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Macro Effects of Scaling Up Aid: A Case Study of Tanzania

This case study examines the impact of increased aid on private sector growth in Tanzania, exploring the dangers of relying on donors and the potential consequences for the economy. It analyzes the increase in public spending fueled by aid and the possible symptoms of Dutch disease. The study also raises concerns about the reliability of aid and its long-term sustainability.

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Macro Effects of Scaling Up Aid: A Case Study of Tanzania

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  1. Macro Effects of Scaling Up Aid: A Case Study of Tanzania Mick Foster

  2. Issues • Has increased aid damaged private sector growth (and did it have to?) • The dangers of depending on donors

  3. A Recap of Some Fundamentals • Govt can increase spending by:- • Drawing on foreign resources (‘aid’) by increasing net imports • Bringing idle capacity into use or • Squeezing private sector demand through taxation, inflation, or less access to credit

  4. Aid and Public Spending as % of GDP • Total Aid as % GDP fell in late 1990s and is below 1995 level • But Aid included in budget has increased, and fuelled a 10% of GDP rise in public spending

  5. Cumulative Increase Compared to 1995 Baseline, $ Mns • Table shows cumulative increase over unchanged 1995 levels • Very little aid was absorbed in higher net imports

  6. Credit Crunch & Recovery • Without higher imports, & with inflation already too high, higher GOT spending required severe private sector credit controls, and private investment share of GDP fell • Credit conditions improved in 2000s, but private investment did not recover – displaced by permanently higher GOT share in demand?

  7. Dutch Disease? • Late 1990s: • Exchange rate appreciated 25% • Non-trad exports grew just 6.5% p.a. (excluding gold) • Exports fell from 20% to 14% of GDP • 2000-04: • Exchange rate depreciated 35% • Non-trad exports grew 15.5% p.a. • Exports recovered to 20% of GDP • Dutch Disease without the benefits of the Aid?:- • Not caused by increasedsupply of foreign exchange financed with aid, because the economy did not absorb it • DD symptoms were probably caused by the reduced demand for forex due to restriction of private sector demand to make room for higher GOT spending on non-tradeables

  8. The Tanzania Story • Tanzania has used increased aid to ‘finance’ a 10% of GDP increase in public spending • But the foreign exchange provided with the aid has not been absorbed • Increased GoT spending has therefore been at the expense of a squeeze on private credit and investment • Possible evidence of Dutch disease symptoms in late 1990s, but GOT resisted exchange rate appreciation and reversed it by accumulating reserves • GOT has relaxed credit and private growth has recovered – but it has not absorbed the modest aid increase • The economy has grown strongly – but the pattern of growth has shifted towards public sector dependent sectors

  9. Issue 2: Aid is Not Reliable A key problem illustrated by Tanzania is that aid promises are not reliable in the short term, and historically have not been sustained in the long-term:

  10. Unreliable Aid 1: Long-Term Trends in Aid inflows and GDP growth in Tanzania

  11. Aid is Unreliable-2 • Aid has far higher Variance than domestic revenue • Aid is 85-90% of HIV spending, so a 10% shortfall requires GOT spending to almost double to replace it • Aid to HIV funds long-term obligations (e.g. to ARV treatment), but is short-term and unreliable: e.g. of the ‘big 3’ donors: • PEPFAR, Annual commitments • GFATM, 2 year pipeline but annual programming • WB MAP, has suffered long procurement delays

  12. HIV/AIDS Spending • It will take to 2030 on optimistic assumptions for GOT revenues available to HIV/AIDS to reach TSh200bn p.a. • Donor spending is expected to reach TSh300bn in 2005/6, more than enough to finance GOT prevention, care and treatment plans • But donor funding is poorly allocated, and does not finance the GOT strategy: • GFATM funding for just 45 of 123 districts at levels that can not be sustained or replicated • Prevention under-funded e.g. condoms, defence, education • Defence treatment costs are a high multiple of civil costs • Vital human resources and systems strengthening is under-funded, and damaged by brain drain to HIV/AIDS partners

  13. Issues Arising • With such reluctance to absorb a recovery in aid to earlier levels, what would happen with a doubling of support? • Should GOT have been more relaxed about the exchange rate, and absorbed the aid by selling foreign exchange rather than adding to reserves? • Is there a general lesson that Government should not spend aid that it has not absorbed, because of the negative impact on the private sector? • Is the increased Government spending more valuable than the lost private sector output? • Can we make aid long term and predictable enough to convince Governments that increased aid is worth the risk of increased dependence on unreliable donors?

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