How Concessional is Aid Lending?
Potts, David J. Chung, W.Y.
Potts, David J.
Chung, W.Y.
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2008
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Abstract
The method used by Development Assistance Committee countries for measuring
the concessionality of aid loans has remained unchanged for nearly 20 years. It was designed to
measure the net cost of aid to donors not the net benefit to recipients. The discount rate used takes
no account of changes in the value of the currency of the loan or of changes in prices for goods
traded by recipient countries. Furthermore, it does not consider the implications of tying of aid or
of policy conditionality. This paper suggests an alternative measure that shows the real net benefit
of aid finance to recipients. It argues that the discount rate used by the Development Assistance
Committee is too high and that changes in the value of the currency in which a loan is taken out
can be important. Nevertheless, real rates of interest for developing countries remain surprisingly
high despite low nominal rates due to falling prices of traded goods. This finding has implications
for the future real cost of debt service to recipients.
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Potts D and Chung WY (2008) How Concessional is Aid Lending? Journal of Development Studies. 44(7): 1023-1036.
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