Aid Scaling-Up Scenarios: The IMF and the MDG Africa Steering Group

1. Aid Scaling-Up Scenarios: The IMF and the MDG Africa Steering Group Calvin McDonald, IMF Brett House, UNDP 9 October 2008

2. Overview • MDGs: Strategic Framework • MDG Africa Steering Group • Current state of ODA • Gleneagles Commitments & Scenarios • IMF Macro Analyses • Next Steps

3. MDGs: Strategic Framework • Goals – Financing – Plans – Schedules – Focus

4. MDG Africa Steering Group • UNSG committed at G8 Heiligendamm in June/07 to accelerate MDGs in Africa. • July/07 ‘Call to Action’ on MDGs. • Convened by UN Secretary-General in Sept/07 in response to ‘development emergency’. • Unprecedented collection of 8 multilaterals. • Endorsed by African Union.

5. Why Africa? • Extreme poverty, IMR and % underweight

6. Why Africa? Ultra poor (<$0.50): 162m Subjacent poor ($0.75 and <$1): 485m Medial poor ($0.50 and <$0.75): 323m Sources: WB WDI and Ahmed et al. IFPRI, 2007

7. Africa: Strong Macro Indicators • Domestic resources have already been mobilized.

8. MDG Africa Key Recommendations 1. Strengthen international support mechanisms • Agriculture and food security • Education • Health • Infrastructure and trade facilitation • Statistical systems 2. Improve aid predictability 3. Enhance country-level coordination

9. ODA: Falling Short

10. Gleneagles Commitments 2005 G8 Communiqué: • ¶27. The commitments of the G8 and other donors will lead to an increase in official development assistance to Africa of $25 billion a year by 2010, more than doubling aid to Africa compared to 2004. Equivalent to: • About US$85 per capita in real terms. • About US$105 per capita in 2007 prices and exchange rates.

11. Scaling Up: Where We Stand • No MDG-consistent PRSP in Africa is fully financed. • Few countries receive ODA consistent with Gleneagles commitment.

12. Gleneagles Commitments: Still Feasible

13. Gleneagles Scenarios: Basic Design • Look at Gleneagles commitments at country level. • Ten case-study countries, vetted by AU Commission: • Builds on MDG-based nat’l development strategies/PRSPs. • Countries identify areas for scaled up spending, with assistance from UNDP, AfDB, WB. • IMF assesses macroeconomic feasibility.

14. Gleneagles Scenario: Basic Design Benin

15. Macroeconomic Implications of Scaled-Up Aid to Benin, Niger, and Togo • Sectoral analyses. Scaling-up scenarios based on sectoral analyses and spending plans by country authorities, the UNDP, World Bank, and AfDB. • Macro analysis. IMF staff use several approaches to analyze effects of possible aid increase on key macroeconomic variables: real growth, inflation, exchange rate & current account. • Comparative lens. Assess the implications of different policy choices. • Caveats. Uncertainty about macroeconomic relationships in Africa. Countries are undergoing structural change. Data and analytical studies are limited.

16. Scaling Up ODA: Broad Conclusions • Growth. Positive impact on growth in both short and medium term. • Absorption. Need to use foreign currency proceeds from aid inflows to finance transfer of real goods and services from abroad. • Competitiveness. Real exchange rate will generally appreciate if government spends aid on domestic goods and services. • Inflation. The impact on inflation will depend on a number of factors. • Capacity development. Public sector’s administrative and spending capacity must be strengthened to make best use of additional resources. • Debt sustainability. Additional ODA should have a large grant element.

17. Benin Gleneagles Scenario:Main Conclusions • Moderate ODA increase. Meeting Gleneagles commitment in Benin would require moderate increase in aid equivalent to about 2 percent of GDP over next three years. • Macro impact. Additional ODA would: • have a positive impact on GDP growth; • exert some short- to medium-term pressures on inflation; and • cause a moderate real exchange rate appreciation.

18. Benin Gleneagles Scenario:Main Conclusions • Risks. Impact on growth and poverty reduction smaller if Benin’s absorptive and administrative capacity is not strengthened.

19. Niger Gleneagles Scenario:Main Conclusions • Relatively large ODA increase. To meet Gleneagles commitment aid would need to increase by amount equivalent to 18 percent of GDP by 2010. • Macro impact. Scaled-up ODA would: • substantially increase GDP growth; • greater government spending could have a sizeable impact on domestic inflation; and • as a result, appreciate real exchange rate considerably.

20. Niger Gleneagles Scenario:Main Conclusions • Risks. In light of its size, the scaling-up could increase the risk of debt distress if the grant element of new aid is low.

21. Togo Gleneagles Scenario:Main Conclusions • Sizeable ODA increase. Meeting the Gleneagles commitment would increase annual aid disbursements by 10 percent of GDP over next few years. • Macro impact. Gleneagles-consistent ODA would: • considerably increase GDP growth; • induce a short-lived, moderate increase in inflation; but • persistently appreciate the real exchange rate.

22. Togo Gleneagles Scenario:Main Conclusions • Risks. Achieving higher GDP growth rates will depend on loosening the economy’s capacity constraints and strengthening the private sector.

23. Scaling Up ODA: IMF’s Stance • Scaling up aid could greatly benefit recipient countries. • Macroeconomic stability need not be at risk if countries follow sensible policies. • IMF stands ready to continue assessing scaling up scenarios for low income countries to support country PRSPs and the MDG Africa Steering Group.

24. Gleneagles Scenarios: Next Steps • Extension of Gleneagles Scenario work to more countries. • Enhance absorptive capacity to ensure aid used effectively. • Consistent with Paris Declaration, ODA should be made more predictable with pre-arranged disbursement schedules. • ODA should also be focused on areas identified under Gleneagles Scenarios.