Finance for an Equitable Recovery - World Development Report 2022

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Finance for an Equitable Recovery - World Development Report 2022

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The interconnected risks faced now by households, businesses, banks and governments could trigger a global financial chain reaction not seen in generations. The 2022 World Development Report (WDR) examines the financial and economic risks that have been created or exacerbated by the pandemic, and outlines policy measures governments should take now to avoid major financial upheaval.

This event will frame the public conversation on how governments should prioritize where to take policy action first and how to best allocate scarce resources to support the recovery.

It will also consider how to address the growing risks of over-indebtedness and increased financial fragilities. This event will center on these issues:

  • The importance of early detection of significant domestic and global financial risks.
  • The need for transparency of non-performing loans and proactive management of distressed assets.
  • The importance of proactively managing sovereign debt burdens to free up resources for the recovery and avoid the significant social and economic costs of sovereign debt distress.
  • The importance of ensuring continued access to credit, especially for low-income communities and small businesses, and the opportunities offered by financial technologies.
  • The need for countries to identify and tackle the most urgent sources of risks. In some countries, managing existing debt burdens is the major challenge, while in others it’s financial sector stability.

See the list of speakers ˅

Use the following timestamps to navigate different sections of the video.

00:00 Introducing the topic: Finance for an equitable recovery
01:40 Welcome and opening remarks
10:53 Report’s main findings and policy recommendations
16:01 Indonesia: Financial sector risks and the challenges of debt
22:40 Post-pandemic risks to the financial sector / Mitigations
30:00 How can rising government debt be managed to lessen the risk
36:20 Mitigating financial risks and encouraging inclusive access to finance
42:24 Dealing with high levels of private debt
48:19 Policy recommendations for Latin America and the Caribbean
52:11 Credit crunch
53:28 Leveraging digital financial technology vs risks of data privacy
56:28 Top priority for policymakers to support an equitable recovery
59:10 Closing remarks

 

Speakers

Moderator

Read the transcript


  • 00:01 [Female voice] COVID-19 forced the world to deal with loss,
  • 00:05 lost lives, but also lost jobs and lost incomes, especially in developing countries.  
  • 00:16 Lost jobs meant some businesses failed, bank  balance sheets worsened, and credit tightened,  
  • 00:23 making new businesses and jobs harder to create. 
  • 00:27 To limit the losses, governments stepped in.
  • 00:32 Their swift action, helped households and businesses  get by and kept financial institutions running.  
  • 00:41 But it costs a lot of money and many  governments borrowed heavily to fund it.
  • 00:46 [Female voice] Now countries face new  
  • 00:50 long-term challenges like unsustainable levels  of government debt, a lack of clarity about  
  • 00:56 the real financial health of households,  businesses, banks, and even governments.  
  • 01:05 The 2022 World Development Report examines the  interconnected economic and financial risks  
  • 01:11 that emerged during the COVID-19 pandemic.  
  • 01:15 And the actions governments can take  now to enable an equitable recovery.  
  • 01:22 Ignoring these risks could threaten any  recovery, impacting the most vulnerable.
  • 01:31 [READ THE FULL REPORT WORLDBANK.ORG/WDR2022 #WDR2022]
  • 01:39 [Francine Lacqua] Welcome to everyone  
  • 01:42 in our virtual audience around the  world. We're so glad you could join  
  • 01:45 us for this virtual event on how finance can  support equitable recovery around the world.
  • 01:49 I'm Francine Lacqua. Now earlier today,  
  • 01:51 the World Bank released its latest World  Development Report Finance for an Equitable Recovery.
  • 01:55 The world is still dealing with  COVID-19. This pandemic really has triggered  
  • 02:00 the largest economic crisis in more than a  century. Increased global poverty for the  
  • 02:04 first time in a generation and increased  inequality across and within countries.
  • 02:08 Now, governments stepped up
  • 02:10 with generous economic  support for households and business.  
  • 02:12 And while these helped mitigate the worst impacts  of the crisis, they now need to be rolled back.  
  • 02:17 So today's event will discuss how this can be done  without setting off a cascading financial crisis.
  • 02:21 We are live streaming today in English, French, Spanish, and Arabic.
  • 02:25 And you can follow the event on social media as well  
  • 02:27 using the hashtag #WDR2022. You can also  post comments and questions at live.worldbank.org,  
  • 02:35 where our experts are standing by  to respond in all four languages.
  • 02:39 [Francine Lacqua] Now let's start off by hearing from
  • 02:40 the World Bank Group President, David Malpass. Mr. Malpass, over to you.
  • 02:47 [David Malpass]  Thank you very much, Francine.
  • 02:50 Thank you everyone for joining us today for the launch of this year's
  • 02:55 World Development Report. It's called  Finance for an Equitable Recovery. Let me begin  
  • 03:00 by thanking Carmen Reinhart and the WDR team for  the timely report. And I also want to welcome  
  • 03:07 our special guest and friends, Sri Mulyani,  Agustin Carstens and James Mwangi.  
  • 03:14 I'm very much looking forward to your discussion.
  • 03:16 I'll say a few words now and then turn over to you.
  • 03:20 [David Malpass] As we're all too familiar, the COVID-19 pandemic and shutdowns
  • 03:24 have created the most significant economic crisis in almost a century.  
  • 03:30 It's challenging the effectiveness of civil  and institutional structures around the world.  
  • 03:37 And it's adding to fragility and violence  that's facing many parts of the world.  
  • 03:42 The result is a crisis for foreign policy and  for development policy, as well as economics.
  • 03:50 [David Malpass] In 2020 economic output contracted in 90% of countries
  • 03:55 and the global economy shrank by 3%. Global poverty rates rose for the first time  
  • 04:01 in more than 20 years. Inequality has worsened,
  • 04:05 and the poorer and the most disadvantaged were hardest hit
  • 04:10 by the downturn and are being left behind in  the recovery. The recovery itself is uneven and  
  • 04:17 faces many hurdles. Geopolitical tensions and  fragility are major recovery risks, as we see  
  • 04:24 every day. New diseases and pathogens are a  risk, as are existing ones and COVID variants.
  • 04:32 [David Malpass] The World Bank Group works extensively on healthcare systems
  • 04:36 around the world to bolster preparedness and provide a variety of surge financing tools.
  • 04:43 Inflation will be hard to stop and hits the poor the hardest.  
  • 04:48 The two primary tools being considered seem  unlikely to be enough. Gradual interest rate  
  • 04:55 hikes would still leave real interest rates,  low or negative. The second tool, tapering  
  • 05:02 Central Bank asset purchases, still leaves huge  distortions in the global financial system.
  • 05:09 [David Malpass] Under the current post monetarist system, Central  
  • 05:14 Banks have two other tools. Financial regulatory  policy, that's a topic of today's discussion  
  • 05:20 for developing countries, and also the duration of  Central Bank assets and the duration of government  
  • 05:28 debt. The use of these two tools will be a key  variable in reducing inflation more quickly.
  • 05:36 [David Malpass] The current global support for bond issuers
  • 05:40 continues to concentrate capital  wealth and excess government spending in a very  
  • 05:46 narrow segment of advanced economies. It's  the inequality that we observe every day.  
  • 05:53 This comes at the expense of small businesses,  slow growth in median income and reversals in development.
  • 06:01 The misallocation leaves  weakness in productive investments,
  • 06:06 in job training, and in the logistics needed to  improve supply chains. That's not an argument  
  • 06:14 for faster interest rate hikes, which themselves  cause damage, especially on new businesses and on  
  • 06:21 developing countries. Rather, it's an argument  for governments and Central Banks to use more  
  • 06:27 of their tools at the same time. Rather than  Central Banks buying back and owning large,  
  • 06:34 long duration debt, there needs to be more focus  on lengthening the maturity and transparency  
  • 06:41 of all levels of government debt outstanding  and slowing the growth in national debt.
  • 06:47 [David Malpass] There needs to be the same  
  • 06:49 focus on debt transparency and sustainability in  advanced economies that we have been advocating  
  • 06:55 strongly for developing countries. Similarly,  it's vital that financial regulatory policy and  
  • 07:02 advanced economies recognize the importance  of working capital and trade finance,  
  • 07:08 as we are doing in developing countries,  even in today's report. Floating rates, small  
  • 07:14 business loans form the financial foundation of  development, yet will be severely disadvantaged,  
  • 07:21 if Central Banks simply rely on interest  rate hikes to try to get ahead of inflation.
  • 07:27 [David Malpass]  The new WDR focuses on developing countries
  • 07:32 and on the interrelated economic risks  
  • 07:35 and spillovers between the balance sheets of  households, businesses, financial institutions,  
  • 07:41 and governments. And also on the central role that  finance needs to play in supporting a recovery.  
  • 07:50 The report discusses a variety of  financial fragilities and risks.
  • 07:54 [David Malpass] First, private debt is at a record high and  
  • 07:57 credit conditions are tightening. A growing share  of businesses are expecting to fall into arrears.  
  • 08:03 A new wave of loan defaults would lead  banks to tighten their lending standards.  
  • 08:09 This is procyclical, deepening the  downturn, it worsens inequality,  
  • 08:14 typically hitting low income households  and small businesses the hardest.
  • 08:18 [David Malpass] And second, sovereign debt has also spiked  
  • 08:22 during the pandemic. It's reached new highs for  some governments as revenues plummeted and related  
  • 08:29 COVID-19 expenditure soared. Surges in domestic  government borrowing can crowd out lending to  
  • 08:37 the private sector and misallocate capital, as  banks shift their lending to governments and  
  • 08:44 expose banks to concentrated sovereign risk.  These are some of the topics in WDR today.
  • 08:53 [David Malpass] So as monetary policy tightens  
  • 08:57 in the advanced economies, debt servicing  and rollovers will become a greater burden.  
  • 09:02 It's critical that risks be uncovered  and managed early. The alternative  
  • 09:09 protracted debt crises and restructurings, risks  derailing growth and development for years.
  • 09:16 [David Malpass] To work toward more sustainable debt,  
  • 09:20 a top priority is improved transparency of  both public and private debt. This helps detect  
  • 09:27 financial risk and enables the proactive  management of debt. We need effective  
  • 09:34 restructuring tools, both for government  and private debt. Currently, there are no  
  • 09:39 predictable or orderly systems for sovereign debt  restructuring and the implementation of the G20  
  • 09:46 Common Framework is stalled. For the medium and  longer term, continued access to finance will be  
  • 09:53 critical to a robust recovery. Innovations  in technology, including digital payments,  
  • 09:59 will be central, especially for low income  households and medium and small enterprises.
  • 10:05 [David Malpass] Let me conclude  
  • 10:06 by saying that I'm very pleased with  the timely release of this report  
  • 10:11 and I commend it to you. And now, we have  an excellent panel here today to discuss  
  • 10:17 these issues in more detail. So I'll pass the  floor, to get them started. Thanks everyone.
  • 10:24 [Francine Lacqua]  Wonderful. Thank you so much.
  • 10:25 Thank you so much for providing this global context.
  • 10:28 Now, before we turn to the panel, let's also hear  from Leora Klapper, Director of WDR 2022,  
  • 10:33 who will give us a snapshot of the report's main  fine endings and policy recommendations. - Leora.
  • 10:50 [Leora Klapper]  Thank you, President Malpass.
  • 10:53 This report is about identifying and resolving  
  • 10:55 financial risks that have been revealed or  worsened during the pandemic, which could  
  • 10:59 threaten the broader economic recovery. This  report comes at a point in the COVID-19 crisis,  
  • 11:05 when the economic programs that were implemented  early in the pandemic to limit the immediate  
  • 11:09 financial impact of the crisis, now need to  be scaled back. In many countries, that means  
  • 11:14 an end to support payments and debt moratoria for  households and businesses, and to relax accounting  
  • 11:20 standards before households and businesses have  recovered their pre-pandemic income levels.
  • 11:25 [Leora Klapper] That creates a potential for unprecedented financial risks
  • 11:29 for both governments and the private sector.  
  • 11:32 Risks that policy makers can't necessarily  see in advance, through support measures,  
  • 11:37 like the late credit reporting that can  mask the true economic health of borrowers.
  • 11:41 [Leora Klapper] One of the central messages of the report,  
  • 11:44 is that when risks appear in one sector of the  economy, they don't remain there. The balance  
  • 11:48 sheets of households, businesses, banks,  microfinance institutions, and governments,  
  • 11:53 are all interconnected. To the extent, that  a risk that arises in one of these sectors  
  • 11:57 can trigger a financial chain reaction that can  spill over and destabilize the entire economy.
  • 12:02 [Leora Klapper] For example, when families and  
  • 12:04 businesses face a loss of income, they may default  on their debts. Lenders are then saddled with poor  
  • 12:10 loan quality and in response tend to reduce new  lending. Almost everyone suffers when the economy  
  • 12:15 experiences a credit crunch, but the worst impacts  hit low income households and small businesses who  
  • 12:21 rely on credit to drive spending and investments.  And these circumstances and negative feedback loop  
  • 12:26 between financial sector performance and real  economic activity can drive income and equality.
  • 12:31 [Leora Klapper] And there's reason to be worried.  
  • 12:34 For example, about half of all businesses surveyed  across selected low and middle income countries,  
  • 12:38 report that they expect to fall into  arrears. Loan default could now sharply  
  • 12:43 increase. And we've seen in past crises  that private debts can become public debts,  
  • 12:48 if governments are forced to bail out struggling  financial institutions. In addition, escalating  
  • 12:53 levels of sovereign debt in the context  of lower government revenue from taxes,  
  • 12:57 they weaken the government's ability to support  households and firms and weaken bank balance  
  • 13:01 sheets if banks were holding local government  debt. There's also the challenge of global risks  
  • 13:07 such as rising interest rates and inflation, which  have the largest effect on the poorest people.
  • 13:11 [Leora Klapper] This WDR focuses on solutions for four key areas of risk.
  • 13:17 First, debt moratoria and freezes in credit  reporting helped prevent a wave of loan  
  • 13:22 defaults during the pandemic, but they  also reduced credit market transparency.  
  • 13:27 Lenders must now prioritize identifying  and reducing non-performing loans. Delayed  
  • 13:32 action can threaten financial stability, reduce  access to credit, discourage entrepreneurship.
  • 13:37 [Leora Klapper] Second, delayed resolution of distressed debt  
  • 13:40 can waste time and the productive use of assets  and human capital. Effective insolvency systems  
  • 13:46 facilitate conciliation and mediation, as  well as simplified and quicker adequate work [inaudible]
  • 13:52 for small and medium sized businesses. These can prevent capital from flowing  
  • 13:56 to unprofitable businesses and allowing individual  debtors to escape the stigma of debt distress.
  • 14:02 [Leora Klapper] The third risk is tighter access to credit.
  • 14:05 Digital financial tools and lending models can help lenders better manage credit
  • 14:10 and continue lending. Policymakers  should put in place pro-innovation regulations  
  • 14:15 and upgrade financial infrastructure,  ensuring consumer protection.
  • 14:18 [Leora Klapper] And fourth, many governments had  
  • 14:21 to borrow to finance their pandemic spending,  pushing sovereign debt to new highs. Now the  
  • 14:26 proactive management and reduction of sovereign  debt is important to free up fiscal resources  
  • 14:32 to support the recovery and the transformation  towards a greener world economy and prevent the  
  • 14:36 problems associated with sovereign debt distress,  including prolonged recessions and high inflation.
  • 14:42 [Leora Klapper] Although we highlight many  
  • 14:43 challenges to the recovery, we're optimistic  about the tools for addressing these risks  
  • 14:48 and the interlinkages in the economy can work in  a positive direction as well. A sustainable public  
  • 14:53 debt, a sound banking system and growing private  sector can mutually reinforce a robust recovery.  
  • 15:00 We hope this report can help governments identify  which policies should surface as high priorities  
  • 15:06 and how to best allocate scarce resources  to support an equitable recovery. Thank you.
  • 15:11 [Francine Lacqua] Thank you so much, Leora,  
  • 15:14 and I have to say it's one fantastic report for  those of you who have not picked it up yet. Now  
  • 15:19 for those who've joined us late, we're discussing,  of course, the just released World Development  
  • 15:23 Report, Finance for Equitable Recovery.  Follow us on social media using #WDR2021.
  • 15:29 [Francine Lacqua] Now let's turn to our panel.
  • 15:30 And with us, we have Carmen Reinhart, Senior Vice President and Chief Economist
  • 15:34 of the World Bank Group, Sri Mulyani Indrawati, Minister of Finance, of Indonesia,  
  • 15:40 Agustin Carstens, General Manager of  the Bank for International Settlements,  
  • 15:44 and James Mwangi, Group Chief Executive  Officer, Equity Group Holdings, Kenya.
  • 15:48 [Francine Lacqua] So thank you all for joining  
  • 15:50 us and thank you for the many questions  that I'm already getting. Please continue  
  • 15:53 sending them through. Now let's pick up on  some of the points raised by David Malpass  
  • 15:57 and Leora, and Minister Indrawati, turning to  you first. As a Minister of Finance, of a large  
  • 16:03 middle income country, how have you managed  financial sector risks and the challenges,  
  • 16:07 of course, of debt in your country to try  and support a robust and equitable recovery?
  • 16:11 [Sri Mulyani Indrawati] First, thank you so much for this invitation
  • 16:15 and congratulations for the WDR,  which is very timely in terms of the topic.  
  • 16:21 The pandemic definitely have a very significant  implication to many countries in the world,  
  • 16:28 including developing and emerging. The  contraction of the economy, especially in 2020,  
  • 16:35 which is followed by the contraction on the  revenue side. For Indonesia, for example,  
  • 16:39 the contraction of the economy is 2.07 in  2020, and then contraction on the revenue side,  
  • 16:47 which is the revenue, dropped by 16% while  the spending increase by 12%. That's widened  
  • 16:54 the deficit in 2020, the first year of pandemic.
  • 16:58 [Sri Mulyani Indrawati] Luckily for Indonesia, I think, the contraction of  
  • 17:02 the economy is relatively modest and how we respond  to this contraction with the countercyclical,  
  • 17:09 both on the fiscal side and monetary side, as  well as regulatory forbearance on a financial  
  • 17:15 sector regulation. Those have been put in three  years extraordinary policy, which is allowed by  
  • 17:25 our emergency law. This actually tried to create  a discipline so that we are not going to continue  
  • 17:33 in emergency and extraordinary situation,  also paving the way for the exit policy.
  • 17:39 [Sri Mulyani Indrawati] So within this context,  
  • 17:41 now the recovery in 2021, driven by, of course,  advanced economies, commodity prices, which also for  
  • 17:49 Indonesia creating also a very strong recovery  on our fiscal. The revenue increased by 19%  
  • 17:56 while the spending are control around 7% growth.  So the deficit has been dropped from 6.1% to 4.6%  
  • 18:07 only within one year. And for this year,  we are going to expect the deficit will  
  • 18:13 be declined even further, below 4% of GDP. So  that within three year we will be able to return  
  • 18:20 to what we call it, fiscal discipline  rule, below 3% maximum deficit.
  • 18:25 [Sri Mulyani Indrawati] How we managed this situation? First, I think  
  • 18:28 there is a discipline in using the fiscal policy,  really focusing on health, related to COVID,  
  • 18:37 social safety net, in order to reduce the  inequality and especially protecting the society,  
  • 18:43 which is the most vulnerable one. And also  focusing on small and medium enterprises  
  • 18:49 to recover the economy. The recovery of the  economy, in terms of growth, has been accelerated,  
  • 18:55 especially on the last quarter of last  year, in which we are able to achieve  
  • 19:01 3.7% of the whole year last year. But this is  also contributed by quite even distribution of  
  • 19:11 recovery, whether this is on a consumption,  investment and also very strong export.  
  • 19:17 On the supply side, production side, across  the board, in this case from manufacturing,  
  • 19:23 trade, as well as services sector, which  is also quite rebound as well as recover.
  • 19:30 [Sri Mulyani Indrawati] So this is a good news for  
  • 19:31 Indonesia. So within this context, in order  for us to be able to manage the fiscal risk,  
  • 19:38 we did what we have to do in this case. While  we are addressing the issue of pandemic, we also  
  • 19:46 deepen our reform. Tax reform is very critical  for Indonesia. So we passed the legislation  
  • 19:52 to improve the tax collection, including  increasing VAT as well as increasing the  
  • 19:57 tax bracket for the personal income tax and also  increasing the tax free. This will be implemented  
  • 20:05 this year and next year and 2025. So this is also  a very careful design, not to disrupt the recovery  
  • 20:14 process, while at the same time, consolidating the  fiscal in a very measured, but also credible way.
  • 20:21 [Sri Mulyani Indrawati] The second one, we enjoy the  
  • 20:24 support from Central Bank. The Central Bank  during this pandemic situation allow to buy  
  • 20:30 government bonds directly, but that can only be  done related to the COVID as well as a social  
  • 20:37 safety net. So that's create a disciplines.  We are not abusing as well as undermining  
  • 20:44 the independence of the Central Bank. Inflation in  Indonesia is still very low. We're just below 2%,  
  • 20:51 and that's provide us with also a strong  room for this maneuver on the monetary side.
  • 20:57 [Sri Mulyani Indrawati] Regulatory forbearance on the financial sector  
  • 21:00 has been provided for three years until 2023. So  basically for Indonesia, we are designing the exit  
  • 21:09 policy in a very measured and calculated way.  Of course, by seeing the recovery process,  
  • 21:16 which is now undergoing, and we do hope of course  that the pandemic is not getting worse because  
  • 21:22 the vaccination is already now achieved 70% of  the population and we even provide a booster.
  • 21:28 [Sri Mulyani Indrawati] So this combination will  
  • 21:30 provide us more confidence on the growth recovery,  
  • 21:34 fiscal discipline and managing the debt. So  when the interest rate globally increased  
  • 21:40 because of the increase in advanced country,  we have a much better and stronger foundation.
  • 21:46 [Sri Mulyani Indrawati] One last thing is, of course,  
  • 21:48 on external balance, that is balance of  payment, different from the taper tantrum, 2013,  
  • 21:55 Indonesia is now having a surplus in both  trade, as well as current account balance.  
  • 22:00 So that's provide also a stronger position for us  to embrace this increasing interest rate globally.
  • 22:09 [Sri Mulyani Indrawati] So that all the foundation  
  • 22:12 that we are trying to do while addressing the  issue of pandemic but at the same time, also, we  
  • 22:19 create a room for the reform so that the  foundation for the economy can be sanctioned.
  • 22:24 [Sri Mulyani Indrawati] Thank you.
  • 22:25 [Francine Lacqua] Fabulous. Thank you so much Minister.  
  • 22:27 And I have to correct myself, because I said WDR  2021, but of course it's WDR 2022 for the hashtag.  
  • 22:34 The last thing I want to do is, add a couple of  months to a pandemic year. But thank you Minister  
  • 22:38 for those remarks. Now, Ms. Reinhart, from the  position of a global multilateral bank and lender,  
  • 22:43 what are some of the post pandemic risks to  the financial sector and how can governments  
  • 22:47 try to mitigate these risks as financial  stimulus policies are starting to be unwound?
  • 22:53 [Carmen Reinhart] So, first of all, I think it's important  
  • 23:00 to recognize, and this is one of the messages of  the WDR, is that there is no one size fits all.  
  • 23:06 The risks differ considerably across countries  and therefore the appropriate policy response  
  • 23:15 does as well. We just heard from Minister Mulyani,  most countries at the moment are not as fortunate,  
  • 23:26 and have not had the benefit of recovery and low  inflation, the combination that Indonesia has.
  • 23:33 [Carmen Reinhart] So a big challenge is,  
  • 23:38 of course, for those countries where recovery has  yet really to take hold, and that is the majority.  
  • 23:46 The majority of countries at the moment have  per capita incomes that are below what they were  
  • 23:53 in 2019, before COVID. They have not fully  recovered. And of course, per capita incomes  
  • 23:58 correlate with a lot of other economic and  social indicators like poverty, health and so on.
  • 24:05 [Carmen Reinhart] Also, most developing and emerging markets have  
  • 24:13 higher inflation, again, different from  what we heard on Indonesia. So real wages  
  • 24:21 are also being eroded. How  does this setting, in which  
  • 24:28 a recovery is very desirable and a sustainable,  equitable recovery is very desirable, how does  
  • 24:34 it connect to the story in the WDR? Well, healthy  recoveries need healthy financial institutions,  
  • 24:44 and they need also healthy governments. Now  it is fairly well known at this stage, that  
  • 24:52 over the last few years, even before COVID, the  state of health of many low income countries,  
  • 24:59 public finances is been strained. The share  of countries in debt distress, or at high  
  • 25:06 risk of debt distress has risen steadily,  and it's really in alarming territory. But  
  • 25:16 I think an area that has not received sufficient  attention during the whole pandemic experience is  
  • 25:26 what these draconian declines in  income, the uncertainty, the stop go,  
  • 25:34 we have closed business, we have open business,  the duration, we're on our third year. What all  
  • 25:40 of this has done to private sector, household  balance sheets, to corporate balance sheets.
  • 25:48 [Carmen Reinhart] And of course, we already heard from the Minister,  
  • 25:52 the response, monetary and fiscal policy stimulus  has gotten the headlines, but financial sector  
  • 26:02 policies have also been very important and  really unprecedented during the pandemic. So  
  • 26:15 excellent timing in terms of counter cyclical,  
  • 26:18 allowing forbearance, so that corporates  and households don't have to, in the midst  
  • 26:28 of an emergency really, don't have to repay their  debts, but there are unintended consequences,  
  • 26:35 that those policies have also applied  forbearance to accounting standards.
  • 26:41 [Carmen Reinhart] So we've had about 20 years of  
  • 26:48 progress in many emerging and developing countries  towards more transparency and balance sheets,  
  • 26:53 towards better and more standardized  accounting of what is non-performing loans. And  
  • 27:03 the pandemic has really set that back.  
  • 27:07 So a concern that we reiterate again, and we  heard from this, from both David, from Leora,  
  • 27:16 is to what extent are we going to see risks from  the things we see or from the things we don't see?
  • 27:29 [Carmen Reinhart] And let me say this, having  
  • 27:31 studied financial crisis for decades, it's often  what we don't see that really triggers a crisis.  
  • 27:40 In the global financial crisis afterwards,  the surprise was Greek debts were a lot bigger  
  • 27:48 than previously thought. In the Asian  crisis of '97, it was thought that  
  • 27:56 Thailand Central Bank had much higher  level reserves than it turned out to have.  
  • 28:01 And now the concern that we put  forth is that, be very careful,  
  • 28:08 take stock quickly, do stress testing, get  a handle on non-performing loans, because  
  • 28:15 I think the forbearance policies that  have been so helpful in providing  
  • 28:20 support to households and firms during the  pandemic, have had unintended consequences  
  • 28:26 of making much more opaque, the balance sheet of  banks. And that could be a very negative surprise.
  • 28:33 [Carmen Reinhart] I will conclude by saying  
  • 28:35 that if you look at some of the World Bank's Pulse  surveys, which survey medium and small enterprises  
  • 28:45 mostly, and one of the questions those surveys ask  is, are you in arrears now, or are you likely to  
  • 28:52 be in arrears six months from now? The answer to  those surveys is, worrisomely, overwhelmingly yes.  
  • 29:05 The average response is, about 40% of the firms  say that they're either in arrears or expect to  
  • 29:11 be. And a significant share of countries, the  share saying yes to arrears, is much higher.  
  • 29:17 How does that connect to a picture where  nothing has happened in non-performing loans?
  • 29:22 [Carmen Reinhart] So be aware of the risks that you don't see,  
  • 29:26 I think is a cautionary message. And therefore  the importance of stepping up surveillance,  
  • 29:33 to assess the damage on a timely  basis and act accordingly, is really  
  • 29:40 a call for action on the part of the WDR. And  I would conclude now by saying that again,  
  • 29:49 this is not a one size fits all. We try to work  with countries depending on their specific needs.
  • 29:56 [Francine Lacqua] All right. Thank you so much for that.
  • 29:59 Mr. Carstens, from your global bird's eye perspective,  on the role that Central Banks and financial  
  • 30:04 regulators play, how can rising government debt be  managed, to lessen again the risk of debt crisis,  
  • 30:09 but also try and support some of these more  equitable societies that we're trying to build.
  • 30:14 [Agustin Carstens] 
  • 30:16 Thank you very much, Francine.  Thank you to the World Bank,  
  • 30:19 to David and Carmen for having inviting me to  this event and congratulations for the World  
  • 30:26 Development Report. Great to see also Sri  Mulyani, recognize her for her work on the G20.
  • 30:35 [Agustin Carstens] Let me start from a key principle here. I think  
  • 30:42 that the real issue we have been facing over the  last two years is something that has to do with  
  • 30:48 a real shock. The real shock was a pandemic and it  had a very important impact on economic activity.  
  • 30:55 Now, macro policies have been implemented to  smooth the initial impact, to impede that this  
  • 31:01 real shock translate into depression and into  a financial crisis. And I think so far so good.  
  • 31:09 We have managed to do that. The monetary fiscal  and financial policies were always, from the out  
  • 31:16 start, predicated on the basis that they would be  an immediate buffer to the magnitude of the shock.
  • 31:24 [Agustin Carstens] At the end of the day,  
  • 31:25 the shock has had an impact on the real  sector of the economy, on the business cycle,  
  • 31:31 on the allocation of resources. The solution  will require a major relocation of resources  
  • 31:38 in the economy, and more than anything, to push  very hard structural reforms that would increase  
  • 31:45 potential growth. I think a lot of the problems  we're facing would be minimized if growth would be  
  • 31:53 enhanced. And as a matter of fact, in  many emerging and developing countries,  
  • 31:57 the growth problem started already  since the mid of last decade.
  • 32:03 [Agustin Carstens] It's important that the macro policies can  
  • 32:07 transfer the baton to other type of policies that  address more directly the nature of the shocks.  
  • 32:16 As the report very well establishes, some  of the macro policies will need to enter  
  • 32:22 into another phase. Why? Because  they have hit their limits.  
  • 32:27 Certainly monetary policy cannot  go further than where it is.
  • 32:32 [Agustin Carstens] It needs to start  
  • 32:34 reining in. And now it has to be, as  Carmen says, one size doesn't fit all,  
  • 32:42 but certainly Central Banks need to be ahead  of the curve, anchor inflation expectations and  
  • 32:48 make inflation reach a more normal level without  generating a major slowdown in economic activity  
  • 33:00 and in the financial sector. A smooth  landing is what Central Banks are looking  
  • 33:06 for. And I think with the instruments  they have, they will be able to do that.
  • 33:11 [Agustin Carstens] Now, in terms of your  
  • 33:12 specific question about government debt, I think  we face today a real interesting circumstance,  
  • 33:22 and that piece, where even growth has been  lower than expected or desired, it still is  
  • 33:29 higher than real interest rates and than  nominal interest rates in many countries.  
  • 33:35 So that gives them time, gives time governments,  to start bringing back order into their finances.
  • 33:44 [Agustin Carstens] Obviously, there might be cases of major urgency,  
  • 33:51 but in most of the cases, there is time also to  gradually start looking after a sustainable debt.  
  • 34:00 And here, let me bring back the issue of growth.  The key equation here, or calculus, or indicator,  
  • 34:10 that Carmen knows extremely well, is a difference  between interest rates and growth rates.  
  • 34:16 If we work more on work growth rates through  time, I think that we can diffuse many of the  
  • 34:23 problems in many countries. And now this also  calls for the allocation of government resources  
  • 34:34 and the policies, that on the fiscal side can  be implemented. I think that now we need to  
  • 34:39 move more into more focused and targeted type of  policies that can enhance the resiliency of firms.
  • 34:48 [Agustin Carstens] Not of all of them, because we know that they have  
  • 34:51 been sectoral shifts, shifts in demand and so on.  And some firms, regretfully, will not be viable.  
  • 34:58 We need to be able to support employment, so  that employment supports consumption. And this  
  • 35:06 continues with the access to financial  services to a lot of the population.
  • 35:10 [Agustin Carstens] So there are many different aspects where,  
  • 35:14 if the policies are fine tuned are well  directed, I think that we can manage to  
  • 35:22 bring this into a route of least pain as possible.  For me, the key is that not only Central Banks,  
  • 35:33 Finance ministries, and so on, need to use  all of their instruments, but we need to use  
  • 35:40 all the instruments that are available in the  economic policy front, and others too. I think  
  • 35:46 that we need to focus is, towards growth, towards  making reallocation of resources more efficient.
  • 35:52 [Agustin Carstens] So, as I said at the outset,  
  • 35:57 the limits of the macro policies will not hurt  the economic recovery and the baton can be taken  
  • 36:05 over by a real sector policy that for sure, the  World Bank always do a great job in this field.
  • 36:15 [Francine Lacqua] Great. Thank you so much, Mr. Carstens. Now,  
  • 36:19 Mr. Mwangi, from the private sector perspective,  what kinds of government policy could help  
  • 36:23 mitigate financial risks that they're also facing?  And also encourage inclusive access to finance?
  • 36:30 [James Mwangi] Thank you very much. I think the situation  
  • 36:34 where we are, particularly developing countries,  given that this is more of an economic shock,  
  • 36:42 the financial sector will only be successful  if it works hand in hand with governments  
  • 36:48 that allows policy change. Unfortunately, most  of the governments of developing countries  
  • 36:55 have no headroom to be able to put stimulus  and significant impact. And they have not  
  • 37:02 had big impact and have really  focused on the social aspect.
  • 37:07 [James Mwangi] So for the governmental movement, the best is to  
  • 37:12 really create elaborate partnerships and try and  harmonize, particularly the public private sector  
  • 37:20 collaboration, which can really mobilize  citizens to play a more larger role.  
  • 37:28 I think today, the bigger private  sector banks like Equity Bank,  
  • 37:32 I think needs to be incentivized by government  so that they play more of a developmental  
  • 37:38 role where they don't really focus on the  financial sector, but seeks partnerships,  
  • 37:44 whether it's with the development banks or  whether it is with the philanthropic world.
  • 37:52 [James Mwangi] So that the approach they take  
  • 37:54 is not the traditional financing and commercial  approach, but it's a developmental approach  
  • 38:00 that builds the financial capabilities, provide  financial tools. But more importantly, to ensure  
  • 38:09 the bulk of the population is not  left behind. As social interventions,  
  • 38:16 particularly capacity building, so that  people are able to bounce [inaudible 00:38:22]  
  • 38:24 adversely affected. And then the [inaudible  00:38:27] have a mix such that it's not the  
  • 38:29 short term financing of banks, but it's  a mix of long term development financing,  
  • 38:36 together with the commercial bank financing, to  allow recovery, and particularly, to also allow  
  • 38:44 development of local and regional supply chains  to replace the broken global supply chains.
  • 38:50 [James Mwangi] Another aspect is policy change. This then  
  • 38:55 means that, if the private sector is to [inaudible  00:38:58] a developmental approach, there must be  
  • 39:01 policy change that allows that, and particularly  links the micro and macro policies. So that the  
  • 39:13 lead economy can then be able to play an active  role. Whether these will then look at incentives,  
  • 39:22 whether these will work in collaborations  and partnerships, or in a case to case basis,  
  • 39:29 or it is more of sectoral approach, I think,  it will depend from one country to the other.
  • 39:37 [James Mwangi] The last one is the [inaudible 00:39:39] for  
  • 39:40 governments to think really how to deal  with crowding out in the private sector.  
  • 39:47 We've realized the banks have responded by  really looking at the risk perspective. And  
  • 39:54 part of [inaudible 00:39:55] looking at the risk  perspective of lending because of the high NPLs  
  • 40:01 has been more, take the sovereign risk.  And as more of the government tries to  
  • 40:09 fill in and replace the lost income in terms  of tax revenues through debt correction,  
  • 40:18 they should strike a balance such that they  don't crowd out completely private sector. That  
  • 40:24 then is bringing a very significant stimulus  [inaudible 00:40:28] out to the lead economy.
  • 40:30 [James Mwangi] So that is how  
  • 40:31 I see where the government can  come in and take a more, like  
  • 40:37 in East Africa, maybe a more regional approach  other than a national approach, may help. So that  
  • 40:45 cross border trade and investment then plays  a bigger role in bringing back the recovery  
  • 40:54 and stimulating recovery, than may be government.  So the issue of re looking at markets and  
  • 41:01 maybe sacrificing a bit of sovereignty to  regional policies that allow cross border trade,  
  • 41:10 that allow larger markets, that allow, maybe ease  of trade, maybe a way to approach this recovery.
  • 41:19 [Francine Lacqua] Mr. Mwangi, thank so much.  
  • 41:22 So let's, first of all, welcome the audience  who have tuned in right now. We're discussing  
  • 41:28 the just released World Development Report on  Finance for Equitable Recovery. Now, we're also  
  • 41:33 asking everyone participating, listening in, or  watching us, to take a poll. In an ideal world,  
  • 41:39 and this is a complicated question, but in  an ideal world, policymakers should be able  
  • 41:43 to address all these challenges, but given  that they can't, they have to prioritize.
  • 41:47 [Francine Lacqua] So what do you think could be  
  • 41:49 the priority to support an equitable recovery,  the first priority. So you can vote, its A, B,  
  • 41:54 C or D. 'A', identify and address non-performing  loans and financial sector stability, 'B' resolve  
  • 42:02 distress loans of households and businesses. If  you answer 'C', and I think you can just actually  
  • 42:07 type it on the website. 'C' is ensure access  to credit, especially for low income households  
  • 42:13 and small businesses, and 'D' finally,  tackle record high sovereign debts.
  • 42:17 [Francine Lacqua] We will reveal the answers at the end,  
  • 42:20 in about 15 minutes from now, but Minister  Indrawati, maybe one of the things that we  
  • 42:27 need to look at, and I'll ask all of you the  same question in about one or two minutes,  
  • 42:31 really to try and get the conversation  going is, what can policy makers,  
  • 42:35 at this point, at this juncture in time, and  we've seen actually some of the difficulties  
  • 42:39 in addressing all of these together. But what  can policy makers do with high levels of private  
  • 42:44 debt whilst avoiding this credit crunch or  sustained lending by banks to zombie firms?  
  • 42:50 There's not a magic answer, but what  signs should they be looking out for?
  • 42:55 [Sri Mulyani Indrawati] I think if the recovery of the economy  
  • 43:00 can be accelerated, that will provide a room for  the bank to address the non-performing loans.  
  • 43:07 Because as I said earlier, even in Indonesia,  we provide the regulatory forbearance for  
  • 43:14 the financial sector, especially bank, for  three years until 2023. And that mean the NPL,  
  • 43:21 although currently at the 3% level, but they are  actually have to provide the additional capital  
  • 43:31 reserve in order to anticipate the realized  non-performing loan by the end of this policy.  
  • 43:39 And that's why, when the recovery process is  accelerated, the bank definitely will see that  
  • 43:46 the corporation, the corporate debt, which is  under restructuring, can become current again,  
  • 43:52 and they can serve their debt again. That is a  good solution. So definitely the recovery economy  
  • 44:00 is necessary condition for this banking sector,  and the exposure to the non-performing loan  
  • 44:08 can be actually decreased or can be addressed.
  • 44:12 [Sri Mulyani Indrawati] The second one is, of course,  
  • 44:14 the stability of the economy in the form  of the interest rate. As much as possible,  
  • 44:18 if you can avoid this disruption of the recovery,  as we can see that the inflation coming, whether  
  • 44:25 this is coming from the supply side disruption,  labor shortage in the advanced country.  
  • 44:31 For Indonesia, we don't have labor shortage,  in this case. Even when our unemployment rate  
  • 44:38 has actually increased from 5.2 to 7%  because of the COVID in 2020, and our  
  • 44:46 recovery process also accompanied by declining  unemployment, but it's still at the 6.4 from 9%.
  • 44:54 [Sri Mulyani Indrawati]  And of course, in Indonesia,
  • 44:56 unlike in a more advanced country, we have an informal sector.
  • 44:59 So labor supply is actually not a problem. Supply  disruption, maybe also not really a problem.  
  • 45:06 We do have the pressure from the inflation  eventually coming from the commodity price,  
  • 45:13 like the [inaudible 00:45:15] coal, oil,  which is going to be also creating a pressure.
  • 45:19 [Sri Mulyani Indrawati] The inflation on the producer side is actually  
  • 45:24 much higher, but inflation at the consumer side,  still the headline on the consumer inflation,  
  • 45:30 is still very low. Some of it is because of  our administered price. That is the government  
  • 45:36 absorbed this increasing price through subsidy,  but that's only one part of the issue. But low  
  • 45:44 inflation, high growth, definitely will have a lot  of restructuring of the loan to become current.
  • 45:51 [Sri Mulyani Indrawati] The second one, this also create  
  • 45:54 a better chance for the banking sector,  to restore their intermediary function.  
  • 46:00 To be honest, during this pandemic in 2020,  the credit crunch is actually quite severe.  
  • 46:08 We are contracted by around 5%. So if you can  combine between, on the supply side mobility has  
  • 46:15 been stopped and then the credit is also stopped  or declined sharply, NPL is going to be increased.
  • 46:22 [Sri Mulyani Indrawati] Bank will take care of their own balance  
  • 46:25 sheet first. And that is exactly also what the  government really want because we don't want to  
  • 46:31 face the pandemic, that is a health crisis, then  can create social crisis when the people become  
  • 46:38 unemployed and becoming poor. Then combined  with the banking crisis. So we want to make  
  • 46:45 sure that the bank and financial sector will  be actually relatively stable. They have to  
  • 46:51 do additional capital adequacy ratio and at  now 25%. So I think it's relatively robust.
  • 46:58 [Sri Mulyani Indrawati] And we also see that the non-performing  
  • 47:02 loan is not declined. And I think the [inaudible  00:47:05] restructure and it becoming current  
  • 47:07 again. So it's good, the right indication  for restoring to the normal level again.  
  • 47:15 The problem for Indonesia, maybe in this case,  Carmen and Agustin, during this special situation,  
  • 47:24 we are supported by Central Bank who become  a standby buyer of the government financing.  
  • 47:30 At the same time, the bank doesn't want to lend  commercially because it's too risky. So they  
  • 47:38 prefer to buy government bonds.  So the government deficit,  
  • 47:43 fiscal deficit has been actually supported  directly by Central Bank, and the fact that  
  • 47:50 banking sector is not lending. Now, if we are  going to normalize, Central Bank stop financing  
  • 47:58 and bank will start lending to the commercial,  then fiscal need to reduce the deficit. So this  
  • 48:05 is going to be like the combination of the macro  level, which is linked to the recovery process.
  • 48:10 [Francine Lacqua] Minister. Thank you so much. Carmen  
  • 48:13 Reinhart, maybe just a question quickly, on zombie  companies, where do you worry about them the most?  
  • 48:18 And then I have a question also for you, from an  audience member, which is basically, what measures  
  • 48:23 should Latin American countries take now so as  not to exacerbate some of the acute problems  
  • 48:28 that they had before the pandemic,  and this person mentions, for example,  
  • 48:33 the lack of basic services, but also some of  the corruption that we could see out there.
  • 48:39 [Carmen Reinhart] Well, to be very direct, we don't address,  
  • 48:50 by no means, the list of problems either created  or exacerbated by COVID. It's a very long list.  
  • 48:59 We are focused in the WDR on these aspects of  finance that we think are very critical. And we  
  • 49:07 just heard the minister and they're very critical  to recovery. In relation to the prior question, as  
  • 49:19 the minister said, recovery is essential. A rising  tide lifts all boats, I believe it's the same.
  • 49:29 [Carmen Reinhart] So that's very critical,  
  • 49:31 but I think what to do right now, and this  is also very applicable to Latin America,  
  • 49:38 including Central America, where some of the  business survey reports that I mentioned, are also  
  • 49:47 somewhat troubling in their disconnect with  non-performing loans, is I think, important  
  • 49:54 stock taking. And it's complacency. We don't  really want to hear about non-performing loans.
  • 50:06 [Carmen Reinhart] Banks historically,  
  • 50:08 historically time and time again, have engaged  in evergreening, which goes directly to your  
  • 50:15 question. You don't recognize the loss. You don't  take the hit right now in your balance sheet. You  
  • 50:21 continue to lend, but if you continue to lend to  a firm that has really ceased to be productive,  
  • 50:30 it is a diversion of resources. And we are dealing  with economies that are scarce in resources.  
  • 50:38 And so the prospect of having  zombie lending, zombie firms,  
  • 50:44 is very detrimental to the vibrant role that banks  could play in stimulating the private sector.
  • 50:56 [Carmen Reinhart] And this goes to comments also, that James and  
  • 51:02 the Minister have made, on also the crowding out  problem. So a credit crunch could ensue because  
  • 51:16 banks are engaged in lending to zombie  firms. A credit crunch could ensue because  
  • 51:24 they are averse, and this is what the Minister was  saying, averse to lending to the private sector.  
  • 51:31 This is commonplace during periods of uncertainty.  They prefer to lend to the government. And then if  
  • 51:39 governments are aggressive in domestic borrowing,  credit crunch can occur because of crowding out.
  • 51:48 [Carmen Reinhart] So, we want to avoid credit crunches, and  
  • 51:54 they're important steps on debt  restructuring and so on, that governments,  
  • 51:59 regulators, I want to stress the role of  regulators. We've talked about Central Banks  
  • 52:04 and fiscal authorities, but regulators  have a big role here. And as do courts.
  • 52:08 [Francine Lacqua] [inaudible 00:52:10] Reinhart,  
  • 52:10 can I just pin you down? When  you talk about a credit crunch,  
  • 52:13 what kind of probability at  this point are we talking about?
  • 52:16 [Carmen Reinhart] Look, again, I'm not dodging your question.  
  • 52:20 It's not a one size fits all. In some countries,  we have been in a credit crunch already.  
  • 52:32 In part that reflects the fact that, as I alluded  to in my earlier remarks for the majority of  
  • 52:38 developing countries, the majority, they have not  yet recovered their pre COVID level of income. So  
  • 52:48 for many, the credit crunch is already underway,  and we've seen the pattern that we heard from in  
  • 52:54 Indonesia, where more lending is going to the  government from the banks, either because the  
  • 52:59 banks are risk averse, the government just needs  to borrow more or a combination of the two.  
  • 53:06 But this is not hypothetical, is the  point that I'm making. And in many cases,  
  • 53:15 extending into 2022 and beyond, really jeopardizes  the prospect for private sector recovery.
  • 53:24 [Francine Lacqua] Great. Thank you so much.  
  • 53:27 Agustin Carstens, I don't know  whether you wanted to talk about  
  • 53:31 what you think is a possible probability at this  juncture in time, of something to go severely  
  • 53:35 wrong, more wrong than we've seen in the last  couple of years. But also how can policy makers  
  • 53:39 encourage at the same time, banks and fintechs  to leverage some of the digital financial  
  • 53:45 technology, to provide financial  services whilst managing the other risks?
  • 53:49 [Agustin Carstens] Well, picking up on what Carmen said  
  • 53:55 in terms of credit crunch and so and so forth,  I think something that we should realize is that  
  • 54:03 this period of difficulty in the world  economy is not a result of a financial crisis.  
  • 54:12 If we compare this to 2008, '09, '10,  then it was a real financial crisis.  
  • 54:19 The epicenter of the problem was  in the financial sector. Here,  
  • 54:23 it's not the case. Here, again, let me  insist, this is a real sector type of crisis.
  • 54:29 [Agustin Carstens] So in this case,  
  • 54:31 I think that the financial sector can really  be part of the solution. And I think so far  
  • 54:36 it has been part of the solution. By and  large, we don't see any banking crisis.  
  • 54:42 In most countries, we don't see any banking  crisis looming. I think that the Basel core  
  • 54:50 principles that were developed after the previous  financial crisis, have done a very good job.
  • 54:55 [Agustin Carstens] I think that commercial banks  
  • 54:57 have a higher loss absorbing capacity. I think so  far, they have been engaging in lending and yes,  
  • 55:05 it probably hasn't been as fast as we would like  to see, because as many of the speakers in this  
  • 55:11 event has said, there is a lot of uncertainty  out there. There is a lot of risk out there.  
  • 55:16 And I think one of the roles, where I think  there is still a scope for joint action  
  • 55:24 between the public and the private sector,  is precisely how can this uncertainty and how  
  • 55:30 can these risks be shared between public  and private sectors in an efficient way?
  • 55:35 [Agustin Carstens] I think many lending can be  
  • 55:38 done through public development banks. I think  international financial institutions can also  
  • 55:45 bring to the table creative financing programs,  where risks can be allocated in a more efficient  
  • 55:55 way and this better location of risks and  better management of uncertainty can unleash  
  • 56:02 more private sector lending. The capacity is  there. We just need to find out how can we  
  • 56:09 unleash it. And this has a lot to do with risks.  And of course, to deal with the pandemic in the  
  • 56:15 first place. And as I have been insisted, getting  more growth going, would also help tremendously.
  • 56:21 [Francine Lacqua] It certainly would.
  • 56:23 I actually have the results of the poll, which I'll  tell you in a second and then go to Mr. Mwangi.
  • 56:27 [Francine Lacqua] So the poll results, about 60% of people  
  • 56:30 who took the poll, across all four languages,  say the most important priority is 'C',  
  • 56:37 which is to ensure access to credit for  low income households and small businesses.
  • 56:41 [Francine Lacqua] So Mr. Mwangi,  it's easier said than done.
  • 56:45 Of course we don't like to do that, but what are the challenges? 
  • 56:48 If this is a priority and I don't know, out of the four questions, if it is your  
  • 56:51 priority, or it should be, of course, all of  our priority, but how'd you get this done?
  • 56:57 [James Mwangi] Truly. I agree that the priority should be availing access to credit,
  • 57:05 particularly for small businesses. Essentially, small businesses provide massive employment,
  • 57:10 particularly in the developing economies.
  • 57:12 They constitute the informal sector,  which in some countries, like in East Africa,  
  • 57:17 they're just above 90% of the entire economy. So  it is really the basis of survival for households.
  • 57:24 [James Mwangi] The second thing is,  
  • 57:26 the biggest employer in emerging markets, the jobs  are in the informal sector. So the best we can do  
  • 57:33 for ourselves is to fast track the recovery  of that sector so that we provide relief to  
  • 57:42 the population and most of them are in the lead  economy. So then the economy would start firing.
  • 57:49 [James Mwangi] How would we do this? I think it has  
  • 57:53 been said by my colleagues, I think development  banks and international financial institutions can  
  • 57:58 partner with the commercial banks, particularly,  to provide a diversified portfolio of credit.
  • 58:05 [James Mwangi] So that feeds in each category. I think  
  • 58:09 philanthropic organizations, foundations,  and development institutions can provide  
  • 58:15 guarantees because most of these  businesses had closed. So they're  
  • 58:20 bouncing back. They have no securities.  The risk is very high. So we could try  
  • 58:26 to do risk sharing, where we could provide some  level of guarantee for lending to this sector.
  • 58:33 [James Mwangi] The third one is  
  • 58:35 government incentives to the banks, to focus  on this, such that whether it is the capital  
  • 58:42 waiting, lending to this sector, the  treatment for reporting purposes by the  
  • 58:49 regulators. A policy shift would be absolutely  necessary so that there is a central focus  
  • 58:56 so that all the efforts, all the hands are on the  deck, of getting the economy to start recovery.
  • 59:07 [Francine Lacqua] Thank you so much, sir.
  • 59:09 We're almost out of time, but I'm going to ask you each,
  • 59:10 actually in 30 seconds, because we have a lot  of policy makers also watching. So could I ask  
  • 59:16 you in 30 seconds, your biggest concern for the  next 12 months and what you think policymakers  
  • 59:23 or how they should address this? Mr. Carstens,  maybe you can kick us off on that? In 30 seconds.
  • 59:30 [Agustin Carstens] Pandemic number one,  
  • 59:34 and the low growth, number two.
  • 59:38 [Francine Lacqua] Minister Indrawati?
  • 59:40 [Sri Mulyani Indrawati] Well, the increasing inflation  
  • 59:45 and interest rate globally, number one. And a  slow growth because of the non-ending pandemic.
  • 59:53 [Francine Lacqua] Thank you so much. Carmen Reinhart?
  • 59:59 [Carmen Reinhart]  Hard to argue with the pandemic.
  • 01:00:00 I think the low growth, inflation are not really separable.  
  • 01:00:07 And I think the part that perhaps is  often forgotten, is that inflation is  
  • 01:00:14 very regressive. It's a regressive tax. So it  goes to the income inequality issue as well.
  • 01:00:19 [Francine Lacqua] Thank you so much. Mr. Mwangi?
  • 01:00:22 [James Mwangi] Macroeconomic environment  
  • 01:00:26 is most appropriate for the private sector to be  able to kick in. I think economic growth is what  
  • 01:00:34 will stimulate and help populations to move out of  the situation. So that should be the policy focus.
  • 01:00:41 [Francine Lacqua] All right. Well thank you  
  • 01:00:44 all for joining us. And of course, as you  see from the poll, thank you for everyone  
  • 01:00:47 who also participated. There's  no real correct answer. Not really.
  • 01:00:50 As you heard today, there's no one  size fits all approach and all these elements  
  • 01:00:55 must be tailored to each country's context  and of course, build on country experience.
  • 01:00:59 [Francine Lacqua] We hope you've enjoyed  
  • 01:01:00 the event today and please do keep sharing  those comments online, using our hashtag #WDR2022.  
  • 01:01:07 Goodbye for now. And thank you again to all  of our wonderful panelists joining us today.

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