Development aid drops in 2018, especially to neediest countries - OECD adopts new methodology for counting loans in official aid data

In 2014, members of the OECD’s Development Assistance Committee (DAC) decided to modernise the reporting of concessional loans by assessing their concessionality based on discount rates differentiated by income group, and introducing a grant-equivalent system for calculating ODA figures.  Instead of recording the actual flows of cash between a donor and recipient country, DAC members agreed that the headline figure for official development assistance (ODA) would be based on the grant equivalents of aid loans, i.e. the “gift portion” of the loans, expressed as a monetary value [1].  The grant equivalent methodology would provide a more realistic comparison of the effort involved in providing grants and loans and encourage the provision of grants and highly concessional (or soft) loans, especially to low-income countries.

In 2016, DAC members also decided to apply the grant equivalent measure to other non-grant instruments, such as equities and private sector instruments (PSI) to better reflect the donor effort involved.  Whilst DAC members agreed on a methodology for counting the grant equivalent of official loans and loans to multilateral institutions, they have yet to reach agreement on how to calculate ODA grant equivalents for equities, PSI and debt relief. Pending an agreement, DAC members have decided on provisional reporting arrangements for PSI whereby either contributions to Development Finance Institutions (DFIs) and other PSI vehicles may be counted at face value (using an institutional approach), or loans and equities made directly to private sector entities may be counted on a cash-flow basis (using an instrument approach) [2], with any equity sale proceeds capped at the value of the original investment . DAC members will continue to work with the support of the OECD Secretariat in 2019 to find an agreement, and make the reporting of PSIs and debt relief consistent with the new grant equivalent method. 

This change in the ODA methodology takes effect in 2019 with the publication of preliminary 2018 ODA.

The implementation of the ODA grant equivalent methodology adds 2.5% to 2018 ODA levels for all DAC countries combined, with impacts on individual country figures ranging from 40.8 % for Japan, 14.2% for Portugal and 11.4% for Spain to -2.7% for Korea , -2.8% for France, -2.9% for Belgium, and -3.5% for Germany. 

The new “grant equivalent” headline ODA figures are no longer comparable with the historical series on “cash basis”.  In the cash basis, the net capital flow over the lifetime of a loan is nil because repayments of principal are deducted when made; interest payments are not taken into account [3].  In the grant equivalent method, both principal and interest payments are taken into consideration, but discounted to the value they represent in today’s money. 

[1] For further information see: www.oecd.org/dac/financing-sustainable-development/development-finance-standards/official-development-assistance.htm.

[2] For further information see: https://one.oecd.org/document/DCD/DAC/STAT(2018)9/ADD3/FINAL/en/pdf

[3] Deducting interest payments yields a measure called “net transfers”.

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