response that included substantial contingency borrowing from IFIs to signal to markets that it had the capacity to intervene if needed. Within this context, IBRD played a useful role. The Bank was quick to respond with large lending volumes that contributed to the government’s signaling effects. The Bank’s substantial and rapid response derived mainly from an existing pipeline of policy loans that were then accelerated and enhanced with additional financing. The contingent nature of the DDO-DPL financing made it an appropriate instrument to support market confidence. It allowed for a flexible government response, and limited costs to the government. Beyond the initial signaling effect, however, it is too early to assess the effectiveness of the Bank response. In the longer term, the use of contingent lending that is not disbursed represents an opportunity cost of using Bank funds elsewhere. As of the end of the review period, the government had only disbursed US$70 million of the US$1.4 billion approved since August 2008. As the “signaling” effect becomes less relevant and if the loans are not disbursed, having served their short-term purpose, early cancellation of the loans may be the best course for the Bank and the government. While attribution of outcomes to the WBG is difficult to establish, IBRD made positive contributions through its policy advice, technical support, and signaling effects. To a large extent, Peru’s success in maintaining macroeconomic stability can be attributed to consistent government policies, as well as to the sharp increase in mineral prices since 2005, which substantially supported positive macroeconomic outcomes.4 The Central Bank of Peru and the Ministry of Economy and Finance are both strong institutions that developed and implemented appropriate policy reforms. Policy reforms and technical improvements were internally driven rather than made to meet the Bank’s lending conditions. Within this context, the Bank made clear positive contributions to the government’s efforts to maintain stability as well as to manage the financial crisis. In particular, as acknowledged by members of both current and past governments: (i) the Bank’s role as an impartial advisor and conveyor of worldwide best practice in macroeconomic management played an important role in defining the reform agenda of successive administrations in Peru; (ii) the technical advice, due diligence AAA, and policy matrices that accompanied the DPLs were highly valued by government counterparts and contributed to timely implementation and better monitoring of programs; (iii) the Bank’s presence helped add leverage to implementing reforms among different government agencies; (iv) the Bank’s TA directly contributed to improvements in budget planning and execution; (v) the Bank’s crisis
response lending effectively signaled to markets that the government had adequate reserves to respond to the country’s needs; and (vi) WBG support for development of the extractive industries sector indirectly contributed to positive macroeconomic outcomes. Outcome Rating. IEG rates the outcome of WBG support for maintaining macroeconomic stability and reducing vulnerability to shocks as satisfactory (see annex 3 for IEG’s ratings scale and definitions).
Deepening and Broadening the Financial System Country Developments Good progress was made in the financial sector in the 1990s, although key challenges remained in 2003 to ensure stability and broaden access to financial services. By 2003, Peru had established an appropriate regulatory environment and public oversight over the financial sector. Capital adequacy ratios had improved to within prudential norms. Several foreign banks had entered the system. Yet, concerns persisted in several areas. First, four large banks accounted for 75 percent of banking assets. Second, a high level of dollarization (80 percent of bank lending) exposed local firms to foreign exchange risks. Third, cautious practices among banks had resulted in a decline in lending to the private sector. Regarding microfinance, although Peru had one of the world’s leading microfinance industries, it accounted for just 2 percent of banking assets. Just 12 percent of Peru’s estimated 3 million microenterprises had access to formal credit. Notwithstanding growth since the 1990s, the expansion of larger loans to (SMEs was hindered by: inadequate recording of titles; weaknesses in realizing collateral; limited project finance lending by banks; and a culture of non-repayment in the rural sector derived from past state agriculture lending. The capital market remained undeveloped and dominated by public debt, with very limited participation by the private sector. Peru’s housing finance industry had a market penetration of just 2 percent, hindered by a: lack of access to cost-effective financing; lack of a secondary mortgage market; an inadequate stock of affordable housing; and weaknesses in the land titling and legal recourse framework.
Risks in the financial sector (since 2003) declined substantially, with improving capital adequacy ratios, strong liquidity positions, and declining non-performing loans among banks.
The World Bank Group’s Contribution to Enhancing Participatory and Sustainable Growth
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