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Reporting debt relief as ODA: civil society shut out, bad rules to be locked in?

Added 21 Nov 2018

“There are negotiations being made that are going to answer all of your questions and solve all of your problems. That’s all I can tell you right now.” So goes the line from The Godfather.

This week at the Organisation for Economic Co-operation and Development (OECD), “negotiations will be being made” about the rules for counting debt relief as Official Development Assistance (ODA – or ‘aid’). As we blogged earlier this year, these negotiations are highly unlikely to answer all the questions or solve all the problems of civil society advocates interested in ensuring that the new rules set the best incentives for eradicating poverty, tackling inequalities and preventing a new wave of debt crises in the global south. Yet, just as in The Godfather, the negotiations remain shrouded in secrecy.

Far more than just bean counting

At first sight, the issue of accounting for debt relief might seem the driest of bean counting questions, far removed from the day-to-day struggles of people experiencing extreme poverty and inequalities. But the rules on what can and can’t count as ODA have a very real knock-on effect on the funds available on the front-line.

Look no further than the distortionary impact of current rules on in-donor refugee spending, student costs and other loopholes to see how readily donors will inflate their reported ODA spending with costs that, for many in civil society, do not meet the core mandate of ODA. The more donors inflate their ODA, the better their statistics look relative to the UN’s 0.7% of Gross National Income target per country. And the better the statistics look, the less pressure these donors face to scale up their spending on activities that would genuinely contribute to eradicating poverty and combatting inequalities – even as evidence mounts of the ever-more-urgent need for additional public finance to fulfil human rights obligations and meet the Sustainable Development Goals.

If high-quality ODA is really to reach the people in the global south who need it most, getting the rules right is critical.

Debt relief: will donors have their cake and eat it?

The ongoing negotiations on debt relief come in response to a new ‘grant equivalent’ system for reporting ODA loans, which will be introduced from the start of 2019. In a nutshell, the new system includes a statistical calculation that rewards donors upfront for taking the risk that their ODA loans may not be repaid (see this piece for more detail). In other words, the risk of future default is factored into donors’ reported ODA levels as soon as a loan is granted.

That’s why the debt relief rules needed a fundamental rethink. If, having already recorded ODA to reflect the risk of non-repayment when the loan was granted, donors then record ODA again when the loan is not repaid, they are double counting.*

For Eurodad, there is only one logical solution to this impasse: debt relief on ODA loans should no longer be included within ODA. And when members of the OECD Development Assistance Committee (DAC) confronted this issue at their High Level Meeting back in 2014, it appeared they agreed, concluding that “The cost of risk should not be double counted.”

A damaging U-turn

However, now it seems that many DAC members are back-tracking, and want to report some debt relief as ODA.

Their justification for doing so is troubling: they argue that, unless debt relief is included within ODA, there will not be enough incentive to grant it. This seems unconvincing. When world leaders backed the demands of the Jubilee 2000 movement almost 20 years ago, was their main motivation really that this would allow them to report more ODA?

And even if self-interest does play a role, so too do economic realities and wider international politics. In most cases we know where bilateral creditors granted debt relief, the borrowers were genuinely insolvent: so bilateral creditors had no choice but to relieve debts, regardless of what the ODA rules allowed them to report. In the remaining cases, debt relief by Paris Club creditors has been granted on the basis of geopolitical considerations, and incentives derived from ODA accounting never played a significant role. Moreover, debt relief was conditional on International Monetary Fund programmes. The harmful economic policy conditionality in these programmes made it difficult for countries in the global south to fight poverty and exercise their right to development.

Development objectives must come first

While DAC members focus on implausible arguments about the incentives to grant debt relief, they are overlooking two much more important points:

  • First, there were in fact strong arguments not to include debt relief in ODA even before the recent rule changes on reporting loans. Previous Eurodad research has shown that most debt relief is actually for non-ODA flows such as export credits, where the primary aim is to support donor country exports – not development. Bringing such spending into ODA through debt relief dilutes the basic principle that ODA should have the “economic development and welfare of developing countries as its main objective”.
  • Second, more fundamentally: prevention is always better than cure. The top priority for DAC members should be to ask themselves what additional incentives they can put in place to promote responsible and sustainable financing in the first place. With very few exceptions, that means providing ODA as grants, not in the form of risky loans. Steps to prevent countries in the global north from co-creating debt crises in countries in the global south through irresponsible lending are all the more urgent at a time when the number of countries at risk is increasing sharply.

A worrying precedent for the DAC-civil society dialogue framework

Recent developments in the debt relief negotiations are alarming in their own right, but they also have wider implications.

In July 2018, the DAC took a historic step forward by agreeing to a new framework for dialogue with civil society organisations (CSOs). The framework includes a commitment that the DAC will “provide space for consultation with CSOs before key decisions are made”.

The decision on debt relief seemed like a natural opportunity for the framework to come into its own. Indeed, we understand that the DAC Secretariat made some welcome suggestions to this effect, shortly after we published our previous blog on this issue back in June.

But unfortunately things didn’t work out that way. Substantive discussions on debt relief have been delegated to one of the DAC’s subsidiary bodies – the Working Party on Statistics. Subsidiary bodies are excluded from the scope of the civil society dialogue framework, partly on the grounds that their work is purely technical in nature. As a result, we haven’t received any official information on the progress of the negotiations since July.

As this blog has argued, the rules on debt relief are much more than just a technical bean-counting issue, and their treatment sets a worrying precedent. If important political issues are being delegated to bodies beyond the scope of the new civil society dialogue framework, how meaningful can that dialogue be?

Looking to the future

Time is now tight before the new reporting rules on debt relief have to be agreed and implemented – but not too tight for the DAC to reach a principled decision. We urge DAC members to exclude all debt relief on ODA loans from future reporting. They should also take this opportunity to review what further incentives could be added to the ODA rules to prevent irresponsible lending in the first place.

We also call for the DAC to review carefully which negotiations are handled by subsidiary bodies, to ensure the main Committee has sufficient involvement in decisions with strong political dimensions. And we hope that in future, in line with the new dialogue framework, CSOs will be more systematically informed of developments in the negotiations, and invited to share their perspectives before key decisions are made. With vital resources for poverty eradication and tackling inequalities at stake, that really would be an offer we couldn’t refuse.

 

* It’s true that the value of debt relief may sometimes be greater than the value of ODA reported up-front. But that’s offset by the fact that, on other loans in their portfolios, donors will be being rewarded up-front for a risk that never materialises.