Loans versus grants
When President George W. Bush visited the World Bank last July, he noted that prosperous countries have a responsibility to work in partnership with developing nations to remove the greatest obstacles to development, including illiteracy, disease, and unsustainable debt. Toward fulfilling this responsibility, President Bush proposed that the World Bank and other multilateral development banks dramatically increase the share of their funding provided in the form of grants to the poorest countries, as opposed to loans.

The principle underlying the President's proposal is a simple one. Development loans to assist revenue-generating sectors such as power and telecommunications make good sense. But the social-sector investments most vital to improving the lot of the world's poorest nations -- investments in education, health, nutrition, water supply, sanitation, etc. -- do not generate the revenues necessary to service loans. Piling up debt from loans that these countries cannot pay off only compounds the problems of the

poorest nations. If our goal is to assist these countries to meet the basic human needs of their citizens and to lay the essential groundwork for further development, then grants are clearly a more effective form of multilateral aid in the social sector.

Take, for example, the effort of the World Bank's International Development Association (IDA) to address the HIV/AIDS pandemic in Africa. The Multicountry AIDS Program (MAP2) is a framework arrangement providing for a series of independent IDA credits/grants with a total value of $500 million to be committed over the next three years in Africa. Unfortunately, IDA 's proposal for MAP2 would allow for only a maximum of 20 percent (or up to $100 million) of total financing to be provided in the form of grants instead of loans. The U.S. believes such assistance should be delivered on entirely grant terms. How can we expect countries to take on additional debt to fight the scourge of HIV/AIDS? There are no revenue streams directly associated with controlling the spread of HIV/AIDS or treating its victims. Development assistance on grant terms in such cases is the only viable alternative.

In the case of Tanzania, the World Bank plans total IDA "base-case" lending of $800 million over the 2001-2003 period. Of this total, between 60 and 79 percent ($485-630 million) is for social-sector programmes. What income-generating capacity will result from the $100 million planned for primary education, or $50 million planned for the Social Assistance Fund, or $40 million planned for forest conservation, not to mention the $20 million planned for HIV/AIDS activities? Indeed, the only clearly revenue-generating project is the $170 million for the Songo Songo Gas Development and Power Generation project!

Despite the common sense of the U. S. approach and the common goals of the international donor community, whose members genuinely want to help the least developed countries, there has been a surprising and disappointing lack of support for the President's proposal. The main argument against the plan is that the viability of the International Development Association (IDA), the low-cost lending arm of the World Bank, would be undermined if a significantly greater percentage of the IDA's funding to poor nations were shifted to grants. Because the IDA relies on loan repayments to finance new assistance, the reasoning goes, it would not be able to sustain the costs of the President's plan.

This concern is wholly unwarranted, however. The President 's plan would maintain the current level of funding for IDA assistance that comes from repayments of previous loans (about 45 percent). Moreover, lost loan repayments brought about by the proposed shift to grants would amount to only a modest percentage of the IDA's cumulative lending and would be phased-in over an extended period of time.

More importantly, the value of the President's proposal is that these foregone loan repayments actually represent benefits to the poorest countries. Grant money that would have eventually been repaid to the IDA had it been given out in the form of loans cannot accurately be characterized as "lost" when it provides real financial benefits for the desperately poor countries receiving the grants. Under President Bush's plan, such countries would be able to use grant money for essential social-sector needs, such as combating HIV/AIDS, without being further pulled down into the quagmire of unsustainable debt.

Given the opposition among donor nations to President Bush's proposal, the grants issue has become a sticking point in talks that aim to replenish funding for the IDA and the African Development Fund (AfDF). However, the United States has shown great flexibility in an effort to come to a meeting of the minds. We have come down from our originally preferred level of 50 percent grants and agreed to examine alternate approaches in striving for final agreement. In addition, we have proposed an 18 percent increase in our own contribution to both the IDA and AfDF, demonstrating our support for the World Bank and the regional development banks. The concept of relying on grants for aid to the poorest nations is hardly new. By 1999, the grant element of the official development assistance provided by the leading 22 donor countries was 95 percent. For assistance to the least developed countries it was over 99 percent. Considered in this context, it seems peculiar for major donor countries to oppose grants from the multilateral development banks when these donors' own development programmes are virtually all grant-based.

As President Bush told the World Bank, "America is committed to walking alongside leaders and nations that are traveling the hard, but rewarding, path of political and economic reform." We want to demonstrate this commitment by increasing the efficacy of the aid for social-sector needs that flows to countries struggling to raise themselves up from unspeakable poverty. We hope that our friends in the international donor community will choose to walk with us on this worthy path.
- posted by Mark Pane @ 5:55 PM