Policy-based Lending Category

Policy-based loans or PBLs provide the Bank’s borrowing member countries with flexible, liquid (fungible) funding to support policy reforms and/or institutional changes in a particular sector or subsector. Policy-based lending is limited to 30 percent of all Bank lending.

Eligibility: To be eligible for a policy-based loan or PBL, the borrowing country needs to have a sound macroeconomic policy framework, as determined by an independent assessment of macroeconomic conditions elaborated by the IDB.

Size of the loan: The size of a PBL depends on the country’s financing needs. It is not necessarily related to the cost of implementing the reforms supported by the program. PBLs provide general financing to the borrower and disburse upon evidence that the borrower or its agents has complied with the policy conditions.

Examples of eligible activities include programs to modernize the fiscal (tax and spending) apparatus of a country, air transport reform programs, transparency and financial integrity programs, or programs to improve technical vocational education.

At the request of the borrower, a policy-based loan may include an investment component, in which case it becomes a Hybrid Loan.

There are two types of PBL instruments: Multi-Tranche PBLs and Programmatic PBLs.

Policy-based Instruments

Multi-tranche Policy-based Loans

These loans are disbursed in several tranches, when the policy conditions linked to each tranche are completed and verified. Multi-tranche PBLs require that all the policy/institutional reforms necessary to achieve a program’s objective be defined before the project is approved. Ideally, there is very little uncertainty regarding the policy/institutional reforms and their sequencing to achieve the programs objectives.

Programmatic Policy-based Loans

These loans support a framework of reforms/institutional changes to be executed in phases. Funds are disbursed in a series of single tranches over the medium term (three to five years). There are specified triggers for moving from one operation to the next.

Policy-based Lending Approach 

Deferred Draw-down Option

The deferred draw-down option can be used with both multi-tranche and programmatic PBLs. It permits PBL resources to be drawn down over a period of three years after the borrower complies with the agreed-upon policy conditions. This gives borrowers flexibility by providing the resources in the amounts, and at the time, that meets their needs most effectively. The draw-down period can be extended for an additional three years. During the draw-down period, the borrower must maintain policy conditions and sustainable macroeconomic policies.

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