III. ODA LOANS

1. Introduction

Significance of ODA Loans

    ODA loans, commonly known as yen loans in the case of Japan, are loans extended by donor governments directly to developing countries. They are classified as a form of official development assistance under the flow of development funds scheme produced by the OECD's Development Assistance Committee (DAC). In other words, under the terms of a yen loan, development funds are furnished to developing countries at low interest rates over extended periods of time.
    In providing assistance to developing countries, there are diverse arguments about the pros and cons of furnishing loans rather than grants. However, self-help efforts on the part of a developing country may be encouraged by furnishing loans to the country and imposing a repayment obligation. From Japan's perspective too, there is also the consideration that ODA loans enable it to respond to demand for large-scale funding requests from developing countries.
    Given, however, that an ODA loan is still a form of aid, the terms and conditions of the loan should be as soft as possible. The conditions for loans extended by Japan are determined upon consideration of economic standards and other circumstances relevant to the recipient country.

ODA Loan (project loan) Mechanism

Role and Forms of ODA Loans

    For developing countries to achieve economic independence and alleviate poverty in the long run, it is essential that they boost the standard of their economic and social infrastructure to enable the accomplishment of constant and sustained economic growth. However, developing countries frequently encounter challenges in procuring the funds required to develop such infrastructure by normal market mechanisms alone. This is where the ODA loan, which furnishes funds under softer conditions, comes into its own.
    The fundamental role played by ODA loans as a form of aid is to complement the domestic resources needed for a country's development. Consequently, the sectors in which ODA loans are provided will vary according to the recipient country's economic structure, and the government's development plan and its policy on the distribution of development funds within the country.
    Traditionally, ODA loans were known as project loans for use in the infrastructure area: the land transport sector, including the construction and development of roads, railways, and bridges; ports and other facilities in the marine transport sector; and the electricity sector, including power stations and transmission facilities.
    More recently, however, ODA loans are being extended in a more diverse range of non-traditional forms: irrigation and other projects in the agriculture sector, the development of sewerage and water supply systems and reforestation projects in the environmental sector, or two-step loans for the promotion of small-and medium-sized enterprises or rural villages; and overseas student loans and other non-project yen loans for the human resource development sector and for assisting countries with balance of payments problems. The upshot of this change has been that loans for economic infrastructure accounted for 68.0% of total ODA loans extended in FY1997.
    Two-step loans and non-project loans will be explained in further detail under the heading Types of ODA Loans.

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