Development Policy Lending: What’s new?

1. Development Policy Lending: What’s new? OPCS, Country Economics

2. What is Development Policy Lending? • The new Development Policy Lendingframework OP/BP 8.60 was approved in August 2004 and replaces the prior policy for adjustment lending (OD 8.60 and a variety of operational memoranda and policy statements) as of September 1, 2004. • DPL covers all rapidly disbursing policy-based financing in the form of loan or grants to help a borrower address actual or anticipated development financing requirements of domestic or external origins. • DPL typically supports a program of policy and institutional actions consistent with a country’s economic and sectoral policies.

3. DPL Nomenclature and Rationale • No more distinction between different types of lending instruments under the DPL roof (SAL, SECAL, PSAL, RIL, etc.) – but the PRSC “label” for lending to support PRSP implementation is maintained. • Original special circumstances rationale for adjustment lending as “balance of payments support” to cover external financing needs is replaced with much broader definition allowing Bank to cover both external and internal financing needs and to provide “budget support.”

4. Considerations in DPL • Appropriateness of DPL is determined in the CAS based on an assessment of the country’s policy and institutional framework. • Bank considers the country’s commitment to and ownership of the program as demonstrated by its track record; assesses the country’s institutional ability to implement the program; and describes capacity-building efforts • As was the case for AL, DPL including tranche releases, are undertaken only when the Bank determines that the country’s macroeconomic policy framework is sound; the existence of an IMF program or IMF views are an important input to this assessment and any relevant outstanding issues raised by the IMF are communicated to the Board.

5. Size and Share of DPL • Size of DPL determined individually based on country circumstances. • Country share of DPL is determined in the CAS, based on, inter alia, financing requirements, the sustainability of the country’s debt, and absorptive capacity • Bank share: Board is informed by management on DPL pipeline on an annual basis. Board can review and decide on a guideline for annual average Bank-wide share of DPL on a rolling three-year basis.

6. Participation • Bank advises borrowing countries to consult and engage with stakeholders • Country determines in the context of its constitutional and legislative framework the form and extent of consultations and participation in preparing, implementing, and monitoring DPL (in the case of PRSP countries, the PRSP process could serve to this end) • Bank staff describe in the program document the country’s participatory arrangements for the operation and their impact in formulating the development strategy

7. Collaboration • The Bank collaborates with the IMF and other international financing institutions and donors, as appropriate, while retaining responsibility for its financing decisions. • The Bank seeks toharmonize conditions with other development partners in consultations with the country. • DPL is applied only to adequately funded programs, considering both domestic and external financing sources; during preparation, Bank staff needs to ascertain overall financing of program from all sources.

8. Analytical Underpinning • A DPL draws on relevant analytical work undertaken by the Bank, country, or third parties. The CAS assesses the adequacy of analytical work and indicates how gaps will be addressed. The program document describes the main analytical work used, and the way they are linked to the proposed development program.

9. PSIA • Bank determines possible poverty and social consequences of development policies • In case of significant negative poverty and/or social effects of proposed policies, Bank summarizes in the program document analysis of these effects, as well as country systems to reduce negative and enhance positive effects • In case of gaps in analysis or country systems, Bank describes in the program document how gaps and shortcoming would be addressed during or before program implementation

10. Environmental and Natural Resource Aspects (1) • The separate treatment of SECAL/SECAC is discontinued. DPL is not subject to OP 4.01, and no ISDS needs to be filed for a DPL. • Bank needs to determine whether specific policies supported by a DPL are likely to have a significant impact on the environment, forests, or natural resources •  Early participation of environmental experts in loan preparation team is crucial to assess measures and identify any necessary additional analytical work

11. Environmental and Natural Resource Aspects (2) • In case of significant impact, the program document must assess the country’s system for reducing adverse effects and enhancing positive effects drawing on sectoral environmental analysis (by country, Bank, or others) • In case of gaps in analysis or country systems, Bank describes in the program document how gaps and shortcoming would be addressed during or before program implementation, as appropriate

12. Fiduciary Arrangements (1) • Bank determines whether fiduciary measures are needed, based on relevant analysis of public financial management • On foreign exchange, Bank discusses with Fund findings of safeguards assessment of the central bank  if safeguards are satisfactory or Fund monitors remedial actions, Bank takes no further actions. (The Fund handles all foreign exchange management issues beyond safeguards). • On budget resources, the Bank assesses public financial management arrangements through diagnostic work as well as country and third party reports, including audits

13. Fiduciary Arrangements (2) • Loan amounts, tranching, conditionality, and risk mitigation are informed by these fiduciary reviews. • Normally, the Bank disburses loan proceeds into a central bank account that is part of a country’s foreign reserves and an equivalent amount in local currency is credited to the government to finance its budgetary expenditure. • Where knowledge of the control environment or budget management system are inadequate, further fiduciary arrangements may need to be applied • Borrowers are expected to not use loan proceeds for ineligible expenditure as a code of conduct; financing of local expenditure will be permitted.

14. Conditionality and Tranching • Conditionality to focus on agreed policy and institutional actions that are critical for the success of the policy program good practice suggests to choose few (~10) high priority actions as triggers, accompanied by a larger set of benchmarks and milestones • DPL can be in one or several tranches • Single tranche and programmatic operations are embedded in an explicit medium-term framework of policy and institutional actions

15. Implementation, M&E • Program documents to describe specific results, including measurable indicators for M&E purposes • Borrower to implement and monitor and evaluate • Bank staff to assess and monitor appropriateness of country arrangements • Bank staff to review implementation progress to verify fulfillment of conditions and compliance with legal covenants

16. Risk Management • Borrower responsible for managing risk • Bank staff to independently identify financial and nonfinancial risks and ensure that the operation contains mitigation measures and monitorable indicators to track high-probability risks

17. Crisis and Post Conflict • In case a quick response is needed, there may not be time to address all design considerations • In such cases, DPL is justified on an exceptional basis • Bank staff are expected to describe in the program document when and how design considerations will be addressed.

18. Conclusion • Streamlined OP for DPL under a single unified framework • More flexibility in financing development programs (i.e., financing of local expenditure) • Incorporates policies for participation and disclosure, and emphasizes analytical underpinnings • Unified conceptual treatment of potential negative impact and risks (PSIA, environment, fiduciary) through relevant analysis of country systems and, if necessary, program actions and conditionality • Focus on results with inclusion of results framework in program documents, clear assignment of M&E responsibilities to borrower, with validation of results by the Bank