Most SALs are designed to be disbursed quickly (median time from Board approval to final disbursement is about seven quarters), and are tranched. Even though the Bank's guidelines on SAL supervision call for monitoring and analysis of the borrower country's overall economic performance, it is not surprising that in practice SAL supervision has often been rather narrowly focused on compliance with legal loan conditions. Yet the experience reviewed in an OED study confirms the benefits of more broad-ranging supervision, in helping to ensure that the reforms being promoted remain appropriate and will be sustainable. The study recommends some procedural changes to make SAL supervision more effective. The study also notes that, though well warranted, improvements in supervision procedures would play only a limited role in making adjustment lending more effective-- experience suggests a more important factor is the commitment of country authorities and Bank management to the reforms.
As practiced, SAL supervision in general is helpful because it encourages borrowers and staff to focus on the actions needed to keep adjustment programs on track. But there are several areas of concern.
Compliance with conditionality
Poor compliance with SAL conditionality generally indicates poor progress in implementation and, thus, in structural adjustment (as in Costa Rica, Kenya, Philippines). But a high degree of overall compliance does not necessarily indicate successful adjustment (Jamaica II and III, Malawi I-III). Assessments of compliance may be too upbeat, while conditionality that does not call for specific actions may be easy to comply with but have little impact on structural adjustment. In the Republic of Korea, Mauritius, and Thailand, whose adjustment experiences were more successful, overall compliance with conditionality was lower than in the Jamaica and Malawi cases.
- Ensure that the most critical actions are embodied in the legal conditions of the loan agreement. In many instances, important conditions cited in President's Reports have not appeared in the loan's legal documents and have thus been unenforceable.
- Limit loan conditions to the most important areas of reform, and make them specific, though not rigid. Even in some recent SALs, loan conditionality has been left vague, making supervision more difficult.
- Ensure borrower and supervision staff know the exact meaning and implications of each condition. To avoid conflicts of interpretation, consider using quantitative measures of progress on agreed policy changes.
Monitoring macroeconomic policies and outcomes, whether or not they are covered by conditionality, is critical to success. In some of the cases reviewed, supervision missions did not successfully recognize and address significant emerging fiscal, exchange rate, or financial problems, or inconsistencies between Bank- and Fund-supported programs. Recent memoranda to the Bank's Board on tranche release show more careful coverage of macroeconomic developments.
In none of the core cases examined did supervision explicitly monitor the social impact of SALs. The poor are most vulnerable to the higher consumer prices, cutbacks in social services, and rising unemployment that are often associated with the adjustment process. Monitoring is needed to ascertain that they are not being hurt more than necessary and to provide information for the design of palliative measures.
- Include in the legal documents a clause requiring the maintenance of a satisfactory macroeconomic framework. In recent SALs, this seems to have brought about closer attention to macroeconomic fundamentals during implementation. Loan documents should also specify the monitoring arrangements to be followed; even though most adjustment programs are concurrently supported by the Fund, the Bank should review macroeconomic
performance at least semi-annually, according to an agreed list of relevant indicators.
- Use, starting from the loan design stage, a policy-oriented macroeconomic model or framework for the country concerned. This would allow fuller, more systematic analysis of the economy-wide impact of agreed policy measures, and help to ensure their consistency with one another and with measures being supported by Fund programs.
Where there is no concurrent Fund-supported program, the SAL should incorporate a suitable macroeconomic stabilization program, underpinned by clearly specified conditions as to performance, which should be closely monitored during supervision.
Borrower's role in monitoring: Bank guidelines recognize the need to integrate the Bank's supervision with the borrower's monitoring and evaluation systems, to strengthen the borrower's "ownership" of the program and to make the Bank's supervision more cost effective. Little information is available on borrowers' monitoring of SAL-supported programs, but the Bank does not seem to have paid enough attention during supervision to this important aspect. In future, it would be helpful to:
- Specify in the loan agreement the borrower's monitoring and reporting obligations. To ensure the borrower understands its undertaking, discuss its role in monitoring explicitly, during loan negotiations. If necessary, the Bank should help to improve the borrower's institutional capacity for monitoring.
- Modify the Bank's supervision guidelines to encourage closer attention to the borrower's monitoring. Discuss this aspect of monitoring in memoranda to the Board on tranche release.
- Consider including in the ARIS process an assessment of borrowers' roles in monitoring adjustment programs.
The Bank's operational guidelines on supervision (OD 13.05, March 1989) are not being consistently applied. They could benefit from some updating. In particular, the Implementation Summary could be adapted to better fit the needs of adjustment operations. A comprehensive implementation summary should become a mandatory component of all forms of supervision reporting on adjustment loans, including memoranda to Bank management regarding tranche release.
Staffing of SAL supervision sometimes suffers from lack of continuity of key individuals, lack of sector specialists, and insufficient coordination among staff.
Recommendations: To help enhance the staff incentives for effective supervision, chief economists might consider establishing special evaluation and career development mechanisms within each Region. More training for staff involved in supervision, especially on following the supervision guidelines, would be valuable. Though SAL supervision inevitably calls for subjective judgments, such training should try to promote more consistency of judgments across countries and regions.
There may be scope for having resident missions play a larger role in monitoring, particularly of social and macroeconomic developments.
The process of review prior to tranche release gives important opportunities for Bank and borrowers to take stock of the progress of adjustment programs, as well as to ascertain compliance with conditionality. In some cases, delaying tranche release, in response to poor compliance with conditionality, has induced further progress toward implementation of the measures being supported.
Recommendations: Disbursement schedules need to allow the borrower enough time to implement the agreed measures; further, the Bank should be prepared to delay programmed disbursements until the measures have been implemented.
Policy reforms have sometimes been reversed after the completion of SAL disbursements. In SALs that were closely followed by repeater operations or related SECALs, Bank supervision continued beyond the disbursement of the final tranche, and the experience gained fed directly into the design and preparation of the follow-up operation. Where there was no immediate follow-up adjustment loan, continued supervision was not a standard practice, and reversals or backsliding sometimes occurred on policy reforms that had been supported.
Recommendations: To help prevent backsliding, it may be worthwhile to continue supervising compliance with conditionality and maintenance of agreed policies after disbursements finish. Possibly, such supervision should be integrated into ESW and other forms of economic reporting taking place after loan completion; Bank management could then use this information in decisions regarding future lending.
Box 1: Scope of Study
The OED study is based on a desk review of 45 SALs in all the 29 countries in which at least two SALs had been audited by OED as of June, 1990. Several more recent SALs, some of them still in progress at the time of the study, were also examined. Evidence from the Bank's records was supplemented by interviews in borrower countries and in the Bank. Though the study did not cover SECALs, several of its recommendations may apply equally to this form of lending.
Box 2: SAL Supervision Guidelines
Earlier Bank guidelines (e.g. OMS 3.50, June 1985) treated the supervision of both policy-based and investment lending similarly. In March 1989, a new set of supervision guidelines (OD 13.05, Annex A) established a special approach for SALs and other adjustment lending. These guidelines provide for supervision to focus on the "timely adoption and effective implementation of the agreed policy measures and other actions". They also call for "fairly broad monitoring of a country's overall economic performance", and "close consultation with the IMF". They underscore the need for close attention to the general economic environment in the context of tranche review, and for delaying tranche release when conditions are not conducive to the reforms being pursued.
Of the SALs featured in the OED study, 15 were supervised under OD 13.05. Of them, only three adhered closely to these new guidelines and reporting requirements. Nine that were supervised quite effectively followed the spirit of the guidelines, though not always the reporting requirements. In five, macroeconomic monitoring was not performed systematically as part of SAL supervision.