- Yongzheng Yang, Robert Powell, and Sanjeev Gupta
- Published Date:
- March 2006
© 2006 International Monetary Fund
Production: IMF Multimedia Services Division
Cover Design: Julio Prego
Typesetting: Alicia Etchebarne-Bourdin
Cover Photo: Brent Stirton/Getty Images
East London, South Africa: Children play on a swing at a community daycare center for disadvantaged children.
- Macroeconomic challenges of scaling up aid to Africa: a checklist for practitioners/Sanjeev Gupta, Robert Powell, and Yonzheng Yang—Washington, D.C.: International Monetary Fund, .
- p. cm.
Includes bibliographical references.
1. Economic assistance—Africa—Handbooks, manuals, etc. 2. Africa—Economic policy—Handbooks, manuals, etc. 3. Monetary policy—Africa—Handbooks, manuals, etc. 4. Debts, External—Africa—Handbooks, manuals, etc. I. Powell, Robert, 1962–II. Yang, Yongzheng.
Disclaimer: This publication should not be reported as representing the views or policies of the International Monetary Fund. The views expressed in this work are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or its management.
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- Glossary of Terms and Abbreviations
- 1. The Macroeconomic Effects of Scaling Up Aid
- 1.1. Meeting the Millennium Development Goals
- 1.2. Tracking Recent Aid Flows to Africa
- 1.3. Using Scaling-Up Scenarios to Identify Appropriate Policies
- 1.4. Tailoring the Scaling-Up Scenario to the Country’s Needs
- 1.5. Estimating Additional Aid and Identifying Appropriate Policies
- 1.5.1. Quantifying New Aid Flows
- 1.5.2. Analyzing Key Policy Questions
- 1.5.3. Using a Standard Macroeconomic Framework
- 1.5.4. Distinguishing between the Short and Long Term
- 1.5.5. Assuming a Strengthened Policy Environment
- 1.5.6. Building Alternative Scenarios
- 1.5.7. Monitoring and Evaluating the Impact of Aid
- 1.6. The Organization of this Handbook
- 2. Managing the Real Exchange Rate
- 3. Using Monetary Policy for Sterilization and Inflation Management
- 4. Mobilizing Adequate Domestic Revenues
- 5. Projecting the Impact of Increased Aid on Economic Growth
- 5.1. The Relationship between Aid and Growth
- 5.2. Accounting for Diminishing Returns and Limits to Absorptive Capacity
- 5.3. Safeguarding Private Savings and Investment
- 5.4. Raising Spending as a Share of GDP
- 5.5. Confirming the Positive Impact of Aid
- 6. Meeting Other Fiscal Challenges
- 6.1. Developing an Exit Strategy
- 6.2. Properly Estimating Current Spending
- 6.3. Targeting the Poor
- 6.4. Containing Unproductive Spending
- 6.5. Balancing Poverty Reduction and Growth
- 6.6. Minimizing Bottlenecks and Improving Coordination
- 7. Strengthening Governance
- 8. Maintaining Debt Sustainability
- 9. Summary: Five Primary Guidelines
- Appendix 1. The Relationship between Aid Flows and Exchange Rates in Sub-Saharan Africa
- Appendix 2. The Macroeconomics of Aid
Glossary of Terms and Abbreviations
Consumer price index
Country Policy and Institutional Assessment (World Bank)
Department for International Development (U.K.)
Debt sustainability analysis
Diagnostic Trade Integration Study
Group of Eight industrial countries
Highly indebted poor country
International Monetary Fund
International Trade Center
Millennium Challenge Account (U.S.)
Millennium Development Goals
Medium-Term Expenditure Framework
Net present value
Official development assistance
Organization for Economic Cooperation and Development
Public expenditure management
President’s Emergency Program for AIDS Relief (U.S.)
Public Expenditure Review (World Bank)
Poverty Reduction Strategy Paper
United Nations Conference on Trade and Development
United Nations Development Program
World Health Organization
World Trade Organization
In 2005, major donor countries of the Organization for Economic Cooperation and Development indicated their intention to increase significantly the amount of external assistance they provide to developing countries in the next decade. The sharpest increase is likely to be in Africa, where a scaling up of external assistance, including comprehensive debt relief, will aim to support individual countries’ efforts to achieve the Millennium Development Goals (MDGs). This handbook was prepared in the Policy Wing of the IMF’s African Department as a practical guide for assessing the macroeconomic implications and challenges associated with a significant scaling up of aid to African countries. Its purpose is to provide a resource for policymakers, practicing economists in African countries, and staff of international financial institutions and donor agencies who participate in the preparation of medium-term strategies for individual African countries, including in the context of Poverty Reduction Strategy Papers (PRSPs). A version of this was published in September 2005 as an IMF Working Paper (WP/05/179).
When aid flows increase, a country has to choose how much to absorb and how much to spend. When aid is fully absorbed, a real appreciation of the exchange rate is likely, at least in the short run. In a number of countries, aid surges have been associated with real exchange rate depreciation, suggesting that supply effects have more than offset the impact of higher domestic demand on the nontradable sectors or, alternatively, that the aid has not been fully absorbed. Developing a good understanding of how a country will spend additional aid, as well as the appropriate policy response of the central bank, is therefore critical to projecting the likely macroeconomic impact. This handbook helps policymakers and economists develop various “scaling-up scenarios” to assess such contingencies. Scaling-up scenarios are not forecasts. They are tools to help countries identify important policy issues involved in using higher aid flows effectively and to help both donors and recipients provide a regularly updated vision for strengthening the potential impact of aid on growth, especially through policies that strengthen economic governance. Governments that receive higher aid flows also face the challenge of what to do if and when such aid flows are interrupted or reduced, and hence they need an “exit strategy” as part of the scaling-up scenario.
Benedicte Vibe Christensen
The authors would like to thank Kevin Carey, Jakob Christensen, Markus Haacker, and Smita Wagh for their contributions, and David Bevan for providing extensive comments on earlier drafts. Very helpful comments were also received from IMF colleagues in the African, Fiscal Affairs, Policy Development and Review, and Research Departments, as well as the World Bank and the United Kingdom’s Department for International Development (DfID). The authors are, however, solely responsible for any remaining errors. Linda Griffin Kean of the External Relations Department of the IMF edited and coordinated the publication of the paper, and Alicia Etchebarne-Bourdin, also of the External Relations Department, typeset the book.
This publication should not be reported as representing the views or policies of the International Monetary Fund. The views expressed in this work are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or its management.