Front Matter

Front Matter

Author(s):
Kevin Fletcher, Sanjeev Gupta, Duncan Last, Gerd Schwartz, Shamsuddin Tareq, Richard Allen, and Isabell Adenauer
Published Date:
April 2008
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    © 2008 International Monetary Fund

    Production: IMF Multimedia Services Division

    Typesetting: Alicia Etchebarne-Bourdin

    Cover Design: Jennifer Geanakos

    Cover Photo: Gideon Mendel/Corbis

    Bhanganoma rural district, Swaziland: An after-school meal is served to vulnerable children.

    Cataloging-In-Publication Data

    Fiscal management of scaled-up aid / Sanjeev Gupta … [et al.] — Washington, DC: International Monetary Fund, 2008.

    • p. cm.

    • Includes bibliographical references.

    • ISBN 978-1-58906-703-5

    1. Economic assistance — Developing countries. 2. Fiscal policy — Developing countries. 3. Developing countries — Economic policy. 4. Developing countries — Economic conditions. I. Gupta, Sanjeev. II. International Monetary Fund.

    HC60.F573 2008

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    Contents

    Abbreviations

    CPAR

    Country Procurement Assessment Report

    CPIA

    Country Policy and Institutional Assessment

    DAC

    Development Assistance Committee

    DEA

    Data Envelopment Analysis

    DfID

    Department for International Development (U.K.)

    DSA

    Debt Sustainability Analysis

    G-8

    Group of Eight

    GDDS

    General Data Dissemination System

    GFSM 2001

    Government Finance Statistics Manual 2001

    HIPC

    Heavily Indebted Poor Countries

    ICPR

    International Development Agency Country Performance Rating

    MDG

    Millennium Development Goal

    MTBF

    Medium-term budget framework

    MTDS

    Medium-Term Debt Strategy

    MTEF

    Medium-term expenditure framework

    MTF

    Medium-term framework

    MTFF

    Medium-term fiscal framework

    NDP

    National Development Plan

    ODA

    Official development assistance

    OECD

    Organization for Economic Cooperation and Development

    PEFA

    Public Expenditure and Financial Accountability

    PETS

    Public Expenditure Tracking Surveys

    PFM

    Public financial management

    PPP

    Purchasing power parity

    PRGF

    Poverty Reduction and Growth Facility

    PRSP

    Poverty Reduction Strategy Paper

    ROSC

    Report on the Observance of Standards and Codes

    VAT

    Value-added tax

    WAEMU

    West African Economic and Monetary Union

    WEO

    World Economic Outlook

    WHO

    World Health Organization

    Preface

    There is a renewed commitment by the international community to increase aid significantly to help low-income countries meet the Millennium Development Goals (MDGs). The Monterrey Consensus of 2002 called for increased and more effective aid for low-income countries. This was followed up by the commitment of the Group of Eight (G-8) countries at the Gleneagles Summit in 2005 to double aid to sub-Saharan Africa by 2010. There has also been a substantial increase in aid to low-income countries from other “emerging donors” as well as from nonofficial sources.

    Prospects of scaled-up aid present low-income countries with both opportunities and challenges. More aid provides additional “fiscal space,” thereby offering these countries a unique opportunity to increase spending to accelerate progress toward the MDGs. Yet managing additional aid resources also poses significant challenges for macroeconomic management, including from the uncertainty and volatility surrounding aid disbursements and the impact of scaled-up aid on macroeconomic stability and debt sustainability.

    The IMF aims to help countries fully spend and absorb all aid, provided that macroeconomic stability is not compromised and that the aid can be used effectively. Fiscal policy, in combination with monetary and exchange rate policy, is critical in determining how much of the aid is spent and absorbed. Low-income countries also need assistance in putting in place the economic and fiscal institutions that will permit them to absorb the scaled-up aid in a sustainable manner.

    This paper discusses the role of fiscal policy in managing scaled-up aid. Accelerating progress toward the MDGs will require both more spending and more efficient spending in order to generate the desired social and economic outcomes. Scaled-up aid relaxes the budget constraint in aid recipient countries but does not eliminate it. Thus governments must choose a time path for revenue and expenditure policies that maximizes society’s welfare, subject to the constraint that spending cannot exceed available resources. A first step in this direction is to determine the overall resource envelope over the medium term. A given resource envelope, however, is consistent with an array of alternative medium-term spending paths. Therefore, choosing an appropriate medium-term spending path that is consistent with capacity constraints, macroeconomic stability, and fiscal sustainability is a critical issue in managing scaled-up aid flows. At the same time, more spending will only translate into progress toward the MDGs and other desired outcomes if spending is done efficiently. Much of this relates to strengthening planning, prioritization, and implementation on the basis of better institutions, in particular, public financial management systems. Another issue of particular importance in the context of scaled-up aid is how to deal with aid volatility and uncertainty. This paper attempts to provide operational guidance in addressing these issues.

    Acknowledgments

    The authors would like to thank Taimur Baig, Lynn MacFarlane, Sailendra Pattanayak, Alejandro Simone, and Justin Tyson for their contributions. Larry Cui, Victoria Gunnarson, and Juan Francisco Yepez provided invaluable research assistance. Helpful comments and suggestions received from IMF colleagues are also gratefully acknowledged. Special thanks are also due to Merceditas San Pedro-Pribram and Alicia Etchebarne-Bourdin, who prepared the document for publication. Any remaining errors are the sole responsibility of the authors. Rebecca Obstler of the External Relations Department coordinated the production of the publication.

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