Policy-Based Lending in Support of Reforms and Structural Transformation in Developing Countries: Lessons Learned from Independent Evaluations of Lending Operations by Selected Multilateral Development Banks and the European Union 2005–2019

This volume is the first global collection of evaluative material and key conclusions on policy-based operations (PBOs), also known as budget support, by international financial institutions over the past decade. It is based on conference papers, a workshop, and commentary organized by the Independent Evaluation Department of the Asian Development Bank. The aim is to assess the role and efficacy of PBOs based on existing independent evaluations published during 2014–19. Five evaluations were conducted by multilateral development banks (MDBs) and one by the European Union (EU).1 Together these organizations account for about 85 percent of budget support operations globally. An assessment of this work is overdue, given the importance and, many would argue, increased need for budget support.

The motivation for this work is that while budget support is an important instrument of international development support, it is not well understood and is difficult to evaluate, and therefore has not been thoroughly evaluated.2 Each of the six development finance agencies represented here provides PBOs to developing countries, totaling about $400 billion in real terms between 2006 and 2021.3 This is small relative to total net private equity inflows in developing countries (about $8 trillion) during the same period, but it has been a major source of financing for many developing countries. PBOs are a key instrument for the development agencies, especially during crisis years, including throughout the COVID-19 pandemic. Yet evaluative findings have been relatively scarce and, for some agencies, decades have passed without a systematic evaluation of PBO lending instruments. This volume aims to help address this glaring gap in understanding the contribution, performance, lessons, and challenges of providing and evaluating budget support to low-income countries (LICs) through consultation and dialogue on the key reforms required to boost growth and avoid crises.

Budget support has the potential to advance achievement of the Sustainable Development Goals (SDGs) and, some argue, it is the right instrument, efficiently providing support and emphasizing country ownership with reforms based on shared analysis and dialogue. But it is deployed at far too limited a scale.4 In Asia or Sub-Saharan Africa, for example, transition toward green and inclusive economies will require a major effort, but the MDBs lack the mandate and resources to play a transformative role. MDBs can use PBOs in parallel with project finance to advance investments in sustainable infrastructure, environmental conservation, digital transformation, human capital formation, and social assistance.5 A word of caution is advisable, however: scaling up PBOs will face the issue of debt distress and the need to generate preferred creditor loans for countries that may have difficulty accessing private capital markets.