Finance

Background

Macroeconomic aspects of aid scaling up and the role of the Fund

World Bank-IMF annual meetings 2007

26 October 2007 | Minutes


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Sponsor: IMF Fiscal Affairs Department (FAD) and Policy Development and Review department (PDR)
Chair: Mark Plant, PDR
Speakers: Mr. Musoni, Rwandan finance minister; Mr. Kasekenda, chief economist of AfDB; Owen Barder, DFID; John Ambler, Oxfam

Presentations

Mr. Musoni, Rwandan finance minister

  • Donors need to be more efficient and innovative
  • Fiscal aspects: uncertain and volatile aid inflows are problematic
    • Quality of aid matters – need correct balance between productive investments and social sector investments
    • Getting aid from vertical funds and outside national budget systems leads to poor coordination and inefficiency
  • Monetary Aspects
    • Absorption is a problem as well – mopping up liquidity is expensive and can cause crowding out
    • Dutch disease is a risk
  • Case of Rwanda – we had problems initially, but now there are no risks because of the 2nd generation PRSP and better coordination.
  • Role of the Fund:
    • It did a great job ensuring macro stability
    • But now macro stability alone is insufficient, we need more support and fiscal space to invest in productive capacity
    • IMF needs an innovative approach without restrictions
    • The aim should always be that aid is only a temporary solution

Mr. Kasekende, chief economic of the African Development Bank

  • Sources of volatility in capital inflows are many:
    • ODA/aid volatility; remittances; private flows including share market investments; speculators searching for high interest rates
    • The IMF is also a source of volatility
  • Macroeconmic challenges facing aid recipients
    • Central banks don’t get all the aid, some of it goes elsewhere creating management problems
    • The problems are limited if there is good investment, but there is time inconsistency – the gains from investment are realised much later
    • We had no Dutch disease effect in Uganda – evidence was that non-traditional exports increased in volume with aid inflows
  • Short run challenges facing countries
    • implementing good policies
    • it isn’t advisable to go for fixed exchange rates because it complicates macro-economic management
    • expenditure smoothing should be the goal
      • donors need to be better about how they give money
      • We must preserve central bank independence during the process
    • We need to have range targets (like 5-6% inflation) rather than point targets

Owen Barder, DFID

  • It is desirable and feasible to increase aid, it can be fully absorbed and spent
  • Some of the potential problems with scaled-up aid
    • Dutch disease is not a problem
    • Other probs: Undermining domestic revenue, bottlenecks, aid coordination, administrative capacity
    • Most of the these probs are more theoretical than real – no dutch disease, domestic revenue mobilisation has increased, general budget support is less volatile than project aid, no evidence on corwding out private investment
    • One consistent finding – diminishing returns to aid
  • Donor behaviour is the biggest problem!
    • we must have less volatility and more predictable long-term aid
    • aid must be transparent – donnors must share information
    • aid needs to build and support country systems, not go around them
    • aid should support not constrain country administrative capacity – ie have fewer missions
    • aid must support both social and productive sectors
  • We also need a better trade system that lets countries export their way to success

John Ambler, Oxfam

  • There is a tension between stability and urgent human imperatives
    • Of course IMF has a role to play in stability
    • Example of a hospital in Sierre Leone with bad services, underpaid staff and broken equipment
  • What can the IMF do?
    • IMF work is public financial management is good and should continue
    • IMF should reach out to CSOs – they can help identify problems, monitor, build accountability and transparency
    • Macro-stability may not be the prime imperative, long-term human development is the goal
      • Fiscal borrowing can be necessary
      • wage bill caps are problematic
      • foreign aid going to foreign reserves is a problem – there needs to be priority put on urgent human needs
    • Why is the IMF still in Tanzania? It is stable and doesn’t need help
    • On aid scenarios – the IMF should demonstrate better absorptive capacity
      • need good projects
      • model Gleneagles commitments

Discussion

Virtuous circle of aid and capacity – don’t countries need aid to help develop the administrative capacity to handle even more aid?
Answer: the panel largely agreed with this

Resources from export and comodity prices – oil exporters aren’t necessarily better

Is aid absorption better in countries with more decentralised administrations?
Answer: there is no evidence yet but something that should be look at

Could front-loaded aid be absorbed by NGOs given the governments capacity constraints?
The panel had differences of opinion, some agreed that NGOs could be used to proviude services while others cautioned against this

Should the IMF be working to mobilise aid?
Answer: most of the panel agreed that the Fundhas a role in inspiring aid, confirming absorptiuve capacity and being sure aid is well spent, but should not be actively lobbying for aid. John Ambler disagreed and so a stronger role for the Fund here

Part of the problem is that not enough governments in Africa listen to advice from the IMF

Is there a problem with avoidance of planning? Need long-term thinking about developing the right resource mix, especially human resources, but this doesn’t seem to be happening