Foreign aid needs a rethink as a result of COVID-19

Traditionally, the Gulf Cooperation Council (GCC) countries have been among the most generous aid donors worldwide, at times exceeding the target set by the UN for aid levels. Over the past 10 years alone, they have provided more than $50 billion in grants and much more in loans and other forms of aid. In addition to their regular contributions to international aid programs, GCC countries have given generously to aid drives organized by international agencies for emergency funding for victims of conflict and natural disasters worldwide.

However, the coronavirus disease (COVID-19) is forcing a rethink of aid policies. The pandemic has put great pressures on GCC economies, making it necessary to rationalize government spending, including on foreign aid. At the same time, COVID-19 has had a devastating impact on poor countries, including in the Middle East, highlighting their need for assistance.

According to a recent International Monetary Fund (IMF) report, real gross domestic product (GDP) for the Middle East and North Africa (MENA) is now projected to fall on average by 4.7 percent in 2020 — a 2 percentage point drop from the IMF’s own estimate in April. The situation is worse for countries that are fragile and in conflict, where the IMF expects economic output to shrink by 13 percent by the end of the year. Making matters worse, there was a sudden reversal of capital flows as the pandemic hit, losing the region an estimated $6 billion to $8 billion in investment outflows.

In fact, much of the pessimism in the IMF’s new growth forecasts for the region is driven by weakened prospects among oil exporters. GCC countries and other oil exporters have faced a double whammy of the pandemic and severe oil market fluctuations. The agreements reached by OPEC and other major oil producers (OPEC+), along with cuts in US shale oil production, have helped stabilize prices to an extent. However, they are still well below pre-COVID-19 levels.

MENA countries’ policy responses to the pandemic have focused on health care spending, supporting the most economically vulnerable, and ensuring liquidity provision. However, other than a handful of GCC countries, the average size of fiscal relief and stimulus packages has been smaller than other regions around the world. The packages have been limited by the shrinking revenues of oil exporters due to the fall in oil prices and its spillover effects on the rest of the region. The pandemic has also led to a significant fall in government revenues and threats to fiscal sustainability in a number of countries. For non-oil exporters, debt-to-GDP levels are now projected to reach an average of 95 percent by the end of 2020.

All aspects of economic activity have been affected and the prospects for post-pandemic recovery are unclear. International reserves among most countries in the region are being negatively affected. What is making matters worse for poorer countries is that the ability of their richer neighbors to help is being constrained by the pandemic. Workers’ remittances have been an important source of support for parent countries, but are now declining due to COVID-19. Overall, external bilateral and multilateral support for poor countries in the region is also declining, despite attempts by the IMF, which has so far provided around $17 billion in aid and hopes to mobilize another $5 billion by the end of 2020. Much of this aid is in the form of loans to be repaid, and it represents a drop in the bucket compared to the devastation wreaked by the pandemic.

It is certainly a dilemma: Poorer countries are in greater need than ever, while the donors themselves are less able to provide aid in the ways to which both sides have become accustomed. Is there a better way that could help poor countries without harming the fiscal sustainability of the donors?

Economists have long advocated a reassessment of the aid given by rich countries in an effort to make it more effective for the recipients and less burdensome on the donor countries. Peter Bauer, a well-known Hungarian-British development economist, argued consistently against the widely held belief that state-to-state foreign aid is the most effective way to help developing countries. In his book “Dissent on Development,” Bauer said: “Foreign aid is a process by which poor people in rich countries help rich people in poor countries.” He was referring to the corruption, inequity and inefficiency frequently associated with such aid.

While support for conventional official aid has dominated the discourse around aid for decades, after COVID-19 it is more important than ever to revisit this issue and for each country to decide how it manages its foreign aid. In the wider Middle East, there is little evidence of the benefits of state-to-state aid compared to its cost. It has certainly not met its intended objectives. Recipient countries have often failed to grow their economies, eradicate poverty, raise the standard of living of the general population, or provide a decent level of social services.

Ending conflicts and building stability are frequently cited as objectives for traditional foreign aid, but there is plenty of evidence that it has provided neither. Countries that have relied on aid are not faring very well on either security or stability. For the past two decades, Afghanistan, for example, has relied almost exclusively on foreign aid, but it is far from stable or secure. Other examples abound in the Middle East and beyond.

With little to show the positive impact of conventional state-to-state official aid, it is important to consider alternatives, such as support for the private sector to create jobs and provide much-needed government services. Partnerships between the private sectors in donor and recipient countries should be encouraged and supported. Investment guarantee and loan guarantee programs are essential, as well as eased credit for private entrepreneurs. Aid should also target capacity building and training for proper economic management and for private entrepreneurs.

There are many other alternatives to choose from to replace conventional state-to-state aid. They are all less costly than grants, but have greater impact. They can be used to improve economic management and enhance fiscal sustainability by enlarging the tax base and providing means for self-financing. They are also less susceptible to corruption.

While emergency humanitarian aid for fragile communities, such as refugees and internally displaced persons, should continue as needed, conventional economic aid and budget support should be replaced by the more effective alternatives.

In the short term, reduced official aid could have some negative effects, but in the long run it could have a positive and more lasting impact by making countries more resilient and self-sustaining.

• Abdel Aziz Aluwaisheg is the Gulf Cooperation Council’s assistant secretary-general for political affairs and negotiation, and a columnist for Arab News. The views expressed in this piece are personal and do not necessarily represent those of the GCC. Twitter: @abuhamad1