6.8 Financial terms of official development assistance commitments
See Table 6.8 hereCommentary
About the data
Definitions
Data sources
By definition, official development assistance (ODA) must have a grant element of at least 25 percent. In recent years many bilateral donors have shifted their aid programs away from loans and now award all their ODA in the form of grants (figure 6.8a). Belgium, Denmark, the Netherlands, and the United Kingdom have either phased out or greatly reduced their loan programs over the past decade, while others, such as Australia, have maintained an all-grant program. One reason for the increasing share of grants has been the rising expenditures reported by Development Assistance Committee (DAC) members on emergency and humanitarian aid and refugee relief. Loans remain important, however, because such countries as France, Japan, and Spain, which have large concessional loan programs, have been rapidly increasing their aid in recent years.
The pattern of aid has also been changing in other ways. Among these changes is the decline in the share of ODA going to multilateral organizations. Almost 35 percent in the early 1980s, when the regional development banks were rapidly expanding their operations, this share had fallen to about 30 percent of ODA commitments by DAC donors in 1993–94. Because contributions to multilateral organizations take the form of capital subscriptions or outright grants, the decline in these contributions has affected the distribution of ODA commitments between loans and grants.
The proportion of untied aid has increased. Aid that is tied obliges recipients to purchase goods and services from the donor country or from a specified group of countries. Partially untied aid allows procurement from the donor country and most developing countries. Untied aid has no such restrictions. Tying arrangements may be justified on the grounds that they prevent a recipient from misappropriating or mismanaging aid receipts—they may help to keep targeted aid on target. But to the extent that they prevent recipients from obtaining the best value for their money, they reduce the value—and thus the efficiency—of the aid received.
About the data
Like other data on ODA in this section, information on the financial terms of ODA commitments is furnished by DAC members. The loans and grants reported here are part of bilateral aid programs and do not include contributions by donors to multilateral institutions. Nor do they include the grants and loans to aid recipients made by the multilateral institutions from these contributions.
The terms of ODA loans are used to determine their grant element, which, according to the DAC definition of ODA, must be at least 25 percent. The grant element measures the concessionality of the loan: the difference between the face value of a loan and its present value when discounted at an interest rate below the market rate over the life of the loan. The market rate is conventionally taken as 10 percent in DAC statistics. Thus the grant element is nil for a loan carrying an interest rate of 10 percent, 100 percent for a grant, and somewhere in between for a soft loan made at less than 10 percent interest. Longer grace periods and longer maturities increase the grant element of loans.
• Grants are the share in total ODA of transfers made in cash, goods, or services for which no repayment is required.
• Grant element reflects the concessionality of a commitment’s financial terms: its maturity, grace period, and interest rate.
• Maturity is the date on which the final repayment of a loan is due and, by extension, a measure of the scheduled life of the loan.
• Grace period is the interval between the time a loan is made and the first repayment of principal.
• Interest rate is the cost of borrowing funds, expressed as an annual percentage.
• Untied aid is the share of ODA under which associated goods and services may be fully and freely procured.
Data on aid are compiled by DAC and published in the DAC chairman’s report, Development Co-operation. The OECD also makes its data available on diskette and magnetic tape and on the Internet.
Sect_6A.htm - top_6Back to top
Back to Contents