European development loans: At what cost?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

European countries’ moneyt spent on foreign aid – and more specifically ‘official development assistance' – is artificially boosted due to flawed measurement tools. One of the main reasons for the lack of progress on this issue has been the dubious role of the EU, writes Joren Verschaeve.

Joren Verschaeve is a PhD candidate at the Centre for EU Studies, University of Ghent.

The EU institutions, France and Germany have recently been accused of boosting their aid budgets by reporting (high) profit-making loans to developing countries as ‘official development assistance’ (or ODA). This is made possible due to outdated and ambiguous international rules on what counts as ODA.

ODA was introduced by the Organisation for Economic Co-Operation (OECD) and is used as a tool to measure development efforts of donor countries. A transaction to a developing country counts as ODA if: it is provided by official agencies; aims at the promotion of economic development and welfare; and is concessional in character.

This definition also applies to development loans, but only if these contain a grant worth at least 25% of the loan.

The reference rate for such a loan was set in the early 1970s. But in recent years, interest rates are historically low, in turn making it rather easy for donors to provide loans that are ODA-eligible. In fact, even high profit-making loans can be reported as ODA, if the repayments are spread over a long enough period of time. Donor countries end up killing two birds with one stone: increasing their ODA figures and making profit.

This is exactly what the EU but also France and Germany have been doing for the past couple of years. In 2012 alone, developing countries repaid €542 million of interest to these donors – respectively EU (€248m), France (€120m) and Germany (€174m) – on loans that are reported as ODA.

The EU says that ODA eligible loans have a catalysing impact on developing countries. Not only does the European Investment Bank (EIB) provide these loans to countries that otherwise have no access to long-term capital; they are also offered at a much lower interest rate than the partner countries would normally attain on the capital markets.

But the EU’s enthusiasm is not shared by the rest of the development community. The European Network on Debt and Development (EURODAD) published a lengthy report in which they pointed at the detrimental effects of allowing donors to report profit-making loans as ODA. More specifically, it was argued that in an era of declining global aid budgets, the current ODA definition gives an incentive to scale down the use of development grants.

Also within the OECD, the issue of ODA eligible loans has spurred debate. The organisation’s secretariat for development cooperation (OECD-DAC) and other members strongly disapproved this practice since it does not require a donor effort. On the contrary, donor countries clearly benefit from these loans, undermining the credibility of the whole concept of official development assistance.

The OECD-DAC undertook several attempts to update its measurement on concessionality but, so far, these efforts have been unsuccessful.

One of the main reasons for the lack of progress on this issue has been the dubious role of the EU. While the EU generally considers itself a leading and benevolent development actor, it never showed a real intention to reconsider its stance on concessionality.

On one occasion, the EU even tried to bypass the OECD-DAC by calling a coordination meeting in Brussels on this issue, with the ultimate aim of reaching a European stance in support of its own position.

The EU should know that it is playing with fire. If the EU continues to block the negotiations on concessionality – and gets away with boosting its ODA figures – it is not unthinkable that other members will reconsider their stance on this issue.

Second, the EU is jeopardizing the credibility of the ODA concept and even the OECD-DAC. This is problematic because this secretariat is generally considered to be an important stakeholder in the post-2015 framework, for example for the measurement of donor efforts. Therefore, it is currently undertaken efforts to update the ODA concept, but these are doomed to fail without an agreement on the issue of concessionality. 

Finally, the EU insufficiently takes into account the downsides of development loans. While nobody denies the fact that these types of loans can have a positive impact on development, it seems that the EU’s primary concern is to boost its own ODA figures in the run up to 2015. 

Therefore, it is time for the EU, for France and for Germany to reconsider its stance on concessionality. After all, what is the purpose of being one of the world’s largest providers of development aid if the concept itself is about to lose its credibility?

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