For Aid to be Effective it Must Reach its Target, A commentary by Abdoulaye Bio-Tchané, Director, African Department, IMF

May 24, 2005

A commentary by Abdoulaye Bio-Tchané
Director, African Department
International Monetary Fund
The Standard
May 24, 2005

This year is important for the effort to help Africa accelerate progress toward halving poverty by 2015. This target, which is central to the U.N.'s Millennium Development Goals, has been given a higher profile with the recent release of reports by the U.N. Secretary General, the Millennium Commission, and the United Kingdom's Commission for Africa. All have presented far-reaching proposals for action by developed and African countries.

There is a unifying theme to the international attention: to make major strides in reducing severe poverty and improving the living standards of Africans, especially in such areas as education and battling the spread of HIV/AIDS. The recent reports all call for a large increase in aid for Africa, which the IMF welcomes and supports. And, most importantly, donors and recipients share the goal of ensuring that the increased aid results in more growth and reduced poverty.

With these goals in mind, the IMF organized a high-level seminar on foreign aid and macroeconomic management in Maputo, Mozambique last month. Several dozen African ministers and central bank governors, and leading academics met to consider how to make aid more effective, and how to better manage large aid inflows. At the heart of the debate was the question of what would happen if Africa receives a large infusion of aid. Solutions appeared to lie in initiatives by recipients to make sure aid goes where it is needed, actions by donors to ensure a more reliable flow of aid, and economic management attuned to the challenges of aid flows.

The most common concern was that the recipient countries would not have enough qualified people, organizational strength and physical capacity (e.g. hospitals, schools, and roads) to productively absorb the aid. The Mozambique seminar agreed that these capacity constraints are critical, but not insurmountable. Ultimately, increased aid presents an opportunity—and not a problem.

In some cases, aid could help remove bottlenecks and create new options for underemployed people and resources. For example, aid to improve a rural road could help boost farm production, which might in turn increase the ability of farmers' organizations to use aid-financed agricultural inputs. However governments need to be alert to early symptoms of capacity constraints, such as wage or price increases in a particular sector.

To be effective, aid needs to reach its intended target. As most aid flows through governments, it is essential to strengthen countries' capacity to develop, implement and monitor their budgets. The IMF, together with the World Bank and other development partners, is actively working with countries to help in this area.

Government resources—including aid-financed spending—will be more effective and efficiently channeled to the poor if spending practices are open and transparent. Full public disclosure of budget processes provides citizens with the information they need to monitor their governments. This is another area where the IMF and many other donors are actively working with African countries. In this vein, we welcome the participation of a growing number of African countries that produce oil or other natural resources in the Extractive Industries Transparency Initiative (EITI)—an important international effort to improve transparency on resource revenues. The recently-published Guide on Resource Revenue Transparency aims at helping countries better manage inflows from oil, mining, and other natural resources.

African ministers at the Mozambique seminar voiced concerns that volatile and unpredictable aid flows pose a severe problem for budget planning and execution. Currently, donors turn the aid tap on and off far too often. Sometimes this reflects weak implementation of policies and projects in recipient countries. But too often it reflects donors' changing political priorities, unpredictable legislative processes, or excessive conditions attached to the aid flows. Ministers called on their development partners to deliver aid in a more predictable and consistent manner.

Some encouraging steps are being taken. In early March, some 60 developing countries and 50 donors participated in the Paris High Level Forum on Aid Effectiveness. The Forum agreed on a declaration that overlapped substantially with the issues raised in the Mozambique seminar—aligning donor aid more closely with country-owned policies, harmonizing and simplifying aid procedures, and reducing aid volatility. The declaration provides an opportunity for Africa to take the lead on monitoring the commitments made by donors to improve aid effectiveness.

It is widely recognized that very high aid inflows pose challenges for macroeconomic management. The flows must be managed so that they do not contribute to inflation or excessive exchange rate appreciation. It is also necessary to make sure that volatility of aid flows does not translate into volatile prices, interest rates or credit that could hinder the ability of private firms to grow. Aid flows must also take account of the future impact on the budget. When aid finances road-building, for example, it is important to ensure that the funds will be available to maintain and repair the road.

These potential problems can be avoided. The IMF looks forward to working with individual countries to help them manage increased aid flows so as to maintain macroeconomic stability. Medium-term policies could address potential concerns about exchange rate appreciation harming exports and growth. For example, spending on infrastructure or business services could raise the productivity and competitiveness of sectors that export or compete with imports.

The IMF firmly supports the proposals to substantially increase aid flows to Africa. The new spirit of partnership and mutual accountability of donors and recipient countries augurs well for ensuring that the aid is effectively used. In this important year for Africa and the MDGs, we must seize this unique opportunity to reduce poverty in Africa. The IMF stands ready to play its part in advising African countries on these crucial issues.


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