In mid-February, G7 members announced their new financial commitments to the Access to Covid-19 Tools (ACT) Accelerator and its pillar for global vaccine procurement, the COVAX Facility. This made headlines, but this news is an exception. With governments struggling to get a handle on an unparalleled number of emergencies – the health crisis, an economic recession and children out of school – foreign aid has fallen even more down the political priority list over the past year.
In practice, aid is a small pot of money. However, many countries rely on it. Other financing options – foreign direct investment, workers’ remittances, and taxes – have fallen and are slow to recover. The International Monetary Fund (IMF) estimates that $290 billion of the external financing needs of sub-Saharan African countries for 2020-2023 are yet to be met. Without sufficient resources, many lower-income countries risk cutting their public spending and raising taxes well before the virus is brought under control.
One year on from the outbreak of the pandemic, how have bilateral and multilateral donors responded to the crisis so far? What are the prospects for aid in 2021? Here are five points to consider, based on our new research.
1. Bilateral aid budgets did not fall (so far)
As was the case with the 2008-2009 global financial crisis (GFC), grim predictions of a sharp decline in aid in 2020 proved wrong. In 2020, most bilateral donors kept their budgets at least constant. Despite a second wave of infections, actual economic growth figures were far better than initially forecast. One notable exception is the United Kingdom, which announced a 30% cut of its overall official development assistance (ODA) budget in 2021 compared with 2019.
Bilateral donors cannot be complacent though. For example, despite an initial increase, aid began to fall a couple of years after the GFC. We estimate the fall in ODA would be moderate (about 2.5%) between 2019 and 2021 if donors had aimed to keep their ODA/gross national income (GNI) ratio constant back in 2019 and beyond. In other words, ODA cuts should not exceed the fall in GNI. We predict the decline in ODA could go up to 9.5% should past relations between growth and aid flows hold constant.
2. Most multilateral development banks stepped up their game
Overall, projects approved at the World Bank and regional development banks increased by 35% between 2019 and 2020, and even more so at the International Development Association (IDA) and Asian Development Fund.
In the absence of increased capital or additional resources for the concessional windows, lending from multilateral development banks (MDBs) could slow down in 2021 and 2022, the reason being that many MDBs have frontloaded much of their resources in response to the crisis. However, a decrease in MDB lending can be avoided if member states and shareholders were to boost their contributions. Recent news of the IDA20 replenishment round brought forward to this year and the record-high replenishment of the International Fund for Agricultural Development are encouraging signals, despite the budgetary pressures many countries are facing. The evidence for investing in the multilateral development banking system is compelling – even more so during this unprecedented crisis.
3. We need a greater focus on the poorest countries
As a result of the long-term scars of the Covid-19 crisis, the World Bank estimates that 250 million more people will be living in extreme poverty by 2030 compared to last year’s projections. My colleagues also estimate a 50% increase in the number of countries facing extreme poverty rates over 20% by 2030. Nearly all low-income countries (LICs) are now expected to have such high rates of extreme poverty (it was less than two thirds before the crisis).
As pointed out earlier, LICs have fewer financing options to support their economic recovery and their vaccine roll out will be slower. This calls for the prioritisation of aid in those countries.
4. The crisis could reinforce the trend of donors becoming “less principled”
My colleagues at ODI found that, on average, bilateral Development Assistance Committee (DAC) donors were becoming “less principled” – even well before the Covid-19 crisis struck. This means donors were failing to see global cooperation in their national interest to foster prosperity and stability worldwide. For example, up until 2018, aid was increasingly allocated to secure direct short-term commercial and geostrategic objectives. All in all, donor responses to the crisis so far – a focus on domestic priorities, vaccine nationalism and export bans – have been reinforcing this trend.
A “principled” aid approach would require development partners to look beyond the health emergency and start building resilience to future crises. This should include addressing inequality that will hamper the global recovery.
5. Are we at a turning point for “development” cooperation?
The lines between “developed and developing countries” continues to be blurred, as I wrote at the very beginning of the crisis. A few low- and middle-income countries are responding better than advanced economies to the crisis, at least so far. For example, India is working with the Canadian government and is at the forefront of supplying the vaccine.
This crisis is also a stark reminder that collective investment is needed to achieve common goals across all countries and challenges, including pandemics, climate change and security. Global cooperation on vaccine distribution is far from being a reality though. Lower-income countries will most likely roll out their vaccination programmes in 2022, or even later. COVAX is underfunded. The announcement of greater funding to the ACT Accelerator and the COVAX Facility is positive, but more needs to be done.
Development assistance is one of few financing options available to support lower-income countries to deal with the health emergency and support economic recovery from the Covid-19 crisis. Aid budgets must be protected – if not increased, and the poorest, most affected countries must be targeted, also beyond the health emergency. It’s now time to make the rhetoric “we will be safe when everyone is safe” a reality.