This important issue has been left unresolved ever since the DAC decided to switch to a grant equivalent system for reporting loans in 2014. According to our information, both parties are set to meet early next week and are aiming to reach an agreement by June this year. This means the next few weeks will be key in making sure the new rules set the best incentives for the provision of much-needed ODA resources to eradicate poverty and tackle inequalities in some of the world’s poorest countries.

Not a new issue

At the 2014 High Level DAC Meeting, members which include the world’s major providers of aid agreed to change the way loans are reported following the switch from a system based on cash flows to a grant equivalent system. Donors would no longer count the full amount of the loan as ODA and would subtract repayments further down the road. Instead, under the new system, donors are rewarded upfront for the risk they take with their new loans as soon as they are granted. The greater the risk profile of the loan, the more these can be reported as ODA.

Former rules for reporting debt relief should have expired in 2017 already, but they did not. As a consequence, donors are still allowed to report any relief granted on those loans as ODA. This could lead to double-counting and could inflate aid figures. The DAC itself has recognised this problem (see Annex 2, Paragraph 14). However, to this day the DAC has still not been able to agree on the implementation rules that would fix this anomaly.

A matter of fairness

Since no major debt restructurings have occurred in recent years, the risk for aid inflation has been minor. Yet, as the response to Covid-19 is adding to the massive pressure from unsustainable debt that many developing countries were already facing before this crisis, we can expect to see more debt relief granted in the near future. Without fixing the rules, these much-needed relief operations risk inflating aid levels as they did in the past. To avoid aid inflation and to put incentives in place to make sure developing countries get the resources they need to deal with the Covid-19 crisis, we firmly believe that debt relief on ODA loans should be excluded from ODA reporting.

While DAC members have agreed that “the cost of risk should not be double counted”, it seems some members are continuing to push for an additional ODA bonus for debt relief. Part of the justification for this is the need to create incentives to grant debt relief. This argument is not very convincing, as in many cases – including the recent debt relief initiative for Somalia – creditors grant debt relief only when borrowers face unsustainable debt burdens and are genuinely insolvent. In other cases, the Paris Club has granted debt forgiveness based on geopolitical considerations. Incentives derived from ODA accounting have never played a significant role.

End in sight?

As the DAC is approaching the end of a long and seemingly difficult discussion on how debt relief should be counted as ODA, now is the time to get things right and to protect the unique and precious character of ODA, as well as its credibility as a measure of rich countries’ efforts to support the most vulnerable. While all other sources of development finance are drying up in developing countries in the wake of Covid-19, aid remains the only stable resource.

The DAC needs to do everything in its power to increase the amount of aid flowing to affected countries without creating additional financial liabilities. In most cases, this means grant-based finance. As well as making sure the rules to count debt relief as ODA are a fair reflection of donor effort, the DAC should also be asking itself what incentives can be put in place to encourage its members to use grant-making, which would also relieve pressure on already unsustainable debt levels.

Given the importance of this issue, it is worrying that there is little transparency on both the calendar and the content of the upcoming discussions. This makes it very difficult for independent experts and aid advocates to assess any proposals on the table or to analyse their impact.

As legitimacy, transparency and accountability are three fundamental principles for ODA, the DAC owes it to its citizens to play its cards openly so that stakeholders are able to assess the impacts of its deliberations. Since 2018, the DAC has made the commitment to “provide space for consultation with CSOs before key decisions are made”. In the spirit of this commitment, civil society organisations (CSOs) are counting on the DAC to organise a dialogue on this matter.

Ahead of the meeting between the DAC and Paris Club representatives, a group of 25 CSOs – members of the DAC-CSO Reference Group – sent a letter to the DAC Chair and DAC Delegates addressing some critical aspects that need to be taken into consideration in the discussions and negotiations with the Paris Club.

Download the complete letter.