Over the last decade, soft loans have extensively been used as an instrument of trade finance. Soft loans are awarded on concessional terms and are generally used to finance infrastructure projects, with recipients usually being developing or transitioning economies. Donors pursue different objectives with their soft loans projects. For one, export promotion is meant to give domestic exporters access to markets and sectors which are not open to them under conventional market conditions. On the other hand, through pursuing soft loan policies countries hope to make a positive contribution to the economic and/or social development of recipients. Funds used for soft loan financing are added to official development assistance (ODA) according to the OECD/DAC definition (ODA ability). A characteristic of soft loans is that they are often provided in the form of tied aid credits. This means that financing is tied to the supply of goods and services from the donor country. This characteristic has led to criticism of soft loans since the prevailing opinion among development experts is that development cooperation should align with the priorities of the recipient country and thus rather be focused on local capacity promotion.
Soft loan programs have recently faced several challenges. Most prominently, many recipient countries are no longer classified as developing countries, resulting in credits no longer being regarded as ODA. Furthermore, attempts are being made to increase private capital for development financing through blending and lastly, debates between the OECD and the United Nations on the future of development finance are likely to have an impact on the design of soft loan policies.
Against this backdrop, the ÖFSE project on soft loans focuses on the following aspects:
- How have development objectives been integrated into the design of soft loan policies on an international level? Which development related aspects are found in the central regulatory framework for soft loans – the OECD Arrangement – and to what extent is the Arrangement consistent with the principles of the OECD/DAC?
- How have different aspects of development been implemented in the national soft loan policies of four selected European countries (i.e. Austria, Germany, the Netherlands and Denmark)? What differences in national implementation can be identified?
- What are the options available for an increased integration of development related issues into soft loan policies?