After a meeting of G7 Finance Ministers in Halifax in mid-June, the grants versus loans controversy has finally been resolved. The disagreement has held up replenishment of the World Bank’s International Development Association (IDA) program, which provides concessional loans to some 79 countries.
The deal means that 18-21 per cent of IDA aid will now come in the form of grants rather than loans. Countries whose average per capita income is below one dollar a day will receive almost all their aid in the form of grants. The US had been arguing that 50 per cent of funds should be given as grants, despite the fears of European ministers that without increasing the total amount of money available, the switch to grants would soon exhaust available funds. There have been suggestions that this was the ultimate goal of the Bush administration, taking into account its distrust of international bodies, and its fondness for laissez-faire economic policies.
$23 billion will be made available over the next three years, of which $13 billion will come from new contributions from 39 donor countries – an 18 per cent increase over levels in the previous replenishment. G8 leaders were ambiguous about whether a majority of the new funds would be directed to African nations, leaving the decision up to individual donor priorities and conditional on good governance and the “promotion of economic freedom” by African governments. Donors want to see the World Bank establish a results-based measurement system to “link IDA programs to a country’s development outcomes”.
Civil society organizations have reacted cautiously to the grants move. Some groups have asserted that the shift to grants will not make a significant difference to borrowing countries for another decade. Other commentators have argued that the switch to grants will mean a significant boost to countries, especially those who have seen debt commitments in hard currencies skyrocket after local currency devaluation.
Taken for granted? US Proposals to Reform the World Bank’s IDA Examined, Bretton Woods Project