The Organisation for Economic Co-operation and Development (OECD) club of rich countries has admitted it needs to comprehensively reassess how global aid figures are measured amid criticism that the value of assistance given is overstated by billions of dollars each year.
Leaving out the interest repayments that donors rece ive from developing countries inflates the value of official development assistance (ODA) loans by $5 billion (€3.8 billion) each year, according to analysis from Development Initiatives (DI), an independent research group based in Bristol.
Some donors, including Japan and Germany, receive hundreds of millions of dollars each year in interest repayments on the loans they give, said DI. In total, "if interest repayments are taken into account, the net resource flows associated with global ODA are approximately $5 billion per annum lower than the reported total net ODA figure suggests," said a DI discussion paper this month.
Jon Lomøy, director of the OECD development co-operation directorate, said he welcomed the paper and the debate on ODA flows. "It is important to open these discussions as we prepare for after 2015 [when the millennium development goals expire]," he said. "We need to open up some of these boxes, some of the methodologies."
Net ODA figures subtract repayments made by recipients, but, according to current OECD rules, only account for principal repayments. Instead, interest repayments are recorded only as a memo item in OECD statistics.
This is significant, said Rob Tew, author of the DI paper, as debates on the impact of aid rely heavily on OECD figures. "When you hear the criticisms of aid, for example [international economist] Dambisa Moyo saying that $1tn has been transferred to Africa … they are typically just adding up the gross aid figures reported by donors, which is a very different thing from the resources actually transferred by donors," he said. "In order to sort out the question of whether aid does any good, we need to get better at counting it."
Lomøy said: "We publish figures on interest repayments. If you go to the statistics, there is full openness. At the moment, they are not deducted from the overall headline ODA figure presented annually. That should be part of discussions now.
"There are two perspectives. How much money does the developing country get? Then there is the donor effort. Maybe one of the things we need to do is to distinguish more clearly."
Japan, for example, actually receives more from developing countries than it gives when interest repayments – which totalled $2.6 billion in 2011 – are taken into account. The Japan International Cooperation Agency (Jica) points out that Japan in the past provided a lot of loans and therefore receives a lot of interest repayments.
The OECD's development assistance committee (OECD-DAC) defines what counts as ODA. Donors can give aid as grants or loans – if they are deemed "concessional in character" and include a grant element of at least 25%. This grant element, which is calculated using the repayment schedule and total cost of the loan to the recipient, varies widely by donor: loans from South Korea and Australia, for example, have average grant elements of almost 90%, while those from Finland (35%) or France (45%) are significantly less concessional.
More loans than aid
Not all donors give loans. However, since 2007 growth in ODA loans has outstripped growth in overall ODA. The UK deals in grants, although there is speculation that the government is thinking about setting up a bilateral development bank to move into loans as well.
The way in which loans can count as ODA came under attack this month from a former chairman of the DAC, Richard Manning. In a strongly worded letter to the Financial Times, he wrote: "The OECD is now quietly allowing large volumes of loans to be counted as ODA even though they do not meet any reasonable definition of being 'concessional in character', which is the basis of the OECD's definition of aid."
In particular, he criticised the metric used by the OECD to measure concessionality, which allows loans with high interest rates to count as aid. "In an era of low interest rates, this can be reached by loans made with no government subsidy whatsoever. Countries nonetheless used to respect the overall intention by refraining from making loans that only narrowly met the metric," he said, suggesting that "if the OECD cannot do a professional job on this, the UN should take over the reporting for international aid flows."
DI said the metrics overstate the economic effort of donors when providing such loans. "The French, Germans and Japanese have most to lose from this calculation being changed," said Tew. If an International Monetary Fund (IMF) reference rate were used instead, for example, many loans would simply cease to qualify as ODA, he said.
The issue of how to define concessionality will be the subject of a meeting in Paris in June, bringing together the IMF, World Bank, aid donors and recipients.