The ADB's conditions

Loan conditions have always been one of the main bones of contention at the annual meetings of the Manila-based Asian Development Bank (ADB). The latest annual meeting which ended yesterday was preoccupied with the current crisis over the dramatic lack of funds, but also saw acrimony over what borrowing countries consider unreasonable conditions attached to ADB's loans.

The problem is not interest rates, nor the terms attached to the credits. The ADB's lending rates are always below market rates even though its rates are based on its own cost of borrowing. In fact, its soft-loan arm, the Asian Development Fund, specifically targets the poorest borrowers and charges no interest at all, only a token administration fee.

What borrowers are complaining about is that the loans are made conditional on reform measures. These measures are often said by borrowers to aggravate, rather than alleviate, their economic difficulties.

However, ADB's donor members argue that the reforms or policy measures required of borrowers are precisely what distinguishes multilateral banks like the ADB different from commercial banks. They contend that if borrowers wanted only money, they could always just go to the international money markets.

It is of course true that multilateral development banks like the ADB and the World Bank perform their development mission largely through policy talks with borrowers. The Indonesian government, as one of the largest borrowers from both banks, has a lot of experience of intensive, vigorous policy debates with the executives of the banks during credit negotiations. The annual meeting of the Consultative Group on Indonesia (CGI) in Paris, for instance, is essentially a round of policy talks between Indonesia and its creditors.

Borrowers and the ADB obviously have different priorities and thus see things differently. For example, ADB executives prescribe policy recommendations related to loan projects according to strictly economic criteria. But a sovereign borrower will tend to see things in terms of politics as well, taking into account its capacity to absorb the recommended reforms without strong public opposition.

The problem, though, is that political and economic constraints differ from one country to another, while the ADB serves many sovereign borrowers and tends to impose uniform policy conditions on borrowers, without taking into account the social and economic complexities of specific countries.

The ADB and its borrowers should therefore work harder to see each other's point of view.

On the one hand, borrowers must appreciate the blunt truth that projects may fail if the domestic economic environment is not right for it. Sound economic policies are essential for the success of both individual projects and development strategies in general.

On the other hand, the ADB should also be more sensitive to conditions -- and political realities -- in borrower countries. That requires the ADB to sharpen up its country strategy analysis because comprehensive country strategies are vital to ensure maximum development impact for its loans.

In policy talks the ADB should try to recognize the differing objectives of sovereign borrowers and avoid taking up dogmatic positions. It should also avoid creating the impression among sovereign borrowers that "the ADB knows best".