9. Future Tasks
Changes in the Environment Surrounding ODA Loans
Net ODA loan expenditure by Japan in 1996 amounted to $2.7 billion, accounting for about 28.9% of Japan's total ODA program. Simply because of the scale of this expenditure, and moreover due to the role played by this concessional form of cooperation, ODA loans are vital from the aspect of guaranteeing the flow of funds to developing countries.
However, there are also challenges to be faced. Some developing countries express dissatisfaction because ODA loans result in accumulated debt and the appreciation of the yen makes the burden of debt repayments ever greater. Advanced countries are heard to voice criticism because ODA loans are employed as a means of boosting trade competitiveness, and may have the effect of distorting world trade. At home, voices demanding greater effectiveness and efficiency in implementing aid are intensifying. These calls must be adequately heeded.
It has already been recounted in detail that Japan is responding to the increasingly disparate aid needs of developing countries through efforts to diversify and afford more flexibility to the forms in which ODA loans are furnished. As well, Japan has adopted the policy of providing soft new money as its basic standpoint on the accumulated debt problem, and where necessary, responds by facilitating rescheduling arrangements on a case by case basis through the Paris Club.
Improving the Conditions under which ODA Loans are Extended
In improving the quality of official development assistance, it is essential to ease the conditions under which ODA loans are provided.
Japan instituted a series of measures to relax conditions for ODA loans in September and December 1997. In addition to an overall lowering of interest rates, the introduction of the following rates for special circumstances resulted in a reduction of 0.7% in interest rates.
(i) Special interest rate for measures to address global environmental problems and strategies to combat pollution.
(ii) Special interest rate for consulting services for ODA loan projects which require taking the environment into consideration when implemented.
(iii) Special interest rate to support human resource development.
(iv) Special interest rate to support small and medium enterprises.
(v) Special interest rate for the development of regional infrastructure.
Increasing the Flexibility of Eligible Recipient Countries
Public-sector debts are rescheduled through the forum of the Paris Club. Certain limits to the provision of ODA loans to the so-called rescheduled countries, the least less developed countries (LLDCs), and the upper-middle income countries are inescapable. However, requests are addressed on a case by case basis, paying attention to the following points.
(i) Rescheduled countries
Because the provision of ODA loan funds is predicated on the eventual repayment of the principal and interest, it is difficult to extend new loans to borrower countries when there is a lack of certainty of repayment.
Seen from a medium and long term perspective, however, the invigoration of the economy through the provision of new money under soft conditions to a developing country can play a role as the driver of major economic and social reforms in that country. Thus, there may be circumstances where ODA loans are extended after taking into consideration the following matters: (a) the latent potential for economic recovery, (b) relations with Japan, (c) the international framework, and (d) the nature of the project concerned.
(ii) Least Less Developed Countries (LLDCs)
The international tendency is for aid, in principle, to be furnished to LLDCs on a grant basis. Japan too, has a policy of further promoting the concept of grant aid as the appropriate form of cooperation for such countries.
However, there are LLDCs among the annual recipients to which Japan provides ODA loans. Such countries actually have a need for ODA loans, and given their firm requests, Japan investigates the possibility of providing loan funds to such countries, taking into consideration the scale of funds for the project sought, the developing country's capacity to shoulder debt, and the diplomatic necessity.
(iii) Upper-Middle-Income Countries
One of the yardsticks employed in determining which countries will receive ODA loan funds from Japan is the income level in the particular country. With reference to the World Bank's financing guidelines, the figure for fiscal 1998 was a per capita GNP level of not more than $3,115 in 1996.
With income levels exceeding this benchmark, the upper-middle-income countries are at varying stages of economic development, and some among them are yet to reach the stage of "takeoff". Such countries cannot expect unhindered economic development through the sourcing of funds under commercial conditions, and in some circumstances, forcefully express their desire for ODA loan funding from Japan.
When the relationship between an upper-middle-income country and Japan is especially important and it is deemed appropriate that it be treated as essential from the diplomatic standpoint, the request is addressed while taking into consideration factors such as the country's economic situation and the nature of the project concerned. In particular, environmental projects which warrant adequate consideration in the context of economic development are addressed positively.
Expansion of Local Currency Financing
Economic difficulties have led to many developing countries adopting austerity budgets. By their very nature, projects that are eligible for ODA loans are those that should necessarily be undertaken, but the government is often unable to allocate the required funds. Setbacks are hence frequently encountered to the implementation of such projects.
Japan's fundamental position is still that local currency loans should be provided from the recipient country's own funds on hand, but it has adopted a flexible approach to requests from aid recipient countries. In other words, in order to smoothly implement ODA loans and support the achievement of economic independence in recipient countries, Japan formerly adopted a flexible approach by funding up to 30% of the loan amount limit in local currency (the so-called 30% rule), taking account of factors such as the country's fiscal position and the nature of the proposed project.
This rule may have been quite appropriate for projects with a high foreign-currency cost component, but this was not always the case for rural village development projects and other high-priority initiatives with a large proportion of local currency costs that were vital to the country's development. Japan addressed this situation by introducing a loan ratio formula to replace the 30% rule in fiscal 1989. Under the loan ratio formula, the upper limit for an ODA loan extended to LLDCs and the low-income countries is set at the foreign currency cost or 85% of the total project cost, whichever is the higher. For low-middle-income countries and middle-income countries, the upper limit is set at 75% of the total project cost or the foreign currency cost, whichever is the higher. The corresponding figure for upper-middle-income countries is an amount equivalent to 60% of the total project cost.
Export Credit Arrangement and ODA Loans
In a bid to restrain export competition engendered by public funding assistance, OECD member countries have adopted a set of rules known as the OECD Export Credit Arrangement. The Arrangement set down such conditions as maximum repayment periods, minimum interest rates, and the percentage of down payment, and include regulations on tied aid credit.
Tied aid credit refers to tied or partially untied loans: ODA loans, OOF (other official flows), grant aid, or mixed loans combining two or more of these. The regulation applies to tied or partially untied ODA loans, and is intended to inhibit the enhancement of donor country-produced exports through the use of mixed loans.
The fundamental aim of this rule is to regulate the provision of tied aid funds, to ensure that assistance boosts concessionality in the true nature of aid, and to warrant the neutrality of aid in the arena of export competition, that is, so that all competitors are treated equally. The trends underlying this issue have been advanced countries' fiscal problems and their attempts to maintain the share of their own corporations in the international marketplace.
Take, for example, a country with a massive budget deficit. Such a country would find it difficult to boost export subsidies. In order to maintain an ongoing presence in the international market, it is absolutely vital wherever possible for the ODA of other donor countries to be untied, and when domestic corporations are successful in snaring contracts, to ensure that those funds are employed. With that background, people in countries with massive trade surpluses such as Japan are increasingly calling for a greater level of untiedness in ODA loans, which have grown in quantitative terms. In accordance with this international trend, the untied ratio of Japanese ODA loans has increased.
Bolstering Consideration for the Environment
In investigating whether or not to extend loans to developing countries, Japan has hitherto adopted a policy of verifying that consideration has been afforded the environment in the planning process. However, recognizing that the issues of pollution and environmental conservation are gaining in importance not only for the region concerned, but also on a global scale, the OECF, Japan's implementing organization for ODA loans, formulated a set of guidelines in November 1989. Known as the Guidelines for Consideration of the Environment, these principles aim to more effectively and efficiently provide for consideration of the environment. Projects are reviewed by the OECF in accordance with these guidelines.
By following the guidelines, the OECF verifies at the development project planning and preparation stage whether or not appropriate measures are in place for various environmental concerns that should be considered by the borrowing country. The guidelines were revised in July 1995 to oblige the borrowing country to conduct an environmental impact assessment for projects expected to have major effects on the environment.
The OECF has also upgraded its own institutions for enhancing consideration of the environment, through measures such as the appointment of new and additional staff with responsibility for environmental matters.
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