Policy issues in scaling up of aid flows 22 April 2006

Policy issues in scaling up of aid flows

Notes from Carol Healy, Trocaire

Sanjeev Gupta, IMF African department

• Impact of exchange rates are offset if aid is used more productively
• Prevalence of Dutch disease is not common in Africa because countries saved
• Many ministers have emphasised the need for agricultural focus
• There is a need for changing institutions and governance to effectively manage scaled up aid flows, which will involve reducing aid dependence over time, and improving budget management
• Countries should start scaling up scenarios similar to Ethiopia and Zambia

Andy Berg, IMF Policy Development and Review department

Macro economic problems with aid inflows: Theory says that aid flows make exports uncompetitive. However, in actuality, nothing happened to the real exchange rate. If aid is spent on infrastructure, this may help the production of domestic goods. However, actually, a lot of aid dollars went back to the West, and are held in reserves in the central bank in New York. Coordination of Ministries of Finance in central banks - the Fund needs to help authorities to coordinate better. Risk of Dutch disease overstated.

Peter Heller, IMF Fiscal Affairs Department

Reconciling policies to promote the MDGs

• Analytic issues: challenges of programming a scaling up of spending to meet the MDGs
• Sectoral imbalances are associated with donor interests and expenditure compositional effects
• There is less of a fiscal anchor with MDRI
• Implications of heavy reliance on grants to finance expanded recurrent expenditure programmes
• Dealing with volatility in external receipts and lack of long term, predictable aid commitments (limits to debt sustainability)
• Fiscal policy stance/fiscal monetary policy coordination/choice of fiscal indicators

Implementation issue

• Establish medium term fixed framework
• Coordination for fiscal and monetary policy
• Strengthened public financial management
• Trust funds
• Ring fencing
• Reliance on fiscal rules as a fiscal anchor
• Reliance on revenue thresholds and revenue rules
• Greater role for independent audits of the fiscal policy framework

Observations: Scaling up is good, but there are challenges: there needs to be a change in how fiscal policy conducted, managed and implemented. Donors need to harmonise and be predictable.

Marijn Verhoeven, IMF

Wage ceilings

Relationship between aid scaling up and wage bill ceilings. Key issues:

• Need more government spending and better policies
• More people and train them better
• When you spend a lot on wages, and wages are rising, this leads to an increase in fiscal deficit, which crowds out macro economic stability

Limitations of ceilings:

• Provide little bit of room to do real work - may lock in inappropriate civil service
• Better to have a civil service reforms, but this is very difficult to do, wage bill ceilings easier
• Once the wage ceiling is introduced, they don't go away, and therefore become a permanent fix
• When aid is uncertain, the wage bill ceiling is revised one the government knows that extra money is coming in.

Discussion

Brain drain issue: IMF didn't look at this in their report. The paper focuses on need for resources to address the brain drain.

Ceilings have tried to limit employment in non-priority sectors

Many countries: civil service wages are much higher than private wages, and are therefore not competitive. There's a tension between raising wages and having an impact on the private sector

There followed a discussion on whose policy the wage ceiling belongs to - the IMF or the national government. The IMF panel argued that it wasn't their policy, that it belonged to the national government. This was disputed by the audience, and the issue of transparency was highlighted. The panel refused to engage in the discussion, and Peter Heller left the room.

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Published: 9 May 2006 , last edited: 27 May 2010

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