New Thinking on Adjustment Lending—New Loan Products

A recent inhouse review of five large adjustment operations of the World Bank concluded:

"In most cases the Bank needs to tilt away from broad coverage and toward selectivity in the policy reforms supported by a single operation. The five operations assessed involved conditionalities on a fairly comprehensive set of reforms. This approach reflected an understandable tendency by Bank staff to push as many elements of reform as possible through the window of opportunity created by a crisis. But given the need for borrower ownership, analytical clarity, and institutional capacity, this tendency should be resisted. Excessively broad conditionality may reduce the probability that real progress will be made on key reforms.

During the design phase the Bank and the government should pay more attention to setting priorities and sequencing reforms. Doing so may help narrow conditionality. Setting priorities is difficult—especially in transition economies such as Russia, where creating an environment that attracts domestic and foreign investment requires that reforms proceed along an ambitiously broad front. Still, realism about the government’s implementation capacity—both technical and political—requires that priorities be set." (PREM Note 27, August, 1999.)

Since that review, the Bank has begun to apply a new approach to adjustment lending. To address the problems identified in the review, it introduced two new products, the Programmatic Structural Adjustment Loan (PSAL) and the Adaptable Program Loan (APL).

The PSAL is a fast-disbursing loan that helps countries close external financing gaps caused by balance of payments or fiscal problems. It focuses on step-by-step capacity building and institutional reform, usually in the public sector, in order to strengthen public expenditure management, improve public sector governance, make public resource allocation more efficient, and enhance the quality of public service delivery, especially to the poor. Because such reforms generally take time, the PSAL serves as an umbrella for a series of individual loans, each building on the earlier ones and each supporting a phase of the medium-term reform program. The time horizon of a typical PSAL series is three to five years, with each loan typically supporting a one-year program. With the agreement of the borrower, the Bank can modify the conditions of remaining tranches in light of changing domestic and external developments and performance.

The APL also comprises a series of loans supporting the implementation of long-term development programs. Loan proceeds may be used to cover the procurement of goods, services, works, and equipment, and to fund incremental operating costs related to the program. The program provides flexibility in adapting project design and financing to meet development objectives.