Moving Out of Aid Dependency:
Reflections on LDC Experience
Presented by
Dr. Debapriya Bhattacharya
Ambassador & Permanent Representative
of Bangladesh to the WTO and UN Offices in Geneva
Presented at
2nd Committee Panel Discussion
Organized by
FFDO, Department of Economic and Social Affairs
United Nations, New York
16 November, 2007
Layout of Presentation
1. Trends in Aid Dependency of LDCs
2. Moving Out of Aid Dependency:
The Bangladesh Experience
3. Quality Aid Flow to End Aid Dependency
 MDG and Role of Foreign Aid
 Paris Declaration and Aid Effectiveness
 PRSP and Aid Financing
4. New Sources of Development Finance
5. Concluding Remarks
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency of LDCs/LICs
Absolute Amount of ODA Flow to Low Income
Countries
50000
40000
30000
20000
10000
0
1985
1990
1995
2000
2001
2002
2003
2004
2005
Source: World Development Indicators 2007
 Rising ODA to Low Income Countries since 2000.
 Aid to the group of 50 LDCs increased by 2004 to USD 24.9
billion. 53 LICs received USD 40 billion.
 In real terms, aid to LDCs actually decreased by 4.4 percent
between 2003 and 2004.
3
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency
Net Disbursement and Commitment of ODA to LDCs
Commitment
Disbursement
Source: The Least Developed Country Report 2007




Steady ODA flow between 1990 and 1995
Declining trend from 1996 to 2000
Drastic rise after 2000 and reached a peak in 2004
This is solely attributed to the rise in emergency
assistance and debt forgiveness grants
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency
ODA As Share of GDP for Low Income Countries
4
3.5
3
2.5
2
1.5
1
0.5
0
1985
1990
1995
2000
2001
2002
2003
2004
2005
Source: World Development Indicators 2007
 ODA as a percentage of GDP of low income countries has declined
sharply throughout the 1990s.
 Share of ODA in GDP started to rise since 2000 and remained more
or less stable till 2005
 Afghanistan and Congo are the two extreme cases where real growth
rate of net ODA during the period between 1999-2004 was 79.2
percent and 93% respectively.
5
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency
Per Capita Flow to LDCs
Source: The Least Developed Country Report 2007
 Per capita ODA flow followed declining trend from 1990 to 1999.
 Began to increase from 2000 and continued till 2003.
 Real ODA per capita disbursed to LDCs was actually 13.5
percent lower in 2000-2004 than in 1990-1994.
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
6
1. Trends in Aid Dependency
Split between Multilateral and Bilateral Flow to LDCs
Net Disbursement and Commitments: Multilateral
Donors
Net Disbursemnet and Commitment: Bilateral
20000
10000
15000
8000
6000
10000
4000
5000
Net Disbursement
Commitment
2004
2002
0
2001
2004
2003
2002
2001
1990
1985
0
2003
Commitment
1990
Net Disbursement
1985
2000
 Gap between committed and disbursed ODA from multilateral donors
widened in 2003 but converged in 2004.
 The gap increased since 2003 in case of bilateral sources of ODA.
 Absorption problem, conditionality and burgeoning pipeline.
7
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency
Split between Loans and Grants to LDCs
 Share of grants in
ODA has been
increasing while share
of loans followed a
declining trend.
Percentage of ODA Financed by Loans and Grants
80
70
60
50
Grants
40
30
Loans
20
10
0
1992-1994
1999-2001
2002-2004
 72% of the total
external financing
came in the form of
grants between 2002
and 2004.
 What about untying of
grants?
Source: The Least Developed Country Report 2007
8
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
1. Trends in Aid Dependency
Composition of ODA during 1992-95 and 2000-2003
Source: The Least Developed Country Report 2007
 The recent upsurge is driven by debt forgiveness grants and
emergency assistance grants. (22.6 % and 27.9% in real terms between
1999 and 2004)
 Share of technical cooperation to the total net ODA to LDCs averaged
22.6 percent in 2004, while net loan disbursements averaged only 17.3
percent.
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
9
1. Trends in Aid Dependency
Growth and Decline in Aid Flow by Country
Million USD
Major ODA Recipients Among LDCs
6000
Afghanistan
5000
Angola
Bangladesh
4000
Congo
3000
Ethiopia
2000
Mozambique
1000
Tanzania
Zambia
0
1985
1990
2001
2002
2003
2004
Source: The Least Developed Country Report 2007
 Major change in ODA took place in Afghanistan (79%) and Democratic
Republic of Congo (93%) between 1999 and 2004
 Between 1999 and 2004, ODA inflows increased by 20 percent per
annum in six LDCs namely Afghanistan, Burundi, The Democratic
Republic of Congo, Lesotho, Sierra Leon and Sudan.
 ODA to Comoros, Mauritiana, Myanmar and Bangladesh have been
seeing a declining trend
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
10
1. Trends in Aid Dependency of
LDCs/LICs
Recap
 Increasing trend in ODA flow in nominal term
since 2000. Per capita inflow also increased.
 No significant change in ODA flow in real terms
 Incremental inflow underwritten by surge in
emergency assistance and debt forgiveness
 Increased grant component, share of multilateral
unchanged.
 Skewed distribution of ODA flow favouring the
failing economies.
 Uncertain prospect about future flow.
11
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
ODA
(Mil USD)
2000
1500
1000
500
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
0
Year
• ODA disbursement trend
showed some volatility
over the years and
remained around $1.5
billion.
Source: Economic Review, MoF
• Divergence between
committed and disbursed
ODA persists over the
years.
Source: Economic Review, MoF
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Share of Loans and Grants in Foreign Financing
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 200696
97
98
99
00
01
02
03
04
05
06
07
Grants
Loans
 Share of grants in total foreign financing is declining
(from 46.86 in FY96 to 20.69 in FY07.
 Share of loan increased from 53.14% in FY96 to 79.31 in
FY07.
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
13
Remitance
Export
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
1995-96
1994-95
1993-94
1992-93
1991-92
20
18
16
14
12
10
8
6
4
2
0
1990-91
as % of GDP
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
ODA
• The declining ODA inflow as percentage of GDP indicates
declining aid dependency in Bangladesh.
• Parallel trends of increase in exports and remittance flow.
• However, there are certain critical sectors which still need
ODA to implement development programmes.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Major Sources of Remittance to Bangladesh (ml USD)
06
05
20
05
-
04
20
04
-
03
20
UK
03
-
02
20
02
-
01
20
01
-
00
20
USA
00
-
99
99
-
19
98
19
98
-
97
19
UAE
97
-
96
19
96
-
95
19
95
-
94
19
94
-
93
Saudi Arab
93
-
19
92
-
92
19
91
-
91
19
90
-
19
1800
1600
1400
1200
1000
800
600
400
200
0
Malaysia
 Highest amount ($1696.96 in FY06) of remittance earning comes from
Saudi Arabia followed by the USA (760.69 in FY06).
 The issues of market diversification and Mode 4 services negotiation.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario




Export is concentrated in the EU (USD 6396.08 ml in FY07) and USA market ($3441.02 ml in FY 07).
Export is also heavily dependent on the RMG sector (75%)
Bangladesh’s GSP Utilization rate in EU is 77.90%
DFQF for LDCs under WTO or AGOA parity for Asian LDCs
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
16
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Share of Export by Destination in FY2007
1.21
0.22
2.38
EU(25)
11.66
USA
Can
3.75
Jp
52.52
28.26
Aus
Ind
Oth
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Bangladesh: From Aid to Trade Dependency
Items
(as % of
GDP)
FY 1981
FY1991
FY 2001
FY 2005
FY2006
FY 2007
1. Export
3.66
5.55
13.52
14.42
17.42
17.98
2. Import
9.86
11.21
19.52
21.90
24.43
25.34
3.
Remittance
1.91
2.47
3.94
6.41
7.96
8.83
4. ODA
Disbursed
5.78
5.59
2.86
2.10
2.06
2.40
NA
0.08
1.15
1.29
1.12
1.12
21.22
24.89
40.99
46.12
52.98
55.67
5. FDI (net)
Total (1-5)
• The relevant indicators suggest that Bangladesh has
moved in the 1990s from Aid Dependency to Trade
Dependency: Trade in manufactures and services
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Bangladesh: From Aid to Trade Dependency
Degree of
Openness (X +
M as % of GDP)
13.50
16.80
33.00
36.30
41.84
43.32
Extent of
Globalisation
21.20
24.90
41.00
46.10
52.98
55.67
X as % of M
37.10
49.50
69.30
65.80
71.29
70.98
(X+R) as % of
M
56.50
71.50
89.40
95.10
103.89
105.83
5.80
5.60
2.90
2.10
2.06
2.40
302.37
226.83
72.74
32.71
25.82
27.17
ODA as % of
GDP
ODA As % of R
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
FY95
FY94
FY93
90
80
70
60
50
40
30
20
10
0
FY92
Percentage
Share of Foreign resoources in Deficit Financing
• The importance of foreign resources in deficit financing is
declining, but still provides substantial support.
• But the grant component has declined.
• In the recent past Direct Budget Support has emerged as an
important component after SWAPs.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
Revenue - GDP Ratio
12
10
8
6
4
2
0
1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 200696
97
98
99
00
01
02
03
04
05
06
07
•
•
•
Stagnating revenue-GDP ratio is not helping the aid dependency.
Need to broaden tax base to generate resources for financing development
budget.
Between FY1996 and FY2007, this ratio increased from 9.2 percent to 11.2
percent.
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
21
2. Moving Out of Aid Dependency:
The Bangladesh Scenario
ODA Contribution in Developm ent Projects
FY05
FY06
FY07
FY08
60
Percentage
50
40
30
20
10
0
Health
Education
Infrastructure and
Pow er
• ODA accounts for about 50% of Annual Development Programme.
• ODA contribution continues remain significant for critical sectors:
Health, Education & Physical Infrastructure.
• Between 1991 and 2005, public expenditure on education and health
increased both as shares of total government expenditure and GDP.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
2. Recap
 Bangladesh is emerging as an LDC which has moved
out of “extreme” aid dependency through generation of
non-debt creating foreign exchange earnings (e.g.
through exports and remittances by temporarily migrant
workers). This has addressed the balance of payment
problem.
 However, flow of FDI had been subdued. Bangladesh is
yet to fully explore new forms of development finance,
but private-public partnership is finding place.
 But due to low level of domestic resource generation
Bangladesh still needs ODA to underwrite fiscal deficit.
 Bangladesh’s moving out from acute aid dependency
has not been rewarded with greater flow of good quality
ODA.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
3. Quality Aid Flow to End Aid Dependency
MDG (2000) and Role of Foreign Aid
 Goal 8 calls for debt relief and increased bilateral and
multilateral development assistance, particularly for
LDCs.
 Funding still remains a major concern for MDG
implementation.
 Poor progress of development partners in providing 0.7%
of their GNI as ODA by 2015.
 Industrialized nations lag behind in meeting their target to
double ODA to Africa by 2010.
 ODA is expected to decline further in 2007 as debt relief
continues
 Political obstacles in Financing MDG
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
3. Quality Aid Flow to End Aid Dependency
Paris (2005) Declaration and Aid Effectiveness:
 The progress in Paris Declaration will be measured by a
survey in 2008.
 The targets set in Paris declaration for 2010 seems
unreachable with the current state of ODA disbursement.
 Harmonization is still not in pursued by the development
partners on the ground.
 Recipient country policies and institutions need to be
right in order to improve quality of aid.
 More initiative from development partners required in
order to achieve full alignment with recipient’s policies.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
3. Quality Aid Flow to End Aid Dependency
PRSP (2000) and Implications for Foreign Aid
• PRSP resulted from a donor driven process,
full ownership could not be ensured.
• Resource envelope: makes it easier for the
development partners to plan for aid, but
financing PRSP is not showing up.
• Discrepancy in aid flow recording between the
recipient and development partners.
26
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
3. Quality Aid Flow to End Aid Dependency
Foreign Financing Requirement for Bangladesh PRSP (as % of GDP)
Fiscal Year
PRSP
Projection
FY 2005
Actual
Disbursement
New
Projection
1.8
FY 2006
2.5
1.5
FY 2007
2.5
1.6
FY 2008
2.6
2.0
FY 2009
2.6
1.8
FY 2010
1.7
 Projected figures for foreign financing have proved to be over-optimistic.
 Achieving downward revised foreign financing targets will also be challenging.
27
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
4. Moving Out of Aid Dependency:
New Forms of Development Finance
Alternative Traditional Forms
Better market access for manufactured
and commodity exports
Improved market access for movement of
natural persons.
Higher quality of FDI flow
Enhanced domestic resource mobilization
effort.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
4. New Forms of Development Finance
Innovative New Forms
 Development of projects under private-public partnership.
 Borrowing from private banking system without public guarantee
generating equity financing from global capital market.
 A system of global pollution taxes could generate a triple dividend: a
better global environment, a second dividend as the environmental
tax implies no efficiency loss nor a burden on employment and
resources for world development.
 Establishment of a Global Lottery in agreement with national
lotteries.
 Global Premium Bond (a savings instrument with a lottery ticket),
along the lines practiced in Bangladesh, Ireland and the UK.
 Measures to increase private donations for development.
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Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC
Thank you for your attention.
30
Bhattacharya D. Moving Out of Aid Dependency: Reflections on LDC