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What prospects for aid in 2022 (and beyond)?

Expert comment

Written by Annalisa Prizzon

Hero image description: Covid-19 testing in Madagascar Image credit:World Bank/Henitsoa Rafalia Image license:CC BY-NC-ND

Multilateralism is not in complete free fall…

Despite grim prospects for donor commitments at the early stages of the pandemic, official development assistance (ODA) rose, albeit marginally, in 2020. In April this year, the Organisation for Economic Co-operation and Development (OECD) released the preliminary ODA figures for 2021 confirming an upward trend to nearly $180 billion – the highest level ever for ODA – and a 4.4% increase from 2020. In this particular case, I am glad our predictions of falling aid flows in 2021 did not materialise.

But these aggregate figures do not tell the full story. In reality, the ODA increase in 2021 was largely inflated by donations of Covid-19 vaccines. Around a third of these vaccines consisted of excess domestic supply rather than doses purchased for immediate use in low- and middle-income countries. Furthermore, by applying the average price paid by COVAX, some donors can count vaccine donations and purchases as ODA at a higher price than they actually paid for them. If Covid-19 vaccine purchases are excluded, the 4.4% ODA increase falls to a meagre 0.6%.

In 2021, the UK cut its aid budget by more than 20% – the largest reduction among the biggest Development Assistance Committee (DAC) donors (and not a result of different accounting rules, as in Sweden’s case). During the same year, ODA was proportionally less focused on the poorest countries. ODA to low-income countries grew by 1% and by 2.5% in the least developed countries – far lower than the year-on-year rise in ODA (4.4%).

Nonetheless, there are a few positive trends and one-off contributions from last year that are worth highlighting:

  • The replenishment of the concessional window of the World Bank Group’s International Development Association (IDA) was brought forward by a year to prevent a fall in its lending in 2022. IDA reached its highest replenishment ever thanks to the leverage effect on its equity and reflows from existing loans. Donor commitments were in line with the previous replenishment, despite sharp cuts from one of its largest shareholders, the UK.
  • The replenishment of the Global Alliance for Vaccines and Immunisation (GAVI) also proved to be successful in June 2021, exceeding the original request from GAVI management.
  • For the 2020/21 period, the funding requirements of the Access to COVID-19 Tools Accelerator (ACT-A) vaccine pillar for 91 low- and middle-income countries were almost entirely met – for example, through financing mechanisms set up by the World Bank Group and the Asian Development Bank.
  • The share of loans in bilateral ODA fell in 2021 compared to 2020, going back to a pre-pandemic share of less than 20% of ODA.

…but the demand for international public finance is mounting

Many lower-income countries are now facing several overlapping crises that have slowed down the pace of recovery from the Covid-19 pandemic. Average income per capita in emerging and developing countries is no longer catching up with the equivalent in advanced economies. Global growth projections for 2022 and 2023 have been revised downwards by about 1% as a result of soaring food and energy prices, rising inflation and greater uncertainty. Lower than expected economic growth forecasts will certainly put pressure on public coffers in donor countries that were already trying to consolidate their fiscal positions. All lower-income countries in sub-Saharan Africa (SSA) are now classified as being at least at moderate risk of debt distress. The default of sovereign debt in Sri Lanka could be the first in a new round of debt crises in emerging economies.

The impact of climate change – such as the droughts that persist in the Horn of Africa – and of the war in Ukraine are putting millions of people at risk of famine. The reconstruction of the economic, productive and social infrastructure of the Ukrainian territories either devastated or at least partly damaged by the Russian invasion will require an injection of finance at scale, currently estimated to exceed $100 billion. If that was not enough, the recent science on climate change demonstrates the urgency of rapid emissions reductions to avoid catastrophic loss and damage from extreme weather events, rising sea levels and ecosystem collapse. Although the Covid-19 pandemic is no longer making headlines, the efforts towards vaccinating the world have not stopped – only 14% of the population of low-income countries has been fully vaccinated as of late June (the world average is 61%).

How will international public finance respond to these challenges in 2022?

Volumes: more international public finance, but some countries and sectors might feel they are losing out? At the end of 2021, a few of the largest donors planned to increase their medium-term ODA projections in their budgets – notably the US, Canada, France and Italy, with mixed or falling trajectories for the EU, the UK and Germany. Where aid budgets were growing, most countries spent more on climate finance too.

In response to the war in Ukraine, several bilateral donors and international organisations have rapidly mobilised resources and at scale for humanitarian assistance, liquidity assistance and the early stages of reconstruction. As of mid-March, the World Bank Group had already committed nearly $1 billion to Ukraine, including fast-disbursing budget support. The European Bank for Reconstruction and Development (EBRD) will contribute $2 billion, while the European Investment Bank (EIB) has committed €4 billion on top of the nearly €700 million of immediate financial support it pledged in early March. The International Monetary Fund (IMF) authorised $1.4 billion in emergency assistance to Ukraine on 9 March under the Rapid Financing Instrument (RFI) to help meet urgent financing needs, including mitigating the economic impact of the war. It was approved in record time by the IMF Board. In March, the US included a $13.6 billion supplemental aid package for Ukraine in its budget for the 2022 fiscal year, consisting of both military assistance and humanitarian aid. An additional $40 billion package was approved in May.

Several G7 countries have announced that they will allocate more to their defence budgets (progressively reaching the NATO’s 2% GDP target) in response to the Russian attack on Ukraine. The impact on aid flows may be unpredictable, however. They could be cut to make space for defence spending or ramped up to secure strategic alliances in regions where there is rising competition with Russia (e.g. Africa). For example, aid flows correlated with military spending during the Cold War.

At the same time, the replenishment processes of several multilateral organisations are happening this year, putting pressure on donor budgets. Except for the IDA replenishment (which was brought forward by a year), in 2022 development partners have been asked to contribute to the African Development Fund; the Global Fund to Fight AIDS, Tuberculosis and Malaria; the Coalition for Epidemic Preparedness Innovations (CEPI) which took place earlier in the year; and the Global Polio Eradication Initiative, to name just a few. Moreover, while ACT-A fundraising in 2020/21 was successful – at least for the vaccine pillar – since October 2021 it has been severely underfunded in all its dimensions.

Geographies: more focus on Eastern Europe, upper-middle-income countries and the Indo-Pacific region? In response to the ongoing war and the refugee crisis, resources are likely to be increasingly directed towards Ukraine and its ODA-eligible neighbouring countries. Many development partners might be keen to invest in the transition to low carbon in emerging economies that are also significant greenhouse gas emitters (e.g. the Just Energy Transition Partnership (JETP) in South Africa and other pilot projects in India, Indonesia, Nigeria and Vietnam). The Indo-Pacific region – through its growing middle class, its contribution to climate change mitigation targets and its status as a counterweight to China – has also been subject to renewed focus among several development partners.

Sectors: more focus on humanitarian assistance, investment in low-carbon transition and perhaps debt relief? The humanitarian response and the support to refugees (which has driven a large rise in ODA from 2015 to 2018) will remain priorities as the war in Ukraine continues. There is already evidence of resources being reallocated away from some sectors to support in-country refugee costs, as in the case of Sweden and Denmark. With growing pressure on meeting the $100 billion climate finance target, donor countries will have greater incentives to fund projects that contribute to ODA too (large-scale climate finance projects are typically in the energy, transport, water and sanitation, and agriculture sectors). Finally, as debt distress mounts in many countries, bilateral and multilateral development partners might need to consider preparing for a new wave of debt relief packages.

Instruments: more grant financing is needed (but that is a hard ask)? The rising level of debt in several SSA countries is putting pressure on debt service in government budgets. Many of these countries do not have, or have limited access to, international capital markets. Grant financing will therefore be one of the few available options for these countries to secure funding and catch up on lost ground in socio-economic development. The reality is that this remains a relatively scarce resource; it is unlikely to rise in the short term.

Multilateralism might not have collapsed in 2021, but the challenges of 2022 and beyond will be the real test for development partners. International public finance remains one of the few financing options available to many lower-income countries when it comes to mitigating the consequences of the multiple and often devastating crises they now face.

I would like to thank Mark Miller and Tom Hart for their valuable input and to Gruffudd Owen for his excellent editing. As usual, I am responsible for all opinions and errors.