IFI governance

Background

Grants or Loans? The Full Debate

6 October 2004 | Minutes


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The five speakers at this meeting were: Francois Bourguignon, Chief Economist and Senior Vice President World Bank; Hiroto Arakawa Director General of the Development Assistance Strategy Department; Pierre Jacquet, the executive director of strategy from the Agence française de développement; Wolfgang Kroh, a member of the Board of KfW Bankengruppe; Matthew Odedokun, technical adviser of the Debt Management Office in Nigeria and John B. Taylor, Under Secretary for International Affairs, U.S Department of the Treasury. Nancy Birdsall of the Center for Global Development chaired the session.

The session considered the arguments surrounding the provision of grants or loans by IDA. It considered the recent call by President Bush for the World Bank and other development banks to provide more of their funds to the poorest countries as grants, in recognition of the pivotal role that grants play in providing prudent financing for pressing development needs. In particular the case for grants or loans was discussed in relation to issues such as debt sustainability in HIPC countries; the issue of re-flows; the role of non-concessional and private sector loans and the market; and the role of good policy in recipient countries, rather than the simplistic split between grants or loans.

Pierre Jacquet pointed out that the use of loans has steadily declined since the beginning of the debt crisis. He believes that the optimal combination of grant/loans is key to this question. He made four main points: That debt sustainability is a central issue, and a pragmatic approach is needed to address this; Classifying countries between grants or loans is dangerous, and that countries that only receive grants will be diverted from international financial markets; Aid agencies make cheaper ‘market loans’ than the market, and that the appropriate combination of grants and loans should be done by aid agencies, not the market; There is a real need to differentiate between ODA instruments in considering this question.

John Taylor based his talk on the premise that ‘good politics equals good economics’. He also stated that there are many instances in which loans are wholly inappropriate, for instance that of HIV/AIDS. Furthermore, in the case of debt sustainability, grants are far more likely to lower the debt levels. He emphasized the need for debt relief to complement grants.

Hiroto Arakawa referred to the Dollar and Burnside paper that essentially concludes that “the impact of aid on growth is positive with good polices”. He asserted that the way forward is how to secure the incentive of the recipient countries for the efficient use of development funds, both ‘ex-ante’ and ‘ex-post’.

Wolfgang Kroh stated that whilst the Monterrey conference committed to increasing net flows by 30%, this was still insufficient to meet the Millennium Development Goals (MDGs). He also pointed out that half of European Commission aid is in fact going to middle income countries, and that HIPC countries are struggling to obtain foreign finance.

Matthew Odedokun stressed the significance of efficiency on the part of recipients.

Francois Bourguingon expressed that credit worthiness has little to do with income per head. Moreover he stated that social spending is insufficient to meet the MDGs, and that financing infrastructure is also key. He raised the question of what instruments or policy should be devised in countries where aid has been unsuccessful, and also pointed out that debt forgiveness would in fact reduce IDA’s resources.

Nancy Birdsall underlined the importance of IDA remaining a strong player in this field.