![]() ![]() In most of the DAC’s examples this is 9 percent, given that the loan is to an LDC. Calculate the present value of the remaining payments, discounting at the appropriate rate.For ODA loans, the aim is to ensure that the “method does not generate more ODA for a loan and subsequent debt relief than a standard grant would generate.” The new system involves a three-step process: For non-ODA loans, the principal (i.e., original face value) of the loan written off was recorded, along with any capitalised interest and charges. If they forgave it later, all they could record was the unpaid interest in the meantime, usually very little as ODA loans were, by definition, at concessional rates. ![]() If they forgave the loan straight away, nothing more was recorded. Donors simply stopped receiving-and so stopped recording-repayments. What happens when loans go bad?įor ODA loans, the old system was equally simple: nothing happened to net ODA. The same loan but charging 3 percent would have a grant element of 42 percent, and so wouldn’t count. Terms for calculating grant equivalent of loansįor example, an 18-year loan to a least developed country (LDC) charging 2 percent interest, for which principal payments start after six years, would have a grant element of 48 percent, and so would count as ODA. The DAC specifies this discount rate by income group, along with new concessionality thresholds for inclusion as ODA (Table 1). The higher the risk of default, the higher the discount rate: this means that payments in the future count for less, as the borrower is less certain about receiving them. The present value is calculated using a discount rate that is intended to account for risk. The new system calculates the “grant-equivalent.” This is the difference between the net present value of the schedule of future payments on the loan and the face value. the subsidy element had to be over 25 percent of the face value). Interest payments were ignored (although interest rates had to be low enough to meet a concessionality threshold, i.e. The measurement of ODA loans under the old system was simple: flows of capital from donors to recipients counted positively, and repayments of capital counted negatively. In the coming weeks, CGD will publish a more detailed look at the new rules. In short, some aspects are counterintuitive and look much more generous to donors than the old system, perhaps confirming the fears of some civil society organisations, creating a greater incentive to provide loans instead of grants, and rescheduling, rather than forgiving debt. This blog briefly describes the new rules for debt relief, and four features that may not satisfy critics of the new system. But it also threw up challenges, including how to score debt relief. In principle, this allowed a fairer comparison between loans and grants, and meant ODA wasn’t affected by decisions from years in the past. ![]() Now, the subsidy element, or “grant equivalent” of a loan, is counted upfront, and no future repayments are deducted. That document is intended to resolve how DAC members deal with debt write-offs following the “ modernisation of ODA.” Previously, loans were measured on a flow basis: disbursement counted as ODA, and repayments counted as negative ODA. The OECD’s Development Assistance Committee (DAC) recently released a new set of rules for how it will record debt relief as official development assistance (ODA). ![]()
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