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The Debate on Aid Flows to Uganda: The IMF's Point of View
A Letter by Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
June 7, 2002
The current discussion about the Ugandan government's policy on health spending—and the advice supposedly offered by the IMF—is missing something: the Fund's actual position.
PRS-Watch reports that Jeffrey Sachs is opposing an argument "put forward by the IMF that Uganda should not accept new donor grants for health since this might lead to undue appreciation of the currency." The IMF has never made such an argument. Even Mr. Sachs said only: "I have also heard, though I don't know whether it is accurate, that the IMF has warned against accepting some new donor grants for health, supposedly arguing that to do so would lead to an undue appreciation of the currency."
We should be absolutely clear on this issue: It is not true that Uganda may have to refuse aid for health or any other poverty-eradication programs in order to adhere to IMF-imposed guidelines.
The government's priority—a priority that is shared by the IMF—is to increase the availability of domestic and foreign resources to reduce poverty. Indeed, IMF staff have suggested restructuring public spending so as to accommodate higher expenditures for important social and economic sectors. The amounts of aid and increases in health spending currently under discussion in Uganda would have minimal macroeconomic impact.
Effectively managing large aid flows and their impact on the economy at large is a legitimate concern for governments. The macroeconomic impact of such flows would, however, depend on the size of the flows, the import composition of the use of these flows, and whether these flows are spent effectively and productively. In the specific case of Uganda, given that the aid flows in question are to be used for top priority spending such as imports of life-saving drugs and other essential medical supplies, we do not see any adverse effects on the macro economy. Moreover, even if these aid flows placed pressure on the exchange rate and the competitiveness of the economy, these effects could be minimized through monetary and exchange rate policies.
In fact, in recent years, the Ugandan government's economic policies have proven quite successful in containing inflation and promoting strong economic growth. These programs have allowed the government to devote increasing resources to its poverty-eradication effort, including rising allocations for health and education. The IMF has fully supported this program with advice and lending.
IMF EXTERNAL RELATIONS DEPARTMENT