On 28 February 2025, Prime Minister Keir Starmer announced a significant reduction in the UK’s Official Development Assistance (ODA) from 0.5% to 0.3% of gross national income, translating to a projected £6.2 billion drop in funding.
This decision raises serious concerns about the future of development aid, particularly for low-income countries heavily reliant on UK contributions, the world’s fourth largest donor.
In this paper, Stephen Paduano explores the implications of these cuts, highlighting the financial challenges faced by the International Development Association (IDA).
As international politics become less conducive to international development, fiscally sound financial engineering — finding clever but sustainable ways to plug gaps left by donors — will become increasingly important.
The World Bank and IMF have gotten an early start on this through analysing and implementing a range of “balance sheet optimisation measures.”
Now it is clear that the financial engineering work of doing development with less grant funding — which the UK has strongly supported at the multilaterals — must come home.
For the UK, a ready-made tool exists in the form of the Exchange Equalisation Account (EEA), a £149.2 billion fund at HM Treasury which has been largely idle for the past 32 years, the utilisation of which would be fiscally neutral, and which has standing authorisation to conduct a broad range of foreign transactions in the UK’s national interest
This policy note proposes two ways to mobilise a small portion of the UK’s largely idle £149.2 billion reserve fund, the EEA:
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To fund Concessional Partner Loans to IDA
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To make Bond Purchase Commitments for IDA
Both proposals are fiscally neutral as they require the issuance of no new debt, the raising of no new taxes, and as their funding through the EEA has no bearing on the UK’s fiscal accounts (the CF and NLF).
The note proceeds with (1) an overview of the ODA cuts and their effect on IDA, (2) a history and operational review of the EEA, (3) the proposal for Concessional Partner Loans, (4) the proposal for Bond Purchase Commitments, and (5) an annex on the fiscal neutrality of the proposals.