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

10 July 2020 by Jan Van de Poel , Nerea Craviotto

CC - David Goehring

Debt relief should not be reported as ODA. 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 or upholding the credibility, integrity and solid reputation of DAC statistics.

This week the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
’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
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
(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 liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). .

 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 Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. 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 Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

– 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 Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -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.

Source: Eurodad



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