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Country allocation, levels of concessionality and graduation issues

The Financing for Development outcomes recognize the importance of providing concessional finance to those countries with the least capacity to mobilize other sources of financing and those in “special” development situations, such as the LDCs, LLDCs, SIDS and countries in conflict and post-conflict situations. Specifically, the Addis Agenda notes that the allocation of concessional public finance should take into account: i) a recipient country’s level of development, including income level; ii) institutional capacity and vulnerability; and iii) the type of project to be funded, including its commercial viability. It also notes the special needs of different country groups, in particular LDCs. In addition, the Addis Agenda recognizes the importance of addressing the financing gap that many countries experience when they graduate to middle income country (MICs) status.

Official flows, including ODA and OOF, to countries with the greatest needs

Total net ODA to LDCs amounted to USD 43 billion in 2015, marking an 8 per cent increase in real terms (adjusting for inflation and the appreciation of the US dollar) over 2014. However, preliminary data available for 2016 show that bilateral net ODA to LDCs decreased by 3.9 per cent in real terms compared to 2015, to USD 26 billion in 2016. Bilateral ODA to landlocked developing countries (LLDCs) remained stable in 2015, at USD 15 billion, while ODA to small island developing states (SIDS) increased to USD 3.1 billion, compared to USD 2.7 billion in 2014. 

ODA and concessional finance for middle-income countries

The share of global ODA allocated to middle income countries has declined slightly since the turn of the millennium, from just above 60 per cent to around 50 per cent in recent years, with ODA increasingly allocated to LDCs and other low income countries.  

Development cooperation and structural gaps in Latin America

As in the case of other middle-income regions, Latin America and the Caribbean has seen its share of ODA diminish. The proportion of ODA received by the region has declined compared with other developing regions, as well as relative to its average gross national income (GNI). ODA flows dropped from an average of 0.4 per cent of regional GNI in the 1990s to 0.17 per cent in the 2000s, and the region’s share of ODA dropped from 15 per cent in the to around 8 per cent.

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The importance of ODA for middle-income countries varies significantly. In the majority of countries ODA represents less than 1 per cent of GNI, while for others it represents more than 30 per cent. In Latin America and the Caribbean, ODA represents over 10 per cent of GNI in 2 countries (Guyana and Nicaragua), between 1 and 6 per cent in 10 countries, and below 1 per cent in another 18 countries.
 
Countries with similar income levels are characterized by different economic and social development (such as social protection, education and health-care quality), and financial participation and inclusion, as well as different levels of resilience to economic and social shocks. Poverty rates in middle-income countries in Latin America range from 0.3 per cent to 67.4 per cent. Inequality is also variable, with the Gini coefficient ranging from 0.28 to 0.66. 
 
Income per capita does not necessary reflect a country’s capacity to access other sources of finance. Access to external resources depends on a wide array of factors, such as credit ratings, risk perceptions, external demand, and the size of the economy. Similarly, the ability to mobilize domestic resources depends on factors unrelated to per capita income, such as the level of domestic saving, the degree of financial inclusion and the ability of governments to collect taxes. The data available also reveal that there is no unequivocal relationship between per capita income and institutional development. Empirical estimates show both positive and negative relations between per capita income and institutional development coexisting with different per capita income levels.
 
To overcome the shortcomings of using income per capita as an approach to allocate ODA, the Economic Commission for Latin America and the Caribbean (ECLAC) has proposed a “Structural Gap Approach”.  This approach identifies key structural obstacles that impede sustained, equitable and inclusive growth for middle income countries. It includes 12 indicators focusing on inequality, poverty, debt ratio, investment and saving, productivity, innovation, infrastructure, education, health, taxation, gender and the environment. 
 
The Structural Gap Approach is similar to the Addis Ababa Action Agenda’s emphasis on i) recipient country’s level of development (including income level); ii) institutional capacity and vulnerability; and iii) the project to be funded for allocating concessional finance. It starts from the premise that there cannot be any single classification or criterion that fits for all countries and that the income level cannot be equated with development level, and could allow to move beyond income per capital as the sole ODA allocation criterion. 
Targeting of concessional resources - IDA replenishment
The World Bank Group Group’s International Development Association (IDA provides concessional long term loans and grants to countries with GNI per capita below USD 1,215 (threshold for fiscal year 2016) and several small island economies above this cutoff. 
 
In the context of its 18th replenishment, IDA is adopting a new financing framework to better target concessional resources. This responds to the Addis Agenda’s encouragement of MDB shareholders to develop graduation policies that are sequenced, phased and gradual.
 
Figure 1: Continuum of IDA Financing Terms expands in IDA18 
Source: World Bank Group
 
IDA financing terms are linked to countries’ risk of debt distress, with: grants provided to those at high risk; a mixture of grants and credits to those at moderate risk; and concessional credits to those at low risk. ‘Blend countries’ that have been above the income threshold for more than two years no longer have access to grants, but can obtain financing on ‘blend terms’, which are above concessional levels but still below market rates. ‘Gap countries’  – countries with incomes above the operational cutoff, but not creditworthy for IBRD lending – also have access to blend credits. 
 
Changes in IDA 18 (see Figure 1) include:
 
A greater engagement of IDA in small states (including making the most concessional lending terms now available to all small states), and making official finance on non-concessional terms available for ‘transformational projects’ in blend countries. Such resources will be channeled through the IDA18 Scale-up Facility (SUF).
 
Doubling resources allocated to countries classified by the World Bank as “fragile or in conflict situations,” with the aim of providing USD 2 billion to help refugees and their host communities, and will significantly increase financing for its regional programme. 
 
Changes to IDA’s financing, including a scaled up Crisis Response Window and a new Private Sector Window. 
Support measures for the graduation process of LDCs

The graduation process of LDCs has progressed since the adoption of the Istanbul Programme of Action in 2011. Currently 10 LDCs are at some stage in the process. For three of them graduation dates have been decided by the General Assembly: Equatorial Guinea in 2017, Vanuatu in 2020 and Angola in 2021 (see State of the Least Developed Countries 2016 for more details). However, projections carried out for UNCTAD’s Least Developed Countries Report 2016 suggest that only 16 of the 48 current LDCs are likely to fulfil the graduation criteria by 2021, well short of the target in the Istanbul Programme of Action that half of all LDCs should satisfy the criteria for graduation by 2020.

Levels of concessionality at the project level

The Addis Agenda also commits providers of development finance to take the nature of a project funded into account when determining the level of concessionality. The Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF) had made a recommendation to this effect (see figure), proposing that ‘international public finance should take into account […] the type of investment. Concessionality should be highest for basic social needs, including grant financing appropriate for least developed countries. Concessional financing is also critical for financing many global public goods for sustainable development. For some investments in national development, loan financing instruments might be more appropriate, particularly when the investment can potentially generate an economic return.’

 

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An example of such adjustments of concessionality is the IDA Scale-up Facility, which provides financing on IBRD (and thus less concessional) terms for specific ‘potentially transformational’ projects or programmes to IDA-eligible countries. It is being expanded in the context of the IDA 18th replenishment, and aimed at projects that can help ‘remove critical constraints to development’, or in other words productive investments with strong returns on investments that enhance GDP growth and government revenues.