III Assistance by Arab Multilateral Aid Agencies
- P. van den Boogaerde
- Published Date:
- June 1991
In addition to their major aid programs, which began in the wake of the rise in oil prices in 1973–74, Arab donor countries established 11 multilateral organizations and funds to assist developing countries. In 1981, these were supplemented by the Arab Gulf Program for United Nations Development Organizations (AGFUND), which was to coordinate the Arab assistance offered to 15 UN bodies for humanitarian projects. A profile of multilateral Arab aid agencies is given in Table 15. The largest of these agencies are the Arab Fund for Economic and Social Development (AFESD), the Islamic Development Bank (IDB), the OPEC Fund for International Development (OFID), the Arab Monetary Fund (AMF), and the Arab Bank for Economic Development in Africa (BADEA). Two funds have ceased to exist: SAAFA was merged with BADEA in 1976 and the OAPEC Special Account was not renewed after 1976. GODE discontinued its assistance in late 1978, following the Arab donors’ decision at the time to stop aid to Egypt, but resumed its activities in 1990.
With a total subscribed capital of nearly $13 billion at end-1989, cumulative commitments by the 12 multilateral organizations at the same date were close to $21 billion, slightly less than half of which were on concessional terms. Net disbursements, at $7.5 billion, of which about 70 percent was concessional, were much lower in view of the large share of project assistance and important repayments to the IDB, since most of its operations consist of short-term foreign trade financing.
Table 16 provides an overview of net disbursements by the Arab multilateral aid agencies and compares them with the total receipts by developing countries from Arab sources. Concessional multilateral assistance started in 1974 and peaked in the years 1976 through 1978, because of very large payments extended through GODE. After GODE ceased operations, concessional net disbursements averaged about $330 annually between 1979 and 1983, but, in line with the general decline in Arab aid in the latter period, fell to the much lower annual average of approximately $130 million during 1984–89. Reflecting the fact that most Arab aid was extended bilaterally, net concessional disbursements by Arab multilateral organizations represented only about 7 percent of cumulative concessional Arab aid between 1973 and 1989.
Nonconcessional multilateral net disbursements, except for a very small payment in 1975, started in 1977 with the operations of the IDB, whose major resource flows consist of nonconcessional trade financing. It also includes the net disbursements by two institutions that extend exclusively nonconcessional finance: AAAID and the Arab Monetary Fund. Annual net disbursements have been characterized by wide fluctuations between 1977 and 1985. They turned negative in 1986 and 1987, especially on account of important net repayments to the IDB in both years and to the AMF in 1987. They recovered in 1988 and 1989, owing to a sharp rebound in net disbursements by the AMF. The share of multilateral assistance in total nonconcessional disbursements (20 percent) was much larger than for concessional assistance.
Arab Authority for Agricultural Investment and Development (AAAID)
AAAID is an investment organization formed by 13 Arab countries to improve the food security of Arab people. It was established in November 1976 and became operational in 1978, with headquarters in Khartoum, the Sudan. Its authorized capital amounts to Kuwaiti dinars (KD) 150 million ($550 million) and the subscribed capital to KD 99.8 million ($370 million), of which KD 95.3 million ($350 million) has been paid in.
AAAID’s objective is to develop agricultural resources in member states, although in practice it has mainly been concerned with establishing agricultural projects in the Sudan through equity participations. It contributed to the establishment of seven companies in the Sudan, with a participation in their capital amounting to $119.8 million at end-1989. In 1987, four of the existing companies were merged into a new company, the Arab Company for Agricultural Production and Processing (ACAPP), and a loan agreement of $120 million was signed with the new entity. The loan was disbursed in 1989, together with a loan disbursement to the Arab Sudanese Blue Nile Agricultural Company.
In April 1984, AAAID modified its emphasis by deciding to investigate the agricultural resources and the potential for agricultural development in other member states. Its mandate includes investing in all forms of agricultural production and related activities, particularly land reclamation, plant, animal and fish production, pastures, forestry, the transport, storage, marketing, export, and processing of agricultural produce, and all inputs necessary for agricultural production. In 1986, a formal resolution extended AAAID activities to other member states. AAAID is now involved in projects in Iraq, Qatar, the Syrian Arab Republic, Tunisia, and the United Arab Emirates, and in a regional project, the Arab Company for Fishery Development. Total capital investment in those projects is $46.8 million distributed as follows: a dairy company in Iraq ($22.5 million), a vegetable company in Qatar ($6.5 million), pesticides production in the Syrian Arab Republic ($3 million), two projects in Tunisia ($1.6 million), three projects in the United Arab Emirates ($9.3 million), and $3.9 million for the regional Arab Company for Fishery Development.
Arab Bank for Economic Development in Africa (BADEA)
The Banque Arabe pour le Development Economique en Afrique (BADEA) was established pursuant to the decisions of the Sixth Arab Summit Conference in November 1973. The agreement establishing the Bank was signed in February 1974, and it began operations in March 1975 with headquarters in Khartoum, the Sudan.
BADEA is the only Arab institution that does not provide any aid to Arab countries. Though funded by 18 member governments of the League of Arab States, its purpose is to contribute to the development of African countries that are members of the Organization of African Unity (OAU) but do not belong to the Arab League.
BADEA’s original subscribed capital was $231 million. In 1977, the financial resources of the Special Arab Aid Fund for Africa (SAAFA), $350 million, were incorporated in BADEA, thereby increasing its capital to $581 million. Since then, there have been three capital increases, bringing BADEA’s authorized and subscribed capital to $1,048.3 million at end-1989, of which $1,045.5 million was paid in. It had accumulated reserves amounting to $335 million as of end-1989.
BADEA’s goal is to foster economic, financial, and technical cooperation between African and Arab countries by participating in the financing of economic development in Africa, stimulating the contribution of Arab capital to African development, and providing technical assistance. Its operations consist essentially of project loans on concessional terms, but it also provides some limited technical assistance, mainly for project feasibility studies.
The projects financed by BADEA must be of national importance for beneficiary countries and usually form part of their economic development plans. These projects can also be of a regional character, benefiting several countries simultaneously. BADEA’s share in the financing of a project must not exceed a ceiling of $10 million or 40 percent of the project’s total cost. Under exceptional conditions, the first ceiling may be raised to $15 million and the second to 80 percent, with the proviso, in the latter case, that total project costs not exceed $5 million. Though loan terms are concessional, they are determined by the economic situation of the recipient country and the nature of the project. BADEA does not extend budgetary or balance of payments support. It provides technical assistance, especially for pre-investment studies, which is generally supplied in grant form. However, if it participates in the financing of a project that has benefited from its technical assistance, the cost of the study is considered an advance on the loan.
From the very beginning of its activities, BADEA has been cooperating closely with other bilateral and multilateral aid agencies and most of its loans have been cofinanced with them. This policy was reinforced in recent years: The need to intensify coordination among donor agencies on one hand, and between these and the borrowers on the other, is now all the greater because of the reduction in financial flows and the insistence on optimal use of aid funds and on promotion and/or strengthening of viable development projects.40
By the end of 1989, 38 out of 41 eligible African countries had benefited from BADEA’s aid. Its operations covered 140 projects, 47 technical assistance grants, 8 lines of credit, and 14 special operations. Cumulative commitments stood at $946 million; $553 million (58 percent) on concessional terms (Table 17). The annual level of commitments remained on average fairly stable. Over the years, the proportion of concessional assistance has tended to diminish in relation to nonconcessional lending, except for the period 1987–89 during which nonconcessional commitments were very small.
Cumulative gross disbursements by end-1989 stood at $486 million, equivalent to 52.6 percent of cumulative commitments. BADEA believed this level of disbursements was satisfactory considering not only the time for project execution and the often inevitable delays associated with this, but also the preparatory phase which must be completed before work and disbursements of funds can begin.41 Net disbursements totaled $355 million between BADEA’s inception and end-1989, $231 million (65 percent) of which was on concessional terms. From a modest level in 1976 and 1977, disbursements rose to an annual average of slightly more than $50 million in 1978–80, slowed down to an annual average of about $30 million in 1981–86, and fell to $16.4 million in 1987, $2.2 million in 1988, and a net repayment of $6.6 million in 1989. Concessional disbursements were negative during both 1988 and 1989. The total includes $47.2 million of installment arrears, $17.7 million of which was due in 1989, $10.1 million in 1988, and $19.4 million in prior years.
In deciding on allocations for individual countries, BADEA tries to balance its aid between East and West Africa and to ensure that the poorest countries receive special attention. By end-1989, about 55 percent of cumulative commitments had been directed to 21 countries in West Africa, and the remaining 45 percent to 16 countries in East Africa. Ghana, Senegal, Madagascar, Guinea, and Rwanda were the five leading recipients of project aid, together accounting for about one fourth of total lending. The sectoral distribution of its commitments shows that by far the largest share has been devoted to infrastructure projects, with 50 percent of commitments. Then came agriculture and agro-industry, accounting for 27 percent of approved loans, followed by industry (12 percent), energy (9 percent), and emergency aid and technical assistance (2 percent). Emphasis on agriculture intensified during the last five years, representing on average about 43 percent of total commitments.
Arab Fund for Economic and Social Development (AFESD)
AFESD is a regional development institution that finances projects for economic and social development in Arab countries. It is the oldest among the Arab multilateral agencies. The agreement establishing it was signed in May 1968, but the General Secretariat of the Arab League declared its effectiveness only in December 1971. The first Board of Governors meeting took place in February 1972, and operations commenced in early 1974. Its membership comprises all 22 members of the League of Arab States.
AFESD’s original subscribed capital was Kuwaiti dinar (KD) 81 million ($280 million), of which KD 30 million was subscribed by Kuwait. The Board of Governors decided to raise the authorized capital to KD 400 million ($1.4 billion) in April 1975 and further to KD 800 million ($2.9 billion) in 1981, of which KD 695 million ($2.6 billion) was subscribed by end-1989. Paid-in capital as of that date was KD 663 million ($2.5 billion) and accumulated reserves amounted to KD 513 million ($1.9 billion). AFESD may borrow twice the amount of its capital; additional borrowing may be authorized by its Board of Governors.
AFESD’s objectives are to (1) extend concessional project loans to governments and public and private organizations and institutions, giving preference to economic projects vital to the Arab world and to joint Arab projects; (2) encourage, directly or indirectly, the investment of public and private capital to develop and expand the Arab economy; and (3) provide technical expertise and assistance in various fields of economic development.
Between the start of its operations in 1974 and end-1989, AFESD contributed to the financing of 231 projects in 17 Arab countries through loans totaling $3.87 billion and grants totaling $90 million (Table 18). More than three quarters of its cumulative commitments have been on concessional terms. The volume of commitments rose very rapidly in the first four years of operations, with the result that by end-1977 commitments exceeded the paid-in capital by about two and a half times. Because of a difference over lending policies, directors did not authorize new commitments, and lending came to an abrupt halt in 1978. Loan commitments resumed in mid-1979 after member countries agreed to increase the subscribed capital from KD 370 million to KD 400 million and to pay in the subscribed capital two years ahead of schedule. The annual level of commitments rose again and fluctuated between $120 million and $360 million annually in the period 1980–87. Commitments grew strongly in the next two years, to $422 million in 1988 and $540 million, AFESD’s highest level ever, in 1989. Almost half of its commitments in 1989 benefited Egypt, with the remainder being spread among five other recipients. The mid-1990 invasion of Kuwait, where AFESD’s headquarters are located, interrupted its activities. It set up a temporary office in Bahrain and is scheduled to return to Kuwait in the latter part of 1991. This disruption will have affected many projects in Arab countries and might influence its lending policies in the years to come.
Net disbursements totaled $1.56 billion up to end-1989. Disbursements grew continuously from 1974 through 1978, when the trend was reversed. The lower volume of disbursements between 1979 and 1984 was the consequence of both the interruption of commitments between 1978 and mid-1979 and the cessation of payments to Egypt, AFESD’s most important recipient, following a decision by its Board of Governors in April 1979. In 1985–88, however, net disbursements rose again to a little more than $100 million annually, and to nearly $200 million in 1989, partly due to the reinstatement of Egypt as an aid recipient.
The geographic distribution of AFESD commitments is biased toward the least developed Arab countries, notwithstanding their lower absorptive capacity. These countries received 40 percent of total commitments. Priority is also given to regional inter-Arab projects. The sectoral distribution is dominated by infrastructure and agricultural projects. At end-1987, 31 percent of cumulative commitments had been allocated for agriculture and agro-industries, followed by transportation (20 percent), energy (17 percent), water supply and sewerage (12 percent), industry (9 percent), telecommunications (8 percent), and other projects (3 percent). Though AFESD is not allowed to participate in equity investment, it provides grants essentially for feasibility studies and training programs.
In keeping with its objective of encouraging the investment of public and private capital to promote the development of the Arab economy, AFESD has tried to act as a catalyst for additional funds for the projects it finances. It also functions as a coordinator of the lending activities of the Arab institutions. A large number of its projects are cofinanced with other national and regional Arab institutions and international institutions.
Apart from its regular activities, AFESD has carried out several special tasks, namely:
—The Coordination Secretariat: AFESD assists and houses the Coordination Secretariat of Arab National and Regional Development Institutions, which meets regularly to exchange views and discuss policies and operations.
—The Basic Program for Agricultural Development in the Sudan: in 1975 AFESD completed the preparation of this program, which recommended and led to the formation of AAAID.
—The AFESD-UNDP Joint Program for the Identification and Preparation of Inter-Country Investment Projects: the goal of this joint program, launched in 1976, was to identify and prepare projects of an inter-Arab nature, for which AFESD allocated $6 million and the UNDP, $8 million. At end-1984, AFESD had committed KD 676,000 ($2.4 million) and disbursed KD 503,000 ($1.8 million) under this program.
—The OAPEC Special Account: in 1974/75 AFESD was charged with administrating loans from the OAPEC Special Account, particularly identifying countries that needed assistance and setting up criteria for distribution.
—The First Arab Development Decade Account (FADDA): In 1981 AFESD established a special unit to deal with the implementation of the $5 billion fund for FADDA, pursuant to a decision taken at the Arab summit meeting in November 1980. According to this decision, $500 million was to be made available annually on soft terms for economic and social projects in the six poorest Arab countries. Allocations for individual projects were made by a special board composed of the finance ministers of the five contributing countries—Saudi Arabia (36 percent), Kuwait (23 percent), the United Arab Emirates (16 percent), Iraq (15 percent), and Qatar (10 percent). AFESD identifies and appraises the projects, channels the payments, administers the loans, and supervises the implementation of the projects.
—AGFUND: AFESD is AGFUND’s technical advisor. It appraises possible projects, studies their feasibility, and makes recommendations to AGFUND.
Arab Fund for Technical Assistance to African and Arab Countries (AFTAAAC)
The creation of AFTAAAC was approved in December 1973 by the Economic Council of the League of Arab States. Its statutes were endorsed in October 1974 by the Seventh Arab Summit Conference. The Council of the Arab League elected the first Board of Directors in April 1975 and operations started in 1976. AFTAAAC is managed by the Secretariat of the League of Arab States and supervised by the League’s Board, but it has its own budget. It is funded by voluntary contributions from Arab states and institutions.
AFTAAAC principally provides technical assistance for development projects in Arab and African countries, sending experts and teachers on missions and extending grants for scholarships and training. Although AFTAAAC does not provide direct financial assistance to projects, it finances and coordinates technical assistance studies and helps develop technical and administrative skills.
At the end of 1986, AFTAAAC’s cumulative assistance totaled $41.7 million and had been directed to eight Arab and ten African countries. The largest part of the funds had been allocated for education. By end-1990, AFTAAC had sent 1,128 Arab experts to a total of 34 countries and had provided 1,133 scholarships for African students.
Arab Gulf Program for United Nations Development Organizations (AGFUND)
AGFUND was established in 1981 by seven Arab countries (Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) to coordinate Arab assistance offered to 15 UN bodies, while ensuring that humanitarian projects are financed. All the financial assistance provided by the AGFUND is in the form of grants, and all projects are prepared and carried out in cooperation with one of the 15 UN organizations. In addition, AGFUND provides grant assistance to a number of nongovernmental Arab organizations. Its technical advisor is AFESD, which appraises the projects and makes recommendations.
AGFUND finances humanitarian aspects of developments. The projects it finances have concentrated on extending basic services to mother and child, fighting disease, and investing in human resources. Its projects include building health centers and water supply works, improving agricultural seed, providing medicines, combating dysentery, fighting illiteracy, strengthening handicraft industries, and providing vocational training. Its financial contribution may not exceed 50 percent of the cost of any project.
From the start of its operations until the end of its financial year 1989 (i.e., end-August 1989), cumulative contributions from the seven member states to AGFUND stood at $207.8 million; it committed and extended a total of $176.3 million in 117 countries. In addition to contributions by the seven member states, AGFUND also launched fund-raising campaigns whose proceeds are used for specific causes. The Governments of France and Italy, and institutions, foundations, and individuals in Saudi Arabia, Oman, the United States, and some European countries have contributed to those campaigns over the years.
Arab Monetary Fund (AMF)42
The agreement establishing the Arab Monetary Fund was signed by 21 Arab countries in April 1976 and came into force one year later.43 Operations started in May 1977 in Abu Dhabi and the first loan agreement was signed in August 1978. The original authorized capital was 250 million Arab accounting dinars (AAD)44 and progressively increased to AAD 600 million in 1983, of which about half was paid up by end-1989.
The AMF has a Board of Governors, a Board of Executive Directors, and a Director-General. The Board of Governors consists of a Governor and a Deputy Governor from each member country. The Board of Executive Directors is composed of the Director-General and eight resident directors elected for renewable terms of three years. The Director-General, who is appointed for a renewable five-year term, is the Chairman of the Board of Executive Directors and the Managing Director of the AMF.
The AMF was conceived as a regional financial institution mainly to help member countries cope with balance of payments deficits but also to foster closer monetary cooperation among Arab countries and to encourage Arab economic integration. The agreement defines the purposes of the AMF as: (1) correcting disequilibria in the balance of payments of member states; (2) promoting the stability of exchange rates among Arab currencies, rendering them mutually convertible, and eliminating restrictions on current payments between member states; (3) establishing the policies and modes of Arab monetary cooperation needed to achieve Arab economic integration as early as possible and to speed the process of economic development in the member states; (4) rendering advice with regard to policies related to the investment of the financial resources of member states in foreign markets; (5) promoting the development of Arab financial markets; (6) studying ways to promote the use of the Arab dinar as a unit of account and paving the way for the creation of a unified Arab currency; (7) coordinating the position of member states in dealing with international monetary and economic problems; and (8) settling current payments between member states in order to promote trade among them.
The AMF extends five types of concessionary loans to its member countries. The Automatic Loan, with a maturity of three years, is maintained at a level of 75 percent of a member’s quota in convertible currency and is given without conditionally to finance a balance of payments deficit. However, should the financial need of a member exceed the resources permissible under the Automatic Loan, an Ordinary Loan of five years’ maturity is extended to support a financial program agreed upon with the AMF in order to correct the causes of the disequilibria. When there is a large structural imbalance in a member country’s economy, the AMF offers an Extended Loan with a maturity of seven years, also in support of an agreed program aimed at correcting the imbalance. The Compensatory Loan, of three years’ maturity, is intended to finance a balance of payments deficit caused by a decline in revenues of exports of goods and services and/or a large increase in the value of imports of agricultural products due to poor harvest. In addition, the Intra-Arab Trade Facility, which has a maturity of four years, is intended to encourage and facilitate trade among member countries and is given to members that suffer regional trade deficits.
Originally, loans to a member in any one year could not exceed 150 percent of the amount of its paid-in convertible currency subscription. In 1979, the lending ceiling was raised to twice the amount of paid-in subscriptions, and a member’s outstanding loans at any one time could not exceed four times that amount. In addition, a member could borrow up to 100 percent of its paid-in capital under the compensatory facility. In 1983, the Board of Executive Directors decided to reduce the lending limit to two and a half times the borrower’s share of paid-up capital in convertible currencies. This decision was occasioned by the increased demand on AMF resources arising from both a larger number of actual and potential users and their greater relative share in the AMF’s capital. Another consideration was the need to provide members with equal opportunities of access. It was also decided that the limit for the Compensatory Loan would be reduced from the equivalent of a member’s share to half that amount. This made the maximum lending limit equivalent to three times the member’s paid-up subscription.
Automatic and compensatory loans are repayable within three years in four equal installments after an 18-month grace period. Ordinary loans have a maturity of five years with repayments starting three and a half years after the initial disbursement, and extended loans a maturity of seven years with repayments commencing five and a half years after the initial disbursement. The ordinary and extended loans are disbursed in installments to ensure that the borrower complies with the agreed program. Loans under the Intra-Arab Trade Facility are repayable within a maximum period of four years after a grace period of 30 months.
The interest rate for automatic loans is 3.75 percent in the first year, 4.25 percent in the second year, and 4.75 percent in the third year. For the other loans the rate of interest rises progressively by 0.3 percent per annum from 5.2 percent in the first year to 7 percent in the seventh year. For loans under the Trade Facility, the rate of interest rises by 0.3 percent per annum from 4.95 percent during the first year to 5.85 percent during the fourth year. In addition, there is a service charge of 0.25 percent on all loans and a commitment fee of 0.25 percent on all but automatic loans.
AMF assistance is shown in Table 19. By end-1989, 86 loan agreements, totaling $2 billion, had been approved (50 automatic loans totaling $878.5 million; 9 ordinary loans—$346.2 million; 8 compensatory loans—$224.6 million; 8 extended loans—$354.9 million; and 11 loans under the Intra-Arab Trade Facility—$239.4 million). The volume of commitments and disbursements was fairly modest in the first three years (1978–80), increased markedly in the following three years (1981–83), but fell again in the subsequent four years (1984–87). Net disbursements were negative in 1984, 1985, and 1987, and only very slightly positive in 1986.
The lackluster lending activity over the period 1983–87 was principally due to five factors: (1) some members had attained their maximum lending limits; (2) the cyclical nature of the AMF’s lending activity; (3) the 1983 reduction of maximum limits from five to three times the member’s paid-up share in convertible currencies; (4) the suspension of lending to two members that were in arrears in their loan repayment obligations; and (5) the effect of the Board’s 1983 resolution to exempt members from settling four fifths of the increase in capital, thereby suspending the overall increase of the AMF’s capital. This trend was reversed in 1988, with the AMF’s lending activity reaching its highest level since its inception in number of loans extended, volume, and number of recipients. It extended 14 loans for a total of $488 million and net disbursements were $228 million. Six loans were approved in 1989 for a total of $335 million and net disbursements totaled $109 million. The largest recipients of AMF lending at end-1989 have been Algeria (29 percent of total net disbursements), Iraq (19 percent); the Sudan (13 percent), Morocco (8 percent), Somalia (6 percent), and Mauritania (5 percent).
In recent years, the AMF has experienced arrears on loan repayments; total arrears as of the end of 1989 were equal to $268 million, more than 60 percent being due from the Sudan, and the remainder due from Mauritania and Somalia. These cumulative arrears represented 23.7 percent of the AMF’s paid-up capital in convertible currencies and 25.1 percent of its loanable resources. The issue of arrears constitutes a major challenge that could impair the AMF’s lending operations. The continued delay by some members in discharging their financial obligations to the AMF will, in the first place, deprive such members of continued access to the AMF’s resources. It also disrupts the revolving nature of the Fund’s limited resources and their availability to other members who need support for the correction of macroeconomic disequilbria.45
Apart from its lending activities, the AMF endeavors to further trade among member countries. After undertaking a comprehensive study on intra-Arab trade, an Inter-Arab Trade Facility with a capital of $500 million was set up in 1988 to finance trade among the Arab countries. The AMF also promotes the development of Arab financial markets and has adopted a work plan to develop and gradually integrate those markets. Furthermore, the AMF provides its member countries with technical assistance in financial policy and statistics, money, and banking. In 1989, the Economic Policy Institute, both a research and a training center attached to the AMF, was formally established.
The AMF sponsors annual meetings of the Board of Governors of Arab central banks and Arab monetary agencies to coordinate member countries’ views on current international financial and monetary issues. To expand the scope of the facilities it offers to these central banks and monetary agencies, in 1989 the Governors authorized the AMF to accept deposits from member countries as well as regional institutions. These deposits are to be managed for subscribers. Deposits are at no time to exceed four times the liquidity of the AMF and cannot be used to finance the operations of the AMF.
Gulf Organization for the Development of Egypt (GODE)
Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates established GODE in 1976 to support Egypt’s development plans by financing investment projects and balance of payments needs. GODE’s authorized capital was set at $2 billion—40 percent of which was subscribed by Saudi Arabia, 35 percent by Kuwait, 15 percent by the United Arab Emirates, and 10 percent by Qatar. The paidin capital amounts to $1,725 million—$690 million from Saudi Arabia, $604 million from Kuwait, $259 million from the United Arab Emirates, and $172 million from Qatar.
In practice, finance was exclusively extended for nonproject assistance. In December 1976, a first loan of $250 million was extended for balance of payments financing. In 1977, the Central Bank of Egypt concluded a second agreement with GODE for a credit facility of $1,475 million; $825 million was disbursed immediately for the repayment of Egypt’s short-term commercial debts and the remaining $650 million in 1978 for balance of payments financing.46 In addition, GODE agreed in 1977 to guarantee a syndicated bank loan of $250 million to Egypt.
The bank loan has been fully serviced by Egypt. Repayment of the facilities extended by GODE was originally scheduled on 12 biannual equal installments following a five-year grace period. Egypt paid interest on the outstanding balances in 1977 and 1978. In 1979, when Arab states severed their diplomatic relations with Egypt following the Camp David accords, a letter of understanding was signed between GODE’s donor countries and Egypt agreeing to roll over the principal of the loans and to set aside the accruing interest in a special account.
GODE extended no further assistance over the next ten years. In mid-October 1989, the first meeting of the Organization for more than a decade studied the possibility of renewing assistance in Egypt. The credits extended from 1976 through 1978 were forgiven in December 1990 in view of Egypt’s role in the Middle East conflict at the time. A new deposit of $250 million was placed with the Central Bank of Egypt in October 1990, followed by another deposit of $50 million in March 1991. This combined deposit of $300 million was transferred as a grant to the Egyptian Government in May 1991.
Islamic Development Bank (IDB)
The creation of the IDB dates back to a Declaration of Intent issued by a conference of finance ministers of Muslim countries in December 1973. The inaugural meeting of the Board of Governors took place in July 1975. It formally opened in October 1975 and approved its first loan agreement in late 1976. In 1975, it had 22 original members and an initial subscribed capital of Islamic dinar (IsD) 750 million47 ($900 million). By July 1990,48 membership had grown to 44 countries that are also members of the Organization of the Islamic Conference (OIC); its authorized capital had grown to IsD 2 billion; and its subscribed capital to IsD 1,961 million ($2.5 billion), of which IsD 1,662 million ($2.2 billion) was paid in.49 Total reserves and retained earnings as of the same date were IsD 293 million ($380 million).
IDB seeks to foster the economic development and social progress of member countries and Muslim communities in nonmember countries in accordance with the principles of the Islamic Shariah (Islamic law). As it is not allowed to charge or obtain interest, it has authority to extend financing and to raise funds in many ways and to establish and operate special funds for specific purposes in order to preserve the value of its assets.
In particular, IDB strives to develop new financial instruments in conformity with Islamic Shariah for additional resource mobilization. Its liquid funds are invested with financial institutions operating in international financial markets; with the Saudi Arabian Monetary Agency (SAMA), with whom IDB maintains a depository and trustee arrangement; and with Islamic banks.
The IDB’s goal is to place almost all liquid funds belonging to ordinary capital resources in arrangements that conform to Shariah. The net proceeds from these deposits are transferred in equal shares to a Special Reserve Account and a Special Assistance Account, the latter serving mainly to finance Islamic research and training, a scholarship program, and technical and relief assistance. At the end of the financial year 1410 H (July 1990), balances in the Special Reserve and Special Assistance accounts were IsD 451 million ($600 million) and IsD 277 million ($370 million), respectively.
In 1980, IDB introduced an Investment Deposit Scheme to raise funds from both individual and institutional investors for use in its foreign trade financing operations. The scheme provides investors with an Islamic alternative for making short-term investments through participation in IDB’s financing. Returns paid to investment depositors are based on the current mark-up applicable to its foreign trade financing at the date of receipt of the deposits. At end-1409 H, total investments under this scheme amounted to IsD 67 million ($85 million), down from IsD 75 million ($97 million) at end-1408 H.
In 1987, IDB launched the Islamic Banks’ Portfolio for Investment and Development to finance trade and leasing activities in the private sector of Islamic countries. The portfolio was established by 21 Islamic financial institutions, including the IDB as its manager and trustee, and the initial capital of $65 million was fully subscribed. Also in 1987, the Longer-Term Trade Financing Scheme was established by 19 IDB member countries plus the IDB itself to promote trade among IDB member countries, with an emphasis on exports of nontraditional commodities. IDB contributed IsD 75 million ($97 million) during the year 1409 H (1988/89) to-ward the capital of this scheme.
Finally, in December 1989 the IDB introduced a Unit Investment Fund to mobilize additional resources from the market. A closed-end fund specifically targeted to institutional investors, it nonetheless allows the exchange of ownership of its shares as in a conventional open-end fund. Its purpose is to pool the savings of investors and channel them to viable project operations within IDB’s member countries. The size of the initial issue of units was $100 million and the IDB, as underwriter of that issue, purchased unsubscribed units for a total value of $69.5 million. It also disinvested some of its leasing and installment sale financing projects having a book value of IsD 64 million ($75 million).
The IDB provides financing through the following channels:
IDB’s ordinary operations cover long- and medium-term project financing and technical assistance for feasibility studies. Between 1976 and July 1990, IDB approved a total of IsD 2 billion ($2.4 billion)50 for ordinary operations, of which IsD 1.95 billion ($2.3 billion) was extended for 320 projects and IsD 67 million ($80 million) was for 154 technical assistance operations. Project financing includes the following:
• Loans are provided for productive and social infrastructure projects free of interest but subject to a fixed service fee. The repayment period is usually between 25 and 30 years. As of July 1990, 140 projects in 40 member countries were financed through loans totaling IsD 693 million ($800 million).
• Equity participations in the capital of industrial and agro-industrial projects with a reasonable return are undertaken on a nonconcessional basis. The participations do not exceed one third of the capital of the investee companies. Irrespective of its share in equity capital, IDB exercises no management control, except where necessary to safeguard its investment. Special forms of equity participations are lines of equity and mixed lines of equity/leasing approved to national development finance institutions for small and medium-sized projects. IDB took 58 participations for a total of IsD 229 million ($276 million) between 1976 and July 1990 under these schemes.51
Lately, the IDB is adopting a cautious approach to taking equity in new projects and a major review of the equity portfolio is under way. Its annual report for Hijra 1408 acknowledges that the financial performance of the IDB’s equity projects has, with very few exceptions, not been satisfactory. As of July 1990, the IDB’s equity participations were valued at IsD 77 million ($100 million), consisting of a cost of IsD 157 million ($204 million) minus a provision for possible permanent diminution in the value of shares of IsD 81 million ($105 million).
• Leasing comprises the purchase of equipment by the IDB and leasing to beneficiaries. Lines of leasing to national development finance institutions were also established in order to fulfill their needs for small and medium-sized projects in the private sector. With the introduction of installment sale financingin 1984, the importance of leasing has declined substantially. Cumulatively, IDB arranged 51 leasing arrangements for a total of IsD 465 million ($519 million) up to July 1990.
• Beginning in 1984, IDB also provides installment sales, and lines of installment sales, whereby the ownership of the asset is immediately transferred to the buyer, while the reimbursement of the purchase price is done in installments. Given the operational flexibility of these arrangements, they have become the most significant mode of ordinary financing. Between 1984 and July 1990, 58 such operations took place for a total of IsD 483 million ($567 million).
• Profit sharing operations consist of nonconcessional participations in the financing of industrial and agricultural projects that offer a reasonable return. Four projects totaling IsD 21 million benefited from this mode of financing.
• Finally, technical assistance serves to identify and prepare viable projects in member countries and to open investment opportunities. Up to July 1990, IDB approved a total of 154 technical assistance operations in 31 member countries amounting to IsD 67.1 million ($80 million), of which about one third is in the form of grants.
Foreign Trade Financing
Responding to its charter’s stipulation to promote trade and cooperation among its member countries, more than 70 percent of the financing approved by the IDB up to July 1990 has been for foreign trade financing. The traditional operations focus mainly on import trade financing (531 operations for a total of IsD 5.6 billion or $6.6 billion). Under this procedure, IDB purchases commodities for cash and sells them at predetermined higher prices to enterprises in member states, which are allowed to repay it in installments over a period of up to two years. Most import trade financing is, however, based on short-term murabaha operations, whereby importers usually receive credit for three months and pay an administrative charge, often closely related to the equivalent commercial rate of interest over the credit period. In this way the IDB has made significant contributions to the promotion of trade among member countries, as about 80 percent of total import trade financing has been approved for trade among member countries. Through its foreign trade financing operations the IDB has actually succeeded in fostering trade links among several member countries that had never traded among themselves before.52
In 1988, IDB developed the Longer-Term Trade Financing Scheme to finance nontraditional exports of participating member countries to other OIC member countries. By July 1990, 21 OIC member countries were participating in the scheme with a total commitment of IsD 153 million ($198 million), which, together with the IDB’s participation of IsD 150 million ($195 million), raised the total committed capital to IsD 303 million ($393 million), of which IsD 101.5 million ($132 million) was paid in. The scheme faced a number of constraints and problems during the early stages of its implementation, including dissemination of information about the scheme, particularly to exporters in OIC countries. From 1988 to July 1990, 68 export financing operations were approved for eight participating member countries, amounting to $101 million (net of cancellations).
In 1988 the Islamic Banks’ Portfolio increased the number of participants to 22 Islamic banks and financial institutions and its capital by $5 million to $70 million. By July 1990, 23 trade financing operations were approved under this scheme for a total of $93.4 million.
IDB is considering additional trade promoting mechanisms, including the establishment of an export credit insurance scheme, a multilateral Islamic clearing union, an Islamic trading company, and the promotion of countertrade.
These are operations financed from the Special Assistance Account mentioned above. Cumulative assistance under this scheme up to July 1990 covered 150 programs in member countries and for Muslim communities in nonmember countries and totaled IsD 264 million ($298 million), including the execution of a $50 million program for emergency aid to Sahelian member countries, a $10 million aid program to the Sudan to overcome the effects of drought, a $14.4 million program to provide emergency assistance for locust control in various member countries, and a scholarship program.
The IDB promotes collaboration and cofinancing with other national, regional, and international development financing institutions. It is a member of the Coordination Secretariat of Arab National and Regional Development Institutions, and has regular working relationships and cooperation agreements with the African Development Bank, the Asian Development Bank, the World Bank, and various UN agencies, in particular with IFAD.
The IDB is now by far the biggest of the eight principal Arab development funds. According to the figures of the Coordination Secretariat, in 1989 its operations amounted to 35 percent of the total operations of the eight funds.53 Between 1976 and end-1989, the IDB committed a total of $8.7 billion for more than one thousand operations to 40 member countries (Table 20). Of this total, $1.1 billion (12.6 percent) was extended on concessional terms. The annual distribution of concessional commitments showed no particular pattern, fluctuating between $7 million in 1976 and a top of $165 million in 1984, falling to about $55 million in each of the years 1986 and 1987, and rebounding to about $120 million annually in 1988 and 1989. Nonconcessional commitments, which consist essentially of trade finance, grew rapidly from $9 million in 1975 to a high of $936 million in 1984, and averaged about $730 million in each of the five years 1985–89.
Cumulative gross disbursement, from the establishment of the IDB up to July 1990, amounted to IsD 6 billion (approximately $8.1 billion). Because disbursement of foreign trade financing is linked to the shipment of a commodity and, in most cases, completed within two years, the weighted cumulative ratio of gross disbursements to approved financing was 76.7 percent as of July 1990. The same ratio for individual operations was:54 ordinary operations, 44.8 percent; trade financing, 89.8 percent; technical assistance, 29.1 percent; and special assistance 40.6 percent. On the other hand, because trade financing is short term in nature, net disbursements up to end-1989 totaled $818 million—$318 million (39 percent) on concessional terms and $500 million (61 percent) pertaining to nonconcessional finance. While concessional net disbursements displayed a relatively regular pattern, nonconcessional net disbursements fluctuated markedly from year to year and were negative since 1986. The IDB is experiencing some payment arrears, but not of a very large nature.55
Of the IDB’s 44 member countries, 40 benefited from its financing. Concerning ordinary operations, the sectoral distribution demonstrated considerable fluctuations from year to year. Cumulatively, however, the industrial and mining sector has been the major recipient of IDB financing, accounting for 35 percent of total ordinary operations approved by the IDB. This was followed by transport and communication (19.1 percent), utilities (16.6 percent), agriculture and agro-industries (14.4 percent), social sector (11.4 percent), and other sectors (3.5 percent).
Islamic Solidarity Fund (ISF)
The ISF was established in 1974, following a decision taken during the Second Islamic Summit Conference, and began operations in 1975. It is managed by the Organization of the Islamic Conference in Jeddah, but has an independent legal personality. Its resources consist mostly of donations from its 31 member countries. In addition, ISF receives grants from public and private institutions as well as individuals, and benefits from the proceeds of the Waqf (special endowment). Total resources at end-1986 amounted to about $124 million. The amount pledged to the Waqf totaled $28 million, of which $8 million was paid in. The ISF provides relief assistance for Muslim communities and aid for the construction of mosques, hospitals, and schools, and supports scientific and technical research, Islamic universities, and the activities of Muslim youth.
The ISF does not extend loans; its assistance consists of grants or is given in kind. Cumulative assistance up to end-1986 was $111 million.
OAPEC Special Account
The OAPEC Special Account was established in 1974 to alleviate the balance of payments difficulties that Arab oil importing countries were experiencing following the increase in oil prices. The OAPEC Council of Ministers decided to allocate $80 million for this purpose and to entrust AFESD with its management. The assistance consisted of long-term interest-free loans to be repaid in ten annual installments after a ten-year grace period. In 1975, the OAPEC Council of Ministers decided to continue the account, but only Kuwait, Qatar, and Saudi Arabia responded to this decision and together provided $37 million in 1976. The Sudan was the largest recipient of the account with $55 million, followed by the Yemen Arab Republic ($18 million), the People’s Democratic Republic of Yemen ($16 million), Somalia ($11 million), and Mauritania and Morocco ($8 million each).
OPEC Fund for International Development (OFID)
The OPEC Special Fund was established by the 13 OPEC member countries in early 1976 as a collective financial facility of a short-term nature; operations began in August of the same year. It became a permanent international agency with its own legal personality in May 1980, and took up its present name, the OPEC Fund for International Development (OFID), as of that date. Initial resources, contributed by member states, were about $800 million, of which $400 million was earmarked for IFAD. Late in 1976, seven OPEC member countries decided to transfer the profits accruing to them from the IMF gold sales to the IMF Trust Fund through OFID, for a total of $110.7 million.
After three replenishments, pledged contributions at end-1989 amounted to $3,435 million, including $861 million earmarked for IFAD and $111 million transferred to the IMF Trust Fund, or a net of $2,463 million. Payments of contributions are made voluntarily by member countries upon demand by the Governing Committee so as to allow for the timely disbursement of the loans committed through OFID. By the end of 1989, $1,858 million had been paid in, excluding $732 million for IFAD and the $111 million for the IMF Trust Fund. Furthermore, accumulated reserves amounted to $768 million.
OFID’s objective is to reinforce financial cooperation between OPEC member countries and developing countries by assisting in particular the poorest countries with their economic and social development. OFID may engage in any activity relevant to its objective. In practice, it extends three types of loans—project loans, program loans, and loans for balance of payments assistance—and provides outright grants in support of technical assistance, food aid, research, and similar activities. In addition, it makes financial contributions to a wide variety of international development agencies that serve developing countries.
Close cooperation and cofinancing with other development finance institutions are part of OFID’s heritage. Before it became a permanent international aid agency in 1980, the appraisal and administration of its lending program had been entirely entrusted to national aid agencies in OPEC member countries and international development institutions, and by the end of 1981 all but one of its project loans had been cofinanced with other bilateral and multilateral sources of aid.56 Most of its project loans have been cofinanced, with the number of donors varying from project to project, but OFID is now often the administrator of cofinanced loans.
Excluding contributions to IFAD and the IMF Trust Fund, OFID’s total approved commitments at the end of 1989 stood at $2.5 billion, consisting of 500 approved loans for a total of $2.4 billion and 267 grants for a total of $140 million (Table 21). The subdivision between the three types of loans was as follows: 298 project loans totaling $1,578 million, 185 balance of payments support loans valued at $724 million, and 17 program loans amounting to $105 million. Except in the case of a few loans to middle-income developing countries, OFID loans were highly concessional and more than 90 percent of cumulative loan commitments were on concessional terms. The annual level of commitments grew rapidly from $193 million in 1976 to a peak of nearly $500 million in 1981 and then, in line with the general decline in resource transfers from Arab donor countries, started to slow down to an average level of about $100 million between 1984 and 1989.
Because about one third of cumulative commitments consists of quick disbursing balance of payments assistance loans, gross disbursements represented 72.7 percent of total commitments at end-1989 (excluding payments to IFAD and the IMF Trust Fund). The different categories were: projects, 63 percent; programs, 94 percent; balance of payments support, 96 percent; and grants, 55 percent.
Cumulative net disbursements at end-1989 amounted to $1.3 billion, 93 percent of which was on concessional terms. Annual net disbursements peaked in the early years of the 1980s, fell to much lower levels since 1984, and were negative in 1987–89.
Every beneficiary of a balance of payments support or program loan has the option to mobilize, within a given period, local counterpart funds equivalent to the proceeds of the loan. OFID encourages beneficiary countries to use such funds in financing the local currency cost of development projects and programs agreed upon by the beneficiary country and OFID. Cumulatively, up to end-1989, local counterpart funds totaling the equivalent of $575 million were approved for use in the financing of 250 development projects and programs in 59 developing countries. The largest shares of this total were allocated to agriculture (38.9 percent), energy (21.5 percent), and transportation (17.9 percent).57 Some of these projects and programs also benefited from foreign exchange obtained through OFID project and program loans, and in many cases were cofinanced by other development finance institutions.
The OPEC Fund’s eligible beneficiaries are all the governments of developing countries, other than OPEC members, and by end-1989, 86 developing countries in Africa, Asia, Latin America, and the Caribbean had benefited from its assistance. The geographic distribution of its lending operations was as follows: 290 loans totaling $1,153 million (47.9 percent of total) to 44 African countries; 135 loans valued at $1,004 million (41.7 percent of total) to 21 Asian countries; and 75 loans worth $251 million (10.4 percent of total) to 21 Latin American and Caribbean countries. The bulk of grants were extended to international institutions whose activities benefit the developing world, in particular to IFAD and the Common Fund for Commodities,58 and to finance technical assistance in cooperation with many international development institutions including the specialized agencies of the United Nations.
Balance of payments support and program loans represented 44 percent of OFID’s loan disbursements. The remaining 56 percent was for project loans in all the major economic sectors. As regards its project loans, the main emphasis has been on energy development, with 27.2 percent of cumulative disbursements. This was followed by transportation (11 percent), agriculture and agro-industry (6.6 percent), industry (3.8 percent), national development banks (3 percent), water supply and sewerage (3.1 percent), education (1 percent), and telecommunications, health, and other sectors (0.5 percent).
Finally, OFID has been entrusted in certain circumstances with coordinating the policies of its members vis-à-vis certain multilateral institutions and with negotiations in international forums when collective action by OFID countries is considered appropriate.59 In particular, the OPEC Fund coordinated its members’ policies toward IFAD. The OPEC countries60 pledged a total of $861.1 million to IFAD through the OPEC Fund. The sum of $435.5 million was committed to the initial resources and $425.6 million to the first replenishment. At end-1989, total payments amounted to $732 million. Also, $110.7 million was transferred to the IMF Trust Fund through the OPEC Fund, representing the profits accruing to seven OPEC member countries from IMF gold sales (almost half came from Venezuela).
Special Arab Aid Fund for Africa (SAAFA)
SAAFA was established concurrently with BADEA in January 1974 by Arab oil exporting countries following a decision taken by the Arab summit conference in Algeria in November 1973 to alleviate the African countries’ balance of payments difficulties in general and to compensate them for the rise in oil prices in particular. Thus, the Arab countries established two channels for financial cooperation with African countries, a development bank (BADEA) and an emergency facility (SAAFA).61 SAAFA’s original capital, consisting of voluntary contributions, was fixed at $200 million, and in late 1974 raised to $350 million. The administration of SAAFA was entrusted to the League of Arab States, with the amount allocated to each recipient being determined jointly by the League of Arab States and the Organization of African Unity. Arab countries in Africa were excluded from the list of recipients.
In 1977, SAAFA was amalgamated with BADEA and uncommitted resources were used by BADEA for projects in Africa. As a result, out of the $350 million contributed by Arab donors, $214.2 million were made available by SAAFA for balance of payments support to 32 countries. The SAAFA loans, which were approved and disbursed in the same year, were repayable over 25 years with a grace period of ten years and at an initial interest rate of 1 percent per annum. Reflows started in 1985 and by end-1989 totaled $68.5 million, of which $41.8 million was repaid and $26.7 million was in arrears.