Bank Group vision

The promotion of good governance is a key element of the Bank Group’s strategy to alleviate poverty in its Regional Member Countries (RMCs). For the Bank Group, good governance is crucial to long-term economic growth, a necessary condition for sustained poverty reduction. To underscore the importance of good governance in its strategic and operational orientations, the Bank Group, created, within the framework of the 2006 institutional reforms, a full-fledged Governance and Economic and Financial Management Department (OSGE).  The main objective of the department is to mainstream governance as well as economic and financial management matters into Bank Group operations in a more systematic and coherent manner. 2007 was the department’s first full year of operation.

In 2007, the Bank Group continued to support efforts by RMCs to improve their systems of governance through lending and non-lending operations. Lending activities are used by the Bank Group to support reforms and help strengthen institutional and human capacities in economic and financial governance. They involve policy-based and budget support programs as well as institutional support operations. Policy-based and budget support operations (grants and loans), which are generally undertaken and implemented in close collaboration with other development partners, are primarily designed to support policy and institutional reforms, while institutional support operations are to enhance human and technical capacities in economic management and financial governance.  

The Bank Group will, henceforth, seek to consolidate its governance activities while sharpening their focus and enhancing their selectivity. To this end, the Bank Group developed, in 2008, a new medium-term Governance Strategic Directions and Action Plan for 2008-2012, which will enable it enhance its contribution to efforts at  promoting good governance in RMCs.  Operationally, the Bank Group’s new approach in governance will focus on strengthening transparency and accountability in the management of pubic resources at the country, sector and regional levels, with special attention to fragile states and natural resources management. The Bank Group’s contribution will concentrate on promoting good financial governance and sound public financial management in RMCs, with a distinctive focus on budget oversight institutions and financial accountability systems. The new Governance Strategic Directions went through a broad consultation process involving external partners and other stakeholders before their adoption.

Policy Based Lending

Over the last decade, the Bank Group has implemented Policy-Based Lending (PBL), which is defined as “quick-disbursing loans with the primary objective of supporting policy reform programs”. The PBL encompasses Development Budget Support Lending (DBSL), which is also referred to as General Budget Support (i.e. funding provided for the government budget using government systems, with little or no earmarking) and Balance of Payment Support (i.e. foreign exchange transfers to a central bank, in support of policy reform, and with limited accounting requirements). The importance of General Budget Support (GBS) has been emphasized in the Paris Declaration on Aid Effectiveness as this aid delivery mechanism lowers transaction costs, increases national ownership and addresses the recurrent cost issue of development projects, which is key to sustainability.

Over the 1999-2001 period, the Bank Group approved 61 budget operations for ADF and 15 for ADB, respectively. For both the ADF and ADB, the total amount of PBL provided rose during the 1999-2004 period (UA 404 million to UA 532 million and UA 426 million to UA 756 million, respectively), but fell, albeit only slightly, during 2005-2007 to UA 526 million and UA 580 million, respectively.  The average size of budget support operations for ADF grew (1999-2001: UA 20 million, 2002-2004: UA 24 million, 2005-2007: UA 28 million), but stabilized for AfDB (1999-2001: UA 107 million, 2002-2004: UA 126 million, 2005-2007: UA 116 million). Due to the nature of available data AF cycles are used to compare both ADB & ADF countries.

Figure 2 indicates the distribution of budget support operations across the year. It shows that for both the ADF and ADB, the number of operations rose between 1999-2001 and 2002-2004 (20-22 and 4-6, respectively), but fell in 2005-2007 (to 19 and 5, respectively). The number of operations for the ADF should be placed within the context of the overall ADF portfolio, during which the overall number and volume of operations for both the ADF and ADB increased.

The results of these two figures indicate that budget support operations increased and then declined in terms of the number of Policy-Based Loans provided to Regional Member Countries (RMCs). The average amount of budget support increased from 20 to 28 million UA for ADF countries and 107-116 million UA for ADB countries for the period 1999-2007.

Based on conditions to be fulfilled by borrowers, Finance and Governance is, by far, the dominant focus of Bank Group operations with an average of 74 percent of all conditions (see figure 3). This is similar with the World Bank’s International Development Association (IDA) in which governance covers 55% of the conditions.

The dominance of Finance and Governance indicates a diminishing level of multi-sectoral operations as well as a lack of complementarities between sectoral project interventions and the use of PBL.

The growth in GBS is part of a global trend as this form of aid delivery is increasingly preferred as a mechanism to deliver aid. This is because this form of assistance avoids aid proliferation and fragmentation, which in turn, limits the absorption capacity of a country (World Bank, 2001) [¹]. This also increases transaction costs of aid projects (Acharya et al., 2006) [²]. In addition, budget support operations also deal with recurrent costs, which is an essential element in sustainability in the long term (Agbonyitor, 1998, World Bank, 2006) [³]. However, the advantage of budget support will only be crystallized if there are sound policies in recipient countries, which is the rationale for linking budget support to policy reforms (Easterly et al., 2004; Roodman, 2007) [⁴]. In sum, the research and policy consensus is that budget support will contribute to enhancing aid effectiveness if recipient countries have a favorable policy environment.

[¹] World Bank (2001) The Drive to Partnership: Aid Coordination and the World Bank (Washington D.C.: World Bank)

[²] Acharya, Arnab, Ana de Lima, and Mick Moore (2006) “Proliferation and fragmentation: Transactions costs and the value of aid.” The Journal of Development Studies 42(1), 1–21.

[³] Agbonyitor, Albert D. K. (1998) “Development expenditures and the local financing constraint.” Policy Research Working Paper Series 1907, The World Bank & Annual Review of Development Effectiveness 2006, World Bank.

[⁴] Easterly, William, Ross Levine, and David Roodman (2004) “Aid, policies, and growth: Comment.” American Economic Review 94(3), 774–780; and Roodman, David (2006) “Competitive proliferation of aid projects: A model.” Working Papers 89, Center for Global Development.