Notes on the 2008 Budget
| 2008 Budget Cycle and the Fight against Poverty: target 0.33%, action still unclear and uncertain |
29 October
By Iacopo Viciani, Luca De Fraia
Reaching 0.33% in 2008, to save Europe in 2010
According to the forecast of the Ministry of Foreign Affairs, the ratio Official Development Assistance / GDP for 2007 is about 0.21-23%, the same level as in 2006, but there are two encouraging signs from the future in Financial Perspectives Document 2008-2010:
1) the planned schedule for the stable re-entry of Italian cooperation policy in Europe, by achieving the objective of 0.33% ODA/GDP, till then reaching 0.51% in 2010. The Financial Perspectives underlines the need to find additional resources for ODA, which, net of previous commitments, should tend towards 0.33% of the GDP (5.2 billion Euros on the basis of the new GDP estimates);
2) The Financial Perspective also groups together ODA expenses with costs due to the renewal of public sector contracts and welfare reforms. This hint that the cooperation allocations – 750 million in 2008 and 150 for subsequent years – has partly become a “compulsory cost”.
Despite these positive elements, the 2008 ODA in budget is difficult to assess due to the unclear nature of the budget and the difficult assessment of the time for disbursement. Therefore it is difficult to say whether the 2008 financial bill allocate enough resources to meet the 0.33% target.
Meeting the EU target with a 2 years delay means to subtract resources from the international aid system. By not meeting the official schedule for aid increase, as included into the 2003-2006 financial perspective, Italy kept 4.5 billion euros away from the international aid system. In terms of financial resources, it is almost equal to the Netherlands ODA.
The total ODA expected for 2008 appears to be more difficult to gauge because the allocations for 2008 are affected by the addition financial resources coming from the Decree 159 dated 3 October 2007 (771 million Euros for ODA). However to be in line with the Financial Perspectives 0.33% target net of previous commitments, only 355 million Euros should be counted as possible 2008 ODA. As for the DAC reporting directives all Decree resources to be disbursed in 2008 will count as 2008 ODA.
Despite these difficulties for any precise forecast, the attainment of the 0.33% target already seems to be very unlikely.
If 0.33% is not achieved in 2008, it will be even more difficult to reach 0.51% in 2010. This will delay the re-entry of Italian cooperation into Europe, but the will have negative impact on the overall European performance. If the 2010 Italian ODA had not reached at least 0.44% (approximately 7 billion Euros) in 2010, Europe will miss its 0.56% collective target.
Limited transparency
The reform of the State budget groups together all the Ministries budget heading under 34 missions. The reform was supposed to enhance transparency and had the potential to gather all headings dealing with development cooperation are under the mission title “Italy in Europe and the world”.
Over the last years, different ministerial departments had proposed to include to the budget a table indicating the forecast ODA level. This year this effort for transparency was in line with budget programme 2 of the “Italy in Europe and the world” mission, that is entitled “development cooperation and global challenges”. Instead both the “mission” is too broad and still does not only report ODA financial resources. In fact, the 662 million euro reported under the Mission/programme “development cooperation and global challenges” only indicates the financial resources available from the Ministry of Foreign Affairs (MFA).
There are still unclear and too broad budget headings scattered among Ministries, that “hide” a significant percentage ODA. This is the case, for instance of:
- the Special Fund of Ministry of Finance, financing, among other things, Italian contribution to development banks and funds;
- the Ministry of the Environment budget heading for sustainable development includes resources to support intervention in Italy and worldwide;
- budget heading n° 7493 of the Ministry of Finance - even more important for the Italian ODA. This contains allocations for the EC budget – 3.89 billion Euros – which will subsequently and partly be counted as ODA, - approximately 750 million Euros per year.
- ActionAid asks that the budget include a comprehensive table indicating the forecast ODA, detailing, among others, ODA channelled to the EU budget, ODA allocations in the Special Fund of the Ministry of Finance and the planned debt relief operations.
ODA from Ministry of Foreign Affairs
In the proposed Budget for 2008, the Directorate General for Development Cooperation (DGCS) asked 1.034 billion Euros be allocated as per law 49/1987 to meaningfully contribute to achieve 0.33%. This request was based on the hypothesis that the DGCS will still manage 22% ODA ( as in 2007), in case the 0.33% is achieved (about 5.2 billion euros). 10.034 million Euros is equivalent to an increase by 57% from the resources currently available. Last year law 49/1987 financial resources had the same increase.
The 2008 Financial Bill increases the law 49/87’s allocations to 742 million Euros, (+100 million - +15%). Despite the fact that the financial request by the DGCS has not been fulfilled, 742 million euro under law 49/1987 is the largest such financial allocation since 2000.
Figure 1: Budget allocations as per law 49/87, real value 2003.
Source: ActionAid processing budget laws.
According to the 2008 Budget estimates, 98% of whole available resources will be allocated to interventions in developing countries, a further increase from last year’s allocation (92%). The 100 million euros increase is likely to be split between bilateral aid – 80 million – and emergency interventions – 20 million. The financial amount for NGOs is unchanged, as this almost tripled last year (149 million euros).
ODA from the Ministries of the Finance, Environment and Internal Affairs
The Ministry of the Economy and Finance (MEF) requested that approximately 600 million Euros - additional to the resources provided by Decree 159r – to be allocated to its Special Fund in order to guarantee the Italian participation to Development Banks and Funds .
Moreover budget line dedicated to the “European Development Fund” has 350 million Euros (420 million in 2007). According to the MEF, the Financial bill did not provide the Special Fund with the requested 600 million Euros, but the only publicly accessible data for this fund is 335 million euros.
Article 48 of the financial bill authorises the Italian participation to the Advanced Market Commitment and extends Italian participation to the Multilateral Debt Relief Initiative (MDRI) - 40 million per year. It positive that 40 years long international ODA commitments are made, yet it is arguable whether these are adequate.
As for the MDRI, in 2005, the Italian coalition against poverty (Gcap) had already assessed Italian financial commitment insufficient. The Gcap called on the Government for a financial increase by committing the same share as the country contribution to the budget of all multilateral development banks (3.5%) – at least 35 million per year.
Article 48 could have included a paragraph on the Italian 10 year long undertaking of 3.2 billion Euros towards the fight against AIDS, as promised by the Prime Minister at the German G8.
The Minister of the Environment requested around 70 million euros be made available for development cooperation activities. Yet, it is not clear to what extent the Ministry will keep the same level of international activities, as its structural reform is still under discussion.
Eventually, at most 17 million euro for ODA are in the budget of the Ministry of Internal Affairs. This amount refers to the first year costs for refugees and can be reported as ODA in line with the international reporting directives. Unlikely other donors such as France, this generally represents a limited share of the Italian ODA: 36 million Euros in 2003 and 23 million in 2004.
- ActionAid call on presenting an amendment to art. 48 of DDL 1817 (Financial bill) in order to allow the appropriation of 3.2 billion euros over 10 years as to fulfil obligations from the G8 initiative to the fight against AIDS.
- ActionAid asks that the resources of the Ministry of internal Affairs to sustain refugees costs not be accounted as ODA, as UK and Hungary are doing.
ODA outside the budget: debt relief and concessional loans
Any accurate estimate of Italian ODA should include the out-of-budget financial resources: disbursement of concessional loans and debt cancellation, which since 2000 have respectively represented 5% and 20% of the Italian ODA.
Loans are delivered via a rotational fund, managed by Artigiancassa: the current rotating fund budget has 1 billion Euros available, net from disbursement and commitments. Unlikely the past, it should be pointed out that since 2006 the rotating fund is not replenished. The Italian development cooperation seems to plan to disburse only ODA grants in the future. ODA loans are calculated net between disbursement and paying-back. In the past, loans’ paying-backs resources were more important than disbursements, having a negative impact on ODA ( -515 million euro since 2000). From 2006, new loans agreements and debts cancellation increased the disbursements while reducing the paying backs. Now loans have a positive impact on ODA, but its share is still very small.
Debt cancellations were the most important out-of budget component of the Italian aid. Unlikely the transfers to the development banks or to the EC budget - generally constant and easy to estimate -, debt cancellations have entailed the greater fluctuations of the Italian ODA over the last 6 years.
Figure 2: Italian ODA/GDP performance, 2000-2006
Source: DAC, 2007.
With debts relief operations worth 6 billion euros from 2000 to 2006, the remaining Italian credits to be cancelled are very limited. Paragraph 1310 of article 1 of last year’s Budget Law positively modified article 5 of Law 209/2000 (debt cancellation), further broadening its scope of application. Estimates by the Ministry of the Economy indicate that debts to be cancelled could reach 1.5 billion Euros - a significant amount equal to 0.11% of the GDP.
Estimates for cancellations in 2008 are difficult to be made as there is no public document indicating either total credit still to be cancelled or cancellation agreements being negotiated during the year. Estimates by the MEF, forecast just 5% of future ODA to be made of debt relief .
- ActionAid recommends that asses the opportunity to replenish the rotating fund with 40 million euros – in line with previous years contributions.
- ActionAid recommends that the “Report on the implementation status of law 209” include a section concerning the total usable credit subdivided by country, with an indication of possible date of negotiations for cancellation.
ODA as disbursement and not merely budget availability: Decree 229 and the problem of planning
ODA is calculated not on available budget resources but on disbursements, which may also include the unspent financial resources from the previous year. This is why article 18 of Decree 159, allocating at least 771 million euro as ODA reportable for 2007, adds further complication to estimates 2008 ODA.
The disbursement of 771 million Euros will push Italian ODA up by +0.06% of the GDP. However, it is probable that due to time and legal constraints, these resources will neither be paid out in 2007, and will thus be carried over to 2008.
In terms of time constraints, the State General Accounting Office (GAO) does not generally authorise any payment before the decree is turned into a law – at latest by December 3rd -, and on the other hand, Ministries must inform the Accounting Office of any financial cost to be paid within the year by 7 December at the latest. Moreover the disbursement of the contribution to development banks and funds - 410 euro - appears to be even more complex, as it will need an additional decree indicating how the amount should be divided.
It is important to note that the GAO is already channelling the decree’s funds to the MFA while still waiting for the final approval. In terms of planning, on October 15th the DGCS committed 195 millions out of 225 as contributions to international organizations. The availability of a significant unexpected financial amount - equal to the whole multilateral heading - obliged the DGCS to quickly review its planning. The procedural advantages of the commitment to multilateral channels help explain the DGCS choice. It is important to note that article 18 limited the DGCS choices of multilateral organizations, excluding the possibility to allocate the 225 million euros to the Global Fund for the fight against AIDS, Tuberculosis and Malaria.
Despite being already committed, these resources could be still disbursed in 2008. Should the 225 million be carried over in 2008, the total resources on law 49/1987 at the beginning of 2008 would be 997 million Euros, very close to the 1.034 billion Euros required by the DGCS.
- ActionAid recommends that at the beginning of 2008 the law 49/87 financial availability should be equal to 1.034 billion euro.
ODA out-of-the-budget cycle allocations
The approval of the budget does not exclude any ODA increase over the year. For instance, during 2007, 75 million were allocated for law 49, thanks to the ODA activities under the “military missions” decrees, and 260 million euros were made available to pay the arrears to the Global Fund under the July extra-budget decree. In 2005, two decrees - January and March - had made available 951 million Euros to cover the Italian contribution to development banks and funds, when only 588 million Euros were available for law 49/87.
In 2008, ODA extra-budget allocations are expected to count to approximately 500 million: 400 million Euros from the authorisation of the Italian participation in development banks and funds – and 100 million Euros from the ratification of the revised Cotonou agreement.
3 scenarios for ODA in 2008
Due to the uncertainty in disbursement and the limited public information available, there are three possible estimates of 2008 ODA, net of debt cancellations and concessional loans:
- “Maximum” scenario, the financial resources in decree 159 will be paid out in 2008 and all the ODA planned resources outside the budget will be paid out.
- “Minimum” scenario, the financial resources in decree 159 will be paid out in 2007 and the extra-budget resources planned for 2008 will not be paid out.
- “Intermediate” scenario, the financial resources in decree 159 will be paid out in 2007 and the extra-budget resources planned for 2008 will be paid out.
| “Maximum” scenario | “Minimum” scenario | “Intermediate” scenario |
| 3.6 billion Euros – 0.23% GDP | 2.4 billion Euros – 0.15% GDP | 2.9 billion Euros – 0.19% GDP |
Thanks to the MEF’s estimate, we can add the forecast debt cancellations for 2008, and make a comparison of ODA/GDP trends between 2007 and 2008. The 2008 debt relief is assessed to be worth around 1 billion Euro – due to the last arrears from Iraq and the Democratic Republic of Congo. Finally, the disbursement of the resources by decree 159 will heavily influence ODA/GNI trends between 2007 and 2008.
| “Maximum” scenario | “Minimum” scenario | “Intermediate” scenario |
| 4.5 billion Euro – 0.29% GDP | 3.3 billion Euro – 0.21% GDP | 3.9 billion euro – 0.25% |
| ODA/GDP 2007: 0.21-0.23% | ODA/GDP 2007: 0.28-0.31% | ODA/GDP 2007: 0.28-0.31% |
The 2003-2006 financial perspective planned to reach the following ODA/GNI levels: 0.19% (2.2 billion euro) in 2003, 0.23% (3 billion) in 2004, 0.27% (3.7 billion) in 2005 and 0.33% (4.2 billion) in 2006. As for 2007, as there is no planned level, the ODA/GNI% is assumed to be equal to the EU minimal since 2006 – 0,33%. Actually, Italy attained 0.17% (1.9
billion euro)in 2003, 0.15% (1.9 billion) in 2004, 0.29% ( 4 billion ) in 2005, 0.20% (2.9 billion) for 2006. In 2007, ODA is forecast to 0.23% (3.7 billion).
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