UNDP Poverty CenterUNDP Poverty CenterPanel Discussion Panel Discussion

An Introduction to the An Introduction to the Macroeconomic Issues of Macroeconomic Issues of

Scaling Up HIV /AIDS Scaling Up HIV /AIDS FinancingFinancing

Presentation by Presentation by Mwanza Nkusu, Senior Economist IMFMwanza Nkusu, Senior Economist IMF

November 20, 2006November 20, 2006

Overview Scaling up of aid is an important ingredient in

actions to help low-income countries reduce poverty

(View of the World Bank and IMF, see 2004 Executive Summary, 2004 Global Monitoring Report)

Aid creates opportunities in recipients countries

but also challenges and issues that merit attention

Opportunities Develop good multi-year national development

plans

Create fiscal space in otherwise very tight budgets

- Help countries address pressing poverty issues (fight against diseases, including HIV/AIDS —a major development threat)

- Help countries address long-term structural issues (develop infrastructure and human capital)

Issues and ChallengesIssues and Challenges

Traditional concerns about the macroeconomic effects of large resource inflows--Dutch disease

Unpredictability Volatility of disbursements

Fiscal sustainability

Debt sustainability

Large aid inflows and the Dutch disease

Large aid inflows raise concerns of causing real exchange rate appreciation and a shrinkage of net exports.

The concerns are legitimate but Dutch disease effects can be mitigated and also depend on premises of the original model.

Mitigating Dutch disease effectsMitigating Dutch disease effects

Large Large import contentimport content (absorbing aid to curb pressure on (absorbing aid to curb pressure on domestic prices)domestic prices)

Encouraging a Encouraging a positive domestic supplypositive domestic supply response response (through improved productivity and/or use of previously (through improved productivity and/or use of previously unemployed production factors)unemployed production factors)

Macroeconomic management—coordination of Macroeconomic management—coordination of fiscal and fiscal and monetary policymonetary policy (one of the reasons why Dutch disease (one of the reasons why Dutch disease did not materialize in some countries is that it was did not materialize in some countries is that it was avoided through policies)avoided through policies)

Relaxing the Premises of the Dutch Relaxing the Premises of the Dutch Disease Model Disease Model

No full and efficient employment (no No full and efficient employment (no resource transfer effect)resource transfer effect)

Absence of small country hypothesis Absence of small country hypothesis (even tradables can expand)(even tradables can expand)

Volatility of aid flowsVolatility of aid flows

Unpredictability and volatility of aid Unpredictability and volatility of aid hampers budget management.hampers budget management.

If spending increases one to one with aid If spending increases one to one with aid disbursement, a negative aid shock would disbursement, a negative aid shock would be very disruptive. be very disruptive.

Fiscal sustainabilityFiscal sustainability

CurrentCurrent versus versus futurefuture fiscal space fiscal space

Future fiscal space hinges on aid Future fiscal space hinges on aid recipients’ ability to increase recipients’ ability to increase domestic domestic revenue mobilizationrevenue mobilization

Debt sustainabilityDebt sustainability

Aid tilted towards grants helps debt Aid tilted towards grants helps debt sustainabilitysustainability

Debt service will put Debt service will put pressure on pressure on government financesgovernment finances and on and on reservesreserves

Addressing such pressures depends on Addressing such pressures depends on ability to improve the ability to improve the revenue effortrevenue effort and and generate generate foreign exchangeforeign exchange. .

Private sector development: key to long-term development

Important that large aid finance outputs/outcome oriented budgets

(good governance and accountability)

Outputs/outcomes that help develop an environment encouraging private investment are key to creating employment, raising incomes, and expanding the tax base.

Summary Scaling up needed to advance poverty reduction efforts

Be aware of likely Dutch disease effects, but bear in mind that they can be mitigated

Make aid disbursements predictable and less volatile

Fiscal and debt sustainability considerations

Important that aid finance well-designed programs that can effectively contribute to private sector development and efficiency in production.

Thank you !Thank you !