In a recent op-ed, two representatives of Expert Group for Aid Studies (EBA), a Swedish government committee tasked with independently evaluating Sweden's official development assistance (ODA), argued for making Swedish ODA more effective by implementing financial reforms in three separate areas.
Jan Pettersson and Númi Östlund from EBA argue that Swedish ODA is currently exposed to various financial risks that reduce its effectiveness. As per the instructions from the Swedish Central Bank, it is important to ensure that every ODA penny makes the maximum contribution to poverty reduction and "create the conditions for better living conditions for people living in poverty and oppression". Moreover, in order to strengthen public support for ODA, Sweden must be able to demonstrate the impact of ODA in its partner countries.
The two authors warned, "ODA is an activity with high risks. It is challenging to finance operations in environments where corruption is commonplace and there is a lack of basic infrastructure and functioning institutions. ODA is largely about contributing money and knowledge where other actors cannot operate. It is crucial that ODA do not fund things that can be financed in any other way, that ODA is."
Pettersson and Östlund argue that it is important to distinguish between risks: those associated with difficult working environments and those related to decision-making or donor systems. Financial risks fall in the latter category, and could, according to the authors, be addressed through three separate measures:
- Abolishing the 1% of GNI target for ODA: This would reduce the volatility of Swedish ODA related to the uncertainty and volatility of GNI forecasts. It would also reduce the impact on ODA volatility related to other components of ODA such as costs related to asylum seekers. This effect was also noted by the National Audit Office in a recent review of Swedish ODA. In the 2020 Fall Amending Budget, presented in September, SEK 750 million (US$86 million) was reallocated to the traditional ODA budget from cost reductions related to asylum seekers, to be spent before the end of 2020. To increase the predictability of the ODA budget, the authors argue that “the government should agree on and communicate clear principles for how to deal with major changes in the budget. This applies in particular to changes within the financial year.”
- Reducing currency risks for Swedish ODA: Swedish ODA is denominated in the Swedish Krona and the exchange rate against major currencies is often susceptible to large fluctuations, the effects of which currently have to be borne by implementing partners. Utilizing available financial instruments to hedge against the currency risks would reduce this burden on them. Again, this issue has been pointed out by the National Audit Office, but very few concrete actions have been taken yet by the Swedish government to address the problem. Pettersson and Östlund argue that the Swedish government should utilize both the expertise of the Swedish National Debt Office as well as public financial guarantees developed by the Swedish International Development Cooperation Agency (Sida) to effectively reduce the currency risks associated with Swedish ODA.
- Reducing the role of the Swedish banking system: Following recent scandals of money laundering, Swedish banks have become increasingly restrictive when it comes to international financial transactions. These measures have also affected ODA transfers authorized by the Swedish government, both in terms of delivery as well as increasing costs related to bank charges and foreign exchange transactions. The authors argue that Sida should support Swedish banks with the relevant information required for the banks to enable these transactions in high-risk countries at lower costs.
Jan Pettersson is the Managing Director of the EBA Secretariat and Númi Östlund is a Program Manager at the EBA Secretariat.