Concept, Forms And Sources Of Foreign Aid

Concept of Foreign Aid

According to Riddel (2007), foreign aid consists of all resources which includes physical goods, skills and technical know-how, financial grants (gifts), or loans (at concessional rates) transferred by donors to recipients. Also, the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) defines aid as Official Development Assistance (ODA) if it fulfill these three conditions: Firstly, it has to be undertaken by official agencies, then it has to have the promotion of economic development and welfare as its main objectives and finally, it has to have a grant element of twenty-five percent or more (Kabete, 2008). Foreign aid normally comes in different ways such as project aid, humanitarian aid including food aid, technical assistance and programme aid (balance of payments support and budget support) while Non-Governmental Organisations (NGOs) also provide aid in support of poverty reduction activities and emergency relief in various recipient countries.

The above definition of aid according to Ugwuegbe et al. (2016) clearly depicts that aid is not the same thing as loan. While aid is more comprehensive and encompassing, loan is embedded in aid because it is usually one of the total packages of aid. Also, aid may serve one or more functions: it may be given as a signal of diplomatic approval, or to strengthen a military ally, to reward a government for behaviour desired by the donor, to extend the donor’s cultural influence, to provide infrastructure needed by the donor for resource extraction from the recipient country, or to gain other kinds of commercial access (Ugwuegbe et al., 2016).

Foreign aid represents an important source of finance in most countries in Sub-Sahara Africa (SSA), Nigeria inclusive where it can supplement low savings, narrow export earnings and thin tax bases. Loan (debt) be it internal or external are classified into two i.e productive debt and dead weight debt. When a loan is obtained to enable the nation purchase some sort of assets, the debt is said to be productive e.g money borrowed for acquiring factories, electricity, refineries etc. However, debt undertaken to finance war and expenses on current expenditures are dead weight debts. When a country obtains a loan from abroad, it means that the country can import from abroad goods and services to the value of the loan without at the same time having to export anything in exchange. When capital and interest have to be repaid, the same country will have to get the burden of exporting goods and service without receiving any imports in exchange. These two types of debt, however, require that the borrowers’ future savings must cover the interest and principal payment (debt servicing). Therefore, debt finance investment need to be productive and well manage enough to earn a rate of return higher than the cost of debt servicing (Ajayi and Oke, 2012).

Forms of Foreign Aid

a. Project Aid

As a part of foreign aid, project aid according to Ugwuegbe et al. (2016) is dominated by funds channelled to interventions in sectors such as health, education, rural development including agriculture, transport and power, housing, and water supply and sanitation. It was however noted by Riddell (2007) that small amounts of project aid are channelled to industrial, mining, trade and cultural projects as many ODA funded development projects aim at achieving specific outputs by providing resources, skills and systems which the recipient country needs.

b. Programme Aid

According to OECD definition, programme aid is defined as financial contributions that are not connected to particular activities. This aid is divided into two forms which are the balance of payments (BOP) support and the budget support. Under the budget support, aid funds are provided to boost aggregate revenue and increase overall spending. Aid funds channelled to ministries of finance are termed as General Budget Support (GBS) while those channelled to particular sectors are termed as Sector Budget Support (SBS). Under the GBS, donors provide funds for implementation of development and poverty alleviating strategies paying attention to the capacity of the recipient governments to use funds efficiently (Ugwuegbe et al., 2016).

c. Technical Assistance

This type of assistance (TA) includes the provision of skills, knowledge know-how and advice. Technical assistance for several years has come in the form of teaching staff mainly in primary and secondary education system in developing countries. Also, more specialised trainers have continually performed skills training functions to meet their needs and to achieve their immediate objectives.

d. Humanitarian or Emergency Aid

This type of aid is channeled towards saving lives, alleviate suffering and enable those suffering to maintain (or retain) their human dignity during and in the aftermath of natural disasters and man-made crisis as defined according to its purpose. Humanitarian aid has been successful in most cases in achieving its tangible outcomes such as saving lives, providing food to the hungry; healthcare and medicines to those vulnerable to acute disease in emergencies; and water, sanitation and shelter to those whose homes have been destroyed. However, the sustained internal conflicts in war prone areas reduce resources to meet development objectives as more resources are directed to meet humanitarian needs.

e. Food Aid

The food aid is made up of programme food aid and humanitarian food aid, while the former may relieve the foreign exchange constraint to the import of the necessary intermediate inputs or by providing fiscal resources through counterpart funds generated by the local sale of programme food aid, the latter is focused on saving lives and alleviating poverty (Conchesta, 2008). These resources can be used by the recipient country to invest in agricultural research and extension and improvement of rural infrastructure in particular. However, programme food aid may have Dutch disease effects on domestic food producers and thus hurting the food sector’s competitiveness in the world markets.

Sources of Foreign Aid

Foreign aids are provided by many actors from government entities group of rich people and individuals, however, some of these sources will be discussed below:

a. The Paris club of creditors

The Paris club of creditors or simply called “Paris club” is an informal group of creditor nations whose main aim is to examine solutions that are workable regarding the payment problems faced by debtor nations. The club is currently, made up of 19 permanent member nations which includes most of the western European and Scandinavian nations, the United States of America, the United Kingdom and Japan. The Paris Club stresses the informal nature of its existence and deems itself a ‘non-institution.’ As an informal group, it has no official statutes and no formal inception date, although there was a record of the first meeting with Argentina, one of its debtor nations as far back as 1956 (Ugwuegbe et al., 2016). The members of the Paris Club meet each month to likely negotiate with the debtor countries regarding the terms of meeting the Club’s pre-conditions for debt negotiation. The main conditions a debtor nation has to meet are that it should have a demonstrated need for debt relief and should be committed to implementing economic reform, which in effect means that it must already have a current program with the International Monetary Fund (IMF) supported by a conditional arrangement.

b. The London club of creditors

The London club of creditors is also regarded to as an informal group of private creditors on the international stage which looks like the Paris club of public lenders. However, the first meeting of the club took place in 1976 in response to Zaire’s debt payment problems. Also, the club is in charge of rescheduling debt payments made by countries to commercial banks which are mainly uninsured grants and unguaranteed loans.

c. Multilateral creditors

Multilateral creditors are international institutions that include organizations like the African Development Bank, International Bank for Reconstruction and Development, International Finance Corporation, International Development Association, European Economic Community.

d. Bilateral creditors

Bilateral creditors normally give out loans for development purposes. Members are the European Union, the United States of America, the East European countries and Japan.

e. Promissory Note creditors

Promissory notes creditors do give out uninsured trade loans which result mainly from trade arrears. For example, Nigeria had some trade arrears in 1982 and 1983 but was financed by promissory notes.