Multiple threats emanating from financial instability, the COVID-19 pandemic, and geopolitical uncertainty are undermining the global economy and the prospects for developing countries, pushing the Sustainable Development Goals further out of reach for many countries. Growth in advanced and developing economies is plunging, inflation has reached its highest level in decades, and rising interest rates in advanced economies have triggered massive capital outflows from developing countries, deepening the debt crisis. Falling real per capita incomes have severely set back efforts to end extreme poverty. To arrest the downward slide and prevent further hardship developing countries, particularly the most vulnerable among them, will need a sharp increase in the level of financial and technical support. Currently, though, the development system is not mobilizing financing at scale or channeling funding to the countries and sectors that need it most.

These challenges have led to calls for a new vision for international financial institutions (IFIs) to expand their capital base and ramp up emergency financing. At the 2022 Annual Meetings of the International Monetary Fund and World Bank Group, the Group of 7, Group of 20, Group of 24, and the United States Treasury Secretary called for bolder, more innovative steps to mobilize finances and support economic resilience in the face of multiple ongoing threats. Given the urgency and scale of financial need, many have called for rapidly disbursing emergency and programmatic support to stanch the fiscal crisis and reinforce resilience, in other words, for budget support to help build resilience and to advance key institutional and policy reforms.

This volume on policy-based finance (PBF), also known as budget support, is therefore timely and has grown in importance since the 2020 conference on which the work is based. The conference, organized by the Asian Development Bank, brought together the evaluation agencies of six major IFIs to examine evidence on the design and implementation of PBF over the past decade. For the first time the independent evaluation departments of the Asian Development Bank, the African Development Bank, the European Union, the Inter-American Development Bank, and the Caribbean Investment Bank met to discuss evidence on the design, use, and performance of their PBF instruments based on their evaluations.

This volume also illuminates the difficulty of evaluating the development effectiveness of PBF and the challenges evaluators face in attributing outcomes to the use of this instrument, given the fungibility of its financing and the difficulty of constructing a counterfactual. In this context, again for the first time, the volume distinguishes the methodological approaches to measuring PBF performance and the characteristic strengths and weaknesses of each. The agencies vary in their focus and depth of analysis in evaluating PBF, recognizing there is more work to be done, particularly in those institutions that have not yet undertaken a comprehensive evaluation of their PBF instruments.

The evaluations covered by the volume revealed important aspects of PBF that governments, policy makers, and development agencies should bear in mind when considering the future uses of PBF and whether limitations still need to be placed on their total portfolio shares. First, it is notable that all the IFIs saw a surge in demand and use of PBF during the economic crises of the past decade. They have proven to be an effective instrument for rapid delivery of financial support during emergencies, when project assistance is slow and tied to laborious procurement rules. Second, evidence based on evaluation agency ratings suggests that the performance of PBF on objectives equals or even exceeds that of conventional project aid, although the depth of reform measures and their durability require more scrutiny. Third, the evaluations reveal the multifaceted nature of the instrument, which IFIs have tailored in to fit the range of economic circumstances confronting developing countries. Apart from the crisis finance PBF that most IFIs provide, the instrument can also be configured for longer-term programmatic reform, as policy-based guarantees that leverage private financing for countries that have difficulty accessing private credit markets, as insurance options to draw down during emergencies, or for sector support targeting special development programs. Disbursement rules also differ across the IFIs, and in the design and use of prior actions (conditionality), design elements that call for deeper evaluation. The instrument has evolved in different directions and will continue to do so as new needs arise, highlighting its flexibility.

This volume offers rich evidence on the contribution of PBF to development finance and to the support for national programs of reform. It also leaves unanswered questions that development practitioners would find valuable to explore further. How can the design of conditions governing PBF most effectively sustain progress and support incentives toward transformative reform? What innovative uses of guarantees and blended finance can leverage long-term private capital for development needs? How can PBF best be used to foster global and regional public goods to tackle the urgent challenges of climate change, contain future pandemics, or arrest global financial contagion following major shocks. Experience with PBF will surely continue to expand, offering more and different experience to fuel future evaluation and refine our understanding of the instrument.

Emmanuel Jimenez

Marvin Taylor-Dormond

November 2022