Concessional loans: Continuing the discussion on ODA reform

Added 29 Jan 2014
The numerous reactions to our latest report on concessionality confirm that we indeed addressed “A matter of high interest”. One of those reactions came in the form of a guest blog for our website, a response by the OECD DAC staff to our report. This was the first time that the DAC staff commented through Eurodad’s media. The guest blog explains the mandate and process related to ODA reform from their perspective and refers to the relevant proposals to measure the broader ‘total official support for development’ that are currently on the table. It also notes that the deliberations are ongoing and that they are open to external scrutiny. We would like to see greater involvement of partner countries and civil society organisations and we are pleased to continue the debate.

A mixed bag of proposals with some food for thought

The proposals outlined in the documents regarding options for modernising ODA and options for concessionality offer much food for thought. It is positive to note that on several occasions the documents acknowledge concerns related to inflated aid and concessional loans and propose alternative measures that could mitigate them. However, many of the scenarios do not come with sufficient background information and data, which make it difficult to determine what their impact would be. One specific example is the need for more research in the case of guarantees and equity in order to validate the assumptions in several proposals (the stated “crowding in” effect) and to demonstrate their additionality in terms of mobilising additional resources.

While elements of the different proposals, such as excluding in-donor expenditures that do not result in flows to partner countries, would be welcomed by CSO groups working on aid; others, such as reporting loans in gross disbursements, would be a step in the wrong direction as they would further inflate aid figures. All of the options have problematic areas that could undermine the credibility of development cooperation and merit further discussion.

Creating the right incentives

In a recent European parliamentary hearing on ODA reform, Concord Aidwatch noted that any new measure for development finance should be critically assessed to determine its credibility. Furthermore it needs to ensure that the right incentives are put in place to achieve poverty eradication and development goals. This credibility is undermined through attempts to valorize debt based financing instruments which in some cases do not represent an actual or sustainable transfer of resources or budgetary effort on the part of donors. The OECD DAC expert reference group on external financing for development notes in a recent document “in the past three years the growth of ODA loans has surpassed the growth of ODA grants. In fact, given the current environment of low interest rates, a growing share of loans from DAC members is made from market-raised funds, which mainly targets the group of Mainly LMICs and Mainly UMICs.” Grant financing is critical to lower income countries and the push by some donors to incentivise market-like instruments has clear ramifications on how and where diminishing development resources are allocated.

With this in mind we urge the OECD DAC to:
  • Engage broadly with all relevant stakeholders including partner country governments and civil society.
  • Carefully assess the impacts of debt based financing on debt sustainability and resource allocation. 
  • Put effective incentives in place so that ODA is primarily provided in grant form. 
  • Ensure donors are not encouraged to profit from development finance.