56754 August 2010 . Number 28 ARAB DEVELOPMENT ASSISTANCE: FOUR DECADES OF COOPERATION Mustapha Rouis 1 institutions are well capitalized, with the capacity to scale up assistance. Introduction: Over the past four decades, Arab aid, which has been relatively under-studied, Figure 1: Arab ODA as a Share of GNI (%) has played an important role in global development finance. Arab donors-- predominantly the Kingdom of Saudi Arabia (KSA), Kuwait and the United Arab Emirates (UAE)--have been among the most generous in the world, with official development assistance (ODA) averaging 1.5 percent of their combined gross national income (GNI) during the period 1973-2008, more than twice the United Nations target of 0.7 percent and five times the average of the OECD-DAC countries. Arab Official Development Assistance (ODA) accounts for 13 percent of total DAC ODA on average and nearly three-quarters of non-DAC ODA. Overview and Trends in Arab ODA: As In addition to government-to-government aid, shown in Figure 1, the share of Arab ODA in Arab donors have established a number of GNI was exceptionally high in the 1970s, specialized financial institutions to provide peaking at over 12 percent for UAE and at development assistance to low-income about 8.5 percent for Kuwait and KSA in 1973. countries. Assistance through these institutions About one-third of all ODA during the 1970s increased substantially by 4.4 percent per year was from Arab donors. High levels of Arab in real terms over the period 1990-2008. ODA in the 1970s and 1980s were primarily a There are good reasons to believe that Arab aid reflection of high oil prices and, to some extent, will continue to play an important role in the substantial start-up costs associated with international development assistance into the establishing aid programs and capitalizing foreseeable future. Arab donors have recently development funds and banks. increased their aid volumes, and Arab financial From this extraordinarily high starting point in the 1970s and early 1980s, levels of Arab ODA declined, although they remained well above 1 Lead Economist, Middle East and North Africa Region, OECD-DAC averages as a share of GNI. The The World Bank. This Quick Note is based on the executive downward trend can be explained by a summary of the 2010 World Bank report "Arab Development Assistance: Four decades of Cooperation". combination of several factors. First, the levels The Quick Note was cleared by Acting MNA Chief witnessed in the 1970s and early 1980s were Economist Farrukh Iqbal. very high by international standards and could percent of total ODA in West Bank and Gaza, not be sustained over time. Second, fiscal space Somalia, Sudan, Turkey, Egypt, Mauritania, in these countries has been reduced as a result and Djibouti. of declining oil revenues and growing national spending on wages, transfers, debt service, and Composition of Arab ODA: The composition social services for a growing population. Third, of Arab bilateral ODA has shifted significantly external factors such as regional security in the last decade. Until 2000, over two-thirds of concerns have also reduced to some extent the Arab bilateral ODA was in the form of grants. fiscal space. Since then, the share of grants has dropped to 40 percent; most aid is provided in the form of Aid levels have increased since 2002, both in soft loans. The bulk of Arab ODA (87 percent) volume and as a share of GNI, as oil prices have has been provided bilaterally. The average ratio risen and post-conflict reconstruction needs of multilateral to total ODA among Arab have expanded. As in the past, most aid comes donors was less than half of the OECD-DAC from KSA, Kuwait, and UAE, respectively. norm (13 percent as compared to 30 percent). Arab ODA from these countries accounts for Of the 11 percent of Arab ODA provided the bulk of non-DAC ODA, averaging nearly through multilateral sources during 1995-2007, three-quarters during 1991-2008. some 4 percent has been channeled through Arab financial institutions, 4 percent through Preliminary estimates for 2008 indicate an even the World Bank, 2 percent through UN agencies higher volume of aid (around US$ 6 billion and and just under one percent through the African 0.7 percent of GNI) in spite of the global Development Bank (AfDB). Other ODA, for financial and economic crisis, with KSA humanitarian purposes, has been directed accounting for the bulk of aid. The Arab ODA- through the Red Crescent Societies and other to-GNI ratio remains more than twice the non-governmental organizations, for which average of 0.3 percent of GNI among OECD- consolidated sources of information are not DAC members for 2008. available. The Reach of Arab ODA: Over time, Arab Arab Financial Assistance Institutions: In the donors have expanded their reach in terms of 1960s, and more importantly the 1970s and recipient countries--beyond Arab and early 1980s, Arab donors established a number predominantly Muslim countries--and in of specialized financial institutions to provide terms of sectors--beyond infrastructure. At development assistance. Kuwait, KSA, and present, Arab ODA covers a wide range of UAE established national aid agencies. In countries, and especially poor countries in sub- addition, five main regional funds were Saharan Africa such as Mali, Mauritania, established: the Arab Fund for Economic and Senegal, Somalia, and Sudan; and in Asia such Social Development (AFESD), Arab Bank for as Cambodia, Bangladesh, Nepal, Pakistan, Sri Economic Development in Africa (BADEA), Lanka, Tajikistan, and Vietnam. The Kuwait Islamic Development Bank (IsDB), OPEC Fund Fund, the Saudi Fund and the OPEC Fund are for International Development (OFID), and the most global in focus, also financing projects Arab Monetary Fund (AMF). Strictly speaking, in Europe and Latin America. The sector focus IsDB and OFID are not exclusively Arab- of Arab ODA has broadened over time to financed institutions, but Arab countries include agriculture, health, education, and provide the largest share of their funding. In social services. addition, the Arab Gulf Program for United Nations Development Organizations Focal Countries for Arab ODA: Arab aid has (AGFUND) plays a special role in financing played a major role in total ODA flows to some technical cooperation and humanitarian countries. In Syria, Arab ODA accounts for over assistance through its support for specialized 70 percent of total ODA from all sources. In UN agencies. These institutions have grown to Morocco, Lebanon, Yemen, and Jordan, Arab become major providers of external financial ODA represents between 20 and 40 percent of assistance. With the exception of AGFUND, total ODA. Arab ODA also accounts for 10-20 these agencies have financed their operations August 2010 · Number 28· 2 primarily from capital subscriptions and loan promote trade between Burkina Faso, Chad, reflows. Sierra Leone, Rwanda, and Cameroon. AFESD's contribution to Arab regional Financial assistance commitments of the nine integration is the financing of the Arab major Arab financial institutions reached a Electricity Grids Interconnection Projects. In the cumulative total of US$ 155 billion (in 2007 area of capacity building and research, AFESD prices) over the period 1962-2008, which is five joined with the World Bank to establish the times the combined paid-up capital of these Research Initiative for Arab Development. IsDB institutions. Commitments increased has also supported regional integration in significantly in both nominal and real terms Africa through assistance to, for instance, the (Figure 2); annual average increases were Trans-Sahara and Trans-Sahel roadways. There estimated at 4.4 percent in real terms for the is a growing effort among Arab financial period 1990-2008. institutions to promote South-South cooperation, as illustrated by the IsDB Capacity Originally created to provide financial Building Program (Box 3.1). South-South assistance to low-income Arab countries, Arab cooperation is one of the hallmarks of Arab aid, financial institutions have broadened their and its effectiveness and lessons merit careful reach to cover a wide range of low- and lower- study. middle-income nations. These organizations traditionally financed infrastructure, but now Though Arab financial assistance is place a greater emphasis on agriculture, social predominantly in the form of concessionary sectors, targeted poverty reduction programs, credit, some institutions provide grants to and private sector development. finance capacity building, project preparation, and technical advice. Arab agencies also Figure 2: Yearly Average Commitment of provide consolidated support to UN Arab Financial Institutions Specialized agencies, Red Crescent Societies, (US$ billions) and non-governmental organizations (NGOs) for humanitarian assistance. Arab financial assistance is noteworthy for its partnership and solidarity with recipient countries--in practice, this is interpreted to mean that Arab donors do not attach policy conditions to the loans they provide. Arab financial agencies coordinate policies and procedures and co-finance projects through a Coordination Group hosted by AFESD. Reports suggest that the use of common procedures has enabled Arab agencies to reduce transaction costs, foster greater transparency in project management, and improve project safeguards Arab financial institutions have also and accountability. Co-financing is the participated in debt relief operations (through principal mechanism through which these rescheduling) and have provided balance of agencies collaborate among themselves and payments and budget support. with other development partners. The Coordination Group also participates in global Regional Integration and Arab ODA: In initiatives to foster aid harmonization and addition to national projects, Arab financial alignment. assistance agencies support projects that foster regional economic integration, particularly in Reporting Practices and Arab ODA Agencies: roads, energy and hydropower infrastructure, Reporting practices among Arab ODA agencies and South-South cooperation. For instance, in are evolving. The establishment of a central 2007, BADEA financed five road projects to agency to coordinate ODA in the UAE and August 2010 · Number 28· 3 efforts made to bolster the visibility of KSA's Contact MNA K&L: aid program bode well for the future Emmanuel Mbi, Director, MNA Operational Core development of Arab ODA reporting systems. Services Unit Furthermore, the Coordination Group David Steel, Manager, MNA Development Secretariat is engaged in a capacity Effectiveness Unit enhancement partnership with OECD-DAC Regional Quick Notes Team: Omer Karasapan, Roby Fields, Hafed Al-Ghwell Looking Ahead: Arab financial institutions are and Aliya Jalloh well positioned to meet the challenges posed by Tel #: (202) 473 8177 the global financial and economic crisis. Being well capitalized and financially conservative, MENA K&L Quick Notes: these institutions may be able to help offset http://www.worldbank.org/mena-quicknotes some of the slack that may be created by declining ODA from other sources. Over the The MNA Quick Notes are intended to summarize medium to long run, these growing and lessons learned from MNA and other Bank Knowledge maturing institutions will be well placed to tap and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its board or its into capital markets to increase the scope of member countries. their operations. August 2010 · Number 28· 4