Official Development Statistics
Tuesday, 23 August 2011 14:38
In order to demonstrate the impact that debt relief is having on development aid it is necessary to examine how the definition of development assistance has changed to incorporate debt relief figures.
ODA is a record of cash that is transferred to multilateral agencies (IMF, World Bank, etc) or to developing countries. This cash must be used for development, as broadly defined, and must contain at least a 25% grant element. The cash that is recorded is net of any repayments of loan capital. This would mean that over the full life of a loan, the total ODA transfer would be recorded as zero. Interest payments on loans are not included in these figures.
There are three exceptions made for the cash rule when compiling ODA statistics. The first is promissory notes issued by governments to multilateral development banks. It is assumed that the promissory note is as good as cash. This does raise the issue of the timing of ODA flows, but does not change the total cash value of ODA. In any case, cash can sit in the vaults of the IMF for some time after the cash is recorded as ODA. This exception is not a cause for concern.
The second exception relates costs associated with such things as technical assistance, i.e. what it costs donors to provide advice to developing countries. This exception is worth noting, due to the high proportion of technical assistance that is measured at cost to donors.
These costs will include large amounts that are of benefit to donors not developing countries, and so should be excluded from the measure of ODA.
The third exception relates to debt relief. Debt relief is recorded not at cash value, but at present value for the purpose of ODA statistics. There is no way to describe mixing present values with a measure that for almost 50 years has recorded only cash values than as anything other than accounting trickery. The ODA statistics relating to Ghana for 2004 will be widely understood as a net cash transfer to Ghana of $1.4 billion. $1.3 billion of this total is not a cash transfer.
The present value of debt relief is arrived at by discounting all future cash flows. This is a theoretical exercise and does not represent cash in the bank now. This is not to say that it is of no use. The simplest way in which to understand the calculation of present values is to understand the calculation as the reverse of a loan.
In order to purchase a house worth $100,000 at a 5% interest rate over 25 years, you would take out a mortgage which you would repay at $519.27 a month. To borrow $100,000 will cost $6,231.24 ($519.27 x 12 months) a year. If the loan is cancelled, the benefit you receive will be $6,231.24 a year for 25 years. The present value at 5% interest is then $100,000. This exercise is important for debt relief due to the many years of refinancing previous loans, and changes in the interest rates (or discount rates) used to undo the loan calculation.
Translating this example to Ghana, we assume that they have been given a reduction in debt service costs of $6,231.24 a year for 25 years. This has been recorded as $100,000 development assistance in 2005. Of which Ghana has only $6,231.24 to spend in 2005. You can’t buy a $100,000 house with $6,231.24 a year unless you take out a mortgage. Or to scale the example up to fit Ghana’s needs, you can’t build power stations with money saved from debt service payments. But you can build them if you issue new government debt.
Present values, as noted above, are based upon the assumed ability to turn future cash flows into present cash flows. If this is not possible, then there is little usefulness in a present value calculation.
As it was never the intention that Ghana issue new debt, if we are to assess the benefit gained from debt relief, we must disregard the official total ODA figures and combine the Net ODA cash figures with the actual cash impact of debt relief on the cash value of service payments.
The paper ‘The HIPC Initiative and Poverty Reduction in Ghana: An Assessment’v usefully lays out a comparison of debt service payments made by Ghana and net foreign aid received by Ghana or Net ODA for the period 1971 to 1997. The paper comments that in 1997 the total debt service payments made by Ghana exceeded total Net ODA. Below is a continuation of this analysis, adjusting for the removal of non cash debt relief and extending the period to 2005. The original paper produced results on a per capita basis, as we are here concerned only with the net transfers the figures used are based upon total cash flows.
The following page contains three charts which present the results of this exercise.
Chart 4.1 Development Data Group, The World Bank. 2006.
Chart 4.2 Development Data Group, The World Bank. 2006.
Chart 4.3 Development Data Group, The World Bank. 2006.
The first chart above (Chart 4.1) extends the original chart to include the years 1998 to 2005. What we can see from this chart is that debt service payments until the mid 1980s were almost identical to Net ODA flows, the net cash effect of debt payments and of ODA was zero. Only from the mid 1980s do we see ODA begin to rise above debt service payments. From the mid 1990s ODA flows accelerate upwards as a result of debt relief. The figures relating to debt relief are the noncash present value calculations. For a true cash picture we must remove debt relief.
Turning to the second chart (Chart 4.2) we can see the impact of removing noncash debt relief. The impact, as indicated above is that far from there being no new money involved in debt relief, the consequence of debt relief replacing cash in development spending is that Ghana becomes a net exporter of cash in 2004. The final chart presents only the net position, cash ODA less debt service payments. That debt service payments closely match net cash ODA indicates the limitation of debt relief.
This is a situation that has been commented upon by the IMF, the World Bank and the DAC (Development Assistance Committee) members themselves. Debt relief, technical assistance and other items have increasingly crowded out cash transfers to developing countries, while offering, as demonstrated above, no new source of funding.
‘It would be indeed highly damaging to the developing countries that the debt reduction initiative should crowd out other ODA.’vi
Indeed this situation may be highly damaging for Ghana. If Ghana is prevented from issuing new debt then the situation it finds itself in remains unchanged – insufficient capital available for investment and complete dependency upon Western donors.
Throughout the period covered in the charts above donor governments and development banks have been making loans, refinancing loans and recently forgiving loans. All these activities have been accompanied by various forms of conditions, and impositions of reforms. The financial benefit Ghana receives remains largely unchanged. The actual tangible benefit may be the new moral purpose that debt relief has recently provided to development banks and Western government rather than any financial gains received by developing countries.
What has changed over the past decade is Ghana’s ability to profit from an expanding global economy. For all the talk of placing Africa on the agenda at the G8 conferences it is precisely the possibility Ghana will profit from debt relief that worries world leaders. The economic situation of developing countries has been placed firmly on the agenda today. But this agenda is dominated by moral posturing rather than support for the development aspirations and economic requirements of developing countries. 50 years ago Ghana was an example to other African nations as it gained its independence from the British. It would be only fitting if Ghana today becomes the first HIPC country to disregard the moral posturing of Western governments and take advantage of its new found credit worthiness to gain access to cheap loans.