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Developing Asia Needs Concessional Resources for Sustainable Development

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 The Asian Development Bank (ADB) should continue to deliver concessional assistance—comprised of very low interest loans and grants—to countries in need in the Asia and Pacific region to enhance their chances of achieving their targets under the Sustainable Development Goals (SDGs), recommends ADB’s Independent Evaluation Department (IED).

­­The evaluation report, Relevance and Results of Concessional Finance: Asian Development Fund (ADF) XI and 12, released by IED today assesses the relevance and results of the use of concessional loans and grants by ADB from 2013 to 2018—the period covered by ADF XI and the first half of ADF 12. ADB’s concessional assistance amounted to nearly $21 billion over 2013–2018, of which $5.8 billion was provided as grants.

The report states that there is a strong rationale for continuing concessional support in Asia and the Pacific. Growing inequality, rapidly accelerating climate crisis, especially in small Pacific atolls, and unrelenting conflict and insecurity in several countries mean there is a risk that poverty gains may be reversed in the medium term, and that there will not be enough progress on climate change mitigation and global peace and security. Without accelerated efforts, the region is unlikely to meet any of the 17 SDGs by 2030.

ADF was established in 1974 as a source of low-interest loans for ADB’s poorest member countries financed largely by ADB’s non-borrowing members. In 2005, grants were also added making ADF a concessional loan and grant facility. However, after the transfer of ADF’s concessional loan portfolio to ADB’s ordinary capital resources (OCR) balance sheet in January 2017, ADF became a grant-only facility providing grants to member countries in debt distress. “The transfer was a very innovative mechanism that has tripled ADB’s capital, allowing a greater response to the region’s development needs,” said ADB Director General of Independent Evaluation Mr. Marvin Taylor-Dormond.

As a grant-only facility, ADF is now concentrated on a much smaller group of countries. They are among the world’s poorest and most vulnerable with exceptional development challenges. The largest of these is Afghanistan while the rest are mainly small Pacific islands. Both are challenging contexts where development results are much harder to achieve. While the small Pacific island states are isolated and suffer from extreme climate conditions and natural hazards, Afghanistan is one of the world’s poorest countries grappling to secure lasting peace. The evaluation found that countries with fragile and conflict-affected situations are not well addressed by ADB in its operations. It also found that sustainability challenges faced by small Pacific island states as a result of climate change are not adequately considered during ADF resource allocation.

“We need to appreciate that traditional development approaches do not work in these complex contexts,” said Mr. Taylor-Dormond. “ADB needs to adapt its business processes to better suit complex country conditions.” The evaluation recommends increasing support to ADF countries for adaptation to climate change and continuing to provide a higher allocation to Afghanistan—which currently accounts for more than half of ADF grant allocations.

The evaluation found that project performance and results have been stronger in the ADF XI and 12 periods so far than in previous ADF periods. While overall performance has improved, sustainability of the investments made was weak, particularly in countries that are disadvantaged in capacity, well-functioning institutions, and peace and stability.

The report underscores the importance of the private sector in achieving SDGs and calls on ADB to scale up support for private sector development in countries eligible for concessional assistance. “Private sector development through nonsovereign operations is a key objective of ADB, but few nonsovereign operations have been undertaken in ADF countries because of the high risk of doing so,” said ADB Principal Evaluations Specialist and the evaluation’s main author Ms. Joanne Asquith. “ADB can introduce a blended finance window to derisk nonsovereign operations in concessional assistance countries, especially in areas where private sector operations are likely to have a high impact on the SDGs.” ADF currently does not provide blended concessional finance for nonsovereign operations.

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Critical Reforms Needed to Reduce Inflation and Accelerate the Recovery

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While the government took measures to protect the economy against a much deeper recession, it would be essential to set policy foundations for a strong recovery, according to the latest World Bank Nigeria Development Update (NDU).

The NDU, titled “Resilience through Reforms”, notes that in 2020 the Nigerian economy experienced a shallower contraction of -1.8% than had been projected at the beginning of the pandemic (-3.2%). Although the economy started to grow again, prices are increasing rapidly, severely impacting Nigerian households. As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60% of the total increase in inflation. Rising prices have pushed an estimated 7 million Nigerians below the poverty line in 2020 alone.

The report acknowledges notable government’s policy reforms aimed at mitigating the impact of the crisis and supporting the recovery; including steps taken towards reducing gasoline subsidies and adjusting electricity tariffs towards more cost-reflective levels, both aimed at expanding the fiscal space for pro-poor spending. In addition, the report highlights that both the Federal and State governments cut nonessential spending and redirected resources towards the COVID-19 response. At the same time, public-sector transparency has improved, in particular around the operations of the oil and gas sector.

The report however, notes that despite the more favorable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility, thereby limiting the government’s ability to address gaps in human and physical capital which is needed to attract private investment.

“Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity”, said Shubham Chaudhuri, the World Bank Country Director for Nigeria. ”While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realize its development potential.”

This edition of the Nigeria Development Update proposes near-term policy option organized around three priority objectives:

  • Reduce inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation;
  • Protect poor households from the impacts of inflation;
  • Facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.

“Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedite reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery” said Marco Hernandez, the World Bank Lead Economist for Nigeria and co-author of the report.

In addition to assessing Nigeria’s economic situation, this edition of the NDU also discusses how the COVID-19 crisis has affected employment; how inflation is exacerbating poverty in Nigeria; how reforming the power sector can ignite economic growth; and how Nigeria can mobilize revenues in a time of crisis.

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Indonesia: How to Boost the Economic Recovery

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Indonesia’s economy is projected to rebound from the 2020 recession with 4.4 percent growth in 2021. The rebound is predicated on the pandemic being contained and the global economy continuing to strengthen, according to the World Bank’s latest Indonesia Economic Prospects report (“Boosting the Recovery”), released today.

The report highlights that although consumption and investment growth were subdued during the first quarter of 2021, consumer sentiment and retail sales started to improve during the second quarter suggesting stronger growth momentum. However, it also notes that pandemic related uncertainty remains elevated due to risks of higher viral transmission.

“Accelerating the vaccine rollout, ensuring adequate testing and other public health measures, and maintaining strong monetary and fiscal support in the near term are essential to boosting Indonesia’s recovery,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “Parallel reforms to strengthen the investment climate, deepen financial markets, and improve fiscal space for longer-term sustainability and growth will be important to further build consumer and investor confidence.”  

The report recommends the government to develop a well sequenced medium-term fiscal strategy, including clear plans to improve tax revenues and fiscal space for priority spending. It also highlights the importance of maintaining accommodative monetary policy and stimulating private credit to support the real sector while monitoring external and financial vulnerabilities.

The report highlights the critical role of adequate social assistance in mitigating rising poverty risks. It finds that maintaining the 2020 social assistance package in 2021 could potentially keep 4.7 million Indonesians out of poverty.  

This edition of the report also looks at the possibilities for Indonesia to boost higher productivity jobs and women’s economic participation.

“Indonesia has reduced poverty through job creation and rising labor incomes over the past decade. The next stage is to create middle-class jobs that are more productive, earn higher incomes, and provide social benefits,” said Habib Rab, World Bank Lead Economist for Indonesia. “While the crisis risks have exacerbated Indonesia’s employment challenges, it is also an opportunity to address the competitiveness and inclusion bottlenecks to creating middle-class jobs and strengthening women’s participation in the economy.”

The report recommends a four-pronged reform strategy to address these jobs-related challenges:

  • Mitigate employment losses by maintaining adequate job retention programs, social assistance, training, and reskilling programs until the recovery is stronger.
  • Boost productivity and middle-class jobs by promoting competition, investment, and trade.
  • Equip the Indonesian workforce to hold middle-class jobs by investing in education and training systems and programs to improve workers’ skills.
  • Bring more women into the labor force and reduce earning gaps between men and women by investing in child and elderly care and promoting private sector development in the care economy.

The Indonesia Economic Prospects Report is supported by the Australian Department of Foreign Affairs and Trade.

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Inequality Has Likely Increased in PNG, with Bottom 40% Hit Hardest by Latest Outbreak

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A joint World Bank and UNICEF report based on mobile phone surveys of Papua New Guinean families has found that while there was a slight recovery in employment between June and December 2020, people in the bottom 40% of wealth distribution remain the hardest hit by the Coronavirus pandemic.

Conducted in December 2020, this second World Bank survey (the first was conducted in June 2020), shows that inequality has likely increased in PNG in the year since the pandemic began, and that the current COVID-19 outbreak is expected to deepen inequalities even further.

“According to the report, there were positive signs that PNG was starting to recover from the initial shocks of the pandemic between June and December 2020,” explained Stefano Mocci, World Bank Country Manager for Papua New Guinea. “However, it was largely wealthier households who were experiencing the fastest recovery in employment and income. In contrast, in areas with above average poverty, there were still high job losses.”

“Given a possible third wave of COVID-19 infections has strong potential to cause further declines in employment and income, social and economic support needs to be targeted to those most vulnerable – the bottom 40% – to try and lessen the widening inequality gap.”

“Little is known about how COVID-19 affects children in PNG,” expressed Judith Bruno, acting UNICEF PNG Representative. “Overwhelmingly, households with children under the age of 15 considered COVID-19 as a major threat to household finances and reported decreases in access to basic services, including water supply, sanitation, health care, and mental health and psychosocial support.”

“This World Bank and UNICEF collaboration will help policy makers and responders to better protect children from the virus, promote safe and continued access to services, and prevent children and their families from further economic hardship.”

Other key findings from the second of five planned World Bank surveys include:

·        For those still working, more than 75% of respondents reported receiving the same income as usual in the past week, compared to less than 50% in June (the strongest gains were for those in the top 40% of wealth distribution);

·        Rural households, and those in the bottom 40% of wealth distribution, were most likely to see decreases in money sent by friends or family.

·        77% of households were somewhat worried, or very worried, about their household finances in the next month.

·        33% of households in the bottom 40% of wealth distribution were unable to buy their preferred protein, compared to just four percent of households in the top 40%.

·        Less than 10% of primary and elementary school students participated in distance learning while schools were closed, but there were no significant differences between boys and girls returning to school and no evidence that the pandemic has widened the education gender gap.

·        Compared to the rest of the country, households in the National Capital District (NCD) were more likely to report deteriorations in theft, alcohol and drug abuse, violence by police and domestic abuse since June 2020 – all indicators of rising tensions in the capital, Port Moresby.

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