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POLICY-BASED LOANS

Purpose of the Policy-based Loan

11.10 ADB provides policy-based lending in the form of budget support in conjunction with structural reforms and development expenditure programs of a developing member country (DMC). It is also used to provide balance-of-payments assistance during economic and financial crises. ADB makes policy-based loans only to DMC governments. In general, policy-based loans (i) are linked to the implementation of policy reforms and are disbursed quickly, and (ii) have sector-wide and economy-wide impacts.

Fiduciary Safeguard

11.11 Since general budget support under stand-alone policy-based lending and programmatic approach are absorbed into a DMC's public expenditures in the form of counterpart funds of loan proceeds, fiduciary arrangements need to be in place to ensure efficient utilization of overall resources through sound public financial management.

Loan Proceeds and Disbursement Procedures

11.12 There is considerable flexibility in the use of policy-based loan proceeds to meet a DMC's developmental needs. The loan proceeds may be utilized to finance economy-wide import requirements on the basis of a negative import list, or sector-specific import requirements on the basis of a positive import list.

11.13 A negative import list specifies imports that are excluded from financing under the loan, either by item or by specification of the Standard International Trade Classification. All items not listed may be financed under the loan. In contrast, a positive import list species eligible imports for financing under the loan.

11.14 The proceeds of a policy-based loan for which there is only a negative list of ineligible items may be disbursed without supporting import documentation if, during each year[1] in which the proceeds of the policy-based loan are expected to be disbursed, the value of the DMC's total imports minus (x) imports from nonmember countries, (y) ineligible imports, and (z) disbursements made under other official development assistance, is greater than the amounts expected to be disbursed during such year. The borrower will be required to submit with each withdrawal request a certification (Section 11.16) confirming the borrower's compliance with the above formula in respect of the period covered by the withdrawal request. Otherwise, import documentation under existing procedures will still be required.[2] Documentation in respect of specific imports will continue to be required for policy-based loans for which a positive list of eligible items is utilized.

11.15 Disbursement under policy-based loans normally takes the form of reimbursement to the central bank of the DMC acting as a depository. The central bank is generally responsible for administering policy-based loans in close consultation with the government and sector-specific entities responsible for implementing the sector program. Where appropriate, the central bank may disburse the loan through commercial banks or development finance institutions or both.

11.16 For policy-based loans with a list of ineligible items of imports (negative list), the borrower is required to submit a certificate (Appendix 11A) in support of the WA. The certificate confirms that

• the value of the eligible imports as defined in the loan agreement (Section 11.14) for the fiscal year is greater than the amount of requested withdrawal, and

• the requested withdrawal will be used to finance eligible items procured in accordance with the provisions of the loan agreement.

Audit Arrangement

11.17 Under all policy-based loans, an audit of policy-based loan proceeds will

be undertaken only upon ADB's request. ADB retains its rights to audit any accounts or to verify the validity of the certification issued by the borrower with each WA.

  • [1] This will normally be the 1-year period for which trade statistics are maintained by the DMC concerned.
  • [2] ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.
 
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