How Concessional is Aid Lending?

Abstract

The method used by Development Assistance Committee countries for measuring the concessionality of aid loans has remained unchanged for nearly 20 years. It was designed to measure the net cost of aid to donors not the net benefit to recipients. The discount rate used takes no account of changes in the value of the currency of the loan or of changes in prices for goods traded by recipient countries. Furthermore, it does not consider the implications of tying of aid or of policy conditionality. This paper suggests an alternative measure that shows the real net benefit of aid finance to recipients. It argues that the discount rate used by the Development Assistance Committee is too high and that changes in the value of the currency in which a loan is taken out can be important. Nevertheless, real rates of interest for developing countries remain surprisingly high despite low nominal rates due to falling prices of traded goods. This finding has implications for the future real cost of debt service to recipients.

The Muslim World in the 21st Century

“…Killick 1996Killick , 1997Hermes and Schilder 1997) to mean conditions imposed by the donors on foreign aid. 9 The recent easing of interest rates by bilateral and multilateral agencies does not help in the economic development of the recipient countries either 10 (Potts and Chung 2008). Conditions on foreign aid, especially in the case of bilateral aid, may require the recipient country to use aid (loans as well as grants) in approved sectors, projects, or products, to purchase material only from the donor country (or from its 'allies'), or to hire consultants/expertise from the donor country.…”

“…The World Bank and the IMF loans are now categorically tied to transparency and poverty al- 9 Readers may like to look at two very interesting works, Chomsky (1992, the new edition of an earlier work offering, among others, an elaborate analyses of political use of foreign aid); Reinert (2008, offers an analyses of the commercial roles of 'aid conditionality'). 10 This is because "declining prices of traded goods increase the opportunity cost of loan repayment … which in turn has implications for the future real costs of debt repayment for loans from all sources" (Potts andChung 2008, p. 1033). 11 After almost 50 years of aid politics the World Bank published in 1998 an important self-evaluative report entitled Assessing Aid: What Works, What Doesn't, and Why (World Bank 1998).…”