Policy-based operations - Lessons Learned from Independent Evaluations by MDBs and the EU - 2005–2019

The report is also available at https://www.ecgnet.org/pbl-book. 

Abstract:

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). 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. 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. 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. 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. 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. 

Demand for budget support typically surges during global economic crises, from both middle- and lower-income countries. The support aims to help countries facing sudden fiscal crisis, often to help sustain critical social spending and to meet recurrent fiscal requirements. The second main source of demand is during noncrisis times, principally from LICs pursuing medium-term reform programs, or fragile and post-conflict countries under fiscal stress and searching for economic and institutional stability. Each MDB has developed multiple types of PBOs to address different country circumstances. 

Budget support is much debated as a tool for development finance. Unlike conventional project assistance, which leaves a physical asset in place, PBOs go into the government treasury to finance recurrent or capital expenditures. It is not separate or distinct from other fiscal resources. Some view this as critical to country ownership and the foundation for effective policy dialogue and technical assistance. Others view it as risky and potentially wasteful. This volume aims to shed light on these issues and anticipate future challenges. 

While there are several reasons to expect that PBOs will remain a critical tool of development support, much can be learned from policy-based financing (PBF) that has not met its objectives or has had unsatisfactory results. Lack of country ownership, excessive conditionality, weak technical capacity on the recipient side, insufficient or poor policy dialogue, and inadequate or delayed technical assistance are among the common factors that account for the bulk of the 20 to 40 percent less-than-satisfactory development outcome ratings of PBOs whose evaluations, along with examples of success and failure, are reported in this volume. The evaluations reflect areas of concern and recommendations for future improvement as agencies look toward strengthening deployment of scarce public capital to improve development outcomes, including opportunities to leverage private capital for development purposes. 

One conclusion of these evaluations is that, despite the main findings reported here, robust evidence on attribution of PBF impact remains elusive, posing a challenge to measures for strengthening evaluation methodology. The relative merits of the two principal evaluation methodologies used by the international development agencies are debated, but there is concurrence that PBF evaluation is difficult and further methodological refinement is needed, preferably through collaborative efforts. 

This overview is in two parts: the first part sets the context and role of budget support against the landscape of evolving global finance, while summarizing the main cross-cutting messages of the volume. The second part summarizes each of the agency papers prepared for the volume, alongside the invited commentaries from prominent development economists.