CDB began participating in PBL operations in the late 1980s, with operations to support macroeconomic adjustment executed in collaboration with the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB). These addressed complex development problems, made more acute by the increased frequency of natural disasters and the impacts of climate change, external shocks, relatively low growth and high debt.  In 2005, CDB formally introduced PBOs into its lending toolkit, which had traditionally focused on expanding productive infrastructural and institutional capacity. The new instrument was guided by a Board-approved policy paper2Caribbean Development Bank: 2005. Policy Paper: A Framework for Policy Based Lending, BD 72/05,outlining the development challenges in the region; the rationale, definition, and objectives of policy-based lending; design considerations; quality at entry standards; organizational and implementation arrangements; and prudential limits.3The IDB played an advisory role in preparation of the paper.This introduced a more appropriate model to support the type of policy and institutional reforms required to address the structural, social and institutional development challenges being faced, and the far-reaching policy and institutional adjustments required to facilitate stronger development pathways.

Since 2005, CDB has sought to gradually strengthen the PBO instrument and the policy governing its use. This has been guided by five external reviews or evaluations, as well as by internal assessments by staff. Over time, these have revealed scope for improving the administration of PBOs, particularly in their design, supervision, and reporting; and the need to develop more a comprehensive and structured policy framework and guidelines. There has also been internal capacity building in results-based management, country fiscal diagnostics, and debt sustainability analysis.

In 2013, a significant revision to the 2005 framework was undertaken4Caribbean Development Bank. 2013. Policy Paper: Framework for Policy-Based Operations - Revised Paper. BD_72/05 Add. 5to provide greater clarity on the principles, procedures, and guidelines for administering PBOs and to anchor them within CDB’s overall risk management and control framework. The changes included:(i) broadening PBOs beyond loans to include grants and guarantees; (ii) clarifying the rationale and purpose for the use of PBOs; (iii) establishing guiding principles for donor coordination; (iv) broadening the types of PBOs to include sector, exogenous shock response, and public goods PBOs, and multitranche, single-tranche and programmatic5A programmatic PBL is a series of single-tranche loans designed to support policy and institutional reforms in a medium-term framework. A multitranche PBL is a single loan consisting of two or more tranches.operations; and (v) clarifying how requests for waivers and the deferral of disbursement conditions, partial disbursements, supplementary financing, and revisions of scope should be handled. These were issues that were not addressed in the 2005 policy paper.  

The 2013 framework provided for an increase in the PBL limit from 20% of total loans and guarantees outstanding to 30%, and subsequently, subject to further approval, to 33%.  It also introduced risk-based and policy-lending allocation limits (from a credit risk, utilization, concentration and capital adequacy standpoint) at the country level that align with, and preserve, the prudential soundness of CDB. Following a comprehensive review of operations and the establishment of a centralized Office of Risk Management (ORM) in May 2013, the PBL limit rose to 33% in December 2015.

In March 2020, the Board gave approval to an increase in the prudential limit to 38%, creating headroom for lending in response to the fallout from the coronavirus disease (COVID) pandemic. This is expected to be temporary, with a return to 33% by the end of 2023. The move has enabled support to the Bahamas ($40 million) and Saint Lucia ($30 million), with the expectation of lending for economic recovery and resilience to additional pandemic-affected BMCs.

• 2Caribbean Development Bank: 2005. Policy Paper: A Framework for Policy Based Lending, BD 72/05
• 3The IDB played an advisory role in preparation of the paper.
• 4Caribbean Development Bank. 2013. Policy Paper: Framework for Policy-Based Operations - Revised Paper. BD_72/05 Add. 5
• 5A programmatic PBL is a series of single-tranche loans designed to support policy and institutional reforms in a medium-term framework. A multitranche PBL is a single loan consisting of two or more tranches.