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A review of OPEC aid efforts: Experience of the first 25 years

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1986
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Ibrahim F.I. Shihata and Naiem A. Sherbiny

Aid from OPEC countries is about as old as OPEC itself. OPEC was formed in 1960 and the first economic aid program from a member country was started in 1961 with the establishment of the Kuwait Fund for Arab Economic Development. Just as OPEC did not become a significant force in the international oil market until the early 1970s, OPEC aid did not become a major factor in international development assistance until that time. This article briefly reviews the nature and role of OPEC aid during the first 25 years of its existence and, in view of the recent decline in oil revenues, discusses its future prospects.

A new concept

Following World War II, foreign aid emerged as a factor in the socioeconomic transformation and reconstruction of the war-devastated economies of Europe and Japan, and later in the launching of development efforts in Africa, Asia, and Latin America. Bilateral institutions and programs, such as the Marshall Plan and Point Four (US technical assistance program), and multilateral institutions, such as the World Bank, the International Finance Corporation, and the Inter-American Development Bank, were all established in the post-war years to provide external financial resources and technical assistance to needy countries. In all these instances, the main sources of finance were the industrially advanced countries, motivated by many factors including enlightened self-interest.

The Kuwait Fund, established in 1961, was the first aid institution set up by a developing country to provide concessional assistance to other developing countries. The rationale for such aid was twofold: ethical, religious, and cultural considerations; and the desire of the donor to ensure a distinguished place for itself in the community of Arab countries. Kuwait at that time was in an outstanding financial position, because of its high oil revenues relative to its tiny population of 320,000. In 1960, its per capita GNP was 13 times the median value for OPEC members as a group, 5 times the median value for the industrially advanced countries, and twice the per capita GNP of the United States.

The Kuwait Fund was the forerunner of the Arab aid institutions that were to emerge in the 1970s in several capital surplus oil-producing countries, some of which were established before the first major oil price increase of 1973–74. During 1971–76, OPEC members established six bilateral aid agencies and efforts by OPEC’s developing country members led to the establishment of seven multilateral development agencies (see box). All these new agencies began lending during the 1970s. By 1984, after less than eight years of operations, the total authorized capital of the ten major OPEC aid agencies stood at $28 billion, having grown from $1.2 billion in 1973; the cumulative commitments at $24 billion; and actual disbursements at $16 billion. As will be shown below, such flows represented a small portion of total aid flows from OPEC.

Profile of OPEC aid

OPEC aid flows have several important characteristics. First, OPEC aid originates from the depletion of exhaustible oil resources. The relative contribution of individual OPEC members is, therefore, much higher than suggested by the conventional ratios of aid to GNP. If aid flows were related instead to non-depletable GDP, the resultant ratios would be significantly higher than what is indicated by the ratios stated below.

Second, during 1974–79 several OPEC countries extracted oil at significantly higher rates than called for by their absorptive capacities. The resultant oil flows were exchanged for paper claims and monetary flows, and the “surplus capital” was invested in major financial markets earning lower returns (7–9 percent) in comparison with the increase in the real price of oil left in the ground during the same period (10 percent).

Third, unlike aid from other sources OPEC aid is generally untied to the procurement of goods and services. As the OPEC economies are still in a developing phase, they have little to export to developing countries other than oil and oil products. In fact, most OPEC aid finances goods and services that are produced outside OPEC countries, especially in the industrial countries.

Earlier articles in Finance & Development covered aid from developed countries: “Aid flows: the role of the DAC” by Michael Black-well, March 1984, and “ODA from developed countries” by Inez Garcia-Thoumi, June 1983.

Fourth, OPEC aid has for the most part been extended by its Arab member countries. Seven of its 13 members belong to the League of Arab States (Algeria, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, and the United Arab Emirates). Together, these countries provided an average 92 percent of the annual OPEC aid flows until 1978. Starting in 1979, they provided, on average, more than 95 percent of OPEC aid flows.

Fifth, despite the high visibility of multilateral OPEC aid institutions in international development assistance, aid from them is but a small part of total aid from OPEC members. The dominant category in OPEC aid flows is the government-to-government general support assistance, followed by multilateral (project and nonproject) aid, bilateral nonproject finance, and bilateral project finance. In fact, national aid agencies in OPEC member countries often have larger resources than their multilateral agencies, and most aid flows through bilateral channels (see Chart 1).

Chart 1Composition of aid flows from OPEC countries and institutions, 1968–84

Sources: Authors’ estimates based on references in box on OPEC aid institutions.

This article is based on a more comprehensive paper by the authors, entitled “The OPEC Aid Phenomenon in Perspective,” to be published in the Winter 1985 issue of the OPEC Review.

Profile of selected OPEC aid institutions(As of end of 1984)
Institution1BaseYearCapitalCumulative financing
EstablishedStartedAuthorizedPaid-inCommitmentsDisbursements
(In millions of US dollars)
Multilateral
Arab Fund for Economic and
Social DevelopmentKuwaitDec 1971Jan 19742,8001,8222,2291,078
Arab Bank for Economic Development in Africa (BADEA)KhartoumNov 1973March 1975988985883527
Islamic Development BankJeddahOct 1975Oct 19762,0101,2814,6863,771
OPEC Fund for International
DevelopmentViennaJan 1976Aug 19763,4352,5132,0341,418
Arab Authority for Agricultural
Investment and DevelopmentKhartoumNov 1976May 1978540340672502
Subtotal9,7736,9419,8996,844
Bilateral
Kuwait Fund for Arab Economic
DevelopmentKuwaitDec 1961Mar 19626,9002,9524,5082,682
Abu Dhabi Fund for Arab
Economic DevelopmentAbu DhabiJuly 1971Sept 19745445811,065865
Iraqi Fund for External
DevelopmentBaghdadJune 1974Jan 19771,0097231,484694
Venezuelan Investment FundCaracasJune 1974Dec 19743,0003,0003,0462,637
Saudi Fund for DevelopmentRiyadhSept 1974Feb 19757,1635,3004,5102,291
Subtotal18,61612,55614,6139,169
Total28,38919,49724,51216,013

Because of a lack of detailed data, different nature and terms of flows, or both, some OPEC institutions are not shown.

Two bilateral institutions are not shown for lack of comprehensive data: the Libyan Arab Foreign Bank, and the Organization for Investment, Economic and Technical Assistance of Iran (Iran Organization).

Three multilateral institutions are not shown for lack of comprehensive data: the Arab Fund for Technical Assistance to African and Arab Countries, the Arab Gulf Program for United Nations Development Organizations, and the Islamic Solidarity Fund. For available information on these institutions, three sources may be consulted: The OPEC Fund, OPEC Aid and OPEC Aid Institutions - A Profile, No. 5, Vienna (1985); OECD, Aid from OPEC Countries, Paris 1983; and UNCTAD, Financial Solidarity for Development, 1973–1981 Review, New York, 1984.

In addition to AAAID’s equity participations, it has guaranteed loans offered to its subsidiary companies in the order of $86 million.

Because of a lack of detailed data, different nature and terms of flows, or both, some OPEC institutions are not shown.

Two bilateral institutions are not shown for lack of comprehensive data: the Libyan Arab Foreign Bank, and the Organization for Investment, Economic and Technical Assistance of Iran (Iran Organization).

Three multilateral institutions are not shown for lack of comprehensive data: the Arab Fund for Technical Assistance to African and Arab Countries, the Arab Gulf Program for United Nations Development Organizations, and the Islamic Solidarity Fund. For available information on these institutions, three sources may be consulted: The OPEC Fund, OPEC Aid and OPEC Aid Institutions - A Profile, No. 5, Vienna (1985); OECD, Aid from OPEC Countries, Paris 1983; and UNCTAD, Financial Solidarity for Development, 1973–1981 Review, New York, 1984.

In addition to AAAID’s equity participations, it has guaranteed loans offered to its subsidiary companies in the order of $86 million.

Finally, OPEC aid is mostly influenced by sociopolitical and humanitarian considerations rather than by a desire to compensate for the higher oil import bills of the recipient countries. With the exception of a few loans, from the Saudi Fund to Brazil (one) and to Taiwan, Province of China (two), the large, semi-industrial, higher income developing countries, which account for most of the oil imports of developing countries, hardly receive any concessional flows from OPEC sources. OPEC countries were not, however, oblivious to the financial hardships caused by higher oil prices. Some OPEC countries participated in financing the IMF oil facility (42 percent); Arab donors established, in 1974, two oil facilities of their own for the benefit of African and Arab countries, respectively; and Venezuela, in association with Mexico, Jointly launched in 1981 an oil assistance program to provide low-cost oil to Central American and Caribbean countries. Such assistance represents, however, a small portion of total OPEC flows which were channeled mainly to countries with modest oil import bills and, in some cases, to other oil exporters.

Through 1984, total cumulative disbursements, net of repayments, of aid from OPEC member countries amounted to about $79 billion. In relation to the timing of the major oil price increases, these net aid flows may be estimated as follows: $5 billion through 1973 (before the first major oil price increase); $31 billion during 1974–78 (between the first and the second major oil price increases); and $43 billion during 1979–84 (following the second major oil price increase).

Thus the aid granted by OPEC members from the time of the first oil price increase to the end of 1984 totaled $74 billion. This was equivalent to about 22 percent of aid given by all major donors. In relation to GNP, OPEC aid flows averaged about 1.7 percent, considerably higher than the 0.7 percent target established by the United Nations (Chart 2). The period after the first oil price increase was one when OPEC members generally ran substantial surpluses, giving them the resources to share with countries in need. During this period, several individual OPEC donors, for many years, granted aid at ratios well above 4 percent of GNP: for example, in 1975 the ratio for Kuwait reached 7 percent, for Saudi Arabia 8 percent, for the United Arab Emirates 12 percent, and for Qatar 16 percent. In dollar terms, for most of the period since 1975, Saudi Arabia has been the second largest national source of concessional aid in the world, while Kuwait consistently ranked among the largest ten donors, and the United Arab Emirates was among the largest ten donors in some years.

Chart 2Net ODA disbursements by major donor groups, 1973–84

Source: OPEC Secretariat based on OECD published figures.

1Council for Mutual Economic Assistance.

The geographic distribution of OPEC aid is not easily documented, especially since some bilateral donor countries (e.g., Saudi Arabia, the leading donor) do not provide detailed information for all their aid flows. The data on geographic distribution of bilateral flows include general support assistance, project assistance, and nonproject assistance, while those of OPEC aid agency operations exclude general support assistance but include some multilateral aid. Available data on bilateral flows show Asia as the main recipient (66 percent), followed by Africa (27 percent), and Latin America (7 percent). The figures for Africa and Asia include flows to members of the League of Arab States that account for about 70 percent of bilateral OPEC aid. This concentration of aid on countries that have special cultural, political, or economic relations with the donors seems to be quite common in bilateral aid flows worldwide.

Aid agencies

The two major oil price increases substantially increased the capital resources of OPEC members and aid agencies. The first dramatically expanded the capital of aid institutions from $1.2 billion to $12.1 billion, and enabled OPEC members to establish within a short period thereafter 11 new aid agencies. The second oil price increase facilitated further capital expansion of existing aid institutions to $28.4 billion. Most agencies more than doubled their capital during 1975–79.

This expansion of capital resources helped broaden the scope and activities of existing aid institutions, both geographically and functionally. Geographically, the existing bilateral aid institutions (e.g., the Kuwait Fund and the Abu Dhabi Fund) expanded their lending beyond the region. Moreover, all the post-1973 OPEC aid institutions, except one, had from the outset a mandate that covered all developing countries. Only the Arab Authority for Agricultural Investment and Development (set up in 1976) had an expressly regional orientation from the start, with particular emphasis on the Sudan.

The change in functional scope has been no less dramatic. Until 1973, the activities of OPEC aid institutions for the most part concentrated on project financing. Despite many advantages, this form of assistance involves long administrative processes that constrain associated financial flows, whatever the volume of funds allocated or committed. To help alleviate conditions in developing countries, Arab members of OPEC have increasingly resorted to the more rapidly disbursed grants and long-term loans and deposits under general support assistance which, until recently, constituted the major portion of OPEC aid.

By the end of 1984, OPEC aid institutions had carried out more than 1,600 operations, totaling nearly $24 billion, geographically distributed among 99 countries on three continents as follows: $10.6 billion to Africa, $10.7 billion to Asia, and about $3.1 billion to Latin American countries (Table 1). Among these, Arab countries in Africa and Asia, as a distinct group, accounted for about $11.1 billion. The sectoral distribution of loan commitments is shown in Table 2. No comprehensive evaluation has been made of the effects of these operations on the recipient countries. However, many of these operations were cofinanced by the World Bank, and were subject to the scrutiny of the Bank’s Operations Evaluation Department as World Bank projects.

Table 1Geographic distribution of commitments by OPEC aid agencies, at end-19841
Regional distributionTotal allocations
Africa2Asia3Latin

America

and other
Amount

(In millions

of US

dollars)
Percentage

share
No. of

countries
No. of

operations
Multilateral(In percent)
Arab Fund60.040.02,2299.416163
BADEA100.08832.737110
Islamic Bank44.255.84,68616.936359
OPEC Fund46.242.711.12,0348.582384
Bilateral
Abu Dhabi Fund41.258.10.71,0654.64084
Iraqi Fund41.553.35.21,4847.63169
Kuwait Fund48.051.20.84,50819.762286
Saudi Fund45.952.02.14,51019.753202
Venezuelan
Investment Fund4100.03,04610.9n.a.n.a.
Regional share of total
allocations43.343.912.8100
(In millions of US dollars)
Regional total10,58510,7313,12924,445100.0991,657
Sources: Coordination Secretariat of Arab National and Regional Development Institutions, Financing Operations, December 31, 1984 and Middle East Economic Survey (MEES), May 6, 1985; except for the Venezuelan Investment Fund, figures for which are obtained from OPEC, OPEC Aid and OPEC Aid Institutions - A Profile (No. 5) 1985.

The data do not include the Iran Organization or its allocations due to incomplete data coverage since 1978. For data up to 1978 see UNCTAD, Financial Solidarity for Development, New York 1984, pp. 40–43.

Africa includes the following members of the League of Arab States: Algeria, Djibouti, Egypt, Libya, Mauritania, Morocco, Somalia, Sudan, and Tunisia. With the exception of Libya, most African states were recipients of OPEC aid.

Asia includes the following members of the League of Arab States: Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen Arab Republic, and Peoples Democratic Republic of Yemen. Except for OPEC donors (other than Iraq), the rest of Arab states, among others in Asia, were recipients of OPEC aid.

According to the statute of the Venezuelan Investment Fund, the amounts it dedicates to development assistance at any given time cannot exceed 15 percent of its assets. At end-1984, VIF’s development assistance was equivalent to $3,046 million, as shown above.

Sources: Coordination Secretariat of Arab National and Regional Development Institutions, Financing Operations, December 31, 1984 and Middle East Economic Survey (MEES), May 6, 1985; except for the Venezuelan Investment Fund, figures for which are obtained from OPEC, OPEC Aid and OPEC Aid Institutions - A Profile (No. 5) 1985.

The data do not include the Iran Organization or its allocations due to incomplete data coverage since 1978. For data up to 1978 see UNCTAD, Financial Solidarity for Development, New York 1984, pp. 40–43.

Africa includes the following members of the League of Arab States: Algeria, Djibouti, Egypt, Libya, Mauritania, Morocco, Somalia, Sudan, and Tunisia. With the exception of Libya, most African states were recipients of OPEC aid.

Asia includes the following members of the League of Arab States: Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen Arab Republic, and Peoples Democratic Republic of Yemen. Except for OPEC donors (other than Iraq), the rest of Arab states, among others in Asia, were recipients of OPEC aid.

According to the statute of the Venezuelan Investment Fund, the amounts it dedicates to development assistance at any given time cannot exceed 15 percent of its assets. At end-1984, VIF’s development assistance was equivalent to $3,046 million, as shown above.

Table 2Sectoral distribution of OPEC aid agency commitments at end-19841(In percent)
Agriculture/

Agro-

industries2
IndustryTransportEnergyOther
Multilateral
Arab Fund16.013.326.219.125.4
BADEA21.112.140.212.214.4
Islamic Bank11.126.227.68.226.9
OPEC Fund12.56.215.751.014.6
Bilateral
Kuwait Fund20.219.330.025.35.2
Abu Dhabi Fund13.947.912.423.82.0
Iraqi Fund12.219.056.92.89.1
Saudi Fund17.47.036.421.317.9
Venezuelan Investment Fund311.61.224.655.96.7
Percent of total allocations17.114.730.823.414.0
Sources: Same as Table 1.

The data do not include the Iran Organization or its allocations, due to incomplete data coverage since 1978.

Agriculture includes livestock and rural development; industry includes mining; transport includes communications and storage; and other includes education, health, national development banks, water supply and sewerage.

Data on the VIF includes oil sales credits with local counterpart funds for project financing.

Sources: Same as Table 1.

The data do not include the Iran Organization or its allocations, due to incomplete data coverage since 1978.

Agriculture includes livestock and rural development; industry includes mining; transport includes communications and storage; and other includes education, health, national development banks, water supply and sewerage.

Data on the VIF includes oil sales credits with local counterpart funds for project financing.

Future prospects

Total OPEC aid peaked in 1980, and since then has declined markedly; the estimated 1984 figure for disbursements was $4.5 billion, about 50 percent of the peak level. Yet in relation to GNP, the ratio in the 1980s for its Arab member countries continues to be above 2 percent. The reduced capacity of OPEC aid donors has resulted from three factors: lower oil revenues, higher domestic absorption, and the continuing Iran-Iraq conflict. The medium-term outlook for OPEC aid indicates a further decline, because of a possible fall in oil revenues, and increased demand on those revenues for domestic needs.

However, the disbursements from OPEC aid institutions are unlikely to diminish markedly during the period through 1990. For one thing, changes in commitments take time before they are reflected in changes in disbursements, and commitments have not declined for most Arab aid institutions and OPEC funds. Further, a number of these institutions had invested, in short-term instruments, considerable sums earmarked for later disbursement. These sums have contributed to improving their cash flows. The liquidity position of these institutions is being further improved by repayments of the loans made earlier in the 1970s. The portion of OPEC aid that is likely to be easily reduced in the immediate future is the larger category of general support assistance.

Broader economic relations

While concessional aid has been a major element of OPEC’s relations with developing countries, it is important to recognize that these relations are much broader in scope. Total financial flows from OPEC to developing countries amounted to some $347 billion during 1973–83, including $164 billion in respect of OPEC imports from developing countries, $70 billion representing workers’ remittances, $14 billion in direct investments, and $29 billion in commercial credits. To the extent, therefore, that these types of flows expand in the years ahead they will compensate for the decline in OPEC aid flows. For example, during 1980–83 when OPEC oil revenues declined by 36 percent, their imports from developing countries increased by 32 percent. As regards workers’ remittances, the expatriate work force in the OPEC countries and remittances continued to grow during 1980–35. In 1983, for example, those remittances were about two and a half times as much as OPEC aid.

To the extent that political risks presented disincentives to OPEC’s direct investments in other developing countries, the protection against such risks expected to be provided by the Multilateral Investment Guarantee Agency is likely to encourage a greater flow of such investments. OPEC countries, it should be noted, have shown particular interest in this agency during the preparation of its convention, which significantly emphasizes the Agency’s mandate to encourage flows of investments among its developing country members.

This brief review of OPEC aid shows that it has, since the early 1970s, been an important source of assistance for many developing countries, and that it has several features that are different from aid from other sources. For the recipient countries, OPEC aid is one element within a network of economic ties that includes trade, direct investment by OPEC institutions and private enterprises, and worker remittances. The emergence of large surpluses in the 1970s and early 1980s facilitated OPEC aid. Future aid will depend on the level of oil revenues, while the expansion of economic relations of OPEC countries with other developing countries will result in an increase in nonaid flows.

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