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Did High Debts Distort Loan and Grant Allocation to IDA Countries?

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  • Marchesi, Silvia
  • Missale, Alessandro

Abstract

We examine the allocation of net loans, net transfers, and grants to IDA countries over the period 1982–2008 focusing on the role of debt and debt sustainability in the decisions of multilateral and bilateral donors. We find no evidence of defensive lending but strong evidence of defensive granting. A significant negative reaction of net loans to the debt ratio indeed characterizes the decisions of both multilateral and bilateral creditors. The impact of lower loans on the budget of debtor countries is however accommodated through higher grants, in addition to debt relief. These findings are consistent with a substitution of grants for loans and with the new approach to debt sustainability but question the efficiency and selectivity of foreign aid.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 44 (2013)
Issue (Month): C ()
Pages: 44-62

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Handle: RePEc:eee:wdevel:v:44:y:2013:i:c:p:44-62

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Web page: http://www.elsevier.com/locate/worlddev

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Keywords: aid; debt sustainability; defensive lending; developing countries; HIPC;

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Cited by:
  1. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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