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OP 8.60 - Development Policy Lending


These policies were prepared for use by World Bank staff and are not necessarily a complete treatment of the subject.
OP 8.60
August, 2004
 

 Note: OP and    BP 8.60 together replace OD 8.60, Adjustment Lending Policy and update the policy decisions in Issues in Adjustment Lending (R-96-55), April 2, 1996; Adjustment Lending to Subnational Units (SecM98-96[Rev.]), May 14, 1998; Programmatic and Emergency Adjustment Lending: World Bank Guidelines (R-98-249), October 22, 1998; and the following Operational Memoranda:  Adjustment Operations – Documentation of Policy Performance in Initiating Memoranda, March 31, 1988; Tranche Release for Adjustment Operations, January 21, 1992; Simplifying Disbursement under Structural and Sectoral Adjustment Loans, February 8, 1996; Guidelines for Special Structural Adjustment Loans, April 19, 1999; Guidelines for Programmatic Adjustment Loans/Credits, February 11, 2000; Clarification of Current Bank Policy on Adjustment Lending, June 5, 2000; and Interim Guidelines for Poverty Reduction Support Credits (PRSCs), May 31, 2001. They also reflect the relevant provisions in Proposal to Introduce a Deferred Drawdown Option (DDO) for Use with IBRD Adjustment Loans (R2001-0174), September 26, 2001, and  The World Bank Policy on Disclosure of Information, Washington, D.C., World Bank, 2002. This OP and BP apply to all operations for which a Concept Review takes place on or after September 1, 2004. Questions on development policy lending should be addressed to Operational Policy and Country Services (OPCS).

 

 1.   Development policy lending is rapidly disbursing policy-based financing, which the Bank[1] provides in the form of loans or grants to help a borrower address actual or anticipated development financing requirements that have domestic or external origins. The Bank may provide development policy lending to a member country or to a subnational division of a member country.[2]

Considerations in Providing Development Policy Lending

2.   Development policy lending aims to help a borrower achieve sustainable reductions in poverty through a program of policy and institutional actions that promote growth and enhance the well-being and increase the incomes of poor people. Development policy operations are supportive of, and consistent with, the country’s economic and sectoral policies and institutions aimed at accelerated sustainable growth and efficient resource allocation. They typically support a program of policy and institutional actions, for example, to improve the investment climate, diversify the economy, create employment, and meet applicable international commitments. Any investment lending subcomponent included in a development policy operation is subject to the relevant operational policies for investment lending.[3]

3.   Lending Criteria and Selectivity. The appropriateness of providing development policy lending to a country is determined in the context of the Country Assistance Strategy (CAS). The Bank’s decision to extend development policy lending is based on an assessment of the country’s policy and institutional framework—including the country’s economic situation, governance, environmental/natural resource management, and poverty and social aspects. The Bank considers the strength of the program and the country’s commitment to and ownership of the program against its track record. It also assesses the country’s institutional capacity and ability to implement effectively the program to be supported and describes the country’s capacity-building efforts.

4.   Volume/Share. The expected total volume or share of development policy lending for a borrower is determined in the CAS, taking the following factors into consideration:

(a)   the country’s financing requirements, given the actions necessary to achieve the expected results of the program, the costs of the program, the size and disbursement profile of the Bank’s lending program, and other financing available;

(b)   for IDA borrowers, the country’s relative allocation of available concessional resources; and for IBRD borrowers, the country’s exposure to IBRD in the context of creditworthiness and risks;

(c)   the borrower’s overall debt sustainability, based on an assessment of the expected impact of development policy program on the debt condition of the country;

(d)   the country’s absorptive capacity; and

(e)   country performance triggers for CAS lending scenarios.

5.   Macroeconomic Framework. The Bank undertakes development policy lending in a country only when it has determined that the country’s macroeconomic policy framework is appropriate.[4] The release of each tranche requires the maintenance of an appropriate macroeconomic policy framework. For development policy lending to a subnational entity, the state or region must have an appropriate expenditure program, as well as appropriate fiscal arrangements with the central government.

6. Consultations and Participation. As part of its country dialogue, the Bank advises borrowing countries to consult with and engage the participation of key stakeholders in the country in the process of formulating the country’s development strategies.[5] For a development policy operation, the country draws on this process of strategy formulation to determine, in the context of its constitutional and legislative framework, the form and extent of consultations and participation in preparing, implementing, and monitoring and evaluating the operation. Bank staff describe in the Program Document the country’s arrangements for consultations and participation relevant to the operation, and the outcomes of the participatory process adopted in formulating the country’s development strategy. Relevant analytic work conducted by the Bank, particularly on poverty and social impacts and on environmental aspects, is made available to the public as part of the consultation process, in line with the Bank’s disclosure policy.

7. Coordination with Development Partners. In preparing development policy operations, the Bank collaborates with the IMF and other international financing institutions and donors, as appropriate, while retaining responsibility for its financing decisions.

Design of Development Policy Operations

8. Development Objectives. The Executive Directors consider and approve each development policy operation as meeting the special circumstances provision of the Bank’s Articles of Agreement.[6] The Program Document sets out the country’s program being supported and the specific results expected from the resource transfer. The program design includes measurable indicators for monitoring progress during implementation and evaluating outcomes on completion.

9.   Analytic Underpinnings. A development policy operation draws on relevant analytic work on the country undertaken by the Bank, the country, and third parties. Drawing on a consultative process, the CAS assesses the adequacy of analytic work on the country and indicates how gaps will be addressed. The Program Document describes the main pieces of analytic work used in the preparation of the operation and shows how they are linked to the proposed development policy program. As appropriate, prior analytic work includes analyses of the country’s economywide or sectoral policies and institutions aimed at stimulating investment, creating employment, accelerating and sustaining growth, as well as analyses of the poverty and social impacts of proposed policies,[7] environment and natural resource management,[8] governance and public expenditure management, procurement, and financial accountability systems.

10.   Poverty and Social Impacts. The Bank determines whether specific country policies supported by the operation are likely to have significant poverty and social consequences, especially on poor people and vulnerable groups.[9 For country policies with likely significant effects, the Bank summarizes in the Program Document relevant analytic knowledge of these effects and of the borrower’s systems for reducing adverse effects and enhancing positive effects associated with the specific policies being supported. If there are significant gaps in the analysis or shortcomings in the borrower’s systems, the Bank describes in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate.

11.   Environmental, Forests, and other Natural Resource Aspects. The Bank determines whether specific country policies supported by the operation are likely to cause significant effects on the country’s environment, forests, and other natural resources.[10 For country policies with likely significant effects, the Bank assesses in the Program Document the borrower’s systems for reducing such adverse effects and enhancing positive effects, drawing on relevant country-level or sectoral environmental analysis. If there are significant gaps in the analysis or shortcomings in the borrower’s systems, the Bank describes in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate.

12.   Program Funding and Size of Operation. The Bank extends a development policy loan only when the overall program is adequately funded, considering both domestic and external sources of finance. The size of each development policy operation is determined individually on the basis of country circumstances, including the following factors:

(a)   overall projected financing requirements at the time of the operation (including the costs of reform, if applicable), the availability of alternative financing, debt sustainability, and creditworthiness (IBRD) or relative claim on available concessional resources (IDA);

(b)   the lending envelope envisaged and the share of development policy lending in total lending in the CAS; and

(c)   compliance with country performance triggers set out in the CAS.

13.   Conditions. The Bank determines which of the agreed policy and institutional actions by the country are critical for the implementation and expected results of the program supported by the development policy loan. The Bank makes the loan funds available to the borrower upon maintenance of an adequate macroeconomic policy framework, implementation of the overall program in a manner satisfactory to the Bank, and compliance with these critical program conditions.[11] The Bank seeks to harmonize these conditions with other development partners in consultation with the country.[12]

14. Tranching. Development policy lending can be provided in one or more tranches, depending on the country’s policy environment and capacity, the country’s financing requirements and other available financing, and the content and phasing of the program being supported by the development policy operation.[13] Development policy operations following a programmatic approach consist of a series of operations within a medium-term framework of policy and institutional actions.[14 Self-standing single-tranche development policy operations are embedded in an explicit medium-term framework and are based on adequate prior policy and institutional actions. For all operations, tranche release depends on the maintenance of an appropriate macroeconomic policy framework and the satisfactory completion of tranche conditions.

15. Risk Management. The borrower is responsible for managing operational risks affecting the development effectiveness of the development policy operation. The Bank independently identifies the financial and nonfinancial risks[15] associated with the program and ensures that the operation contains appropriate mitigation measures and monitorable indicators to track high-probability risks.

16.   Implementation, Monitoring, and Evaluation. The borrower implements the development policy operation, monitors progress during implementation, and evaluates results on completion. Bank staff assess and monitor the adequacy of the arrangements by which the borrower will carry out these responsibilities, with due regard to the country’s capacity. In addition, Bank staff review implementation progress during supervision to verify fulfillment of program conditions and compliance with legal covenants, and to validate monitoring and evaluation findings.[16 Supervision includes a focus on development impact, assessing the changes in outputs and outcomes resulting from the operation.

Fiduciary Arrangements for a Development Policy Operation

17.   Drawing on relevant analysis of the country’s public financial management, the Bank determines whether the operation should include measures to address identified fiduciary weaknesses.

18.   Disbursements. Development policy lending funds are disbursed against satisfactory implementation of the development policy lending program, including compliance with tranche release conditions and maintenance of a satisfactory macroeconomic policy framework. The borrower commits not to use development policy lending funds for ineligible expenditures. The Bank normally disburses the loan proceeds into an account that forms part of the country’s official foreign exchange reserves (normally held by the central bank), and an amount equivalent to the loan proceeds is credited to an account of the government to finance budgeted expenditures.

19. Fiduciary Arrangements. The Bank focuses on the borrower’s overall use of foreign exchange and budget resources as follows:

(a)   Foreign exchange. Bank staff review, and discuss with IMF staff as appropriate, the IMF’s most recent assessment of the borrower’s central bank. When the assessment shows that the control environment of the central bank is satisfactory, or reveals issues for which the borrower has agreed remedial actions that are monitored by the IMF, the Bank takes no further action.

b)   Budget resources. The Bank reviews the country’s public financial management and procurement arrangements through diagnostic work and through reports prepared by the borrower and others, including published annual audit reports of the central bank and of the government.

These reviews inform Bank decisions on the amounts of development policy loans, tranching, program content, conditionality, and risk mitigation measures. When the available analysis identifies weaknesses in the borrower’s central bank control environment or budget management system, or when an acceptable action plan to deal with identified weaknesses is not in place, the Bank will identify the additional steps needed to secure acceptable fiduciary arrangements for development policy lending: for example, requiring dedicated accounts for loan proceeds or counterpart funds, and having a right to request an audit on the dedicated accounts. The Bank may also agree with the borrower on the use of loan proceeds or counterpart funds.[17]

Options

20. A development policy operation may include one or more options that have specific requirements.

Deferred Drawdown

21.   A deferred drawdown option (DDO) allows a borrower to postpone drawing down a loan for a defined drawdown period after the loan agreement has been declared effective. A DDO is included within the CAS envelope and does not constitute a window for additional resources.

22.   Eligibility, Drawdown Period, and Conditions. IBRD-eligible borrowers may defer disbursement of a single- or multiple-tranche development policy loan for up to three years, provided that (a) overall program implementation is consistent with the Letter of Development Policy, and (b) the macroeconomic policy framework remains adequate. All specific conditions of tranche release for a development policy loan with a DDO must be met before Board presentation; none are included as effectiveness conditions in the Loan Agreement.

23.   Financial Terms. A development policy loan with a DDO includes a three-year drawdown period. The repayment term, including a grace period, commences from the beginning of the interest period following drawdown.[18 The Bank may extend the drawdown period for an additional period of up to three years if the country’s implementation of its reform program, and its macroeconomic policy framework, remain satisfactory.

Special Development Policy Lending

24.   For IBRD-eligible countries that are approaching or are in a crisis with substantial structural and social dimensions, and that have urgent and extraordinary financing needs, the Bank may, on an exceptional basis, provide special development policy lending beyond the level set out in the CAS. The magnitude of such financial support is subject to the availability of adequate IBRD financial and risk-bearing capacity.

25.   Design and Eligibility Criteria. To be eligible for special development policy lending, the country must have a disbursing IMF-supported program in place. Special development policy lending must be part of an international support package—which may include multilaterals, bilateral donors, and private lenders and investors—of structural, social, and macroeconomic policy, with conditionality embedded in a strong policy program. The Bank determines that the country’s external financing plan is sustainable, and ascertains that the special development policy lending and its associated debt service are within medium-term debt sustainability limits. A special development policy loan may have one or more tranches.

26. Financial Terms. The financial terms of special development policy lending reflect the special nature and high risks of lending for crisis support beyond anticipated levels.[19]

Supplemental Financing

27.   In exceptional cases, the Bank may provide supplemental financing—a loan additional to the loan provided for in the original Loan Agreement—in support of a program under implementation. Supplemental financing may be provided for a development policy operation for which an unanticipated gap in financing jeopardizes a reform program that is otherwise proceeding on schedule and in compliance with the agreed policy agenda. Supplemental financing is approved only when

(a)   the program is being implemented in compliance with provisions of Loan Agreement;

(b)   the borrower is unable to obtain sufficient funds from other lenders on reasonable terms or in a reasonable time;

(c)   the time available is too short to process a further freestanding Bank loan; and

(d)   the borrower is committed to the program and the implementing agencies have demonstrated competence in carrying it out.

Debt and Debt Service Reduction

28.   There may be circumstances under which the Bank may be called upon to use its financial resources in support of loan restructuring, equity conversion, or interest rate swaps. Lending for debt and debt service reduction helps highly indebted countries reduce commercial debt and debt service to a manageable level, as part of a medium-term financing plan in support of sustainable growth. The focus is on rationalizing the country’s external commercial debt, by either converting it to lower-interest instruments or buying it back at a discount. Funds are disbursed against tendered commercial debt for buy-backs or for purchasing acceptable collateral, to reduce principal and interest payments on new instruments issued in exchange for existing debt. The following cases may be distinguished:

(a)   In countries where a program of structural reform supported by development policy lending is already in place or is agreed to at the same time as the Bank-supported debt restructuring, the Bank must satisfy itself that the savings resulting from debt reduction will increase resources available for investment, because of the comprehensiveness of the program or specific assurances by the borrower.

(b)   In countries where the Bank is not currently engaged in development policy lending, to lend to the country for debt restructuring the Bank would need to show (i) that the reduction in debt service permitted by the operation is expected to be translated into increased productive domestic investment[20] and thus enhance economic growth and development even in the absence of an accompanying Bank-supported development policy program, and (ii) that the borrower’s supportive policy framework is expected to remain in place.

(c)   Debt/equity Conversion and Interest Swaps. For debt/equity conversion (direct and indirect) and interest rate swaps, Bank involvement is justified when the Bank lending or guarantees assist the borrower to (i) undertake a specific new investment, (ii) to enhance an existing project, or (iii) in special circumstances, to pave the way, significantly and materially, for conditions more conductive to investment so as to justify the intervention.

Documentation and Disclosure

Program Document

29.   For each development policy operation proposed for Bank financing, the Bank prepares a Program Document that describes and appraises the operation. An annex on Bank/Fund relations is attached.[21]The Program Document is available to the public after the operation has been approved by Executive Directors.

Letter of Development Policy

30.   The borrower sets out the program of objectives, policies, and measures to be supported by the development policy operation—typically a subset of the government’s overall strategy—in a Letter of Development Policy (LDP), which is included in the loan documentation presented to the Board.[22] The LDP is available to the public after Executive Directors approve the operation, unless they decide otherwise.

Tranche Release Documents

31.   In a multiple-tranche development policy operation, for each tranche after the first one, the Bank prepares a Tranche Release Document that reports on the status of the program being supported under the operation. The Tranche Release Document is available to the public (a) after Bank Management has approved the release of the tranche and the Board has been informed, or (b) if a waiver of tranche release conditions is recommended, after Executive Directors have approved the waiver.

Crisis and Post-Conflict Situations

32.   Countries affected by crisis[23] or conflict[24] may require an unusually quick response from the Bank. There may not be sufficient time or country capacity to adequately address design considerations (such as possible distributional effects, effects on natural resources and the environment, fiduciary arrangements), or a strong policy program developed with stakeholder consultation.

33.   In such situations, development policy lending is justified on an exceptional basis. In seeking Board approval of such operations, Bank staff describe in the program document when and how remaining design considerations would be addressed.

______________________

1. “Bank” includes IBRD and IDA, “loans” includes credits and IDA grants, “borrower” includes borrower and IDA grant recipient, and “subnational divisions” refers to states or provinces.

2. See   OP 7.00, Lending Operations: Choice of Borrower and Contractual Agreements.

3. See    OP/BP 10.00, Investment Lending.

4. The presence of an appropriate IMF program is usually an important input in this determination. If there is no Fund arrangement, Bank staff ascertain, before making their own assessment, whether the Fund has any major outstanding concerns about the adequacy of the country's macroeconomic policies. Any outstanding issues relevant to the adequacy of the macroeconomic policy framework raised by the IMF are communicated to Executive Directors. For internal guidelines to assist in the application of OP and BP 8.60 on assessing the macroeconomic policy framework, staff may refer to Good Practices in Designing Development Policy Operations.

5. Key stakeholders include social groups directly affected by the operations, as well as public sector, private sector, and donor organizations relevant to the operation. Country strategies include the poverty reduction strategy paper (PRSP) process in IDA counties or the country’s overall or sectoral development strategy in IBRD countries. For internal guidelines to assist in the application of OP and BP 8.60 on consultations and participation, staff may refer to the Good Practice Note in Supporting Participation in Development Policy Operations.

6. The Bank's Articles of Agreement provide that Bank loans should finance specific projects. "except in special circumstances." IBRD Articles, Article III, Section 4 (vii); and IDA Articles, Article V, Section 1 (b).

7. For guidance on poverty analysis, see  OP 1.00, Poverty Reduction. For specific guidance on analyzing distributional effects, staff may refer to the  User’s Guide on Poverty and Social Impact Analysis.

8. See the sections on Country Environmental Analysis and Strategic Environmental Assessment in the Analytic and Advisory Assistance section of the World Bank Environment website.

9. For internal guidelines to assist in the application of OP and BP 8.60, including possible criteria for the selection of policies for analysis, staff may refer to the Good Practice Note on Poverty and Social Impact Analysis and Development Policy Lending.

10. For internal guidelines to assist in the application of OP and BP 8.60 on analyzing environmental and natural resource risks and opportunities in development policy lending, staff may refer to the Good Practice Note on Environmental and Natural Resource Aspects in Development Policy Lending.

11. For internal guidelines to assist in the application of OP and BP 8.60 on conditionality, staff may refer to Good Practices In Designing Development Policy Operations.

12. See  Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality (SecM2001-0461), August 23, 2001.

13. For internal guidelines to assist in the application of OP and BP 8.60 on tranching, staff may refer to Good Practices In Designing Development Policy Operations.

14. This approach involves (a) clear monitorable indicators and progress benchmarks, (b) triggers for moving from one operation in the series to the next, and (c) notional timing and amounts of subsequent operations. A poverty reduction support credit (PRSC) is a development policy operation in the context of a programmatic approach in support of a country’s PRSP.

15. These include operational, developmental, macroeconomic, political economy, social, environmental, governance, reputational, and capacity/implementation risks, as appropriate. For internal guidelines to assist in the application of OP and BP 8.60 on risk assessment, staff may refer to Good Practices In Designing Development Policy Operations.

16. For internal guidelines to assist in the application of OP and BP 8.60 on implementation and monitoring, staff may refer to Good Practices In Designing Development Policy Operations.

17. Where the Bank agrees with the borrower on specified purposes for which the loan proceeds may be used, the Bank’s policies on procurement would apply (see OP 11.00, Procurement). In addition, in such cases, retroactive financing is permitted under the following conditions: (a) the payments are for items that are eligible for financing under the terms of the Loan Agreement; (b) the payments are for items that have been procured in accordance with applicable Bank procurement procedures; (c) such payments do not exceed 20 percent of the loan amount; and (d) the payments were made by the borrower not more than 12 months before the expected date of Loan Agreement signing. The date after which payments may be made is agreed at appraisal, confirmed during negotiations, and recorded in the Loan Agreement. In extraordinary circumstances, such as in response to crisis and post-conflict situation (as described in paragraphs 32-33 of this OP), exceptions to these retroactive financing limits may be approved by the Regional Vice President in consultation with the Vice President, Operations Policy and Country Services. Proposals for retroactive financing, including any exceptions to normal limits for such financing, are spelled out in the Program Document.

18. See the World Bank Financial Products and Services website for the financial terms for DDOs.

19. Information about the pricing for special development policy lending can be found in The Fixed Spread Loan, April 2003.

20. Investment has been defined broadly in the Bank’s practice to include spending not only for enlarging the productive basis of a country, but also for making it more productive. Investment includes both physical and human capital, as well as spending which directly substitutes for future investment requirements, such as spending on improved operations and maintenance.

21. For internal guidelines to assist in the application of OP and BP 8.60 on relations with the IMF, staff may refer to  Operationalizing Bank-Fund Collaboration in Country Programs and Conditionality.

22. When the country has prepared its own strategy document describing its development and reform program (such as the PRSP), that strategy document—depending on its coverage and specificity—may serve as the primary vehicle for setting out the substance of the country’s program. The LDP can then become a short letter reflecting specific parts of the country’s own strategy supported by the operation.

23. Countries affected by crisis referred to in this OP are those facing either an urgent financial crisis (actual or potential) with substantial structural and social dimensions, or actual or potential serious economic dislocation caused by shocks. These might include countries eligible for special development policy lending under paragraphs 24-26 of this policy statement.

24. Countries affected by conflict referred to in this OP are those that need development policy lending for urgent rehabilitation, and where the medium-term structural reform agenda is still emerging. (For countries affected by conflict, staff may refer to   OP 2.30, Development Cooperation and Conflict.)

 

 




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