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UNDP Poverty Center Panel Discussion An Introduction to the Macroeconomic Issues of Scaling Up HIV /AIDS Financing. Presentation by Mwanza Nkusu, Senior Economist IMF November 20, 2006. Overview.

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UNDP Poverty CenterPanel Discussion An Introduction to the Macroeconomic Issues of Scaling Up HIV /AIDS Financing

Presentation by

Mwanza Nkusu, Senior Economist IMF

November 20, 2006

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  • 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

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  • 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)

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Issues and Challenges

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

  • UnpredictabilityVolatility of disbursements

  • Fiscal sustainability

  • Debt sustainability

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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.

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Mitigating Dutch disease effects

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

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

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

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Relaxing the Premises of the Dutch Disease Model

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

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

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Volatility of aid flows

  • Unpredictability and volatility of aid hampers budget management.

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

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Fiscal sustainability

  • Current versus future fiscal space

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

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Debt sustainability

  • Aid tilted towards grants helps debt sustainability

  • Debt service will put pressure on government finances and on reserves

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

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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 l.jpg

  • 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.