Over the past 20 years, the global aid architecture has undergone significant transformation. Official financial flows (OFF) volume has seen a notable increase, particularly benefiting low-income countries. However, this shift has also led to a more complex and fragmented aid structure, with a noticeable decrease in concessional resources.
Official financial flows increased to US$1 trillion in 2021, marking a 53% increase from 2010. Despite this substantial expansion, the aid architecture faces considerable challenges as the demand for development finance outpaces the financial flows. Low-income countries require US$2.4 trillion annually until 2030 to address climate crises, conflict, pandemics, and health concerns. Although official financial flows have grown in volume, the number of donor channels has also expanded rapidly without benefiting the overall aid architecture.
From 2002 to 2021, official finance providers increased from 62 to 112. This growth reflects new donors' emergence and new multilateral institutions' creation. Over this period, the number of donor agencies providing finance more than doubled from 215 to 565.
This unwieldy growth has led to significant circumvention of government budgets. Many donors and varied channels have created obstacles for low-income countries with weak implementation capacity, especially those already struggling with debt or in conflict and fragile situations.
For instance, Ethiopia's average number of donor agencies has risen by 24 percent over the last two decades. The country now manages more than 200 donor agencies. Small countries face even more severe situations; Tajikistan (with a population under ten million) manages 130 agencies while Malawi (19 million people) deals with 171 agencies.
Recipient countries grapple with challenges from multiple donors each with its requirements such as project audits, environmental assessments, procurement reports, financial statements and updates. This leads to limited policy leverage and conflicting policies further complicating matters for both donor and recipient countries.
Donor proliferation has led to the fragmentation of aid flows, especially Official development assistance (ODA). The average ODA grant is now half the size it was 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. This decrease in grant size places a disproportionate burden on LICs due to their weaker capacity and higher transaction costs.
To enhance aid delivery, a well-balanced and complementary approach is required. A solution that benefits everyone involves combining horizontal aid providers' strengths through improved partnerships and co-financing.
In this context, IDA offers a solution to the challenges posed by complex aid architecture. As a representative player with a global community of countries, including 59 donors (both traditional and non-traditional), IDA forms the world’s largest fund for low-income countries.
IDA's global footprint and its ability to convene various stakeholders facilitate better coordination and alignment of efforts. Its unique hybrid financial model enables it to leverage additional resources for low-income countries, making IDA a vital player in tackling current development challenges. Therefore, IDA's financing capacity should be safeguarded and increased as part of the upcoming IDA21 Replenishment which aims to 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 rapidly increased with official financial flows being reduced into smaller portions. These trends underline IDA's critical role. Over 90% of IDA's financing is channeled through recipient countries' governments reducing the risk of aid diversion. Every dollar from an IDA donor 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.