Why modernise official development assistance?

Charlotte Moreau/OECD Observer

“To eradicate poverty we need to direct more development assistance and concessional loans to the poorest nations and mobilise much more private finances for development.” Official development assistance (ODA) reached an all-time high of $135.2 billion in 2014. Even so, not all developing countries rely on ODA to the same extent, and to some of them it may seem like a drop in the bucket compared to other international financial flows. However, for the least developed countries, such assistance represents over 70% of available external finance and more than one-third of their total public revenue and expenditure. This highlights the importance of the target set by the United Nations in 1970: for donors to allocate 0.7% of their gross national income as ODA.

Most ODA continues to be provided in the form of grants. Nonetheless, concessional loans, which are those provided on favourable terms to developing countries, will continue to play a key role in mobilising resources to support the Sustainable Development Goals (SDGs).

The concept of ODA was developed by the OECD Development Assistance Committee (DAC) in 1969, yet until recently the definition of what made a loan “concessional” in character was open to interpretation. This resulted in inconsistent ODA reporting across DAC members.

For Erik Solheim, chair of the DAC, the time has come for a modernisation of ODA, particularly now as the world prepares for post-2015 and a new set of SDGs. However, beyond consistency is a deeper motivation, as quoted in the OECD’s online DACnews: “To eradicate poverty and continue the huge development success of the past decades, we need to direct more development assistance and concessional loans to the poorest nations and mobilise much more private finances for development.”

In December 2014 DAC member countries agreed to important improvements. Whereas in the past the face value of both grants and loans was counted as ODA, they agreed that only grants and the “grant portion” of concessional loans would be considered. This should provide a more realistic comparison of loans and grants, and encourages the use of grants and highly concessional loans. The discount rate used in the calculation will also be differentiated by developing country groups, so that a loan to a least developed country (LDC) or other low-income country (LIC) will score higher in ODA terms than a loan provided under the same conditions extended to a middle-income country. This incentivises lending to poorer countries, based on the consideration that it involves greater effort by providers in terms of both the funding cost of the loan and the risk associated with it.

Furthermore, for countries most in need, higher concessionality thresholds have been introduced to fix softer terms and conditions. What does this mean? In the past, the threshold for ODA eligibility was set at a grant element of 25%. Under the new system, loans to LDCs and other LICs must reach a grant element of at least 45% to be reportable as ODA, while lower middle-income countries will require only a minimum 15% grant
element and upper middle-income countries a minimum 10% grant element. Particular emphasis has also been placed on debt sustainability: to be reportable as ODA, loans must comply with the International Monetary Fund’s (IMF) Debt Limits Policy and the World Bank’s Non-Concessional Borrowing Policy. Finally, the maximum ODA interest rates permitted have been lowered for all country categories and nearly halved for LDCs and other LICs.

Why do these changes matter? This new statistical framework measures ODA loans more accurately and credibly, ensuring comparability of data across providers. It adds an incentive not only for more concessional resources to implement the SDGs, but a better allocation, too. It also promotes greater transparency and heightened accountability, helping to ensure that ODA goes where it is most needed and has the greatest development impact.

For the time being, ODA will be reported using both the new and the old systems to allow for full transparency regarding the impact of the changes on ODA volumes. Data on disbursements and repayments of loans will continue to be published in a fully transparent manner. The new system will become the standard for reporting from 2018 on (for which ODA reporting will take place in early 2019).

References

DACnews (2015), “New rules for what counts as ODA”, February, see www.oecd.org/dac/ dacnewsfebruary2015.htm

OECD (2014), Development Co-operation Report 2014: Mobilising Resources for
Sustainable Development, OECD Publishing.

For more on the OECD DAC and ODA, visit www.oecd.org/development

See also www.oecd.org/dac/financing-development.htm

©OECD Observer July 2015




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