2 February 2024

En 1960s, a new type of development financing emerged for low-income countries that had gained independence: concessional loans, i.e. low-interest, long-term loans with long grace periods .

New organizations were responsible for distributing them. The International Bank for Reconstruction and Development, created in 1944 in Bretton Woods, has been joined by an International Development Association (IDA, in reference to its English acronym) responsible for allocating these loans to a list of countries categorized as “low-income country”.

Many agencies have followed similar practices. The International Monetary Fund (IMF), which was certainly not made for this, allocates concessional loans from 1986, thanks to the sale of part of its gold. But this is not a general case. For a long time, for example, the European Development Fund was limited to donations.

The will of the United States

Such a practice, however, has no real basis: it is not because countries are poor that they cannot repay loans at market rates. For once, all economic theories agree: investments in poor countries should be more profitable than in already rich countries, where capital is abundant. Microfinance is based on this idea at the individual level: it promotes high-interest loans to poor people to guarantee the financial sustainability of the system.

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The introduction of this type of bastard financing, concessional loans, was in fact linked to the desire of the United States not to depend on United Nations agencies (which make donations), when they have a power preponderant within the governance of the World Bank, the parent company of IDA.

Organizations that grant concessional loans thus have a dual nature. On the one hand, their mission is to promote the development of poor countries, but on the other, they are creditors of these same countries – and even privileged creditors, who must be reimbursed before the others. However, it is not for them to make profits.

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Concessional loans carry such low interest rates that they cannot provide even minimal profitability (except perhaps during exceptional periods of negative interest rates). This is why these development funds are not financially sustainable. They must regularly call on new resources, which are given to them by volunteer countries. The ability of agencies to continue providing concessional loans depends on these subsidies, forcing them to ration the credits they can provide.

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