EU Aid Donors to Have Misused High-Interest Loans

Written by | Tuesday, January 21st, 2014

Europeans donors have reportedly profited from high-interest loan and aid budgets. As budget for development assistance is increasing tightening, some EU members opted out for applying outdated and ambiguous international standards including high-interest loans to poor economies in their annual official development assistance (ODA) figures.
The European Network on Debt and Development (Eurodad) has recently published a report saying that poor economies face interest payments of almost 660 million euro to Europe annually. Jeroen Kwakkenbos, policy and advocacy officer at Eurodad, emphasized that making developing economies spend such large amounts of money on interest payment reduces budgets for improving health and education for the most impoverished ones. Mr Kwakkenbos added that rules need urgent changes to prevent donor agencies from providing credit under “usurious” conditions.
Eurodad says that the way concessionality is defined by the Organization for Economic Co-operation and Development (OECD) allows donors impose high interest rates on development loans. The OECD development assistance committee defines exactly what spending can be included in ODA. The organization also publishes detailed figures on the provision of development aid by its members. Loans can be included in ODA if they have a concessional character and consist of a grant element of minimum 25 percent.
According to Eurodad, the OECD should brush up its methodology and metrics in order to keep track with today’s context of low interest rates. The advocacy also recommends to use a more relevant reference rate in lieu of the current 10 percent in order to prevent donors from including hard loans in ODA. Mr Kwakkenbos added that if finance can be accessed at low interest rates, donors could provide ODA loans without any public subsidy. In his opinion, reporting must be overhauled to deduct interest payments from metrics and only the grant element should be reported as ODA. Moreover, he believed that the current way foreign aid is reported creates a distorted picture of “donors’ efforts”.

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