UNDP Poverty Center Panel Discussion An Introduction to the Macroeconomic Issues of Scaling Up HIV /AIDS Financing Presentation by Mwanza Nkusu, Senior Economist IMF November 20, 2006

Overview   Scaling up of aid is an important ingredient in actions to help low-income countries reduce poverty (View of the World Bank and IMF, see 2004 Executive Summary, 2004 Global Monitoring Report)   Aid creates opportunities in recipients countries but also challenges and issues that merit attention

Opportunities   Develop good multi-year national development plans   Create fiscal space in otherwise very tight budgets - Help countries address pressing poverty issues (fight against diseases, including HIV/AIDS —a major development threat) - Help countries address long-term structural issues (develop infrastructure and human capital)

Issues and Challenges   Traditional concerns about the macroeconomic effects of large resource inflows--Dutch disease   Unpredictability Volatility of disbursements   Fiscal sustainability   Debt sustainability

Large aid inflows and the Dutch disease   Large aid inflows raise concerns of causing real exchange rate appreciation and a shrinkage of net exports.   The concerns are legitimate but Dutch disease effects can be mitigated and also depend on premises of the original model.

Mitigating Dutch disease effects  Large import content (absorbing aid to curb pressure on domestic prices)  Encouraging a positive domestic supply response (through improved productivity and/or use of previously unemployed production factors)  Macroeconomic management—coordination of fiscal and monetary policy (one of the reasons why Dutch disease did not materialize in some countries is that it was avoided through policies)

Relaxing the Premises of the Dutch Disease Model  No full and efficient employment (no resource transfer effect)  Absence of small country hypothesis (even tradables can expand)

Volatility of aid flows  Unpredictability and volatility of aid hampers budget management.  If spending increases one to one with aid disbursement, a negative aid shock would be very disruptive.

Fiscal sustainability  Current versus future fiscal space  Future fiscal space hinges on aid recipients’ ability to increase domestic revenue mobilization

Debt sustainability  Aid tilted towards grants helps debt sustainability  Debt service will put pressure on government finances and on reserves  Addressing such pressures depends on ability to improve the revenue effort and generate foreign exchange.

Private sector development: key to long-term development   Important that large aid finance outputs/outcome oriented budgets (good governance and accountability)   Outputs/outcomes that help develop an environment encouraging private investment are key to creating employment, raising incomes, and expanding the tax base.

Summary   Scaling up needed to advance poverty reduction efforts   Be aware of likely Dutch disease effects, but bear in mind that they can be mitigated   Make aid disbursements predictable and less volatile   Fiscal and debt sustainability considerations   Important that aid finance well-designed programs that can effectively contribute to private sector development and efficiency in production.

Thank you !