Official Development Assistance (ODA)
11. Untied ODA Loans

In the process of development, what is needed is not just grant aid for the social sector. The construction of economic and social infrastructure, which requires huge sums of money, is also extremely important. By utilizing low-cost funds from the Japanese national investment and loan program, ODA loans realize extension of a large amount of money on concessional terms to meet the financial needs of developing countries. As most of the ODA loans are untied, they are highly appreciated by developing countries as well as the international community as efficient aid funds which make it possible for recipient countries to procure quality goods and equipment at competitive costs from all over the world without causing trade frictions. As a result, Japan's ODA loans increased in size to about half of the balance of loans extended by the World Bank group, or at the same level with the total balance of loans extended by the Asian Development Bank and other major regional development banks combined. Japan's ODA loans are thus playing a critical role in financing socio-economic needs in developing countries.

The process of untying Japan's ODA loans started in the 1970s. When criticisms from industrial nations against the large trade surplus of Japan became increasingly vocal, the Japanese Government clearly announced its position in 1978 (in a joint communique with the United States) to increase the ratio of untied loans and has since increased the untied portion steadily. Today, 97.7% of Japan's ODA loans are untied.

Meanwhile, some Japanese firms, suffering from the eroding competitiveness of Japanese products owing to a strong yen, pointing to the falling ratio of orders (about 27%) landed by Japanese firms from Japan's ODA loan-financed development projects, demand resumption of making ODA loans tied to Japanese goods. ODA loans, however, are an aid vehicle different from grant aid and technical cooperation in the sense that they obligate developing countries to repay the principal and pay interest accruing on it. Therefore, it is necessary to bear in mind that tying ODA loans to Japanese goods would deprive recipient countries of options to buy goods from other countries, thus impede efficient utilization of aid funds, and could increase the financial burden on developing countries.

Most of OECD countries are strongly criticising some industrialized nations keeping their ODA loans tied to their firms. Under such circumstances, if Japan were to reverse its basic policy that its ODA loans should be generally untied, there would arise criticisms that Japan's ODA loans are used as a lever to promote its exports and could undermine their integrity, which Japan has painstakingly fostered over the years. Furthermore, the guidelines adopted by the member countries of the OECD ban tying ODA loans when the concessionality level is lower than a certain level. In order to make ODA loans tied to the Japanese firms under the current low-interest environment, Japan will need to cut the interest rates of its ODA loans substantially (much below the current average rate of 2.5%).

Under the basic policy of maintaining ODA loans untied, shares of ODA contracts awarded to firms of developing countries have been on the rise (currently about 60%). Factors contributing to their advance are the fact that loans earmarked for the procurement of locally-produced goods have increased, and that the products made in some of the developing countries have become more competitive in certain areas even in comparison with industrialized nations. In any event, this is a welcome development in a sense that untied loans have been instrumental in spurring the growth of private firms in developing countries and that such development in a private sector is an important contributing factor to the development of national economies. (Incidentally, the ratio of ODA contracts awarded to firms of OECD countries other than Japan has dropped from 21% in FY 1990 to 13% in FY 1995).

In view of such circumstances, it is necessary for the Japanese Government to maintain its untying policy, supported by its people, and live up to the international appreciation and expectations for Japan's ODA loans.

Graph : Chart 12 Trend in Procurement Condltions on Japan's ODA Loans

Graph : Chart 13 Trend in Procurement of ODA Loans (By Cuntry)