Some Definitions

For the purposes of this post on the basic principles of international financing, the term “Credit Agency (CA)” will be the one that grants a loan to a State, and the one that grants non-reimbursable resources “International Cooperation Agency or donor (ICA)”.

The difference between both sources is that a loan (CA) must be repaid by the State and a cooperation resource (ICA) is non-reimbursable.

Both loans (CA) and grants (ICA) are structured through a project or program, depending on the grantor.

As the loans (CA) must be repaid by the receiving State, they carry an interest that we will call original and one or more punitive interest in case of sub-execution. We will call sub-execution the circumstance in which the objectives defined within the project have not been met in a timely manner.

Introduction

In the cases of non-reimbursable resources from International Cooperation agencies (ICA), these translate into obtaining: hiring consultancies, training or equipment related to the objectives of the project and the achievement of its results.

It is worth repeating: for a Government, it is safe to assume that the resources (both CA and ICA) are never freely available to the receiving country.

Structuring of funds

But then, if these funds are not freely available except within the framework of what is established in the project, what use are they? In principle, they represent a very effective means of advancing on key issues for a Government with the help of others who have already traveled the path before, allowing them to do so in less time and at a lower total cost. For example, if a Government desires to provide its citizens with a Comprehensive Health Service (CHS), it can request help from Canada (through its Cooperation agency (ICA), CanadaAid ), in the hope that it will share your experiences and sponsor its implementation, something that can be significantly more efficient than implementing the policy alone. In this case, of course CanadaAid would have an audit power over the development of the project.

It can also happen that politically unstable states request a credit agency (CA) for a loan (e.g. Inter-American Development Bank - IADB, World Bank - WB, among others) for the sole purpose of stabilizing and guaranteeing the execution of a priority policy for the country. This, because upon receiving the funds, they also accept the external review of the grantor, who can apply sanctions for non-compliance with the project’s objectives (punitive interests other than the original ones).

All in all, it can be affirmed that the funds can only be granted through the approval of a project, which implies a detailed description of the objectives to be achieved, the stipulated execution period and the assigned resources (budget). On a recurring basis, the project is carried out by a local execution unit, which, if it does not have installed capacity, can be an international organization (such as the United Nations Program for Development and Sustainable Life - UNDP), or a combination of both.

That is to say, everything is oriented towards a tight control of the finances and the objectives of the project, given that it is exercised by:

1. the receiving State
2. the project execution unit
3. The organization originating the funds, whether they are multilateral lending banks, regional banks and/or bilateral donors (CA and ICA).
4. Others involved (stakeholders)

The “special requests”

It is sometimes curious that in many jurisdictions, government officials do not seem to understand that the resources granted by these organizations (CA and ICA) cannot be used to cover expenses not related to the project.

We have seen in some cases that, faced with this reality, officials try to make requests outside the project, in some cases we have observed how conferences have been organized in 5-star hotels not provided for in the project budget, or the hiring of a venue has been required unqualified but highly influential in key positions as a requirement for its continuity.

In this sense, it may happen that the receiving Government understands that the political and short-term objective takes precedence over the objective of the project but using resources for results not foreseen in it.

Normally, the organizations (both CA and ICA) do not grant funds for current expenses, such as salaries of public employees, electricity or gas bills, among others, financing in some cases only very short-term expert consultancies (for example 2 weeks) so that they can transmit their knowledge to the receiving State, usually with little impact, especially in cases of high staff turnover.

What can a State do with the funds granted by an international organization?

Once the funds have been granted and the project approved, it can be assumed that the negotiation stage is over, so that only what is included in the project can be executed. Sometimes, government officials do not understand this premise.

It is worth remembering that both the CAs and the ACIs can contribute to the achievement of the priority policies of the recipient country, which in turn are framed within the objectives of said organizations.

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