Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti

IMF Working Papers, September 11, 2018

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Canonical URL: Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti

Authors: Ioana Moldovan, Marina V Rousset, Chris Walker
Date: September 11, 2018
Core question: How should a low-income country such as Haiti respond when facing diminishing aid inflows? Options considered include spending cuts, monetization, sales of debt, or use of foreign reserves.
Core conclusion: Sales of foreign exchange reserves can compensate for loss of aid inflows but are not sustainable; when reserve use is constrained, a mixture of spending cuts and depreciation is the best strategy.

Analytical tools: A set of DSGE models recently developed to evaluate policy choices in low-income countries for which external aid flows represent an important revenue source.
Model progression:
- Two simplified stylized variations of the main model used to build intuition and initially assess tradeoffs.
- A full-scale small open economy DSGE model, calibrated to match conditions in Haiti and in similar low-income countries, is employed for quantitative assessment.
Model features and terminology preserved from the source: Dynamic Stochastic General Equilibrium Model (DSGE), small open economy, monopolistic competition, nominal exchange rate, real exchange rates, real interest rates, labor disutility parameter, steady-state labor.

Common results across model versions:
- Sales of foreign exchange reserves can compensate for the loss of aid inflows, but this strategy is not sustainable.
- Remaining policy choices (spending cuts, monetization, sales of debt) entail larger welfare costs, including lower consumption levels and real depreciation.
Policy tradeoffs emphasized: welfare costs versus sustainability of reserve use; interaction between fiscal consolidation (government spending cuts) and exchange rate adjustment (depreciation).

Preferred strategy when reserves are constrained: a mixture of spending cuts and depreciation.
Implicit caution: reliance on reserve sales delays adjustment but does not provide a lasting solution; other options involve higher welfare costs and lower consumption.

Subject: Consumption, Expenditure, Financial services, Foreign aid, Foreign exchange, National accounts, Real exchange rates, Real interest rates
Keywords: aggregate consumption, Aid, Caribbean, Consumption, depreciation rate, Dynamic Stochastic General Equilibrium Model (DSGE), exchange rate depreciation, exchange rate fluctuation, Fiscal Policy, Foreign Reserves, Global, government spending cut, Haiti, labor disutility parameter, labor income, labor supply decision, Monetary Policy, monopolistic competition, nominal exchange rate, open economy, Public Investment, Real exchange rates, real interest rate, Real interest rates, steady-state labor, Western Hemisphere, WP

IMF Working Paper: "Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti", September 11, 2018.

Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti, WP/18/198, September 2018
- Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti, WP/18/198, September 2018 (Markdown version)
- Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti, WP/18/198, September 2018 (PDF)