Finance

Background

What is World Bank Development Policy Financing?

23 March 2021

Washington D.C., Overview of World Bank Group headquarters in 2015. Photo: Franz Mahr / World Bank

Development Policy Financing (DPF) is a World Bank lending instrument that provides credits, loans, grants or guarantees to a borrowing country through ‘fungible’ (i.e. non-earmarked) budget support. It is issued by the International Development Association (IDA), the Bank’s low-income country arm, and the International Bank for Reconstruction and Development (IBRD), the Bank’s middle-income country arm. DPF is at times referred to as development policy lending (DPL, see Inside the Institutions 2012).

Unlike the Bank’s Investment Project Financing (IPF) and Program-for-Results Financing (PforR), DPF is not earmarked for specific projects, such as bridges and hydroelectric dams, but instead supports targeted policy reforms and provides finance directly to a borrowing country’s general budget. This budget support comes with strings attached, as each loan contains policy conditions that borrowing countries must meet.

While the Bank insists that these conditions are developed in cooperation with the borrower, the power imbalances often embedded in the creditor-borrower relationship and the need for prior actions to be undertaken as preconditions to DPF lending raise questions about the nature of this partnership and the sovereign policy space of borrowers.

Created in 2004 by merging Sectoral Adjustment Loans (SECALS) and Structural Adjustment Loans (SALs), DPF is governed by Bank Procedure 8.60, updated in July 2014, and the Bank Policy on Development Policy  Financing, issued in August 2017. The latter includes an extension to IDA countries to address shocks related to natural disasters and/or health events called “deferred drawdown option for catastrophe risks.”

Within the World Bank Group, DPF is managed by the Operations Policy and Country Services (OPCS) vice presidency and is implemented by the Bank’s country teams in partnership with relevant units based in Washington DC, such as the Macroeconomic Trade and Investment team.

Each of these individual loans, grants or guarantees is called a development policy operation (DPO). According to the World Bank’s last review of DPF in the 2015 Development Policy Financing Retrospective, between 2012 and 2014, DPOs accounted for an average of 29 per cent of total Bank lending, although this had risen to nearly 40 per cent in the aftermath of the 2008 global financial crisis.

The World Bank’s DPF portfolio increased again in the aftermath of the Covid-19 pandemic. In  remarks  to the G20 finance ministers in March 2020 World Bank President David Malpass stated, “Countries will need to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong. For those countries that have excessive regulations, subsidies, licensing regimes, trade protection or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery.” DPF accounted for 47 per cent of IBRD lending and 28 per cent of IDA lending, respectively, in the fourth quarter of FY20 (April-June 2020), as the Bank responded to the Covid-19 crisis.

Conditionality by another name

In its 2017 policy document, the Bank described the purpose of DPO policy conditions as follows: to “promote growth and sustainable poverty reduction”, with reforms aiming, “to improve the investment climate, diversify the economy, create employment, improve public finances, strengthen service delivery, and meet applicable international commitments.” When developing a DPO, the Bank often consults with the International Monetary Fund (IMF) and the International Finance Corporation (IFC), the Bank’s private sector arm, to develop a macroeconomic framework for the borrowing country, including standards on what the Bank and Fund deem to be fiscal and debt sustainability.

“Prior action” is the name given to certain policy or institutional actions, including macroeconomic policy reforms, which the borrowing country must complete in order for financing to be disbursed. On its website, the World Bank publishes a Development Policy Actions database  of all prior actions contained in DPOs since 2005.

Though it claims that DPOs are, “supportive of, and consistent with, the Member Country’s economic and sectoral policies and institutions,” the World Bank’s global  influence as a major creditor and agenda setter means that, in practice, the World Bank wields significant power in directly shaping the laws and policies that are included in borrower’s sovereign decision-making space. This is particularly problematic in the context of the Global South’s continued structural underrepresentation in World Bank governance structures and leadership (see Inside the Institutions, April 2020).

Conditionality within DPF has been the subject of longstanding criticism from academics and civil society, in particular Southern feminist and environmental groups, who have argued that it imposes neoliberal reforms on countries in the Global South. This approach to economic development has been much disputed, with many arguing that free-market policy prescriptions, adopted by the vast majority of low- and medium-income countries since the 1980s initially in the form of World Bank and IMF ‘structural adjustment’ programmes, have restricted national policy space, increased poverty and inequality (see Observer Winter 2017) and have ushered in damaging financialisation (see Observer Winter 2020).

Though structural adjustment programmes are no longer used by the World Bank, in many cases DPOs continue to promote the policies of the ‘post-Washington Consensus’ (see  Inside the Institutions 2020), and have increasingly been aligned with major private financial interests, in what has been dubbed the ‘Wall Street Consensus.’ Without an integrated human rights framework that informs its design and assessment, DPF contributes to maintaining the Bank’s  reputation as a “human-rights free zone”, as claimed by the former UN Special Rapporteur on extreme poverty and human rights, Philip Alston, who argued that the Bank, “contradicts and undermines the consistent recognition by the international community of the integral relationship between human rights and development.”

In its 2019 report, Flawed conditions: the impact of the World Bank’s conditionality on developing countries,  Brussels-based economic justice network Eurodad highlighted that economic policy reforms, such as demanding caps on public sector hiring, as well as those aiming to increase the role of the private sector in countries through deregulation and other means, remain common ‘prior actions’ in DPOs. The report concluded that, “DPF is a vehicle to lock in a donor-driven reform agenda in recipient countries….This suggests…there is a preferred set of policy prescriptions, which serves to undermine democratic ownership of development polices.” Others have highlighted the democratic deficit whereby international financial institutions do not require borrowers to ensure democratic oversight of conditionality through parliamentary debate and popular consultation.

Neglecting social and environmental risks

During the Bank’s 2013 review of social and environmental safeguards, civil society organisations (CSOs) argued  that DPLs, as DPF was more commonly known then, should be part of the review, because this type of lending can entail significant adverse risks as the operations can alter countries’ legislative and regulatory regimes. A 2013 briefing from US-based CSO Bank Information Center (BIC) and CSO Global Witness stated, “The current safeguard review must consider whether, and if so how, the safeguard policies will apply to all Bank instruments, including DPLs. The credibility and utility of the review will be undermined if a large portion of the Bank’s lending portfolio is excluded from the outset without a clear rationale.” Despite this, the Bank’s Environmental and Social Framework (ESF), updated in 2017, which sets out environmental and social safeguards of Bank financed projects, does not apply to DPF (see Observer  Spring 2015).

The World Bank’s policy for DPF requires that the Bank conducts a risk assessment for each operation to determine whether, “specific policies supported by the operation are likely to have significant poverty and social consequences, especially on poor people or vulnerable groups.” The Bank must assess whether a borrower has a system in place to manage those risks. If gaps are observed in the borrower’s risk management system, it must identify measures for “reducing adverse effects.”

To determine this, the Bank conducts a Poverty and Social Impact Analysis (PSIA) on prior actions, which is outlined in the programme information document for each operation. If any prior action is found to have “likely significant effects,” the Bank must summarise “relevant analytic knowledge of these effects”. If there are significant gaps in the analysis or shortcomings in these systems, the Bank must describe in programme documents how these “would be addressed before or during program implementation, as appropriate.”

In 2015, the World Bank’s Independent Evaluation Group (IEG) produced a report on Managing Environmental and Social Risks in Development Policy Financing. In its portfolio review of a sample of DPOs approved between 2005-2014, the IEG identified significantly more actions with risks of negative environmental or social effects than were highlighted by World Bank task teams, which it noted, indicated, “underreporting of potential risks” and “inconsistent” identification of risks by Bank staff. It found that there was “no formal definition” of environmental and social risks in Bank policy for DPF, concluding, “If the World Bank is supporting far-reaching member country reforms that are intended to contribute to the twin goals, then it should seek to understand the impact of those reforms on the poor.”

The World Bank itself  described  its PSIA coverage as remaining “inadequate” in its 2015 World Bank Development Policy Financing Retrospective, stating that, “continued attention is needed to ensure that PSIAs are conducted for all prior actions that are likely to have significant effects, especially negative ones.” It outlined a series of recommendations, such as conducting a comprehensive revision of staff guidance on environmental effects and introducing a new mandatory screening table on environmental and social effects.

Since the publication of these evaluations, more evidence has emerged of the gaps in the Bank’s approach to safeguarding in DPF. The Bank still does not outline its methodology for identifying or addressing risks or explain how it conducts PSIAs. Research by the Bretton Woods Project in 2019 showed that many PSIAs included in programme documents tend to gloss over risks. For example, a DPO series that included prior actions for public wage bill cuts in Serbia in 2016 and 2018 concluded there were no “significant adverse distributional impacts” of the policy reforms, with no explanation or evidence to support this conclusion. This raises questions about whether the PSIA is fit for purpose, given the likelihood of the negative social impacts of these cuts, on women in particular.

Behind closed doors

The lack of transparency and accountability around DPF, especially with respect to  local communities  affected by reforms to environmental regulations, has been another consistent critique of the instrument. A 2018 report  by BIC on a land reform DPO in Colombia found that the operation “did not establish mechanisms or provide information to ensure ethnic communities’ proper participation in the new institutional arrangements were supported”, finding that the project document, “does not assess evidence regarding who was consulted, how and about what.”

Ensuring DPOs are designed in inclusive and participatory ways is particularly challenging because they do not carry the same visible presence as many physical development projects, meaning the exact influence of the World Bank can be hard to discern. They are often agreed between the World Bank and the borrowing country behind closed doors, with limited democratic scrutiny  over the proposed prior actions.

In a July 2020  letter  to the World Bank’s vice president of OPCS ahead of the World Bank’s forthcoming retrospective of DPF, civil society groups called on the World Bank to ensure meaningful consultation with the review process. Particularly in the light of the crises triggered by the Covid-19 pandemic, it is more critical than ever that this powerful lending instrument becomes responsive to the communities it is meant to support.

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