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Will new rules on reporting debt relief as development aid be another missed opportunity?

Added 27 Jun 2018

On 2 July, the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD DAC) will decide whether to change the rules on how debt relief is reported as Official Development Assistance (ODA). There is a serious risk that these changes could create loopholes allowing donors that use debt-based instruments to inflate their aid levels at the expense of the poorest countries.

Due to the switch from a cash flow basis to the Grant Equivalent (GE) system for reporting sovereign lending as ODA, the OECD DAC needs to revise the rules for how debt relief is reported. The reason behind this is that the GE system includes an ex ante adjustment for default risk, based upon country income classification:

  • 4% for Least Developed Countries (LDCs) and other Low Income Countries (LICs)
  • 2% for Lower Middle Income Countries (LMICs)
  • 1% for Upper Middle Income Countries (UMICs).

As the risk of default is already included in what is reported as ODA, including debt relief for any loans that are defaulted on would be double counting and would inflate ODA figures. (On a lighter note it also seems a waste of an acronym not to call the new system the “Risk Adjusted Grant Equivalent” – or RAGE!).

At the OECD DAC High Level Meeting in 2014, where the switch to the GE system was agreed, members acknowledged this risk in their final communique:

We agree that the cost of risk should not be double counted. Changing the measurement system from net flows to risk-adjusted grant equivalents will therefore also change the basis on which we report on debt relief of ODA loans. We have therefore agreed that the rules on reporting ODA debt relief will need to be updated to rule out double counting, bearing in mind the past need to encourage debt relief initiatives such as HIPC and MDRI.” (Annex 2 Paragraph 14)

Unfortunately, due to weaknesses in transparency at the OECD, it is not possible to access the current proposal through public channels. A coalition of civil society organisations (CSOs) including Eurodad is currently engaging with the DAC over how to bring urgently-needed improvements to make these kinds of decisions more transparent.

Given the lack of public information available, watchdog groups have to rely on unofficial sources, which have indicated that the proposal does not prevent the possibility of double counting debt relief. In our opinion, this is completely unacceptable.

Eurodad and other CSO groups have argued for many years that debt relief should not be counted as ODA as it distorts aid flows and creates bad incentives for donors. Previous Eurodad research has shown that the majority of debt relief isn’t even for sovereign lending but is for non-ODA flows such as export credits (for example, between 2005 and 2009, export credits accounted for 85% of cancelled bilateral debt to the poorest countries).

There are very good reasons why export credits don’t count as development aid (they don’t focus on development and are tied to donor economic interests). Bringing them in through the back door undermines the credibility of the ODA reporting system.

The OECD DAC and its membership are approaching the end of a long and difficult discussion on how aid needs to be changed to make it better and more focused. Members must take this opportunity to finally clean up serious flaws that threaten to undermine the character of a unique and precious financial resource.

In the case of debt relief, the new system accounts for the risk of default ex ante and the old system allowed flows in ODA that had nothing to do with development ex post. We believe there is no justification for its inclusion in a modernised, fit-for-purpose and reporting system that’s focused on development.