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Development Policy Lending Replaces Adjustment Lending

The World Bank overhauls its guidelines for policy-based lending to reflect 20 years of experience
Available in: العربية, Español, 中文, русский, Français

August 10, 2004―One of the World Bank’s main lending instruments--Adjustment Lending--has been replaced by the new Development Policy Lending in a major overhaul of the Bank’s operational policy.

Policy-based lending in support of a country’s policy program accounts for about one-third of the World Bank’s annual lending.

The Bank’s other lending instrument – investment lending – funds projects such as road and school construction.

The new policy is the culmination of more than two years of consultation with stakeholders—including governments, community representatives, civil society groups, academics and private sector representatives around the world.

The framework unifies policy that applies to a whole range of instruments, including sectoral adjustment loans, structural adjustment loans and poverty reduction support credits. In addition, it deals with core issues of design, fiduciary arrangements, financing options, and dissemination and disclosure.

James Adams, Vice President and Head of the Operations Policy and Country Services Network, says the switch to Development Policy Lending is much more than just a name change: It reflects how thoroughly transformed the instrument has become in the last decade or so.

Country Ownership

The new policy acknowledges there is no one blueprint for reform that will work in all countries. Therefore, governments must take ownership of reforms to develop a program that meets their countries’ needs.

“We have abandoned the prescriptive character of the old policy statement, in which we essentially enshrined goals and methods: ‛this is how you do public sector reform, ’ ‛

this is how you privatize,’” Adams says. “We have learned that a wide variety of approaches can work but we’ve also learned that the key ingredients to successful economic growth include giving greater space to the private sector, and promoting the rule of law and a functioning judiciary. ”

The new policy also seeks to ensure broader participation in government policy making by emphasizing that reforms should not be implemented without consultation with stakeholders nor without a deeper understanding of the social and environmental impact.

“There is a much clearer statement about the desire to see governments working with civil society and other actors in the development front in putting together policies to reduce poverty. The Bank is willing to support a country’s agenda, if we think the policies are sound, workable, and are truly owned by the government and its citizens.”

Long-term Focus

The new policy also recognizes that for a long time now only a minority of “adjustment” lending operations have been preceded by a crisis to which adjustment is necessary. In fact, most policy-based lending is now in the form of programmatic support for complex medium-terms structural and institutional changes rather than to help eliminate economic distortions.

“Many of these operations now involve longer-term structural change.” Adams says. “They involve complex institutional issues like strengthening the education and health policies, improving a country’s investment climate environment, and addressing weaknesses in governance, public expenditure management and public financial accountability. They require a careful step-by-step approach over many years.”

Evolution of Conditionality

One of the more controversial aspects of policy-based lending – conditionality – has also evolved since the 1980s. “The experience of the past 20 years has shown that these policy programs are not effective when they are not owned by the countries themselves” says Stefan Koeberle, Advisor in the World Bank’s Operations Policy and Country Services Network.

The bulk of adjustment operations are now done in the form of programmatic adjustment loans where disbursements are made against actions that have already been completed, rather than actions that are promised in the future.

Under this process, the Bank and the country reach an understanding about their goals and how to assess progress and if it is deemed adequate, funding can be provided for a second operation.

“In the Bank, we have found that programmatic operations have emerged as a promising approach to reconcile the objectives of ownership and resource predictability. In that sense conditionality has evolved into a mutual commitment device which holds governments accountable for reliably making progress toward their own poverty reduction strategies and the development community reliably providing financial support to help achieve these results.”

The model the Bank sees emerging in many low income countries is for external donors to provide reliable budget support in alignment with the country’s budget cycle which avoids the disruptive stop-go practice of donor funding of the past. This allows governments to proceed with more certainty knowing they can rely on the funding if they proceed according their commitments.

“In these operations you spell out the understanding between the Bank and the borrower about the types of key measures that would be critical for making progress toward the country’s goals—a pragmatic mix of outcomes, indicators, specific actions, maybe strategies,” says Koeberle. “A year or so later the Bank can provide a second operation, based on its due diligence that adequate progress has been made in the last year, even if the individual measures achieved are not precisely those that were expected a year earlier.”

Moving Forward

“The quality of policy-based lending drastically increased during 1990s,” Adams concludes. “Even critics of the Bank acknowledge that we are now doing a much better job of incorporating the lessons from 20 years of policy-based lending: Conditionality cannot substitute for ownership; participation and consultations matter since broad support of stakeholders is a decisive factor for the success of policy reform; and the need to be aware of the social and poverty impact of key policy measures. And one way to communicate that change is by changing its name.”

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