IDA's Role in an Increasingly Complex Global Aid Architecture

Over the past two decades, the global aid architecture has undergone a significant transformation. This period has seen a notable increase in Official financial flows (OFF) volume, particularly benefiting low-income countries. However, this shift has also led to a more complex and fragmented aid architecture, with a noticeable decrease in concessional resources.

Official financial flows increased to US$1 trillion in 2021, a 53% increase from 2010. However, despite this significant expansion, the aid architecture faces substantial challenges as the demand for development finance grows faster than the financial flows. Low-income countries (LICs) require US$2.4 trillion annually until 2030 to address climate crises, conflict, pandemics, and health concerns. Although the volume of official financial flows has increased, the number of donor channels has also expanded rapidly and organically without benefiting the overall aid architecture.

Between 2002 and 2021, official finance providers increased from 62 to 112. This proliferation reflects the emergence of new donors and the creation of new multilateral institutions. Over the same period, the number of donor agencies providing finance more than doubled, from 215 to 565.

The burden on low-income countries

The unwieldy growth has led to significant circumvention of government budgets. Additionally, many donors and varied channels have created obstacles for low-income countries with weak implementation capacity, particularly those already struggling with debt or in conflict and fragile situations.

For example, Ethiopia's average number of donor agencies has increased by 24 percent in the last 20 years, leaving the country to manage more than 200 donor agencies now. The situation is dire in small countries. Tajikistan (with a population of under 10 million) has to manage 130 agencies, and Malawi (19 million people) has 171 agencies. 

Recipient countries face challenges from multiple donors, each with its requirements, such as project audits, environmental assessments, procurement reports, financial statements, and updates. This results in limited policy leverage and conflicting policies, making the situation more complex for donor and recipient countries.

The increase in donor proliferation has led to the fragmentation of aid flows, especially Official development assistance (ODA). The average ODA grant is now half the size of 20 years ago. Between 2000 and 2021, the size of ODA grants went from an average of US$1.7 million to US$0.8 million. The size of grants is especially concerning since LICs have a weaker capacity, and the higher transaction costs place a disproportionate burden on them.

Towards Greater Balance

A well-balanced and complementary approach is required to enhance aid delivery. A solution that benefits everyone involves combining the strengths of horizontal aid providers through improved partnerships and co-financing.

IDA as a Partner of Choice

In this context, IDA is a partner of choice that offers a solution to the challenges posed by a complex aid architecture. It is a representative player with a global community of countries, which includes 59 donors (both traditional and non-traditional, including all the BRICS) that form the world’s largest fund for low-income countries.

IDA's global footprint and the ability to convene various stakeholders, including governments, civil society organizations, and other development partners, facilitate better coordination and alignment of efforts. IDA's unique hybrid financial model enables it to leverage additional resources for low-income countries. These features make IDA a vital player in tackling the present development challenges. Therefore, IDA's financing capacity is safeguarded and increased as part of the upcoming IDA21 Replenishment, which should establish a new record financing package.

Over the past two decades, donor channels have increased to more than 200 donor agencies in some countries. Earmarked aid has also increased rapidly, with official financial flows reduced into smaller portions. These trends underline the critical and irreplaceable role of IDA. Over 90% of the IDA's financing is channeled through recipient countries' governments, which helps reduce the risk of aid diversion. Every IDA donor money is multiplied between three- and fourfold for recipient countries. As the only triple-A fund for the world’s poorest countries, IDA provides unmatched financial efficiency for donors.