If image-library is true, then the database is loaded from image-library-filename. It's a current limitation that only a single database can be loaded.
The image library database is stored in a separate directory because it must be parsed with the XML declaration. The only practical way to accomplish this with Jade, if you are processing a document that uses another declaration, is by having a catalog file in the directory that contains the image library that specifies the SGMLDECL. (So if it was in the same directory as your document, your document would also be parsed with the XML declaration, which may not be correct.)
(define image-library-filename ;; Name of the image library database "imagelib/imagelib.xml")