Policy‐based lending by the world bank

This paper aims to explain the essential logic of adjustment lending by the World Bank, and to assess some of the implications of the Bank's expertise in this genre for the practice of project lending. Adjustment lending arose from a sense that the disturbances which struck the international economy in the early 1980s could not be adjusted to by project lending alone, and that a lending instrument was required which would help correct the policy distortions which threatened the efficiency of the Bank's projects themselves. Such finance is provided to countries whose commitment to reform is proven, in order to reduce the sacrifice of growth which economic adjustment would otherwise require. Conditionality as understood by the Bank consists of a set of understandings between the Bank and a borrower concerning the nature of the reform programme required, of which the explicit legal conditions contained in loan documents are simply the external symbol. Since the start, conditionality has been linked to the requirements for project success, but much conditionality has in the 1980s been moved away from project agreements towards sector‐level agreements in order to ensure that those signing contracts on behalf of the recipient are also those empowered to carry them out and to take responsibility for sustainability. It may be expected that the demand for adjustment lending will diminish at least in the countries which used it effectively in the 1980s; and therefore that the relative importance of this type of operation in total Bank lending will diminish over time.