UN warns of shift from development aid grants to loans

By Sam Ursu

UN warns of shift from development aid grants to loans

Donor agencies are increasingly moving towards a model of providing loan-based “aid” at a time when developing nations are increasingly suffering from excessive levels of debt while simultaneously receiving less overall aid assistance, the United Nations Conference on Trade and Development (UNCTAD) has noted in a report issued on April 11, 2024.

The report entitled “Aid under Pressure” highlighted that in 2022, aid in the form of grants was slashed by 8% to $109 billion while aid in the form of loans rose by 11% to $61 billion. This is occurring amidst a backdrop in which global ODA to developing regions declined by 2% or $4 billion despite a record total of $287 billion being spent on ODA in the same period.

Fig.1. ODA to developing regions declined despite a global ODA record

Source: UNCTAD

Furthermore, the report noted that 40% of the world’s population lives in developing nations where their governments are already forced to spend more on servicing debt than on investing in key development infrastructure such as healthcare or education. And yet, at the same time, donor nations are reducing their overall spend of Official Development Assistance (ODA) on countries most in need while shifting their emphasis to loans instead of grants.

See also: 2023 global ODA spend inched up with lion’s share going to Ukraine

According to the UNCTAD report, three accelerating shifts are rapidly transforming the role, scope, and influence of ODA. The first is that a series of non-stop, overlapping crises is putting extreme pressure on aid budgets at a time when the need for emergency responses is out-competing long-term development priorities. The second key shift is that the least developed countries on Earth are now overwhelmed by their debt burdens, with much of that owed to the same donors that are simultaneously moving towards providing more of their aid in the forms of loans. And the third key shift identified in the report is that overall bilateral ODA is decreasing, especially to the Least Developed Countries (LDCs) and Small Island Nations that need it most.

ODA increasingly used to cover domestic costs of hosting refugees

One specific topic of concern noted in the UNCTAD report is that ODA budgets in OECD-DAC countries are increasingly being retasked to pay for domestic or the “in-donor” costs of hosting asylum seekers and refugees. The report noted that, in 2022, 40% of ODA for “unspecified” recipients was allocated to cover costs incurred by locally hosting refugees and asylum seekers, including increased administrative expenses as well as social infrastructure and services.

Fig.2. ODA to “unspecified” recipients is mainly used for asylum seekers and refugees in donor countries

Source: UNCTAD

This increase on ODA being spent locally is contrasted to an overall drop of 3.6% in ODA spend that went to least developed countries in 2022. However, 3.6% is just the overall number; in two areas of the world that are the most in need of development assistance, Africa and Asia and Oceania, ODA spend was reduced by 4.1% and 3.7% respectively. In total, more than 70 of the world’s poorest countries received less aid in 2022 than in the year prior.

Furthermore, although OECD-DAC members still represent the biggest source of aid to developing countries, their share of ODA is declining. In 2022, DAC members accounted for 61% of ODA to developing countries, down from 76% in 2012.

More loans and less aid to LDCs

At a time when developing nations can least afford to take on new debt, bilateral donors are increasingly shifting to ODA in the form of loans. In the past 10 years alone, the share of loans as part of total ODA has more than doubled for developing nations in Latin America and the Caribbean and now comprises 49% of ODA to those regions. Loans as the share of ODA for Asia and Oceania rose to 40% in 2022 and 29% for Africa.

According to the UNCTAD report, “the growing share of loans as ODA raises concerns in times of widening debt distress and rising interest rates in international markets.” At the same time, the report showed that ODA funding for debt relief action has dropped from 48% of total ODA in 2006 to just 0.2% in 2022 or a paltry $300 million.

The report found that the Least Developed Countries (LDCs) saw their share of ODA fall to just 22.5% of total spend in 2022. Aid provided for all other purposes aside from social and economic infrastructure and services (which is collectively known as “Aid for Trade”) was reduced in 2022, with enormous cuts in areas such as debt relief (-88% from the year prior) and commodity-related aid (-50%). The report noted that 2020 and 2021 were anomalies in that ODA actions to reduce debt burdens were increased, but the overall trend since 2012 has been to cut debt-related assistance by 17% on average every year.

In 2022, debt relief ODA to Least Developed Countries reached the lowest level on record at just $130 million.

Cascading crises are eroding long-term development priorities

Since 2020, a series of geopolitical issues compounded by natural disasters has resulted in a near-permanent crisis mode for aid providers. The response to the pandemic, the war in Europe, sanctions, interruptions in supply chains, rising food and energy prices, tightening financial conditions, and other factors have required ever-increasing emergency responses from ODA with a trade-off of decreases in funding longer-term development projects and infrastructure.

According to the UNCTAD report, over the past decade, humanitarian aid has been the fastest-growing component of ODA. In 2012, just 9% of ODA was in the form of humanitarian aid, but that level rose to 18% in 2021. Although 2022 saw a small decline, humanitarian aid still represented the third largest component of ODA.

A staggering 97% of the world leaders who spoke at the 78th Session of the UN General Assembly in 2023 addressed the issues of inflation, food insecurity, increasing debt burdens, and soaring energy prices. Despite this, aid to developing countries related to food, energy, and debt has been decreasing since 2016 and comprised just 9% of ODA in 2022.

In short, unless OECD-DAC donors can step up to the plate and meet their 0.7% of GNI targets alongside a renewed commitment to implementing long-term development strategies beyond “Aid for Trade,” the future of the world’s neediest people is grim. Poorer countries are being crippled by unsustainable debt levels as they struggle to recover from geopolitical shocks all while bilateral ODA continues to decrease.

Should reforms to strengthen the effectiveness of ODA not be immediately implemented, the UNCTAD warns that achieving the goals of achieving global prosperity and sustainable development are at risk of failing.