IDB President on the Cancún Annual Meeting

IDB Annual Meetings often present an opportunity to set the course for the coming months and even years. What are some of the key issues at this annual meeting in Cancun?

The worst of the economic crisis seems to have passed but important challenges remain. The financial crisis has increased the need for governments to improve their fiscal situation while addressing the region’s growing social needs. In spite of recent progress, nearly 200 million people in the region are still poor, one in every 12 children aged five or younger are underweight and more than half of the employed population works in the informal sector. They have precarious access to social safety nets. Productivity is about half that of the United States, and the region´s economic growth rate is well below its full potential.

According to our estimates Latin America and the Caribbean need to invest about 40 percent more annually to close the economic and social gap with OECD and middle-income Asian nations.  

To do this, more than ever the region needs the support of the international community and multilateral institutions such as the IDB. We can help bring about the changes needed to reduce macroeconomic vulnerabilities and make public policies and spending more effective.

In addition to these difficult challenges, the region has been hit with the disastrous earthquakes in Haiti and Chile. The IDB is working closely with these countries to support their rebuilding efforts.

So the IDB must be able to meet these development demands in an agile way, as we ensure we implement good governance and accountability internally. This includes a review of our capital levels, to ensure the IDB has the ability to respond to the countries’ needs over the next decade. And, of course, we will be looking at the special needs of Haiti.

What is the status of the IDB’s work in Haiti?

We are the largest multilateral donor in Haiti and have undertaken a number of initiatives following the earthquake. For the immediate response, we will make the best use of our existing portfolio of 25 operations – with a cost totaling $707 million – for earthquake relief. We have an undisbursed balance of $339 million, with resources that can serve that purpose.

We are reviewing this year’s pipeline of $128 million in grants for Haiti to ensure adequate response to the country’s needs. We hope that our overall support for Haiti during 2010 could be as high as $300 million.

We have sent a number of multidisciplinary teams to support the government in its efforts to lay the foundation for rebuilding or rather reconfiguring the country, as Haitians say. We have agreed in principle to increase our support for education and to include an emergency housing program.

Making sure all donors are working off the same script is critical. We are working closely with other donors to improve coordination. We are working with the government and other key actors to set up a multidonor trust fund. To ensure efficiency, we believe that the government of Haiti should consider setting up a separate single reconstruction agency to coordinate all efforts during a period of time.

At present we are working with the Haitian government, the World Bank, the European Commission, the United Nations and bilateral donors in the development of a comprehensive Post-Disaster Needs Assessment (PDNA). We are also providing financial assistance for the PDNA exercise, and we are working with the government to establish a long-term development plan, which will be the basis for a donors’ conference to be held in New York on March 31st. We are also looking to encourage more private sector investment in Haiti, and we are working with the Central Bank of Haiti to get the financial system up and running.

And finally, we are going to discuss in Cancun options for further debt relief for Haiti. The stock of debt of Haiti with the IDB is $447 million. A number of countries have expressed the desire to contribute to debt relief and we hope to come up with a solution very soon.

Is the financial crisis over for Latin America?

Vigorous economic growth won’t be back this year for several countries. Latin America and the Caribbean will grow on average between 3 percent and 4 percent in 2010, still below the growth rate before the crisis.

The larger point is that growth will be uneven. Large commodity exporters such as Brazil and Peru will fare better in 2010 because of the growing demand from China. Recovery in Mexico and Central America is lagging because their major market, the United States, is recovering slowly. The crisis also impacted the Caribbean, through fewer tourists and declining remittances. This region also faces a challenging fiscal environment.

How did the crisis impact IDB lending?

The IDB and other multilateral institutions have increased lending to help countries maintain investments in key infrastructure projects and social programs. This was done to protect the most vulnerable in the society. Over the short term, we increased our lending capacity by about $6 billion, which includes a temporary capital contribution of $4 billion by Canada and a $2 billion adjustment in our policies, which brought us in line with other multilaterals.

The result is that for a second consecutive year, in 2009 the IDB registered record loan approvals. We approved last year $15.5 billion in financing for the region, including loans and guarantees, a 38 percent increase from 2008. Our disbursements were also a record, increasing 56 percent to nearly $12 billion in 2009. So the region got $6.5billion more from us than they paid us back. This is three times last year’s volume.

What’s your response to those who look at these numbers and say the IDB is more focused on volume rather than on ensuring quality?

I disagree. In recent years we have undergone a very broad and deep transformative process to ensure our programs have the desired impact.

We have focused our priorities to meet emerging development needs. We now have specific initiatives for climate change, private sector development and social inclusion. This impacts our lending. For example, the IDB approved last year $3.5 billion of loans for environmental improvements, climate change and renewable energy programs, a ten-fold increase since 2007.

We have also reached out beyond our traditional clients —central government agencies— to new ones, like municipalities and foundations. As a result, we had seen an increase in demand for our resources even before the crisis struck, particularly from the poorest nations.

As you say, getting more money out the door is only part of the story. We have to make sure our programs have the impact we say they have. We have taken steps to increase transparency and accountability by giving local communities greater access to voice their concerns about Bank-financed projects. Our environmental and social safeguards were strengthened to ensure we address environmental and diversity issues early on in the project cycle, for example.

We have overhauled the way we measure and evaluate our work, using more empirical evidence. Our loans undergo a thorough evaluation 18 months after the initial disbursement. The IDB is squeezing more development out of every dollar it spends.

Through our evaluation work, we learned that an iron supplement used in a social program in Mexico was not being absorbed by children, who suffered from high anemia rates. We changed the supplement, and the rates of anemia have fallen dramatically.

So yes, we have increased our lending to help countries in difficult times, but we also have better tools in place to ensure our programs have the desired impact.

With the worst of the crisis over, why is the IDB seeking a capital increase?

The IDB is seeking a capital increase to meet the long-term development needs of Latin America and the Caribbean and to replenish its Fund for Special Operations, which supports the poorest countries in the region.

The IDB has been able to meet this rising demand by using its unused lending capacity and with short-term measures I mentioned before, such as temporary increase in Canada’s callable capital contribution. The Bank has brought forward several projects to support the region during the crisis since 2008.

As a result, we are reaching our maximum lending capacity earlier than expected and we now face a dramatic fall off in lending starting 2011. The crisis has brought forward a discussion for a capital increase.

In addition, I’d note that demand for our loans started rising before the crisis hit, particularly to new clients, such as the private sector and municipalities. For instance, loans to governments with sovereign guarantees almost doubled over the past five years. But our lending to entities that do not enjoy a sovereign guarantee more than tripled over the same period.

Any parting messages for Mexico, and Cancun in particular?

Our Annual Meeting is an occasion to showcase our close partnership with member countries. The richness of our programs is on display in Mexico. The IDB’s first tourism loan was for Cancún. The funds were used to build an airport, a port and the city’s first hotels.

The IDB has supported key social programs in Mexico. For instance, we worked closely with Mexican authorities on one of the first conditional cash transfer programs, now known as Oportunidades, that benefits 5 million families and serves the dual purpose of fighting poverty and ensuring kids stay in schools and get proper medical care. Similar programs have been implemented in 18 countries around the region.

In the past half century, Mexico received more than $25 billion in support from the IDB, including $3.1 billion last year, when the country had to deal with the global economic crisis and the H1N1 flu outbreak.

We have programs to bolster the country’s mortgage industry, its agricultural sector, and we are working closely on climate change adaptation, which as you know is a priority for the government. It has been a long and very productive relationship.