How the UK Can Plug the ODA Hole: A Modest Proposal for Financial Engineering

The decision to reduce ODA spending to 0.3% of GNI has created a £6.2 billion hole in the UK’s foreign economic policy. The cuts will lead to development and humanitarian setbacks in low-income countries and threaten political and geopolitical spillovers for the UK and its partners. They will also put significant pressure on the World Bank’s balance sheet: World Bank financing commitments will have to rise to fill funding gaps at the same time that the ODA cuts are projected to reduce equity contributions to the World Bank. The UK can partially mitigate the consequences of its ODA cuts through responsible financial engineering — putting idle foreign reserves into action in ways that are legally and financially sound. This policy note proposes two ways to mobilise a small portion of the UK’s largely idle £149.2 billion reserve fund, the Exchange Equalisation Account (EEA), to continue supporting low-income countries. The proposals are to use the EEA to fund Concessional Partner Loans to IDA and to make Bond Purchase Commitments for IDA. Both proposals are fiscally neutral as they require the issuance of no new debt, the raising of no new taxes, and as their funding through the EEA has no bearing on the UK’s fiscal accounts (the CF and NLF). The note proceeds with (1) an overview of the ODA cuts and their effect on IDA, (2) a history and operational review of the EEA, (3) the proposal for Concessional Partner Loans, (4) the proposal for Bond Purchase Commitments, and (5) an annex on the fiscal neutrality of the proposals.