Issues in Assessing the Impact of Project and Sector Adjustment Lending

Abstract

The paper deals wich some conceptual and analytical issues in the area of international development financing. The major lending modalities of the multilateral financial institutions (HFIs) include project and adjustment lending. While project lending could be viewed as the modality for augmenting investment, the role of adjustment lending would be to facilitate adjustment of policies and institutions in developing countries. The purpose of this paper is to highlight the major conceptual issues in assessing the impact of project and adjustment lending focusing on the areas of commonality and points of departure in the two modalities. No attempt is made to infer implications for the procedures and policies of the HFIs. At the outset, a brief review of the evolution of project and adjustment lending would be instructive. Imperfections in the world capital markets led to the initial impetus for lending by the HFIs in developing countries for sound investment purposes. Lending through project loans with sufficiently high rates of return to service the loan and contribute to economic growth was advocated for two reasons. First, project loans were considered a good conduit for the transfer of technology to developing countries without adequate technical capacity to plan and execute projects. Second, capital accumulation was viewed as crucial to increasing growth rates. In the 1970s, it was recognized chat some project investments would not yield their potential rates of return without policy reforms. Poor policy environments were not conducive to effective operations of projects. For example, the crucial link between public utility pricing and project profitability was recognized and addressed through policy dialogue on subsectoral issues. Suggestions for policy reforms were limited to addressing issues related to project viability.