While it has managed to keep its purse strings relatively loose for foreign aid despite its tight financial situation, Japan has cut back on “untied” loans — loans with no strings attached — to developing countries in recent years.
According to data compiled recently by the Japan Bank for International Cooperation, untied loans accounted for 83.6 percent of the 1.05 trillion yen worth of yen loans extended during the fiscal year that ended on March 31. The percentage was the lowest in 10 years.
The JBIC is a government-affiliated aid bank created in October through the merger of the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund.
Contracts for infrastructure and other projects funded by untied loans are awarded through international competitive bidding. “Tied” loans, on the other hand, are extended on the condition that contracts for projects financed by the loans be awarded to either Japanese companies alone or Japanese and the borrowing countries’ firms.
In response to international criticism that Japan was using tied loans as an effective tool for promoting exports and favoring domestic companies, Japan initiated a policy to make more of its yen loans untied in the late 1970s.
As a result, the percentage of untied loans reached 100 percent for the first time in fiscal 1996. The figure was only 50.8 percent in fiscal 1985.
But since hitting 100 percent, the percentage of untied loans has declined for three consecutive years. It dipped to 99 percent in fiscal 1997, 91.5 percent in fiscal 1998 and 83.6 percent in fiscal 1999.
Japan has remained the world’s largest single aid donor for nine straight years. Yen loans are the main pillar of Japanese official development assistance extended bilaterally to developing countries. There are two other types of bilateral Japanese ODA: grants-in-aid and technical cooperation.
Foreign Ministry officials say the decline of the untied-loan to tied-loan ratio in recent years is due to the introduction of “a special environmental yen-loan program” in fiscal 1998. The decrease was furthered by the start of a three-year special loan program in fiscal 1999 for countries hit hard by the 1997 Asian economic crisis.
Under the special environmental loan program, yen loans are extended at 0.75 percent. Contractors for environmental projects funded by the loans are limited to Japanese and the borrowing countries’ firms.
Under the three-year special loan program for crisis-stricken countries, 600 billion yen in yen loans are to be provided at an interest rate of 0.95 percent to help designated developing countries promote their economic structural reforms. Project contracts are awarded only to Japanese companies, in principle.
Yen loans under the two special programs are repayable over 40 years, including a 10-year grace period.
Both special programs were introduced amid growing calls for more tied loans from domestic industries, which are struggling to survive due to the continued economic slump at home and increased competition abroad.
In the past five years, Japanese firms won an average of only 30 percent of contracts for yen loan-funded projects in developing nations.
While emphasizing that Japan’s two-decade-old basic policy of promoting untied yen loans remains unchanged, one senior Foreign Ministry official in charge of ODA said that “a certain percentage of yen loans needs to be tied in order to avoid a loss of domestic public support for Japanese ODA itself in the current tight fiscal situation.”