At the end of July, in private closed-door discussions, donor countries reached an agreement on debt relief that will have massive implications for development aid. Spoiler alert: it’s bad news.
This deal could allow donors to artificially inflate their aid statistics, counting relief for loans that are not for development, and double counting aid money if they provide relief. This is an unfair change, particularly in the middle of a global pandemic when more aid — not double counted aid — is needed to tackle COVID-19 and its aftershocks. High-income countries have made promises to deliver aid, and they need to live up to those promises fairly and transparently.
Why was a deal needed?
Over the past several years, the Development Assistance Committee — a group of donor countries which define standards for foreign aid — has been working on updating several aspects of how aid is counted.
One major change is about how donors count loans as official development assistance (ODA). Because loans will eventually be paid back, donors cannot count the full amount of a loan as aid, but rather the concessional portion of the loan.
The details are somewhat complex but, in short, donor countries use a methodology to figure out how much the loan is actually worth today, looking at things like the terms of the loan, the interest rate, and crucially, the risk that the loan won’t actually be paid back in full.
When they agreed on this change in 2014, they also agreed that the way they count debt relief needed to change. Otherwise, they argued, they would end up double counting some of the money they provide. Which brings us to today…
New rules could allow donors to double count aid money
During the negotiations, one of the main questions donors grappled with was whether they can count debt relief — loans that are forgiven in a certain year — as new aid spending.
If we look only at the technical aspects of how loans are reported, the answer is no. The reporting methodology — appropriately called the “risk-adjusted grant equivalent” — already takes into account the risk of non-payment. That means that donors are counting a bit more of every loan at the time it is given as aid, in order to compensate for the fact that some loans will not be fully paid back.
So why would donors be allowed to count debt relief as aid?
In the recent agreement, donors argued that the risk-adjusted grant equivalents of loans “do not cover for ‘the cost of default,’” (sic) among other factors. Despite the fact that risk is already built into the initial loan value.
This is like your car insurance company saying that your premium covers the risk that you have an accident, but doesn’t cover any of the cost of repairing your car if you do have an accident.
This type of language and rationale are very surprising from an organisation that takes pride in its standards and statistics.
The new rules also allow donors to count loans that are not for development purposes
When times are particularly hard for countries — for example during a world pandemic — paying back some loans can become really difficult. In such cases, debt relief can be a very useful tool.
However, aid loans are not like other types of loans. They are meant to help countries invest in economic and social development. And compared to normal loans, from commercial banks for example, aid loans have better terms. That means more years to pay back, lower interest rates and so on.
While aid loans are not, in most circumstances, as good as grants, some donor countries use them in order to make larger sums of money available for international development. But these same donors also lend money for other non-development purposes at market-like terms.
If donor countries provide debt relief on non-aid loans, the new rules allow them to count that as aid. If loans were not for development purposes when they were first given, why should they be counted as aid when they’re forgiven?
Donor countries have made commitments to spend certain amounts on development, and only money spent on development should count against those commitments.
This deal could be better
This deal could be better in at least two important ways: First, only development loans should count as development aid.
And second, don’t give credit twice for the same thing. The decision to provide debt relief should be in response to need, not because of how much donors will be able to inflate aid numbers as a result.
This is only a fraction of what is in the agreement. But it makes one thing clear: the new rules are not a fair deal for developing countries, and it is not a wise move during a global pandemic, when more aid is needed than ever before.
A perfect solution that both incentivises debt relief and does not double count any aid money is probably not possible. But donors must do better — including by working with civil society organisations and developing countries — in order to strike a better, and more coherent, balance.