consider the recovery needs of the next few years ahead has been one of the important learnings from Covid, revealed the second time around in 2021.

Reflecting this approach, the Bank has introduced some new innovations for lending including introduction specific criteria for loan selection; including the use of preliminary assessments in terms of the sustainability, green profile or relevance to the digital economy. By 2021, the Bank had also introduced criteria for lending such as geographical origin of companies to support the south, which needs criteria to be selective to support less developed regions. Furthermore, the Bank is required to assess the impact of its loan – in particular the economic impact as opposed to just financial. “CDP needs to be useful to change the business model of companies we finance – the impact of lending. “

Lending to SMES and trade sector. The economic structure of Italy depends on export sector, even more relevant at the start of the pandemic as GVCs so affected. Challenge in keeping alive! Keep smooth functions of the export economy, we relied on it. Had to ensure to keep alive this part of the economy. 90% of economy are SMES. Italy exported 500 billion euros exports this year, huge. Last year it was stuck.

Lending to the regions Pandemic affected some regions more than others, as reflected in the new criteria to promote lending to the South and other less developed areas.

Challenges, the fast move to digital was a massive challenge. Disbursement of lending at the early stage during lock-down and social distancing proved challenging, as the public administration was generally not well set up for digital operations. The Bank had to work hard and quickly to set up online digital systems to collect request for funds (from borrowers). During the first Covid period, within 12 hours the CDP received enough requests to mobilise the entire fund of 1.2 billion euros. Unsurprisingly with such unprecedented demand, the platform at first crashed. It was also difficult to disburse a huge amount of funds in a short time, whilst maintaining the need to insure quality, accountability, and stability.

This year there was a similar reply to the offer of loan finance, especially the need for liquidity; however the impact of the selection criteria means we needed more quality, which reduced the number of requests.

Nature of lending during crisis months. Most DBs are long-term and for some banks, the Covid response meant they switched to providing working as opposed to long-term capital. In the case of CDP, they did not do this; out of respect for the bank’s mandate, and to ensure responsible management of the Fund. It was also not possible to switch the approach because of the sources of much of the bank’s own resources – which, unlike many other banks relies heavily on the postal savings of private citizens, as well as from the market – hence it must also comply with strict rules, long-term lending, risk, etc. It was felt that while this constrained the bank in one direction, it had benefits reputationally – “The CDP’s credibility is linked to the fact it can remain firm.” The Bank does however offer concessional loans within its mandate and also some grants to SME, although this possibly only when finance was coming from the EU Public Fund, not the CDP’s own money. Impact on returns. An important question for many banks concerns the impact of their crisis lending to long-term financial metrics. In the case of CDP, it was anticipated that the bank will still need to make a positive rate of return (which was 10% in the pre-Covid year); and even that similar levels could still be made again, because some companies the Bank lent to survived quite well. Reflects the fact the bank has been cautious in long-term investments.

Countercyclical role The bank was clear of its need to provide crisis support. This is “precisely how we see ourselves, to be at the disposal of the public sector to support the long-term goals 10-20 years. Not used to look at one year. Look rather for how we can contribute to the next generational 6-10 years of the EU” The Bank saw itself as a socially and publicly oriented bank, with different role to play and different demands put upon it compared to an Italian commercial bank.

Tools and instruments. Some banks were able to do rescheduling very quickly, funded projects already approved, rescheduled loans, reallocated liquidity only when needed, which is not the case now. However, the CDP did not do much rescheduling. Nor did it increase leverage, that is a big challenge for it. Rather, the bank relies on public guarantee to mitigate our risk and provide lending support. It is linked to the credit rating of the national public debt of Italy, so its lending is more expensive on the market than others. It tries to reduce the cost of lending to make it more affordable for clients; for example, the bank tries to blend finances with MDBs, public institutions, and the EU. It needs to rely on government guarantees ”Sometimes we can get it but not always. Our lending counts as fiscal deficit on the national budget of Italy, that’s why it’s not always possible to get it”.

Relationship with government. The bank worked closely with national and supranational authorities It participated in preparatory activities for the National Recovery Resilience Framework, where the EC and European Council had asked members to submit plans for reforms and sectoral priorities. The Bank provided advice and support, contributing to the creation of a well-received plan, with clear priorities. Now the plan is all in place, all member states need time line. In addition to such broad strategic participation, the so CDP gives support to the government on a daily basis, to the PM’s office, the Ministry of Finance etc. The Bank sees the benefit from having a long-lasting relationship, which helps to smooth the way during crisis because there was already a stable mechanism of cooperation in place. Even then, the new framework still had to be set up; now the machine is in motion, the CDP advisor is part of the EU process.

Lessons for Italy and other countries. It’s clear we are not going back to the previous models, of public administration nor work; it’s a new era, a new phase. The pandemic was a dramatic and negative experience, but it triggered effects such as speeding up digitalisation. We are managing to come out of crisis with a positive effect, a huge public fund and clear priorities (green, digital).

The new challenge is to make sure it materializes; and that the impact assessments work correctly, they are key.

8. Korea Development bank

Drawn from interview with Eugina Kim.

From the year 2019 to 2020, our data shows KDB loan commitments increased 25%. There is no data on disbursements.

Covid context. It is important to stress that there was no lockdown in Korea, so Covid damage to economy far smaller than in many other countries. Indeed, GDP fell by less than 1% in 2020 in South Korea. (At the same time, Korea was impacted by the wider shock to trade and economic activity worldwide; as were other countries that also did not do lockdowns or did them slowly).

Links between immediate Covid recovery, and longer-term green lending. KDB has a target to achieve a significant increase in green lending by 2030. The change now is government led. President Moon announced a new green policy. The Ministry of Environment and public entities have a Green Taxonomy which is the basis for all stakeholders to define whether activities are green or not. KDB is also making their own criteria aligned to the Taxonomy. The mission of KDB is to become a Climate Bank in the next years.

Link with government. KDB mission is always aligned with that of the government. This time, the new mission, is to be a Climate Bank.

With Covid, there was not a single institutions that could resolve that, even if they were very large.

KDB is “government policy implementation arm”. It supported SMES and some large conglomerates and venture start-ups.

Government budget is critical, for expanding lending quickly; there must be someone who can implement the funds. Private banks cannot finance large conglomerates because of the Basle ratio. “KDB is the only bank that can support these large conglomerates”.

KDB also established a fund for vulnerable SMES, the original source of funds was the government budget.

Latest target, venture and start-ups, as part of “policy finance”. The Fund for Stabilisation of SMES in Time of Crisis offered loans, also delayed payments, rescheduled debt.

The Fund was large scale, KDB was just an implementor. Also a lot of sub-implementers, KDB gave loans to them with favourable conditions.

Government provided funding to KDB to lend to SMES, from the government budget. Covid and green new deal are integrated together in KDB. The vehicle to support SMEs is temporary, the “New Deal Fund” is much larger, and more permanent. KDB also responding to Covid at the same time. In the post-Covid crisis, KDB also established the New Deal Fund, it is the primary one, responding to a lot of issues. Funds came from Ministry of Finance, some from the KDB itself, also from private banks.

KDB takes the main risk. Thus KDB has the first loss equity. Main instruments are loans, reimburseable grants and equity injections – depending on the company needs. Startups are important, in fields like AI, green and tech. “As a bank KDB expects repayment but know that only 1/10 of start-ups can survive, so call it policy finance.”

Looking ahead. During Covid crisis, KDB still supported startups. Startups promote their business on a KDB platform, broadcast nationwide on zoom and you tube. Even large investors come from Singapore to watch the presentation platform.

In the crisis, the larger financiers and banks could not provide sufficient funds, so KDB stepped in as crisis provider. KDB made these loans on a commercial basis, but favoured production with greater Korean content.

Corporate restructuring was a major task, for KDB in times of crisis such as Covid; it lent for example to airlines.

Definitely, procedure for lending was different with the fund for SMEs. The team was exclusively operating under the Ministry of Finance, implementation and operations were done by the KDB but reporting to the Ministry of Finance.

KDB is the only accredited Korean entity to the GCF, the Korean based Green Capital Fund. Korean firms must go through KDB, to have access to these funds. KDB is in discussions with Cambodia to help them join the GCF. Cambodia is the first that KDB is supporting. The GCF wants to replicate this, if it is successful. Thus KDB would play a major role in the Green Capital Fund domestically and internationally

KDB plays an important counter-cyclical role. It is only the public DFI that can take the risk, so private banks can lend. KDB negotiated with the President’s office and the Ministry of Finance.

Drawn from interview with Jan Klasen, 31 January 2022.

From 2019 to 2020, the KfW increased loans committed by +75%; there is not disbursement data.

Speed of response. KfW response to Covid was very speedy. This speed was possible because they used existing programs for loans. Loans took place in three weeks from an idea being implemented. By 28 March 2020, KfW had accepted applications for loans.

The KfW motto was “be quick, be decisive, use big numbers”

Building confidence. Companies take up financial support when offered, but the knowledge there is further support, if needed, was also important – it buys trust, especially for people and in circumstances of uncertainty about their future. Used this previously in the 2008 crisis, which was actually smaller than the Covid crisis. In the Covid crisis, KfW loaned only a small portion of what KfW offered. Although the numbers committed are big, this is far less than what KfW could have done. If we look at the overall commitments, in 2019 all of the operations - domestic, exports, development, etc - came to 77 billion euros. In 2020, it was 125 billion euros, of which more than 50 billion euros was related to problems generated by Corona.

Indeed, even usual business loans, at 84 billion euros was higher than normal, in addition to 50 billion euros of corona-related business. The usual business did not go down, climate reduction was a big source of demand.

Links with Government. Corona Special Programs were linked to a special guarantee from the German Federal government. Government covers 100% of the risks, which KfW committed. This guarantee was used only for domestic support, for German companies.

For the rest of the world, the development sector got $1 billion from government for special transactions. Existing facilities were used.

Further capacities KfW could have done more loans. It put the offer on the table, German companies could apply for cheap loans, sometimes government took 100% of risk.

9. The KfW

KfW did on-lending to banks, who on lent to final customer, SMEs had 90% government guarantee, bigger companies 80%; Corona quick programme, implied 100% government guarantee, but this was limited to a total loan of 1 million euro, companies could apply for without any proof of documents, limited in volume, not used much; it was available for companies with less than 10 employees. Dominant part was for SME support, which had 90% government guarantee.

KfW had 154,000 applications; in fact, KfW could have had 200,000 or 300,000 applicants and could have met that. The demand was not there. It is interesting that KfW did not turn away a single client, everyone who wanted a loan got one. Because KfW offered security of available future loans, nobody rushed. As KfW said come when you need, companies were confident there was enough. This was in contrast with the beginning of the Covid crisis, when there was panic. Once companies knew there was support, they analysed what they needed and borrowed only that.

GDP fell but not as badly as expected. We set clear principles, if companies met them. They got the money.

Conditions for eligibility. Borrowers had to be in good shape prior to the end of 2019. Not in distress.

We turned away the ones who “wanted a free lunch, said now my problem is corona”. Eg show you had a drop in orders, show where you’d use the funds. Choice between long term or working capital, 5-10 years maturity, you had the choice. Long term offers to give relief.

10. African Development Bank

Drawn from interview with Prajesh Bhakat, Carina Sugden, Laurent Achi

The African Development Bank data shows approvals in 2020 were down 43%; however, disbursements up 44% driven by CRF (Covid Rapid Recovery Fund) disbursements.

Speed of response. As soon as Covid struck, the CRF set out possible response to help members. Completely reoriented the programme. All lending to the private sector was de facto stopped in March 2020 and did not take place, as AfDB needed all the resources to help governments deal with the pandemic. Governments badly and urgently needed support, which was granted mainly via budget support, that tends to be disbursed in one big tranche.

Prudential rates went down as countries were downgraded – prudent lending to governments (only, not private sector?)

Change in orientation. Disbursed more in 2020 because the budget support operations, once signed were disbursed in one big tranche. This is why the disbursement in 2020 is so much higher. $3.5 b was “crisis response budget support” to 39 member countries, 90% was disbursed by the middle of the year.

Similar to policy operations, as for example done by the World Bank

Could not use it in all countries. For high risk countries, we approved normal operations, $306 million.

Also, allowed restructuring of some projects. If excess resources could be diverted to Covid related activities.

CRF document envisaged support to private sector, workforce, business, etc but all the crisis response focus went in fact instead to governments – activities such as health, support to vulnerable groups, cash transfer programmes, economic recovery of SMEs. Thus, governments helped the private sector through giving tax credit assistance, deferrals, incentives for small SMES. Government helped many private sector enterprises to survive

Reporting and feedback. Currently launching a whole in-depth evaluation of how member states responded, and used the resources.

As regards speed of lending, AfDB had to build in mechanisms to ensure governments did report, also in African countries the financial systems needed more time to create appropriate mechanisms than in developed economies. Still, AfDB did transactions in almost half the time, than in normal times. With upfront dialogue, (or) discussions don’t get tracked… it takes time.

First Covid cases appeared in March, severity was known by mid-March. The Bank responsed from early April – reprioritization, very fast, envisaged and planned. Rapid Response facility. Bank staff “did not sleep, as worked so hard”, in April and May 2020!

Key instrument – programme based lending. World Bank calls it policy lending – basically it is budget support.

2012 policy for crisis response was approved by the AfDB, it was unique as for example budget support criteria are different compared to what needed to fulfil a normal budget support Criteria are : does country have a strategy to respond to crisis, was it developed with the stakeholders? Existence of this previous policy decision facilitated and accelerated ability to respond to Covid crisis.

Designed to provide liquidity, here and now, to address the fiscal gap. Governments don’t have buffers, NO resources available for expanding health services, vaccination, etc , essential to respond to COVID. AfDB contributed to provide resources

AfDB already had the details for how to do rapid crisis response, which helped streamline and fast track. AfDB still needed to decide what to fast track… “Did not sleep between April and May”. Processes were developed to be able to approve and disburse fast, without compromise on quality, due diligence, fiduciary responsibilities or good governance, as attempted not to cut those

Another unique AfDB strategic response, focused on what we do. However, health support had not been one of the sectors supported by the Bank – but could not ignore health! Lot of discussion at the Board, which concluded: “We won’t meet those other strategies if we don’t do this one” COVID spillovers would affect all other sectors, therefore priority given to support health sector

Counter-cyclical properties of budget support, can come in quickly, governments can then help their private sectors. Each country programme was tailored to their needs.

AfDB did not use development banks for channeling funds, but lent directly to government, via budget support, which was fungible. AfDB look at government policies, and at what AfDB and they saw as the highest priorities. AfDB need assurances they had a plan and a programme. AfDB will hold them accountable.

Challenges. In COVID times, there were no country missions; work was all virtual, there were lockdowns.

Another major challenge was for donors to allow commitments to be front loaded in the AfDB Fund. The cycle is usually three years; all funds were asked for in year 1. The Fund did a lot of front loading. In 2021, there was nothing left in the Fund, therefore no approvals.

The Fund is replenished every three years, then annual resource allocation can front load 50%, also only allowed to give 25% to budget support. This Fund is for low-income countries. In 2020, AfDB frontloaded every country, and there were high disbursements.

Capital constraints. The demand for budget support is much larger than what the Bank can supply. AfDB and AfDF are constrained by limits on their capital. If it was possible to increase their capital, their level of activity could increase significantly.

Another problem for the AfDB is that it obtained a capital increase, but it was slow. Belgium has agreed to pay in one shot. Dialogue with other members, who argue they are in a difficult situation too.

Also, SDRs would help the Bank get more headroom, for increasing their operations in African countries. AfDB is pushing hard on this issue, so SDRs are partly channeled through MDBs, such as the AfDB, by increasing their capital. The president of AfDB is strongly supportive, the EIB also is.

What is AFD?

Éditions Agence française de développement publishes analysis and research on sustainable development issues. Conducted with numerous partners in the Global North and South, these publications contribute to a better understanding of the challenges faced by our planet and to the implementation of concerted actions within the framework of the Sustainable Development Goals.

With a catalogue of more than 1,000 titles and an average of 80 new publications published every year, Éditions Agence française de développement promotes the dissemination of knowledge and expertise, both in AFD’s own publications and through key partnerships. Discover all our publications in open access at editions. afd.fr.

Towards a world in common.

Publication Director Rémy Rioux

Editor-in-Chief Thomas Melonio

Legal deposit 2nd quarter 2023

ISSN 2492 - 2846

Rights and permissions

Creative Commons license

Attribution - No commercialization - No modification https://creativecommons.org/licenses/by-nc-nd/4.0/

Graphic design MeMo, Juliegilles, D. Cazeils

Layout Denise Perrin, AFD

Printed by the AFD reprography service

To browse our publications: https://www.afd.fr/en/ressources-accueil