2021 Development Policy Financing (DPF) Retrospective: Facing Crisis, Fostering Recovery

The World Bank’s three financing instruments are Investment Project Financing (IPF), Development Policy Financing (DPF), and the Program-for-Results (PforR). World Bank borrowers can choose between these financing instruments depending on the type of development challenge they are trying to address. Development Policy Financing supports policy and institutional reforms to help clients achieve sustainable growth and poverty reduction. The Bank has periodically reviewed the trends and performance of DPFs, with a view to strengthen its relevance as a financing instrument for Bank clients. This Retrospective presents key takeaways on trends and performance of DPFs and their role in supporting development priorities.

DPFs continue to work well as a robust, yet flexible instrument for World Bank support to its client countries. It continues to support its clients efforts at improving the lives of their people, and has demonstrated its strength in responding to heightened challenges and more adverse operating contexts in FY22 and beyond.

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Crisis Response and Preparedness

DPFs played a key role for reinforcing foundations for long-term development, crisis response, and preparedness. Many countries have used the “Catastrophe Deferred Drawdown Option” (CAT-DDO) designed to provide quick liquidity to manage natural disasters, and support crisis preparedness, response, and recovery. DPFs have surged during global crises; the fast-disbursing and fungible nature of the instrument makes it suitable to meet countries’ short-term emergency financing needs while supporting their medium-term policy agenda. DPF financing was particularly supportive of fragile, conflict, and violence (FCV) affected countries during crisis periods. Similarly, DPF support to small island developing states in the aftermath of the global financial crisis (GFC) and COVID-19 was primarily aimed at supporting crisis response. The emergency funding proved particularly valuable in responding to the COVID-19 emergency, as indicated by the high number of disbursements from existing CAT-DDOs in 2020. 

Overall, a large share of DPFs supported pandemic recovery efforts, alongside other response instruments. 93% of DPF commitments between April 2020 and June 2021 were part of the COVID-19 response. While the strategic focus of COVID-19 DPFs varied over time, most operations included both immediate crisis response as well as medium-term policy components to pursue a sustainable recovery. Countries in all WBG regions received DPF support during the pandemic. 

Seychelles built capacity for disaster response which enabled fast and efficient reaction to the COVID-19 pandemic. A Seychelles DPF was prepared in the wake of Tropical Cyclone Felleng in 2013. The disaster risk management policy instruments created, capacities developed, exercises conducted, and stakeholder coordination mechanisms established during the initial implementation of the program enabled a fast and efficient response during successive natural disasters and the COVID-19 pandemic.

Fiscal and Debt Sustainability

Many DPF operations support fiscal and debt sustainability, with the objective of supporting macroeconomic stability, building fiscal buffers for resilience to shocks and broadening fiscal space for future investments in human and physical capital. Even before the pandemic, public-debt vulnerabilities were rising. Between the FY11–FY15 and FY16–FY21 periods, DPFs increased their focus on revenue mobilization. This trend reflects an expanding body of research on tax-collection performance and the World Bank’s growing emphasis on supporting clients’ efforts to increase domestic revenue mobilization through reducing tax exemptions or enhancing tax-related transparency and reporting. Expenditure-related reforms also remain a key policy area of fiscal and debt-related DPFs, focusing on size, efficiency, and composition of public spending. The new IDA Sustainable Development Financing Policy (SDFP) has reinforced the role of DPFs in helping countries address debt vulnerabilities via improved debt management, debt transparency, and fiscal sustainability.

Private Sector Enabling Environment

A vibrant private sector is a key growth driver and the source of “good” jobs in the world, both of which are core elements of social inclusion. It is also a critical component of a green, inclusive, and resilient post-pandemic global recovery, in a context of heightened fiscal constraints. The creation of business enabling institutions (rules and regulations) has been the most salient policy area for business-enabling-environment-oriented DPFs. Policy change was aimed at reducing business costs, as well as increasing access to markets through trade facilitation.  

Gender Equality

Gender equality is integral to smart development policy. DPFs have shown good potential to foster a complex set of reforms related to gender equality, complementing other World Bank instruments. The DPF process can align diverse stakeholders around a reform agenda, and this has worked well to support the inclusion of gender focused prior actions in DPFs. The in-depth policy dialogue embedded in the DPF process has proven critical to build awareness around gender gaps and their impact on development and economic growth more broadly.

Bangladesh strengthens post-pandemic safety nets and childcare reforms  DPF for Bangladesh aimed to accelerate job creation, improve job quality, expand access to jobs for women and other vulnerable groups, and strengthen safety nets in the wake of the COVID-19 crisis. The supported reforms included legislation which puts in place the framework for licensing and regulation of daycare centers, which would alleviate constraints on female labor-force participation.

Climate Change

Rising climate change adaptation and mitigation challenges in client countries have led DPF to intensify support to climate change related reforms. In FY21, DPF climate co-benefits reached 26 percent and almost all DPFs (97 percent) delivered co-benefits, up from just 7 percent in FY15. DPFs have included a diversity of policies and institutional reforms for climate action, including: transforming fiscal policy to support climate goals; supporting long-term climate strategies; mainstreaming climate in public financial management; greening the financial system; and fostering long-term resilient decarbonization in key sectors.

Colombia focuses on green growth aspects of their National Development Plan A DPF series supported measures to encourage green growth in the transportation and energy sectors, enhance environmental quality, strengthen the management of natural resources, and improve the performance of sanitation and solid waste reuse and disposal services. The DPF series supported the National Development Plan (2014-2018), which identified green growth as a central theme and was aligned with Colombia’s commitments under the OECD Declaration on Green Growth and the Paris Climate Agreement.

Conclusions

Development Policy Financing was effective in supporting client countries key development priorities in the context of the Bank core corporate commitments.

• DPFs should maintain and enhance the sharp focus on fiscal and debt-related reforms for countries at higher risk of debt distress.
• DPFs can further focus on policy dialogue and reforms to advance gender equality, such as improving girls' education; incorporating family planning, reproductive and sexual health; strengthening childcare policies; improving systems and institutions to address gender-based-violence and sexual harassment across sectors; addressing gender gaps related to climate change; increasing women in leadership and decision-making roles.
• DPFs can play an important role in supporting the business environment for private sector development. It would be useful to expand the use of DPFs in support of private capital mobilization for investment and job creation.
• The "Catastrophe Deferred Drawdown Option" (CAT DDOs) can be enhanced to allow access to additional sources of financing for rapid liquidity support in the wake of a disaster while incentivizing further reforms for crisis preparedness and climate adaption and resilience.
• Continued focus on reforms to support climate mitigation efforts—such as renewable energy, transport, and energy subsidy reform—as well as climate adaptation efforts—such as climate smart agriculture and water conservation—will help countries on their pathways toward climate-resilient development and low greenhouse gas emissions. As part of its Climate Change Action Plan, the Bank has also committed to align all its DPOs, and indeed all its operations, with the objectives of the Paris Agreement as of July 1, 2023.