Private
finance
Debt
Tax
justice
Aid
Financial
architecture

Donor countries will undermine the integrity of aid if they continue reporting debt relief as ODA

This week the OECD’s Development Assistance Committee (DAC), a forum of the main providers of aid, will once again discuss the rules for reporting debt relief as Official Development Assistance (ODA). This issue has been on the DAC’s table since 2014, but it is gaining momentum as the goal is to reach an agreement this summer. The response to the Covid-19 crisis is adding pressure to these negotiations, as everybody expects more debt relief to be granted in the near future. And things are not looking great, as discussions seem to be moving towards a solution where reporting additional debt relief could allow donors to meet their ODA commitments by inflating aid figures. This would be a major issue for developing countries, as the crisis has clearly exacerbated the need for fresh financial resources that come with no additional financial labilities.


Double-counting risk


In 2014 the DAC announced that, starting with data from 2018 flows, it would adopt a ‘grant equivalent’ methodology to measure ODA. Until then, loans had been reported on a ‘cash-flow basis’ which allowed donors to report loans for their full amount, subtracting repayments in subsequent years. The new rules require donors to report only the ‘grant equivalent’ of the loans. When calculating those grant equivalents, donors use 'risk-adjusted discount rates' that take into account the risk that the loan will not be paid back.  In other words, the new rules reward donors for the possibility of future debt relief as soon as the loan is granted. 


However, some members seem dissatisfied with the current system and are pushing for more generous rules for reporting debt relief, arguing that the current rules do not fully capture the financial effort related to ODA loans, and ‘disincentivises’ debt relief from happening in the first place. Apart from the fact that most debt relief is granted out of economic necessity (and not because it can be recorded as ODA), more generous rules will unequivocally lead to double counting and the inflation of ODA statistics. Inflating ODA figures is appealing to some donors as it helps push ODA levels closer to the 0.7% ODA/GNI target (currently DAC members’ performance hovers around 0.3%). This in turn reduces the pressure donors feel to scale up spending that contributes to the eradication of poverty and addressing inequalities. In the past, debt relief has already inflated ODA, even though most relief was for non-ODA flows, such as expert credits used to help donor countries’ companies do business in developing countries. 


Open, transparent and inclusive debate? 


Given the high degree of secrecy in which this debate takes place, it is difficult to assess the impact of the different  proposals on the table. No official documents have been made publicly available, even though donors have previously agreed to hold open, transparent and inclusive’ discussions on this issue. But while CSOs and other independent experts have been largely shut out of the process, the Paris Club – an informal group of creditor country treasury departments with very different objectives to ensuring ODA is a credible reflection of donors’ efforts – is being involved in the decision-making process.


Even though the grant equivalent methodology agreed in 2014 allows a certain level of ODA reported upfront for the risk of having to forgive or reschedule a loan, one option on the table seems to be based on a calculation of a new grant equivalent  that materialises if debt relief is granted. Imagine, for example, a donor country gives out an interest-free loan of US$ 100 and obtains a grant equivalent of US$ 30 reported as ODA (factoring in the risk of default).  A few years down the line, the borrower defaults and debt relief is granted: US$ 50 of the loan has already been paid back, so the remaining US$ 50 is granted as debt relief. Under the logic of recording the ‘additional concessionality of the relief operation’, at least part of the remaining US$ 50 could potentially be considered as an additional grant equivalent and recorded as ODA, artificially boosting the originally estimated grant equivalent, which already built in the risk of default. Of course, this is just an example of what could go wrong, but it clearly shows the potential impact and the need for an open, transparent and inclusive debate carefully assessing all options. 


The DAC’s credibility is on the line


Apart from inflating ODA statistics, a solution that allows for double counting of risks or flows would be unfair to the majority of donors that have chosen to deliver most of their aid through grants. When countries default and their debt needs to be cancelled, only a handful of donors providing ODA loans would be able to artificially crank up their ODA accounts, while others that already focus on grants would have to step in with more grants to prevent the collapse of countries desperately in need of finance. As we are only just starting to see the consequences of the Covid-19 crisis in many countries, this is not an unlikely scenario.


For Eurodad, the solution is quite simple: debt relief should not be reported as ODA, especially not as the rules to report loans have changed so much that the more risk a lender takes the more ODA can be recorded. In the coming weeks, DAC members need to decide what is most important to them: allowing ODA double counting and inflation to create incentives to reward debt relief – even when most debt relief is granted out of economic necessity – or upholding the credibility, integrity and solid reputation of DAC statistics.