The grant element method of measuring the concessionality of loans and debt relief

The grant element is the “gift portion” of a financial transaction. The mathematical technique for arriving at a precise grant element percentage was first proposed by John Pincus of the RAND Corporation in 1963, and developed mathematically by Göran Ohlin of the Development Centre in 1966. Pincus also advocated expressing foreign aid in terms of its grant equivalent – i.e. the grant element expressed as a monetary value instead of a percentage. Grant element methodology was first used officially in 1969, in a target for softening the terms of aid. A grant element test was then introduced into the definition of official development assistance in 1972. Grant element methodology was subsequently applied to regulate the terms of export credits, to help assess the sustainability of developing country borrowing, and to calculate the level of debt relief and ensure comparability of effort in relevant Paris Club debt rescheduling operations. Central to grant element calculations is the selection of an appropriate discount rate to reflect financial market conditions. The present low interest rate environment raises challenges in this respect. This paper offers a layman’s introduction to the nature and mechanics of grant element methodology, and to the history of its application in practice.