Iceland’s development community grapples with foreign aid cut

Villagers unfurl a traditional seine fishing net on a beach in southern Sri Lanka. Iceland's aid agency supports efforts such as this one to help fishermen develop sustainable livelihoods, but due to aid cutbacks prompted by the financial crisis, its mission in Sri Lanka is set to close in June 2009. Photo by: Gunnar Salvarsson/ICEIDA

For an aid agency hoping for a budget increase, it can’t be good news when the national government beseeches the International Monetary Fund for an emergency bailout.

In Iceland, arguably the hardest-hit country by the financial crisis, this disaster scenario suddenly became a reality when the country’s three major banks collapsed due to a run on deposits by account holders abroad. The banking crisis quickly reverberated throughout the real economy, leading to skyrocketing inflation, a surge in unemployment, and political discontent. Amidst this domestic turmoil, Iceland’s government chose to drastically cut its overseas development assistance.

In 2008, Iceland contributed about 0.31 percent of its gross domestic product to foreign aid, which is roughly on par with the aid commitments of Canada and Australia. Prior to the crisis, the country planned to increase its aid expenditures to 0.35 percent in 2009, with the aim of eventually reaching the 0.7 percent target set by the United Nations. Instead, the Ministry of Foreign Affairs is now slashing the aid budget to 0.27 percent.

But this budget cut tells only half the story. Iceland’s currency, the krona, has lost nearly half its value since the crisis hit. This meant that the Icelandic International Development Agency, which makes its foreign aid commitments in dollars, saw its budget suddenly shrink from $22 million to $13 million.

According to ICEIDA Director General Sighvatur Björgvinsson, the agency was forced to immediately curtail expansion plans and focus on survival.

“We are just trying to hold steady to honor our agreements,” he said. So far, ICEIDA has pledged to maintain all funding commitments to its project partners, even those which extend until 2015.

It remains unclear whether Iceland’s sudden reduction in foreign assistance is an exception to an otherwise steady stream of aid flows, or an early harbinger of drastic cutbacks across aid agencies worldwide. In this mercurial financial crisis, where new wrinkles seem to emerge every day, it is hard to tell if the worst has hit. Whatever the eventual outcome, the case of Iceland serves as a reminder that domestic economic conditions in donor countries can have a direct and immediate impact on development assistance, even in a political climate that is otherwise favorable to foreign aid.

ICEIDA’s decision on how to implement the budget cuts was made in close collaboration with the central government, which enjoys “very good cooperation” with its aid agency, according to Björgvinsson. Faced with the sudden need to pare down state expenditures, the Ministry of Foreign Affairs asked Björgvinsson what measures ICEIDA could take to reduce foreign aid costs. In response, he offered to implement a suspension of future programs, which would allow ICEIDA to maintain its current obligations.

The freeze on all new projects is set to last until at least 2010. ICEIDA has also decided to cease operations in Sri Lanka, and is considering pulling out of other countries in 2009-2010. So far, there have been no layoffs or pay cuts, though Björgvinsson noted that staff paid in kroner are struggling to cope with the higher cost of living.

Though ICEIDA is relatively small compared to other aid agencies, there are two reasons that the cutbacks will be acutely felt by its partners in the field. First, ICEIDA focuses on only six member countries, all of which are relatively small. This limited scope allows the agency to concentrate its efforts, becoming a key player in local communities abroad.

Also, ICEIDA tends to support projects that correlate with Icelandic expertise, namely geothermal energy and the fishing industry. In these niche sectors, few donors may be willing or able to take the agency’s place.

“Iceland has enormous technical experience when it comes to fisheries,” said Amanda Kiessel, program director of Sewalanka, a Sri Lankan non-governmental organization. “ICEIDA’s departure will leave a gap at a national level.”

Sewalanka, whose fishery projects largely depend on ICEIDA support, is scrambling to find aid from other sources in order to continue its work in 25 locations in the wake of ICEIDA’s impending departure this June. According to Kiessel, it is relatively rare for donor agencies to fund fisheries projects at the community level, so she is hoping to find support from individual donations and small grants.

But to some extent, this uncertainty about donor funding comes with the territory, Kiessel acknowledged. “It is common for aid commitments to change, especially if you’re a local NGO,” she said.

When the financial crisis hit, Sewalanka staff began to speculate that ICEIDA’s days in Sri Lanka were numbered. ICEIDA informed Sewalanka staff as soon as the decision to withdraw from Sri Lanka was made, allowing ample time to phase out the relationship, according to Kiessel.

“Because we have good lines of communication, it wasn’t a shock,” Kiessel noted. “The exit has been handled very well.”

Despite their frustration with the impending cuts, ICEIDA partners have applauded the agency’s decision to keep its current commitments amid such trying circumstances. This stoic acceptance stands in stark contrast to the outcry among Italian NGOs when their government announced a 55 percent aid cut. Gudrún Dögg Gudmundsdóttir, director of the Icelandic Center for Human Rights, recently stated in an interview with the Icelandic newspaper Morgenbladid that the financial crisis had prompted her organization to reconsider its call for the nation to increase foreign aid funding levels.

According to Björgvinsson, most members of the development community had expected that cutbacks were inevitable. “The NGOs are frustrated, but everyone is frustrated.”

In spite of these setbacks, Björgvinsson hopes that Iceland will gradually increase aid flows after the crisis and spend 0.35 percent of its GDP on international development by 2014.

“Our nearest future is gloomy,” he said, “but we are determined to overcome.”

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