BRIEF

Financing for Fragile and Conflict-Affected Countries

October 9, 2014

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For financing purposes, the International Development Association (IDA) groups fragile states in four categories:

  • Countries receiving allocations based on IDA's Performance Based Allocations (PBA) system
  • Countries receiving exceptional post-conflict allocations
  • Countries receiving exceptional allocations upon re-engaging with IDA after a prolonged period of inactivity, but which did not qualify for post-conflict assistance
  • Countries that do not receive any IDA financing because they are in arrears on IDA repayments

IDA provides financing primarily through the PBA system, which emphasizes performance, while factoring in country needs. For fragile and conflict-affected countries, particularly post-conflict countries the Bank takes into account the special circumstances of the country.

  • IDA13: IDA provided grants to the poorest countries, debt-distressed poorest countries, post-conflict countries, and for HIV/AIDS and natural disasters. Many of these provisions benefited fragile states.
  • IDA14: IDA provided grants based on a country's risk of debt distress. IDA established policy-determined debt burden thresholds because generally countries with better policies and institutions can carry more debt. Because fragile states have weak policies and institutions, they also have lower debt-carrying capacity and therefore mainly receive grants.
  • IDA15: The World Bank Management committed to a range of actions related to work in fragile and conflict-affected countries: progress on human resources reforms; cooperation with the UN and other development actors; implementation of good practice principles for engaging in and adapting Country Assistance Strategies to fragile and conflict environments; and strengthening IDA support for state- and peace-building activities.
  • IDA 16: The World Bank Management has committed to several monitorable actions. These include, among others, examining the operational implications of the 2011 World Development Report (WDR) on Conflict, Security and Development, and developing plans for enhanced implementation of UN-World Bank Partnership Agreements in several pilot countries. During the IDA16 discussions, Deputies expressed interest in setting up working groups on four topics, including one on fragile and conflict-affected countries. The working groups will provide a forum for learning and informal discussion on the selected themes.

Because of the Multilateral Debt Relief Initiative (MDRI), IDA, the AfDF and IMF all canceled their debt for countries reaching Heavily Indebted Poor Countries (HIPC) completion point. Cancelling the debt freed resources in these countries to meet their developmental needs. 

State- and Peace-Building Fund (SPF)

The multi-donor State- and Peace-Building Fund (SPF), was created in 2008, supports measures to improve governance, institutional performance, and reconstruction and development in countries emerging from, in, or at risk of sliding into crisis or arrears. SPF funds are available to all Bank member countries, IBRD and IDA-eligible countries, as well as countries in arrears.
The SPF supports strategic initiatives/projects that

  • pilot innovative initiatives that address the challenges of fragility and create a foothold for wider development involvement;
  • assist countries that are in arrears;
  • promote cross-cutting, innovative approaches to the challenges of conflict and fragility; and
  • capture and disseminate the lessons of SPF activities to promote better understanding of the dynamics of fragility and conflict and develop effective strategic and operational approaches.

The 2011 World Development Report: Conflict, Security, and Development, along with the Bank’s own operationalization strategy, marked a significant shift within the Bank and across the international development system toward new and revitalized approaches for working in fragile and conflict-affected situations (FCS). SPF funding supports development of “transformative” strategies at the regional, country, and sub-national levels that address prevention, management, and recovery from violence, conflict, and fragility, using the World Development Report as a framework. Currently three SPF strategy initiatives are under preparation: transforming citizen security in Central America; conflict mitigation in ECA; and reengagement in Yemen. There are also ongoing discussions with country teams in Zimbabwe, Guinea-Bissau, Liberia, Somalia, and Cote D’Ivoire on possible strategic initiatives.

At the end of June 2012, the SPF portfolio consisted of 50 projects (53 grants) for a total of $134.6 million. Of the 53 grants supported by the SPF, the majority are implemented in Africa (53 percent), followed by the Middle East and North Africa (15 percent) and Latin America and the Caribbean (10 percent).

Korean Trust Fund

The Korean Fund for Economic and Peace-building Transitions (KFEPT) was established in October, 2009 with two objectives:

  • Support measures to improve governance and institutional performance in fragile, conflict-prone, or conflict-affected countries. This objective focuses on strengthening, building and rebuilding state effectiveness through institutional strengthening and economic governance interventions.
  • Support the reconstruction and development of fragile, conflict-prone, or conflict-affected countries.

The Korean Trust fund is managed by the State and Peace Building Secretariat. Projects are approved both by the SPF Governance Committee and the Korean authorities.


Multi-Donor Trust Funds (MDTFs)

MDTFs combine the contributions of multiple donors, generally for a program of activities over many years. Their arrangements include standard legal agreements with all donors, which specify governance procedures covering trust fund management, operational and financial reporting, and the allocation and uses of funds. Bank-administered MDTFs do not allow donors to earmark funds to specific activities or recipients.

MDTFs are used frequently in post-crisis environments—both post-conflict and post-disaster. They can improve resource efficiency and effectiveness by reducing transaction costs, and by managing the high-risk levels inherent in post-crisis environments. For national authorities, MDTFs can increase and untie funding and provide political visibility. International support can bring legitimacy to the overall peace process. For donors, MDTFs reduce information, administrative, and various access costs by working in a coordinated manner.

Being involved in MDTFs can allow the Bank re-entry into countries that have not been eligible for Bank support, including helping address arrears and helping countries become eligible for IDA support. Moreover, the Bank can promote economic growth and strengthening the institutions and processes of governance in these countries by administering MDTFs.

Strategic Review of MDTFs in Fragile States

The World Bank commissioned a strategic review of the role MDTFs play in fragile states which found that the share of funding sent through the World Bank administered MDTFs versus through IDA has grown substantially, and in FY09 MDTF funding in FCS was equal IDA funding . MDTFs have evolved into the preferred modality by donors for working in FCS, and the World Bank is the manager of the largest proportion of MDTFs in FCS.

The report and annex [pdf - 301Mb] offer lessons learned from previous MDTFs and makes suggestions for ways to improve the World Bank's engagement in FCS when working with MDTFs. The video provides an overview of the findings of the MDTF review. Look at the video presentation.


Special Allocations

Although the majority of IDA resources are allocated through the Performance-based Allocation (PBA) system, countries emerging from severe conflict (post-conflict countries) or after prolonged disengagement with IDA (re-engaging countries), can, under certain conditions be provided with additional resources. Allocations to countries eligible for this support are determined on the basis of performance as measured by the Post-conflict Performance Indicators framework (PCPI) and, where available, portfolio rating.

For more details on how these indicators are prepared, please see Frequently Asked Questions [pdf -427 kb]

Post-Conflict Countries

  • Definition: Under the framework agreed in IDA-13, potential candidates for post-conflict IDA allocations must fall into one of the following three categories: (i) a country that has suffered from a severe and long-standing conflict which has led to inactivity of the borrower for an extended period, or at least a substantial decline in the level of external assistance, including from IDA; (ii) a country that has experienced a short but highly intensive conflict, leading to a disruption of IDA involvement; and (iii) a newly sovereign state that has emerged through the violent break-up of a former entity.
  • Eligibility Criteria: An eligible post-conflict country would need to score "high" in at least one of the three following categories: (i) the extent of human casualties; (ii) the proportion of the population which is internally displaced; and (iii) the extent of physical destruction. The Bank's OP 2.30 guides the decision on its involvement in these contexts based on four conditions: (i) sufficient reduction of conflict; (ii) reasonable expected stability; (iii) presence of an effective government counterpart; and (iv) evidence of strong international cooperation.
  • Special Allocations: Under IDA-15, the special post-conflict allocations were set to be provided for a period of up to four (4) years of premium plus six (6) years of phase-out to the performance based norm, for a total of ten (10) years.
  • IDA 16: post-conflict countries will also be eligible for a case by case extension of their phase out period beyond six years provided they meet a predetermined set of criteria. Eligibility depends on whether at least two of the following three criteria are met: (i) limited income and financing options as measured by GNI per capita under IDA operational cutoff or lack of access to IBRD; (ii) continuation of conflict as measured by the presence of a UN peace-keeping mission; and (iii) effectiveness of use of IDA resources as measured by IDA portfolio rating at above 3.0 over the last 3 years.

Re-engaging countries.

  • Definition: These countries have not experienced severe conflict but have been disengaged from IDA for a long period of time and expressed willingness to re-engage on the basis of a strong transition program with concerted donor support.
  • Eligibility criteria: Eligibility criteria for exceptional allocations under the re-engagement window include: (i) evidence of partial collapse of the state, but ineligibility for IDA post-conflict assistance; (ii) existence of a strong transition plan supported by concerted donor support; and (iii) disengagement from IDA for a prolonged period and accumulation of sizeable arrears to the World Bank Group. During IDA-16 countries that are reengaging with IDA after a prolonged period of inactivity on the basis of a strong transitional plan with concerted donor support are eligible for exceptional allocations.
  • Special Allocations: Under IDA-15, the special re-engagement allocation were set to be provided for a period of up to four (2) years of premium plus six (3) years of phase-out to the performance based norm, for a total of five (5) years.
  • IDA16: re-engaging countries will be eligible on a case by case basis for extension of their phase-out period beyond the three years. Eligibility depends on whether at least two of the following three criteria are met: (i) limited income and financing options as measured by GNI per capita under IDA operational cutoff or lack of access to IBRD; (ii) continuation of conflict as measured by the presence of a UN peace-keeping mission; and (iii) effectiveness of use of IDA resources as measured by IDA portfolio rating at above 3.0 over the last 3 years.


Budget Support

Budget aid is a term that encompasses both budget support operations and other sources of budget financing.

In February 2011 the World Bank and the African Development Bank produced a joint publication "Providing Budget Aid in Situations of Fragility". The key premise behind this publication is a need for more predictable and targeted budget aid aimed at addressing the root causes of fragility and conflict. The International Monetary Fund was an important consultative partner, and the European Commission provided valuable guidance and support to the publication.

As a "think piece" this publication does not constitute official World Bank or African Development Bank policy advice, operational policy or guidance.


Debt Relief

Debt relief work relates to implementing the Heavily Indebted Poor Countries (HIPC) Initiative, the Multilateral Debt Relief Initiative (MDRI), and the administration of the Debt Reduction Facility for IDA-only countries. The HIPC Initiative seeks to reduce the debt of HIPCs pursuing adjustment and reform programs. Countries graduating from the HIPC Initiative process also benefit from a 100 percent debt relief on eligible debt from major multilateral creditors under the MDRI. Debt relief provided under both initiatives aims.

  • to bring debt burdens of HIPCs down to manageable levels;
  • to provide countries with additional resources to help them reach the Millennium Development Goals (MDGs).

The Debt Reduction Facility catalyzes commercial creditors' participation in the HIPC Initiative. To encourage commercial creditors to bear their share of HIPC debt relief, the Debt Reduction Facility provides grants to eligible HIPCs to buy back their eligible commercial debt at a deep discount. Debt relief initiatives are a key to recovery for many fragile and post-conflict states because they may have entered arrears during periods of political instability and may require assistance to get back on track.





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