March 11, 2002

IDB REPORT: LATIN AMERICA AND CARIBBEAN FACE HISTORIC CHALLENGE 2001 Annual Report says Bank steps up lending to meet adverse economic circumstances

Latin America and the Caribbean are facing an historic challenge as they adopt policies and make adjustments to overcome adverse economic circumstances brought on by a series of world shocks, according to the 2001 Annual Report of the Inter-American Development Bank.

The IDB responded rapidly to the crisis by approving $7.9 billion in loans and guarantees to the region during 2001, the third highest level in the Bank’s history and the highest for its regular lending program, the report said.

“The lending program reflected the region’s broad-based development agenda of poverty reduction and social equity, reform and modernization of the state, and investments in infrastructure and productivity,” the Annual Report said.

The worldwide economic slowdown, exacerbated by the terrorist attacks in the United States on Sept. 11, “brought increased demand by countries for fast-disbursing sector loans to support stabilization and modernization,” the report said. “The Bank responded by providing $3.1 billion in financing for policy-based sector loans for reform, modernization of the state and protection of social spending during times of economic stress.”

According to the report, Latin America’s by-and-large healthy economic performance during the much of the 1990s suffered setbacks resulting from the Asia financial crisis of 1997 and the Russian crisis of 1998. The slowdown in the United States, Europe and Japan beginning in mid-2000 also marked the beginning of an economic deceleration in Latin America and the Caribbean.

“As a result of protracted stagnation and the difficult outlook for 2002, the countries of Latin America and the Caribbean are entering one of their most critical stages in decades,” the report said.

Commenting on the challenges facing the region, IDB President Enrique V. Iglesias said, “In such difficult circumstances, it is crucial for the IDB to sustain its financing and continue promoting a policy dialogue on issues such as competitiveness and integration, areas that are essential to achieving faster growth.”

He observed that the region’s leadership must resist pressures to reverse or dismantle macroeconomic reforms achieved during the past decade that have brought about stability and a capacity to reduce the impact of the recent economic crisis, which would have been much more severe without the reforms.

“The IDB stands ready to meet the challenge to our Hemisphere by mobilizing more resources and shaping lending instruments that will reinforce both the reform process and social safety nets,” he said.

IDB main lender to region

For the eighth year in a row the IDB was the largest source of multilateral credit for development of the region. Fifty-four percent of the total loan volume and 59 percent of the number of projects supported investments in poverty reduction and social equity – an emphasis that reflected guidelines of the Board of Governors. The Bank approved 14 programs totaling $1.7 billion to protect the social safety net and to promote human capital investment. Nine loans totaling $711 million supported basic, secondary and technical education in five countries.

The Bank used new flexible lending instruments for 29 operations totaling $963 million. These included innovation loans; multiphase projects; sector facilities in trade, health and education; and the Project Preparation and Execution Facility.

In addition to its lending program, the Bank provided $66 million (nominal terms) in debt relief to Bolivia, Guyana, Honduras and Nicaragua under the original and enhanced Heavily Indebted Poor Countries Initiative (HIPC), as well as $71 million in grants for 376 technical cooperation projects.

The Inter-American Investment Corporation, an autonomous affiliate of the IDB that supports small and medium-sized businesses, approved 19 transactions for a total of $128 million.

The Multilateral Investment Fund, an autonomous fund administered by the Bank that promotes private sector development through grants and investments, approved 66 projects for a total of $90 million.

Modernization of the state continued to be a priority for IDB financing operations. The Bank approved 22 loans totaling $2.4 billion for a broad range of programs, including reform of the judicial system, public management, decentralization and fiscal reform.

“A strong emphasis was on strengthening state institutions so that they can build or rebuild the institutional capacity necessary to meet the challenges of an increasingly open, competitive global economy,” the report said.

The Bank provided technical assistance and support for the integration of the Americas, both at the level of Summit of the Americas for a Hemisphere free trade zone and at subregional levels. The IDB also promoted the integration of the Central American Isthmus and southern Mexico through the Plan Puebla-Panama and has approved $240 million in financing to support the Central American Electric Interconnection System (SIEPAC).

The IDB approved financing operations to support the social and economic inclusion of indigenous and Afro-Latin American communities, to fight HIV/AIDS and to assist El Salvador and Peru recover and rebuild from earthquake emergencies.

To support the private sector, the Bank approved $279 million in direct financing for five private sector projects without government guarantees and an additional $586 million in syndicated loans from commercial lenders. The Private Sector Department concluded its first re-insurance agreement, enabling it to enhance its catalytic role in private financial markets through risk sharing. The Bank’s Board of Governors, underscoring its commitment to mobilize resources to support the development of dynamic private sectors in the region, approved the framework to allow an increase in private sector loans over time from 5 percent to 10 percent of the IDB loan portfolio.