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Aid Scaling-Up Scenarios: The IMF and the MDG Africa Steering Group Calvin McDonald, IMF Brett House, UNDP 9 October 2008 Overview 1. 2. 3. 4. 5. 6. MDGs: Strategic Framework MDG Africa Steering Group Current state of ODA Gleneagles Commitments & Scenarios IMF Macro Analyses Next Steps MDGs: Strategic Framework Goals – Financing – Plans – Schedules – Focus 2000 Millennium Summit, incl. MDGs 2002 Monterrey Financing for Development Conference 2005 World Summit G8 Gleneagles Summit Paris Declaration on Aid Effectiveness 2007 MDG Call to Action 2008 MDG Africa Steering Group Accra HLF on Aid Effectiveness UN HLM on Africa’s Development Needs UN HLE on MDGs at MDG midpoint 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. Why Africa? Extreme poverty, IMR and % underweight Why Africa? Subjacent poor ($0.75 and <$1): 485m LAC 19 mln EAP 109.3 mln ECA 3 mln MENA 3.3 mln SSA 87.0 mln SA 263.6 mln Medial poor ($0.50 and <$0.75): 323m LAC 16.6 mln MENA 0.9 mln ECA 1.1 mln EAP 51 mln SSA 90.2 mln SA 162.9 mln Ultra poor (<$0.50): 162m LAC MENA ECA 0.4 mln 11.5 mln 0.2 mln EAP 8.8 mln SA 19.7 mln SSA 121 mln Sources: WB WDI and Ahmed et al. IFPRI, 2007 Africa: Strong Macro Indicators Gov't revenue and grants (percent of GDP) Domestic resources have already been mobilized. 38 36 34 32 30 28 26 24 Industrial Emerging & Developing Africa 22 20 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: WEO, IMF. 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 ODA: Falling Short 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$105 per capita in 2007 prices and exchange rates. Scaling Up: Where We Stand No MDG-consistent PRSP in Africa is fully financed. Few countries receive ODA consistent with Gleneagles commitment. Indicative nominal ODA per capita, 2006 USD Benin CAR Ghana Liberia Niger Rwanda Sierra Leone Tanzania Togo Zambia Sources: OECD/DAC; Global Monitoring Report. 45 33 53 72 29 65 66 48 13 81 Gleneagles Commitments: Still Feasible 1,600 US 'rescue' 1,400 Military spending Billions of US Dollars 1,200 1,000 800 600 400 Ag. subsidies 200 0 Wall Street bonuses Gleneagles Africa Gleneagles Scenarios: Basic Design Look at Gleneagles commitments at country level. Ten case-study countries, vetted by AU Commission: Benin Central African Rep. Ghana Liberia Niger Rwanda Sierra Leone Tanzania Togo Zambia Builds on MDG-based nat’l development strategies/PRSPs. Countries identify areas for scaled up spending, with assistance from UNDP, AfDB, WB. IMF assesses macroeconomic feasibility. Gleneagles Scenario: Basic Design Benin 120 Projected ODA (US$ per capita) US$105 100 US$85 80 scaling up 60 40 20 Baseline ODA (proj.) Gleneagles ODA 0 2007 2008 2009 2010 Macroeconomic Implications of ScaledUp 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. 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. 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. Benin Gleneagles Scenario: Main Conclusions Risks. Impact on growth and poverty reduction smaller if Benin’s absorptive and administrative capacity is not strengthened. 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. 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. 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. 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. 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. 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.