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With the clock ticking on the end-of-June deadline for a final agreement, the world’s major industrialized countries appear to be nearing a compromise on fresh funding for the International Development Association.

According to international financial sources, Japan, the United States and major European countries are no longer digging in their heels in the dispute over whether to replace some of the concessional IDA loans with grants, a major sticking point in the negotiations on the 13th replenishment of IDA resources.

It is possible that a compromise deal will be reached and finalized before an annual summit of top leaders from the Group of Eight major countries in Canada in late June, the sources said. The G8 comprises the Group of Seven major industrialized countries — the U.S., Canada, Britain, Germany, France, Italy and Japan — plus Russia.

The IDA is the World Bank’s concessional lending window to the world’s poorest countries and is more commonly referred to as the “Second World Bank.” The G7 countries are by far the largest contributors to the IDA, together providing the bulk of the new resources it received in the past 12 replenishments.

Unlike the World Bank, which lends on a largely commercial basis, the IDA provides long-term loans at zero interest to the world’s poorest countries, although they must pay a service charge of 0.75 percent annually.

At present, 79 countries that had a per capita annual income of less than $885 in 2000 are eligible to borrow from the IDA. Of the 2.5 billion people living in these countries, an estimated 1.1 billion live on an extremely low daily income of less than $1.

The IDA lends zero-interest loans worth between $6 billion and $7 billion on average to the poorest countries each year for various types of development projects, especially those that address basic human needs, such as primary education and health care.

The funds are replenished every three years. At issue is the 13th replenishment, which has been under negotiation since last year. The fresh replenishment will provide resources needed to assist the poorest countries over a three-year period starting July 1.

The negotiations have been deadlocked over a U.S. proposal made last summer to turn exactly half of of the IDA’s loans into grants, which do not have to be repaid.

The administration of President George W. Bush has insisted that IDA assistance for the poorest countries should be provided in the form of grants from the beginning, on the grounds that most of those loans will eventually go sour and not be repaid, even if they carry no interest.

Japan and major European countries have adamantly opposed the U.S. proposal, claiming that the IDA was set up in 1960 as a lending body and that if it begins to provide a huge percentage of its assistance in the form of grants, as proposed by the U.S., its nature will change and its functions will overlap with those of United Nations-affiliated aid bodies.

There is another, perhaps more important, reason for Japan’s refusal to go along with the U.S. initiative.

Japan’s financial contributions to the IDA come from its official development assistance budget. But the ODA budget for the current fiscal year that started on April 1 was trimmed by 10 percent due to austere fiscal conditions brought about by a prolonged domestic economic slump.

In stark contrast with Japan, the U.S. and the 15-nation European Union both announced sharp increases in their ODA spending programs recently.

Japan fears that if half of the IDA’s assistance is provided in the form of grants, the financial institution will eventually face difficulties securing necessary funds, and the major donor countries will have to increase their financial contributions to it.

At present, while a little over half of IDA funds are contributed by donor countries, mostly the G7, other funds come from the financial institution’s own income and debt repayments.

According to the international financial sources, the U.S. has recently begun to soften its position and has showed a willingness to accept a lower percentage of grants than the 50 percent level originally proposed, although no specific figure was given.

The EU has also begun to compromise and has showed a willingness to agree to turn about 10 percent of the IDA’s assistance into grants, a position Japan now thinks is acceptable, the sources said.

One source said, “Japan, the U.S. and Europe are now engaged in intense haggling, not over whether the IDA should be allowed to begin to offer grants, but over what percentage of IDA assistance can be provided in the form of grants.

“They are working hard to try and reach a final settlement to the issue of fresh IDA-resources replenishment before the forthcoming G8 summit. So, an agreement before then is possible.”

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