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Less and worse aid? Financial crisis shows first impacts on European aid budgets

by Eurodad

7 February 2009

While rich countries’ governments spent trillions on bailing out banks and speculators, the more than one billion people living in absolute poverty will clearly be the losers of the financial crisis. Several donors announced recently that they will either cut their aid spending in 2009, or they will deliver more aid in less effective or more harmful ways.

Less aid: Ireland, Italy, Latvia

On the 3rd of February, the Irish government revised its budget for 2009 and slashed its Official Development Assistance (ODA) by 95 million euros, more than 10 percent of the amount originally budgeted. Ireland has committed to reaching the international target of spending 0.7 percent its of Gross National Income (GNI) by 2012 and an interim benchmark of 0.6 percent by 2010. With this cutback, ODA spending drops back to 0.53 percent making it increasingly difficult to reach these targets. The Irish government’s decision followed the bad example of other European donors such as Italy and Latvia.

In December, the Italian government announced aid cuts of 56 percent, and last month Latvia said it cut aid by 100 percent, thereby ceasing to be a donor country shortly after it becoming one.

Less aid value: United Kingdom

Other donors’ aid spending will be effected by the indirect impacts of the financial crisis. An analysis recently carried out by Eurodad member CAFOD calculated that if the UK increases aid as pledged to 0.7 percent of its Gross Domestic Product (GDP) in 2014, the US-dollar (USD) value of disbursed UK aid might fall by 41 billion USD over the next seven years, compared to the amount projected before the crisis hit the British economy. The economic recession decreased Britain’s GDP, and thus the absolute amount the UK is obliged to pay to achieve the ODA targets. But even more relevant is the devaluation of the British pound against the US dollar and many developing country currencies over the past year, which substantially reduces the purchase power of UK aid in recipient countries.

More but worse aid: Spain and Germany

Some other donors plan to dedicate a share of their economic stimulus packages to development assistance. Germany’s latest 50 billion euro package includes a new contribution of 100 million euros to the World Bank, a mere zero point two percent of the total amount. The Spanish government launched a new “anti-crisis plan for the internationalisation of the Spanish economy” which includes new loans worth 100 million euros to finance infrastructure projects in Africa - tied to orders to Spanish corporations. Eurodad member Observatorio de la Deuda en la Globalizacion heavily criticized this abuse of aid for economic self-interest, saying it will lead to unsustainable debt levels, not to poverty alleviation in Africa.

The impacts of the financial crisis are already affecting the living conditions of hundreds of millions of people in developing countries. ODA as a source of development finance is more important than ever, since the financial crisis has dried up other sources such as export revenues or private capital flows to developing countries. At the International Conference on Financing for Development in Doha last December, donors reaffirmed their aid targets in an ‘aid compact’ and pledged that the financial crisis would not lead to aid cuts, but it seems as though many are moving in the wrong direction just two months after that summit.

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