Commitments and special terms on ODA to LDCs

All developing countries are eligible for ODA until they exceed the high-income threshold determined by the World Bank for three consecutive years. Special commitments have been made regarding ODA to LDCs:

  1. Commitment to provide 0.15-0.2% of GNI in ODA to LDCs

There is a longstanding commitment by developed countries, reiterated in the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda of the Third International Conference on Financing for Development and the Programme of Action for the Least Developed Countries for the Decade 2011-2020 (Istanbul Programme of Action), to provide the equivalent of 0.15 to 0.20 per cent of their gross national income (GNI) in the form of ODA to LDCs (in parallel to a commitment to provide the equivalent of 0.7 per cent of GNI in ODA to developing countries).  A large share of ODA is provided by members of the Development Assistance Committee (DAC) of the Organization for Economic Co-Operation and Development (OECD).  In 2016, only 6 of the 29 DAC countries fulfilled this commitment. ODA from DAC countries to the least developed countries expressed as a percentage of provider countries’ gross national income remained at 0.09 per cent (OECD Development Co-operation Report, 2018). For more information, see Istanbul Programme of Action; Report on the Comprehensive High-level Midterm Review of the Implementation of the Istanbul Programme of Action for the Least Developed Countries for the Decade 2011-2020; OECD Development Co-operation Report, 2018

2. Grants and loans

In the 1978 Recommendation on the Terms and Conditions of Aid, DAC members agreed on a series of measures designed to improve the overall financial terms of aid, either by increasing the share of grants (transfers made in cash, goods or services for which no repayment is required), or by reducing the interest rate or lengthening the repayment period of loans.  According to the recommendation, the average grant element in the ODA to LDCs should be either 90 per cent of a given donor’s annual commitment to all LDCs or at least 86 per cent of the donor’s commitments to each individual LDCs over a period of three years. For other developing countries, the norm is that 86 per cent of ODA commitments should be delivered through grants. Data from the OECD’s Creditor Reporting System show that in 2017 approximately 82% of ODA commitments and 90% of disbursements by DAC countries to LDCs were in the form of grants.

Some countries and organizations have special terms for LDCs in concessional loans:

  • Republic of Korea: LDCs have the most favourable conditions, including lower interest rates and longer repayment periods, in the loans provided by the Economic Development Cooperation Fund of Korea, administered by the Export-Import Bank of Korea and the Ministry of Strategy and Finance.
  • Japan: LDCs have the most favourable terms within the Japanese ODA Loans.
  • Asian Development Bank: LDCs that are no longer low-income countries and that lack creditworthiness are provided concessional assistance only (as opposed to  blended finance for countries of similar income that are not LDCs); countries that are no longer low-income countries but that have adequate creditworthiness have access to blended finance (as opposed to ordinary capital resources only countries with a similar level of income that are not LDCs). See Asian Development Bank (2018), “Classification and Graduation of Developing Member Countries”, Operations Manual Section A1, Policies and Procedures, updated on 5 January 2018.

3. Untied aid

Tied aid is defined as “official grants or loans that limit procurement to companies in the donor country or in a small group of countries”. Tied aid “often prevents recipient countries from receiving good value for money for services, goods, or works” (see “Untied aid”, OECD). Untying aid, that is, removing those limitations, reduces transaction costs and improves ownership by recipient countries. In 2001, OECD-DAC members adopted a Recommendation to untie ODA to LDCs. The Recommendation covers most forms of ODA, but excludes free-standing technical cooperation, and it was left up to members as to whether they could untie food aid. The 2005 Paris Declaration on Aid Effectiveness reiterated the Recommendation and envisaged that progress in untying be monitored. The Recommendation was subsequently amended and now also covers heavily indebted poor countries (HIPCs) (see Revised DAC Recommendation on Untying ODA to the Least Developed Countries and Heavily Indebted Poor Countries)In 2016, 76 per cent per cent of total bilateral ODA to the LDC/Heavily Indebted Poor Countries group was covered by the recommendation. The OECD conducts annual reviews of progress in the implementation of the Recommendation. Key findings of the 2018 Report on the Untying Recommendation (OECD) were:

  • “Most members report as untied all or almost all of their ODA covered by the Recommendation. The share stood at 88% in 2016, an increase of 5.7 percentage points compared to 2015. However, a few donors continue to fall short of their untying commitments. The DAC should invite these Members to undertake measures to honour their commitments.”
  • “The adherence to transparency provisions, intended to address concerns that de jure untied aid might remain de facto tied, is mixed. The reporting on ex post contract awards has been marked by a significant improvement in 2015 and 2016. However, adherence to ex ante notification reporting remains very weak.
  • “A large part of aid contracts continue to be awarded to companies from the donor country awarding the contract. In 2015 and 2016, 65% of contracts were awarded to companies in the donor country.
  • “Looking at all bilateral ODA beyond that covered by the Recommendation (i.e. all categories and all recipients), DAC members continue to sustain an improved performance on untying ODA in line with their Accra and Busan commitments.”

According to the OECD Development Co-operation Report, 2018, “While 22 DAC members untied between 90% and 100% of ODA covered by the recommendation, a few donors continue to fall short of their untying commitments. The untying ratio for Korea has substantially increased, from 49.1% in 2015 to 67.1% in 2016, but a recent peer review found that the percentage of Korea’s ODA untied in the LDCs in 2015 (45.9%) was below the average for its total ODA (48.7%). Portugal’s share also improved, increasing the share untied to 55.4% in 2016 from 38.9% in 2015. After significantly improving from 24% in 2014 to 44.2% in 2015, the Czech Republic’s share of untied aid decreased to 34.2% in 2016. Austria’s share dropped sharply from 84.8% in 2015 to 26.9% in 2016. The level of Poland’s untied aid continues be particularly low at 2%.”

From the archives: Untying aid for LDCs: Trends and implications (2012)