WASHINGTON, 6 October 2008: On the sidelines of last week’s United Nations summit on the Millennium Development Goals (MDGs), a major topic of discussion was scaling-up aid to Africa.
Calvin McDonald of the IMF African Department participated in a September 22 event on Africa’s development needs that addressed the Gleneagles approach to scaling-up official development assistance (ODA).
A panel consisting of ministers from Benin and Rwanda, bilateral and multilateral donors, and advocacy groups — including musician-activist Bob Geldof — participated. Asha-Rose Migiro, UN Deputy Secretary-General, opened the event, which was moderated by Jeffrey Sachs, UN Special Advisor on the MDGs.
McDonald presented macroeconomic analyses of ‘Gleneagles Scenarios’ for the use of scaled-up ODA for Benin, Niger, and Togo. This is part of work currently underway on assessments of such scenarios in ten countries.
The studies are aimed at better understanding the growth, inflation, and exchange rate implications of a dramatic boost in aid, promised at the G-8 Summit in Gleneagles, Scotland, in 2005. It is also part of a multinational effort — the UN MDG Africa Steering Group — to identify practical steps for Africa to achieve the MDGs and to help mobilize the international community to deliver on aid commitments to Africa.
The framework for the IMF scenarios is based on sector-level analyses and spending plans from country authorities that have been developed with assistance from the UN Development Program, the World Bank and the African Development Bank.
IMF staff are using several approaches, including a model to analyze the effects of increased aid on key macroeconomic variables and to assess the implications of different policy choices.
The IMF believes that the scaling-up of aid could greatly benefit recipient countries, and that macroeconomic stability need not be at risk if countries follow sensible policies. Some broad conclusions from the IMF studies are:
The scaling-up of aid can have a positive impact on growth in both the short and medium term. The short- to medium-run effect would come from the increase in the productive capacity of the economy, as a result of higher investment in public infrastructure and a considerable increase in human capital following greater spending on health and education.
The magnitude of the growth impact will depend on the increase in aid flows and on the efficiency of public spending.
It is important that most of the foreign currency proceeds from the aid inflows are used to finance a transfer of real goods and services from abroad, either directly through the government’s import bill or through the private sector’s purchase of much needed capital goods. The proceeds should not necessarily be accumulated as foreign reserves. In other words, aid must be fully absorbed to reap its potential benefit, and current account deficits should widen accordingly.
In general, the real exchange rate will have to appreciate if the government spends the aid on domestic goods and services, as is expected. While a real appreciation may affect export competitiveness in the short run, the increase in productive capacity described earlier should encourage higher export growth in the medium term.
However, a potential real appreciation should not deter countries from absorbing the aid.
The impact on inflation will depend on a number of factors. In countries with fixed exchange rates, a temporarily higher inflation rate will be necessary to help achieve the required real appreciation. In countries with flexible exchange rates, the pressures on inflation will depend on whether the central bank accumulates the foreign currency proceeds as reserves, and if so, whether such reserve accumulation is sterilized.
It is imperative that the public sector’s administrative and spending capacity is strengthened to make the best possible use of all additional resources.
Finally, it is important that the additional aid that countries committed to at the Gleneagles Summit have a large grant element. Otherwise, there could be risks to the debt sustainability of the receiving country, especially if the increase in aid is very large.
In their presentations, the ministers of government from Benin and Rwanda reviewed their countries’ Gleneagles scenarios and identified clear opportunities to scale up poverty reduction programs and projects if increased financing is made available.
Panelists were unanimous in their call for donors to meet their ODA commitments to Africa, and to implement the recommendations of the MDG Africa Steering Group.
Kilde: IMF
