The US yesterday fleshed out its controversial policy of a shake-up in aid disbursement, calling for Heavily-Indebted Poor Countries (HIPC) to be given grants to reach debt sustainability and to fund projects. John Taylor, under-secretary for international affairs at the US Treasury, said that it would be hard to push loans through Congress as members did not look favourably on providing borrowing to poor countries which subsequently defaulted.
"Good economics is rarely good politics," he said. Officials from other nations rushed to condemn the plans, claiming that grants did not signal fair lending rates to markets, encouraged aid dependency and, most importantly, would leach money out of the multilateral institutions since grants are never repaid.
Taylor outlined the US position, saying that re-flows, returning funds from the amortization of debt to the International Development Agency and African Development Fund, had been, and were likely to remain, a negligible source of multilateral financing. The IDA has 81 borrower countries and will have $23 billion to commit between 2002 and 2005.
The treasury official also stated that recipient countries would prefer the permanency of grants over loans. He said he could not accept that the poorest countries were obliged to pay back the IDA and condemned the Fund policy of allowing debt-to-exports to reach 300% in some cases under HIPC.
"This it not good; it's got to be fixed," he said. He moved to appease Europeans by saying that as countries moved up the 'development staircase', the use of loans would become more appropriate.
Heavyweight Europeans weighed in against the US position. Pierre Jacquet, executive director, strategy, Agence Francaise de Developpement, France's development agency, labelled the presumption of grants for HIPC countries 'doctrinaire' and called for a pragmatic approach by country and by project with a combination of loans, grants, equity stakes, guarantees and other instruments structured in appropriate bundles. He agreed that the poorest countries should be eligible for loans until they had become solvent, but implied that not all HIPC countries should be eligible for grants.
Francois Bourguignon, chief economist at the World Bank, joined him in cautioning against the US plan. He said that using loans rather than grants enabled more projects to be financed because of the reflows from debt amortization. He added that donors monitor loans more closely since the money is not given away.
Wolfgang Kroh, member of the board, KfW Bankengruppe, noted that existing commitments of the donor community were not backed up with commitments of money. The Monterrey Consensus added $30 billion to the annual bill for international donors and meeting the Millennium Development Goals a further $50 billion annually.