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Macro Effects of Scaling Up Aid: A Case Study of Tanzania

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Macro Effects of Scaling Up Aid: A Case Study of Tanzania
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  1. Macro Effects of Scaling Up Aid: A Case Study of Tanzania Mick Foster

  2. Issues • Has increased aid damaged private sector growth (and did it have to?) • The dangers of depending on donors

  3. A Recap of Some Fundamentals • Govt can increase spending by:- • Drawing on foreign resources (‘aid’) by increasing net imports • Bringing idle capacity into use or • Squeezing private sector demand through taxation, inflation, or less access to credit

  4. Aid and Public Spending as % of GDP • Total Aid as % GDP fell in late 1990s and is below 1995 level • But Aid included in budget has increased, and fuelled a 10% of GDP rise in public spending

  5. Cumulative Increase Compared to 1995 Baseline, $ Mns • Table shows cumulative increase over unchanged 1995 levels • Very little aid was absorbed in higher net imports

  6. Credit Crunch & Recovery • Without higher imports, & with inflation already too high, higher GOT spending required severe private sector credit controls, and private investment share of GDP fell • Credit conditions improved in 2000s, but private investment did not recover – displaced by permanently higher GOT share in demand?

  7. Dutch Disease? • Late 1990s: • Exchange rate appreciated 25% • Non-trad exports grew just 6.5% p.a. (excluding gold) • Exports fell from 20% to 14% of GDP • 2000-04: • Exchange rate depreciated 35% • Non-trad exports grew 15.5% p.a. • Exports recovered to 20% of GDP • Dutch Disease without the benefits of the Aid?:- • Not caused by increasedsupply of foreign exchange financed with aid, because the economy did not absorb it • DD symptoms were probably caused by the reduced demand for forex due to restriction of private sector demand to make room for higher GOT spending on non-tradeables

  8. The Tanzania Story • Tanzania has used increased aid to ‘finance’ a 10% of GDP increase in public spending • But the foreign exchange provided with the aid has not been absorbed • Increased GoT spending has therefore been at the expense of a squeeze on private credit and investment • Possible evidence of Dutch disease symptoms in late 1990s, but GOT resisted exchange rate appreciation and reversed it by accumulating reserves • GOT has relaxed credit and private growth has recovered – but it has not absorbed the modest aid increase • The economy has grown strongly – but the pattern of growth has shifted towards public sector dependent sectors

  9. Issue 2: Aid is Not Reliable A key problem illustrated by Tanzania is that aid promises are not reliable in the short term, and historically have not been sustained in the long-term:

  10. Unreliable Aid 1: Long-Term Trends in Aid inflows and GDP growth in Tanzania

  11. Aid is Unreliable-2 • Aid has far higher Variance than domestic revenue • Aid is 85-90% of HIV spending, so a 10% shortfall requires GOT spending to almost double to replace it • Aid to HIV funds long-term obligations (e.g. to ARV treatment), but is short-term and unreliable: e.g. of the ‘big 3’ donors: • PEPFAR, Annual commitments • GFATM, 2 year pipeline but annual programming • WB MAP, has suffered long procurement delays

  12. HIV/AIDS Spending • It will take to 2030 on optimistic assumptions for GOT revenues available to HIV/AIDS to reach TSh200bn p.a. • Donor spending is expected to reach TSh300bn in 2005/6, more than enough to finance GOT prevention, care and treatment plans • But donor funding is poorly allocated, and does not finance the GOT strategy: • GFATM funding for just 45 of 123 districts at levels that can not be sustained or replicated • Prevention under-funded e.g. condoms, defence, education • Defence treatment costs are a high multiple of civil costs • Vital human resources and systems strengthening is under-funded, and damaged by brain drain to HIV/AIDS partners

  13. Issues Arising • With such reluctance to absorb a recovery in aid to earlier levels, what would happen with a doubling of support? • Should GOT have been more relaxed about the exchange rate, and absorbed the aid by selling foreign exchange rather than adding to reserves? • Is there a general lesson that Government should not spend aid that it has not absorbed, because of the negative impact on the private sector? • Is the increased Government spending more valuable than the lost private sector output? • Can we make aid long term and predictable enough to convince Governments that increased aid is worth the risk of increased dependence on unreliable donors?