17.01.2014 | Eurodad

A matter of high interest

Assessing how loans are reported as development aid

by Stéphanie Colin

The Organisation for Economic Cooperation and Development (OECD) Development Assistance Committee (DAC) compiles aid statistics that allow comparisons and monitoring of aid volumes provided by bilateral governments and multilateral institutions for the purpose of reducing poverty in developing countries. Loans offered at preferential terms can be reported as official development assistance (ODA), provided they meet certain concessionality conditions.

The issue of concessional loans has attracted much discussion in recent years. The context of tighter budgets in OECD-DAC countries is incentivising governments to find methods to increase ODA levels without budgetary implications. One possible way of doing this is by reporting a larger share of their loans to developing countries as ODA. The discussion is also gaining prominence in relation to several issues on donors’ agendas, including how to leverage development resources by blending public with private funds, and how to capture budget neutral financial instruments and lending to middle-income countries as development finance contributions.

Lending to sub-Saharan African governments has more than doubled over five years, from $8 billion in 2006 to $20 billion in 2011. Concessional lending to developing countries has followed a similar rising trend. DAC multilateral institutions have disbursed twice as many concessional loans to developing countries in 2011 ($42 billion) than in 1995 ($19 billion). Similarly, concessional loans from DAC bilateral donors have doubled over the past decade, from $8 billion in 2001 to $16 billion in 2011.

‘Concessionality requirements’ are currently being discussed within the DAC, to see whether they are relevant and how they can be improved. While concessionality addresses key issues for the future of aid quantity and quality, the debate has so far been taking place among government officials with no broad involvement of civil society and has been framed in rather technical terms.

This paper discusses the main developments in this debate over the past ten years and presents recommendations on how to optimise the developmental benefits of this reform.

The first section puts the concessionality discussion in a historical perspective, highlighting the requirements to report loans as ODA, the broader context of development finance, as well as the current state of play of the discussion. The discussion is at a critical stage as a review is underway that will specify the conditions that loans should fulfil to qualify as ODA.

The second section analyses the different concessionality requirements and the issues they raise. The preferential terms of loans are assessed on the basis of a 10% reference rate, which is disconnected from real market conditions and allows donors to make a profit out of concessional lending. Moreover, loans are required to be ‘concessional in character’ but donors’ interpretations differ as to whether risk-mitigating instruments such as credit default risks and guarantees can count as a form of subsidy and about the market rates that should be used as a benchmark to measure whether loans are concessional.

The third section includes examples of how the ambiguity around the definition of concessionality requirements has led to mixed reporting by some donors, where unsubsidised loans have been reported as concessional loans and risk-mitigating instruments used to justify their concessionality.

The fourth section points out how the current reporting system of concessional loans contributes to inflating aid figures and raises concerns of debt sustainability and suitability of loans as development tool in the world’s poorest countries.

The fifth section concludes with a summary of the main points and a series of recommendations for the future.