Proportion of UK aid spent in developing countries set to shrink further

For a number of years there has been a decline in the proportion of UK ODA that represented a real transfer of resources to developing countries. Even before the recent, much-publicised cut in their headline ODA target, the UK had been spending an increasing amount of its aid budget within its own borders. This trend looks set to continue and potentially accelerate, meaning the reduction in actual resource transfers may be much steeper than the headline cut suggests.

When the UK government announced, last year, a cut in its ODA spending from 0.7% of GNI to 0.5% there was widespread criticism from the development community – with the UK standing accused of “turning its back on the world’s most marginalised people”. Even with the 0.7% commitment in place, UK aid had already fallen by £700 million in 2020, due to the economic effects of the Covid-19 pandemic. As a result of abandoning the 0.7% target, UK ODA in 2021 is predicted to fall by a further £3.4 billion to its lowest level in nine years. Earlier this year, dozens of development organisations submitted evidence to the UK Parliament’s International Development Committee, highlighting the adverse effect of such a drastic cut to the UK’s aid budget.

In their recent budget, the UK government pledged to return ODA levels to 0.7% of GNI in 2024/25. However, this resumption of the 0.7% target is dependent on two fiscal tests:

• The government not borrowing money for day-to-day spending
• Underlying debt falling as a percentage of national income.

These tests may prove difficult to meet in practice, so the UK aid budget could continue to be capped at 0.5% of GNI in 2025 and beyond.

Analysis by DI suggests that, even if ODA levels return to 0.7% of GNI in 2024/25, the UK will have reported a cumulative $18 billion less ODA during the period 2021–2015 than would have been the case if the 0.7% target had been maintained. If the fiscal tests are failed and UK ODA remains at 0.5% of GNI into 2025, then this figure rises to $28 billion.

However, this is only part of the story. Attention has shifted to the possibility that the UK may further reduce the true value of its ODA by including in its reported figures elements that do not result in a direct transfer of resources to developing countries.

The government has stated that it intends to include a debt write off to Sudan totalling £861 million in its ODA, with £580 million reported in 2022 and the remainder in 2024. This would represent the largest amount of debt relief counted as ODA by the UK in 15 years. Furthermore, the vast majority of this £861 million is not money that the UK actually lent to Sudan but is the result of interest at 11% accumulating on loans that were defaulted on in 1984. The UK has also pledged to recycle a proportion of the Special Drawing Rights (SDRs) issued to it from the International Monetary Fund (IMF) as a loan to the IMF’s Poverty Reduction and Growth Trust. This could potentially count for over £1 billion of the UK’s reported ODA. These transactions would both give the UK a means of appearing to give large amounts of ODA without spending any money. Furthermore, if the UK sticks rigidly to an overall ODA level of 0.5% of GNI, these amounts will effectively reduce the budget available to use for other forms of aid spending.

Counting transactions that do not result in a direct transfer of resources to developing countries as ODA would see a continuation of a trend in UK ODA that began in the middle of the last decade. In 2013, the year that the UK first achieved the 0.7% target, ODA that did not result in some form of transfer of resources to developing countries accounted for just 4.8% of the UK’s reported bilateral ODA. However, by 2019 this proportion had grown to over 22%.

Some of this rise was due to an increase in in-donor refugee costs in response to the upsurge in asylum seekers from Syria and elsewhere. In-donor refugee costs rose from 0.5% of UK bilateral ODA in 2013 to 4.9% in 2016 before falling back to 4.6% in 2019. There has also been a sustained increase in the amount of administrative costs the UK counts as ODA. Administrative costs accounted for 3.4% of UK bilateral ODA in 2013, but this proportion has increased in every year since and, by 2019, they accounted for 7.3% of UK bilateral ODA.

The biggest single factor, however, was the UK’s decision to count the recapitalisation of CDC (the UK government-owned development finance institution) as ODA. In 2016, the UK began to issue promissory notes to CDC to increase the institution’s capital assets. Between 2016 and 2019, the UK government counted over £2.3 billion of these promissory notes in its reported bilateral ODA. £1,008 million of this was reported in 2019 alone, meaning that these transactions accounted for almost 10% of UK bilateral ODA (£10.4 billion total) in that year. The government has counted 100% of these promissory notes as ODA, despite the fact that not all of CDC’s activities are ODA-eligible. The UK government has pledged to issue a total of £3.5 billion in promissory notes to CDC, meaning that we can expect a further £1.2 billion of UK ODA to take this form.

If all of these items were declared in the UK ODA figures for 2022, it is conceivable that over half of UK bilateral ODA in that year could be of a type that generates no immediate transfer of resource to developing countries.^[1] This would more than double the, already historically high, proportion of UK ODA that was not directly transferred to developing countries. In this scenario the UK would, in all likelihood, be alone among the major donor nations in counting such a high proportion of non-transfer transaction in its reported ODA.

This blog was updated on 12 and 17 November 2021