Concessional loans form a significant proportion of global aid flows and have been on a rising trend, compared to overall ODA, since 2007. There are a number of issues with loan valuation within official development assistance (ODA) loans and also some controversies regarding whether, and in what circumstances, loans should be used instead of grants.
The value to the recipient of each dollar of lending, as measured by the grant element of each loan, varies widely between donors. Also, the basis on which the grant element is estimated is itself highly questionable.
This paper explores some of these issues and then turns to the question of whether aid should be given in the form of loans at all. It looks at the case of ODA being delivered in the form of grants and where loans are more appropriate.
Switching from grants to loans may not deplete loan-giving agencies’ resources as much as some observers suggest. This begs the question: should donors only give loans in circumstances where grants would not be preferable?
The paper also suggests that lending targets operated by loan-giving development agencies should potentially be reviewed to minimise inappropriate ‘loan pushing’ in order to meet such targets.