March 2002

IDB RESPONSE TO TERRORIST ATTACKS

IDB MEETS ECONOMIC CHALLENGE FOLLOWING SEPTEMBER 11 TERRORIST ATTACKS WITH RECORD FINANCING, RESOURCES TO INCREASE AIRPORT SECURITY

New financing operations expected to assist fight against money laundering

The terrorist attacks on the World Trade Center in New York and the Pentagon in Washington on Sept. 11 deepened an already recessive economic trend in both the developed and the developing countries. Latin America and the Caribbean were especially hard hit. Economic forecasts and performance plummeted immediately following the attacks as investors and airline passengers reduced their activity in a sudden and unexpected atmosphere of insecurity.

Caribbean island states whose economies are heavily dependent on tourism were battered by a steep drop in airline traffic. Mexico, as a member of the North America Free Trade Agreement, felt the recession that affected the entire trade bloc.

Latin America and the Caribbean grew at only 1 percent during 2001 compared with 4 percent during 2000. Capital flows slumped from $72 billion in 1999 to $57 billion in 2001. Interest rates rose, while prices slumped for commodity exports, especially coffee. Argentina’s economic framework, in difficulty before Sept. 11, became unsustainable afterward.

Another negative economic effect was the drop in the $20 billion in annual remittances to the region sent by immigrants living abroad, mainly in the United States, because of increasing insecurity and job layoffs caused by recession.

A survey commissioned by the Multilateral Investment Fund, a member of the IDB Group, reported that 56 percent of those who send money home to their countries of origin have reduced their remittances because of their less favorable situation. In many countries of Latin America and the Caribbean, remittances account for more than 10 percent of the gross domestic product.

IDB rises to the challenge

As financial resources dwindled in the region, the IDB stepped up its financing during 2001 to a total of $7.8 billion, a record level for the Bank’s regular lending program. Of this amount, $1,275 billion consisted of fast-disbursing sector loans to support policy reforms and modernization in areas of poverty reduction strategy (Bolivia and Honduras), human capital promotion and social sector administration (Brazil, Jamaica and Colombia), Health (Uruguay) and pensions (Nicaragua).

A $40 million loan to Jamaica approved on Oct. 3, complemented by a $1.1 million grant for technical assistance, was increased by $20 million on Dec. 6 to a total of $60 million to partially compensate for the drop in airline traffic and tourism as well as from the effects of Hurricane Michelle.

The resources will protect health, education and other social spending during a time of strong fiscal adjustment and will support the restructuring and better targeting of the country’s social safety net program.

Recognizing the need to take steps to meet the more challenging environment, the Committee of the IDB Board of Governors, in a working session preparatory to the Bank’s Annual Meeting in Fortaleza, recommended a $26 billion financing framework for ordinary capital loans to the region, in addition to $2.25 billion in concessional loans and $500 million in technical cooperation for the three-year period 2002-2004. The resources represent a sizeable increase from the previous three years of lending by the Bank and would include special credit lines to support borrowing member countries facing emergencies or critical situations.

Recognizing the need to strengthen the private sector, the IDB Board of Governors recently voted to double the ceiling on direct IDB loans to the private sector without government guarantees from 5 percent of the Bank’s portfolio to 10 percent.

Airport security

The IDB’s Multilateral Investment Fund (FOMIN) in November of last year approved up to $10 million in grants to assist countries of the region strengthen airport security. Resources will help strengthen civil aviation policies and regulatory frameworks, improve administrative services and train personnel in charge of surveillance and enforcement of new regulations. The MIF’s contribution would be a maximum of $500,000 for each qualified project, which would also require a counterpart contribution from the country of between 30% to 50% of the total value.

In an earlier operation to promote aviation safety, in December 2000, MIF approved a $4 million grant to assist the five countries of Central America - as well as Belize, Dominican Republic, Haiti and Panama - to improve the safety and competitiveness of the aviation sector by bringing national safety standards closer in line with international standards.

In another area of activity relevant to the war against terrorism, the MIF is expected to approve several operations during 2002 to help countries control money laundering and thereby make the financing of illegal activities more difficult. These operations will support training for public and private officials involved in the detection and prevention of money laundering, exchange of information and detection of illicit movements of funds, the strengthening of justice systems in charge of combating money laundering, as well as other activities.