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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
Preface
Acknowledgments
1 Introduction
2 Establishing a Medium-Term Resource Envelope
3 Choosing an Expenditure Path
Time Profile of Aid
Absorptive Capacity Constraints
Spending and Debt Sustainability
Spending and Growth
Spending Efficiency
Expenditure Path and Fiscal Targets
Updating Baseline and Alternative Scenarios
4 Dealing with Aid Uncertainty and Volatility
5 Strengthening Institutions to Promote Effective Utilization of Aid
Weaknesses of Existing Public Financial Management (PFM) Systems in Low-Income Countries
Overall Strategic Planning
Developing a Medium-Term Approach to Budgeting
Strengthening Budget Execution and Reporting
Integrating Donor Aid in the Budget Process
Strengthening PFM Systems, Including Their Capacity to Track Poverty-Reducing Spending
Formulating and Implementing PFM Action Plans
The Role of Technical Assistance in Supporting the Reform Process
6 Conclusions
Appendixes
1. Country Experiences with Scaled-Up Aid
2. Expenditure Efficiency—An Empirical Assessment
References
Boxes
1. Choosing an Expenditure Path When the Resource Envelope Is Expanding
2. Fiscal Targets in IMF-Supported Programs
3. Strengthening Public Financial Management in Postconflict and Disaster-Affected Countries
4. Current Medium-Term Fiscal Planning Practices
5. Short-Term Priorities for Public Financial Management Reform
6. Illustrative Expenditure Tracking Mechanism
7. Role of Donors in Promoting Effective Public Financial Management Reform
Figures
1. HIPC-AAP: PFM Performance by Key Categories
2. Fiscal ROSC Assessments, 1999–2005
3. PEFA Assessments Undertaken During 2005–06
4. CPIA: Quality of Partner Country PFM Systems in 2005
A1.1. Event Study: Aid Flows After an Aid Spurt
A1.2. Aid Volatility and Fiscal Institutional Quality
A1.3. Changes in Current Spending and Institutional Quality
A1.4. Changes in Capital Spending and Institutional Quality
Tables
1. Illustrative Platforms for Strengthening Budget Formulation in a Typical Low-Income Country
A1.1. Aid and Revenue, 1990–2004
A1.2. Total Aid, Loans, and Grants
A1.3. Selected Regression Results
A2.1. Countries Included in the Efficiency Analysis
A2.2. Spending and Outcome Indicators for the Efficiency Analysis
A2.3. Percent of Countries in Top Half of the Efficiency Distributions for Health by Income Level
A2.4. Percent of Countries in Top Half of the Efficiency Distribution for Education by Income Level
A2.5. Control Variables
A2.6. Correlation Matrix of Relative Efficiency Scores and Control Variables
A2.7. Truncated Regressions of Expenditure Efficiency Scores
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.