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Time to put the poorest first: Why the OECD DAC must reform rules on concessional lending

The OECD’s Development Assistance Committee (DAC) will meet in Paris later this month to discuss the ongoing process of re-examining the definition of – and reporting criteria for – aid.

This review could not come soon enough as the EU, some of its largest member states and multilateral development banks, are increasingly reporting profit-making loans as aid due to outdated and ambiguous rules.

Eurodad’s new report, A matter of high interest: Assessing how loans are reported as development aid finds a number of critical problems with the current reporting system. If the OECD DAC review does not bring an end to lax reporting criteria, aid could be artificially inflated by more than 50 billion euros in coming years.

In an era when overall aid budgets are declining globally, loans can be seen an attractive way to increase aid without clear budgetary costs. Governments and institutions can make money from the loans; they are not affecting their own budgets in times of austerity; and they are still reporting ‘aid’ donations.

This ‘win-win situation’ is not the case for developing countries. In a time of global crisis, the IMF has noted that the largest source of debt distress in the poorest countries come from concessional loans. Developing countries already faced interest repayments of almost 600 million euros in 2012, of which 90 per cent came from EU institutions, France and Germany. These repayments are not deducted from aid figures under the current rules.

The patterns of lending are also worrying, with most loans concentrated in middle-income countries and invested in highly profitable productive sectors. This means that sectors such as education and health, which are traditionally funded through grants, could be neglected, and the poorest people in the world are the ones who will carry the burden.

The rules governing loan reporting are complex. Put in more simple terms, the most worrying aspects of the current system are that:

  • All loans that include a ‘grant element’ of at least 25 per cent – whether it is 26 per cent or 99 per cent – are fully counted in aid figures.
  • The grant element is based on a 10 percent reference determined in the early 1970s, which no longer reflects reality and allows donors to report profitable loans as aid. 
  • Interest repayments on loans are not currently deducted from aid figures which means more money actually leaves the county than initially goes in.

The OECD-DAC will have its discussions in private later this month and in early March it will reveal its recommendations. We want to see a greater involvement of developing countries and civil society organisations in these discussions, which should be open and accountable.

Our report also recommends that in the future:

  • Interest repayments are deducted from aid figures.
  • Only the grant element of a loan is reported as aid.
  • Steps are taken to ensure that the main incentive of aid is poverty eradication.
  • The 10 percent reference rate is replaced with a more relevant benchmark.
  • The rules should specify that loans include a budgetary effort in the form of an official subsidy to qualify as ‘concessional’ in character.

All of our recommendations are easy to implement and are not controversial or radical.

But as long as these conditions are not revised, developing countries will continue to spend large amounts of money repaying loans and the whole credibility of aid and development cooperation will be put at risk. This is especially important as we head towards the post-2015 era. What happens now will define how aid is delivered in years to come and it is down to our rich countries to ensure that the needs of the poor are prioritised.  

The Guardian published an article highlighting Eurodad’s concerns and findings on concessional lending. Read the article here