The 1978 DAC Recommendation on Terms and Conditions of Aid is the only OECD legal instrument on the financial terms of official development assistance (ODA). It commits Development Assistance Committee (DAC) Members to ensure a minimum concessionality for their ODA commitments, with special provisions for least developed countries (LDCs).
Terms and conditions of aid
Abstract
According to the 1978 DAC Recommendation on Terms and Conditions of Aid, concessionality refers to the measure of the "softness" of a credit, or loan. Concessionality is achieved either through interest rates below those available on the market, or by grace or long maturity periods, or a combination of these. In the case of DAC statistics, it is measured by the grant element, which must be at least:
45% in least developed countries (LDCs) and other low-income countries (LICs) (calculated at a discount rate of 9%)
15% in lower middle-income countries (LMICs) (calculated at a discount rate of 7%)
10% in upper middle-income countries (UMICs) (calculated at a discount rate of 6%)
10% per cent in the case of loans to multilateral institutions (calculated at a discount rate of 5% for global institutions and multilateral development banks, and 6% for other organisations, including sub-regional organisations).
The original intent of the 1978 Recommendation was to recognise the special value of grants compared to loans. It reflected a political agreement among members on the overall concessionality of ODA and recognised that LDCs need higher levels of concessionality.
Overall financial terms. Members should maintain or achieve an average grant element (concessionality) in their total ODA commitments of at least 86% (Para 2).
Special terms for least developed countries. Grants should be prioritised over loans. The average grant element of all commitments from a member should be at least 86% to each LDC over a period of three years, or at least 90% annually for the LDCs as a group (Para 8).
Volume test. Members whose ODA commitments as a share of gross national income (GNI) are significantly below the DAC average country effort of 0.38% in 2020 will not be considered to have met the terms of the recommendation (Para 3).
The definition of ODA set by the DAC covers aspects of debt sustainability (the amount of debt a borrower can undertake and afford to repay in the future). As of 2014, the OECD-DAC statistical reporting directives require ODA loans to comply with the International Monetary Fund and World Bank policies on limits on public sector concessional or non-concessional borrowing for specific countries.
The introduction of the grant equivalent system in 2018 changed the way ODA is measured. The accounting of loans is no longer based on the face value of the loan, but on the grant element or concessionality of the loan.
The eligibility thresholds and discount rates used to calculate the grant element of ODA are now different from those mentioned in the 1978 DAC Recommendation, which required a grant element of at least 25%, using a 10% discount rate. This triggered a reflection on the Recommendation and its numerical targets.
In 2020, the DAC agreed on the need to update the Recommendation to reflect the decisions taken by the DAC High Level Meeting in 2014, such as the revised ODA definition and new measure of concessionality. However, DAC Members expressed different opinions on the substance of changes to be made beyond a technical update.
1. Overall financial terms of ODA in 2020.
17 DAC countries provide grants exclusively, and therefore have a grant element of 100%.
10 others meet the overall terms requirements (i.e. maintain or achieve an average grant element – concessionality - in their total ODA commitments of at least 86%) and have at least a portion of loans in their portfolio.
2. Special terms for least developed countries.
21 DAC countries (Australia, Austria, Czech Republic, Denmark, Finland, Greece, Hungary, Iceland, Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, and the United States) provide grants almost exclusively and meet the special terms for least developed countries.
Out of all DAC countries that report ODA loans, 5 (Belgium, Germany, Italy, Korea, and Portugal) also meet the special terms for LDCs.
By definition, grants have a grant element of 100%, and therefore comply with the concessionality requirement of the 1978 DAC Recommendation. When extending loans, development co-operation partners should align concessionality levels with needs. Greater concessionality can be achieved in three ways:
A low interest rate with a wide spread between the interest rate and the discount rate.
A long grace period (period between the first disbursement of the loan and the first repayment).
A long maturity, or the period at the end of which the principal is repaid with interest.
How do we know if DAC Members are moving in the right direction?
They meet the minimum grant element of ODA commitments of 86%
The average grant element of bilateral ODA loans to LDCs increases
ODA commitments as a share of gross national income (GNI) increase over time.
OECD DAC Peer Reviews refer to the performance of DAC Members against the 1978 DAC Recommendation, and the Secretariat publishes annual statistics:
This table provides an overview of DAC Members’ compliance with the Recommendation according to its 3 components: overall financial terms; terms for bilateral ODA to LDCs; and the volume test.
This table describes the financial terms of ODA commitments and includes members’ grant element of total ODA commitments; grant share of ODA; and grant element of ODA to LDCs.
1978 Recommendation on Terms and Conditions of Aid, [OECD/LEGAL/5006].
Revision of the 1978 DAC Recommendation on Terms and Conditions of aid in line with the Grant Equivalent System, [OECD account access required], Development Co-operation Directorate, Development Assistance Committee.
Monitoring the Implementation of the Grant Equivalent system, DAC Working Party on Development Finance Statistics, Development Co-operation Directorate, Development Assistance Committee.
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