Development policy operations of the World Bank are quick-disbursing external financing to support policy and institutional reforms. They are financed in the form of development policy loans or grants to help a borrower address actual or anticipated development financing requirements. The World Bank may provide development policy lending to national or sub-national level governments in a member country.
The World Bank's policy with respect to Financial Management (FM) in Development Policy Operations (DPOs) is set out in Operational Policy OP 8.60 and and Bank Procedures BP 8.60, (Development Policy Lending). FM work focuses on the borrower's overall use of foreign exchange and budget resources:
- The funds flow arrangements should provide reasonable assurance that the foreign exchange (forex) from loan proceeds are deposited into an account of the central bank that forms part of the country's foreign exchange reserves, and that an equivalent amount is credited to an account of the government available to finance budgetary expenditures.
- Appropriate management of the country's budget resources should be ensured through the country's public financial management (PFM) system.
World Bank reviews of the above two issues inform decisions on development policy loan amounts, tranching, program content, conditionality, and risk mitigation measures.
Given the fungibility of foreign exchange reserves and budget resources, it is not required (and normally not possible) to track the ultimate use of the World Bank funds in DPOs. The borrower provides an undertaking, documented in the legal agreements, that it would not use the proceeds of DPOs to finance ineligible items (called "the negative list"). This is in effect a self-implementing "code of conduct" for borrowers, which, if breached, would trigger the enforcement by the World Bank of its legal remedies.
A DPO draws upon analytic work of the country's PFM system. Where there are weaknesses identified, the World Bank requires that:
the government has committed itself to an adequate and credible program of PFM improvement or reform, and
there is reasonable evidence that improvements and progress are occurring in a timely manner. There is no established minimum absolute standard of PFM performance per se, as a precondition for DPOs.
For further information on FM in DPOs, contact Manuel Vargas, email@example.com, +1-202-473-6536.