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Appendix: Summaries of Country Studies*

Author(s):
Matthew Gaertner, Laure Redifer, Pedro Conceição, Rafael Portillo, Luis-Felipe Zanna, Jan Gottschalk, Andrew Berg, Ayodele Odusola, Brett House, and José Saúl Lizondo
Published Date:
March 2012
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Benin

Meeting the Gleneagles commitment for Benin would require a moderate scaling up of aid by approximately 2 percent of GDP over the next few years. Aid inflows were 5.9 percent of GDP in 2007, equivalent to $42 per capita (Table A1.1). To reach $85 per person by 2010, aid would have had to increase to 7.7 percent of GDP by 2010 and average 7.5 percent of GDP annually during 2011–15. This would have increased overall ODA from $330 million in 2007 to $732 million in 2010.

Table A1.1.Benin: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008-10
Total,

2007-10
ODA (current projections)329.9382.6401.2428.4404.11,542
ODA as % of budget (current projections)27.119.521.721.020.7
ODA per capita (current projections)42.147.348.149.748.4
ODA (with Gleneagles)329.9456.1590.2732.6593.02,109
ODA as % of increased budget (with Gleneagles)27.022.029.031.027.3
ODA per capita (with Gleneagles)42.156.470.785.070.7
Additional ODA under Gleneagles scenario0.073.6189.0304.1188.9567
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Benin has identified education, health, agriculture, infrastructure, gender, and statistics as priority areas for scaled-up outlays. These priorities cover programs and projects that were identified in the MDG needs-assessment exercise, but that could not be integrated in the Medium-Term Expenditure Framework of the Growth and Poverty Reduction Strategy (2007–09) because of funding constraints.

Under the Gleneagles scaling-up scenario, priority is given to infrastructure and health, accounting for three-fourths of spending and including investments to strengthen health systems and improve maternal and child health. Approximately one-fourth of the additional resources would be allocated to agriculture, and 10 percent to the education sector, with emphasis on technical and professional training (see Figure A1.1).

Figure A1.1.Benin: Average Spending by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The additional aid inflows are projected to have a positive impact on GDP growth, with some short- to medium-term pressures on inflation and moderate appreciation of the real exchange rate. The incremental increase in aid in 2008–15, assuming it is effectively used, would boost annual growth by an average of 0.8 percentage point relative to the steady state. As a result, per capita annual income would increase to $574 by 2015 in constant 2007 prices, 6 percent higher than in the baseline scenario. As a result of the allocation of about one-third of the additional aid inflows to education and health, human capital investment would rise to 4.7 percent of GDP in 2015 from 2.2 percent in 2008, also suggesting higher potential growth for Benin beyond 2015 as higher skilled and healthier individuals enter the labor force (see Figure A1.2).

Figure A1.2.Benin: Macroeconomic Impact of Aid under the Gleneagles Commitment, 2007-15

Source: Authors’ estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

The impact on growth and poverty reduction could be lower if Benin’s absorptive and administrative capacity is not strengthened. The simulations are based on the critical assumption that structural reforms will continue to be implemented to address any significant bottlenecks in the economy that could jeopardize the effective use of the additional aid. Structural reforms that will make Benin’s economy more competitive and flexible include the divestiture of key public enterprises, effective management of the port, and improved public financial management. With such reforms, the additional aid inflows could have a more profound impact on growth over the medium and long terms. In addition, higher inflation and real exchange rate appreciation are risks because spending of the additional aid on nontradables could strain already limited absorptive capacity.

Central African Republic

The Gleneagles scenario would suggest a significant boost in foreign assistance to the Central African Republic. Foreign assistance in the form of grants and concessional loans is still very low by regional standards, with ODA per capita of only $13 in 2007. Meeting the Gleneagles commitment would require a scaling up of aid of 13 percent of GDP, with an increase in overall ODA from $55 million in 2007 to $389 million in 2010 (Table A1.2).

Table A1.2.Central African Republic: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average, 2008–10Total, 2007–10
ODA (current projections)54.696.789.797.194.5338.1
ODA as % of budget (current projections)14.218.514.713.815.7
ODA per capita (current projections)12.722.020.021.221.1
ODA (with Gleneagles)54.6161.5272.8388.5274.3877.4
ODA as % of increased budget (with Gleneagles)14.227.434.439.133.6
ODA per capita (with Gleneagles)12.736.860.985.060.9
Additional ODA under Gleneagles scenario0.064.8183.1291.4179.8539.3
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of the Central African Republic has identified education, health, agriculture, infrastructure, gender, and crisis prevention as priority areas for scaling up (Figure A1.3). These areas include programs and projects identified in the MDG needs-assessment exercise that could not be integrated in the PRSP (2008–10). Half of the additional projected aid would be invested in the infrastructure sector, making more rural roads available and increasing access to safe drinking water. About one-quarter of the Gleneagles aid would be dedicated to the health sector, helping to improve indicators on child mortality, malaria, and HIV/AIDS prevalence. With supplementary interventions in nutrition, the population below the minimum level of dietary energy consumption could drop to 45 percent (compared with 60 percent under current projections) and the prevalence of underweight children would likely be reduced by an additional 8 percentage points. Finally, with additional investments in the implementation of the Global Peace Accord and Disarmament, Demobilization and Reintegration interventions, 20,000 additional excombatants could be disarmed and reintegrated.

Figure A1.3.Central African Republic: Average Spending by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The additional aid inflows would have a large impact on GDP growth, with some short-term pressures on inflation and real exchange rate appreciation (Figure A1.4). The simulations indicate a substantial positive impact on growth and per capita GDP, reflecting investment in much-needed public infrastructure and the resulting positive impact on private sector investment. This outcome would also serve to reinforce the recent economic recovery following several years of political instability and a deterioration in living standards. The positive impact of higher aid on the accumulation of public and private capital is relatively large for the Central African Republic, given the country’s low starting point and seriously depleted capital stock. Although inflation would rise and the real exchange rate would appreciate in the short term, the adverse impact on the tradables sector would likely be relatively limited.

Figure A1.4.Central African Republic: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

There are risks that the growth impact of additional aid inflows could be constrained by limited absorptive and administrative capacity and an underdeveloped private sector. Because of limited administrative capacity and weak public financial management, additional aid could be diverted to unproductive government consumption or investment, and the supply response to the aid-financed increase in demand for nontradables and services may be much weaker than the model assumes. In addition, the numerical simulations must be interpreted with some caution, given considerable data limitations for the Central African Republic.

Ghana

The Gleneagles scaling up would result in a significant increase in foreign assistance to Ghana. In 2008, ODA was 9 percent of GDP, or about US$61 per capita; a projected scaling up to $85 per capita by 2010 would have required an increase in ODA of about 4½ percent of GDP per year, increasing the overall ODA from $1,139 million in 2007 to $2,036 million in 2010 (Table A1.3).

Table A1.3.Ghana: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008–10
Total,

2007–10
ODA (current projections)1,138.71,406.51,596.61,461.41,488.25,603.2
ODA as % of budget (current projections)2826332728.7
ODA per capita (current projections)5161686163.3
ODA (with Gleneagles)1,138.71,425.41,723.92,035.91,728.46,323.9
ODA as % of increased budget (with Gleneagles)2826343431.3
ODA per capita (with Gleneagles)5162748573.7
Additional ODA under Gleneagles scenario018.9127.3574.4240.2720.6
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Ghana has identified energy, education, health, technology/communication, and agriculture as key areas for scaling up (Figure A1.5). These priority sectors are derived from the Growth and Poverty Reduction Strategy, 2006–09. Under the Gleneagles scenario, priority would be given to energy, to which 32 percent of the additional resources made available under the Gleneagles envelope would be dedicated, while 26 percent of the additional resources would be allocated to the education sector in an effort to raise the gross enrollment rate to 100 percent by 2010. The health sector would receive 16 percent of the additional resources; attention would be given particularly to nutrition, sexual and reproductive health, health systems, and sector governance. A similar share of the Gleneagles envelope would be dedicated to communication and technology. Finally, 8 percent of the additional ODA would be invested in agriculture, with particular emphasis on food security and emergency preparedness.

Figure A1.5.Ghana: Average Expenditure of Additional Resources by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The model simulations suggest that the macroeconomic impact of scaled-up ODA to Ghana, taken alone, should be readily manageable. Higher investments would boost growth by about 1 to 1½ percent per year, with increased demand for nontradables generating a real exchange rate appreciation of about 2 percent over the short term, declining to about half that amount over the medium term. Although tradables-sector production declines slightly at the outset of the scaling-up exercise, production in this sector rises in subsequent years, suggesting that Dutch disease effects would be modest or absent. Inflation is boosted by about 1 percent initially, and by less than ½ percentage point over the medium term (Figure A1.6).

Figure A1.6.Ghana: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

The challenges of managing scaled-up ODA could be complicated by Ghana’s shift to oil producer status. Oil production will generate additional foreign currency inflows starting in 2011 that, with scaled-up ODA, could exacerbate Dutch disease risks. The inflationary impact and real exchange rate appreciation are minimized when oil revenues are partly saved. Under a high-case scenario, in which oil revenues are used to boost government spending by a further 6 percent of GDP, the impact on inflation is calculated to be less than 3 percent per year, while the decline in tradables production on account of Dutch disease effects would be limited to several years. In a scenario in which increased spending is focused on the nontradables sector (such as public service wages, rather than importation of capital goods), the Dutch disease effects are more pronounced, with tradables production depressed below steady-state levels for a decade.

The results of the scaling-up exercise are sensitive to existing shortcomings in public expenditure management and absorptive constraints linked to limited manpower skills in key areas (for example, health and education). These considerations would need to be taken into account in the design of a potential scaling-up program.

Liberia

Liberia already receives more aid per capita than the Gleneagles commitment of $85 in light of its particularly elevated need for external financing.

However, given the country’s very low starting point for its stock of human and physical capital, it is assumed that aid needs to rise further to meet the expenditure requirements necessary to reach the MDGs. As a result, the Gleneagles scenario assumes a nominal increase in total ODA of 15 percent over 2008 levels to $108 per capita, equal to an annual additional aid flow of about 4.9 percent of GDP on average from 2009 through 2011. The assumed increase in the Gleneagles envelope would have increased overall ODA from $399 million in 2008 to $483 million in 2011 (see Table A1.4).

Table A1.4.Liberia: ODA Scaling-Up Summary ($US million)
Measure2008200920102011Average, 2009-11Total, 2008-11
ODA (current projections)398.7407.6417.3403.3409.41626.9
ODA per capita (current projections)101.298.796.890.295.2
ODA (with Gleneagles)398.7427.3455.7482.8455.31764.5
ODA per capita (with Gleneagles)101.2103.5105.7108105.7
Additional ODA under Gleneagles scenario019.738.479.545.9137.6
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Liberia has identified infrastructure, education, health, and agriculture as priority areas for scaling up (Figure A1.7). These sectors are derived from Liberia’s Poverty Reduction Strategy (2008-11). Priority would be given to infrastructure, to which 31 percent of the additional resources ($29 million) would be allocated. The emphasis would be on water and sanitation, with the objective being to finance the rehabilitation of all existing damaged drinking water facilities in urban areas, the rehabilitation of Monrovia’s sewage system, and the construction of 700 rural boreholes with hand pumps and 30,000 rural latrines for families. A similar share (29 percent) of the additional Gleneagles resources would go to education. The main goals in this sector would be school construction, curriculum development, teacher training, vocational training, and school feeding programs. In addition, 21 percent of the assumed additional resources ($19 million) would be earmarked for health, and 7 percent ($7 million) for agriculture, mainly for input supply.

Figure A1.7.Liberia: Average Expenditure by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The model results for Liberia indicate that an aid increase of this magnitude would have a positive and long-term impact on economic growth, with manageable effects on inflation and competitiveness (Figure A1.8). The GDP growth impact is initially 0.5 percentage point higher than the benchmark before aid scaling up. The growth impact declines in the following years, averaging 0.16 percent over 10 years. The longer-term impact on growth is modest because the proportion of investment spending, which has persistent effects, is assumed to be relatively small, as is the case for existing aid. Although the real exchange rate would appreciate in the short term, the adverse impact on the tradables sector would be relatively limited. Simulation results also confirm that Dutch disease effects are not likely to outweigh the positive growth effects of aid. Using dynamic stochastic general equilibrium and other models, the growth impact of scaled-up aid in Liberia is similar to that in other IMF country case studies, after controlling for Liberia-specific structural factors, although the results are subject to uncertainty from several factors, including a high level of dollarization. Other factors include a high dependence on imports, which reduces multiplier effects; a relatively low share of aid used for investment; thin financial markets; and a low growth elasticity to existing high levels of aid. Accordingly, a higher GDP growth impact could be reached if incremental aid is tilted more toward priority sectors that have persistent productivity effects—such as investment in physical infrastructure, health, and education—as tradables production increases and financial markets develop.

Figure A1.8.Liberia: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

The simulation results for Liberia are subject to considerable uncertainty. For example, the actual growth response could be higher if the labor market response were stronger than projected, which might occur if participation in the formal labor market increased from currently low levels. The analysis and results for Liberia are also subject to substantial caveats owing to significant data limitations. Notably, national accounts data are estimates by IMF staff pending the compilation of national accounts, scheduled for late 2011.

Niger

The increase in aid required to meet the Gleneagles commitment for Niger requires a significant scaling up, equivalent to 18 percent of GDP by 2010. The Gleneagles envelope would have increased overall ODA to $655 million in 2008, $949 million in 2009, and $1,262 million in 2010 (Table A1.5), nearly double the level of foreign assistance projected in the current program agreed upon between the authorities and the IMF. In light of the magnitude of the increase, the scaling up could increase the risk of debt distress if the grant element of new aid is relatively low.

Table A1.5.Niger: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008-10
Total,

2007-10
ODA (current projections)378.0520.9520.9536.9526.21956.7
ODA as % of budget (current projections)38.143.743.141.942.9
ODA per capita (current projections)28.137.436.236.236.6
ODA (with Gleneagles)378.0654.6949.01262.1955.23243.7
ODA as % of increased budget (with Gleneagles)38.149.058.063.056.7
ODA per capita (with Gleneagles)28.147.066.085.066.0
Additional ODA under Gleneagles scenario0.0133.7428.1725.2429.01287.0
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Niger has identified education, health, agriculture, and infrastructure as priority areas for scaling up (Figure A1.9). These priority sectors are derived from the “MDG scenario” of the Accelerated Growth and Poverty Reduction Strategy (2008-12). The Gleneagles-assumed composition of aid-funded expenditures is the same as the composition of PRSP-related expenditures in 2007, with 52 percent allocated to health and education programs, and 42 percent assigned to the productive sectors of agriculture and infrastructure. Priority would be given to education—additional investments are expected to raise the gross enrollment rate by 12 percentage points. Equal shares (21 percent) of the additional resources would go to the infrastructure and agriculture sectors, increasing the population’s access to safe drinking water to 80 percent (compared with 75 percent under current projections) and decreasing the level of undernourished children by 11 percentage points. In the health sector, receiving 14 percent of the Gleneagles resources, priority would be given to improving health systems and maternal health. A scaling up in aid of this size would have a significant impact on economic growth in the medium and long terms. The simulation results suggest that average GDP growth would increase by 1.9 percentage points per year relative to the steady state during the following 10 years (Figure A1.10), allowing Niger to increase real income per capita by 60 percent from 2008 to 2020 (as opposed to an increase of about 30 percent under the steady state). This scenario would be altered if a bigger percentage of aid were to be allocated to social expenditures and a smaller share to infrastructure. With a higher share of aid flows being directed to social expenditures, the impact of aid on growth in the short term would be smaller, given that the impact of this spending takes place over a longer time span.

Figure A1.9.Niger: Average Expenditure by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

Figure A1.10.Niger: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: The IMF Debt Sustainability Framework for Low-Income Countries considers that external debt may not be sustainable if above the threshold of 150 percent of exports.

The increase in demand as a result of increased aid would also have a sizeable impact on domestic inflation, resulting in a considerable real exchange rate appreciation. However, the simulation projects that this would be relatively short-lived, because the pressure on domestic prices and the real exchange rate would ease up in the medium term as aggregate supply responds to increased foreign aid.

The execution capacity of the public administration must be improved to better manage the increased expenditures funded by scaled-up aid. The results presented in this assessment hinge on a supply response that has no major bottlenecks in the accumulation of factors of production. If, for instance, these additional expenditures are only 80 percent as efficient as current projects in increasing the public capital stock, GDP growth would be 1.4 percentage points above the steady state over the next 10 years, 0.5 percentage points less than in the “efficient” scaling-up scenario.

Rwanda

Rwanda has experienced a significant increase in aid flows in recent years and the additional aid under the Gleneagles scenario would be modest. Almost 50 percent of budget spending between 2004 and 2007 was financed by aid (Table A1.6). The additional aid needed to meet the Gleneagles commitments would be only about 1 percent of GDP, with an increase in overall ODA to $854 million by 2010.

Table A1.6.Rwanda: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008-10
Total,

2007-10
ODA (current projections)4756587085166272357
ODA as % of budget (current projections)48.952.747.932.144
ODA per capita (current projections)5169725164
ODA (with Gleneagles)4755957218547232645
ODA as % of increased budget (with Gleneagles)48.950.248.443.847
ODA per capita (with Gleneagles)5162748574
Additional ODA under Gleneagles scenario0-631333796287
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Rwanda has identified education, health, agriculture, and infrastructure as priority areas for scaling up (Figure A1.11). These priority sectors are derived from the Economic Development and Poverty Reduction Strategy, which emphasizes the country’s commitment to achieving the MDGs while implementing Rwanda’s Vision 2020—the country’s strategy for long-term development directly linked to the MDGs. Priority would be given to the infrastructure sector with the construction of rural roads and improvements in energy transmission. The second largest share of investment (30 percent) would go to the health sector in an effort to strengthen health infrastructure and geographical accessibility for the rural population. Agriculture—in particular, land husbandry, hillside irrigation, and water harvesting—would also receive a large share of the Gleneagles aid (28 percent).

Figure A1.11.Rwanda: Average Expenditure by MDG Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

As a result, the simulations suggest that scaling up of aid to $85 per capita does not have a significant macroeconomic impact, nor does it present major policy challenges for Rwanda (Figure A1.12). Although the model suggests that the additional aid flows would generate some reallocation in resources from the tradables to the nontradables sector, the impact on inflation, the real exchange rate, and growth is short lived and modest, reflecting the relatively low amount of additional aid needed to reach the Gleneagles commitment. In the short term, the results show a positive impact on growth as a result of the ability to draw on unutilized capacity to increase output, but in the longer term the impact is relatively modest because higher production in the nontradables sector is offset by slower growth in the tradables sector relative to the benchmark.

Figure A1.12.Rwanda: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

Sierra Leone

To meet the Gleneagles commitment, foreign aid to Sierra Leone will need to more than triple from its current levels. Aid inflows were projected to be 7.4 percent of GDP in 2008, equivalent to $29 per capita; under the Gleneagles scenario, foreign assistance would have needed to increase by an additional 15 percent of GDP to reach the nominal target of $85 per capita by 2010 (Table A1.7). The Gleneagles envelope would have increased overall ODA from $161 million in 2007 to $451 million in 2010.

Table A1.7.Sierra Leone: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008-10
Total

2007-10
ODA (current projections)161146129111128546
ODA per capita (current projections)3229252125
ODA (with Gleneagles)1612543504513521216
ODA per capita (with Gleneagles)3250678567
Additional ODA under Gleneagles scenario0108221340223670
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The government of Sierra Leone has identified infrastructure, education, health, and agriculture as priority areas for scaling up (Figure A1.13). These priority sectors are derived from Sierra Leone’s Interim Poverty Reduction Strategy. Priority would be given to the infrastructure sector, to which 80 percent of the additional investments are expected to be allocated, with an emphasis on investment in roads (85 percent of new infrastructure investments). In addition, 9 percent of the Gleneagles ODA has been earmarked for agriculture, mainly for farm and community-based interventions; 7 percent would go to the education sector, with an emphasis on primary education; and 3 percent would go to the health sector, in particular HIV/AIDS and malaria treatment and prevention.

Figure A1.13.Sierra Leone: Average Expenditure by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The impact on GDP growth from the increase in aid would be considerable because higher public investment would boost productivity and encourage greater private investment (Figure A1.14). As the stock of public capital rises, so does the productivity of private capital, leading to a sustained increase in private capital over six years. Output growth starts to increase after two years as a result, peaking at 10 percent (from a benchmark rate of 6 percent) before gradually returning to the steady-state rate. The nominal and real exchange rates would appreciate as a result of higher aid inflows, but the impact on the export sector would be offset by higher returns to private investment. The nominal real exchange rate appreciation would contribute to lower inflation.

Figure A1.14.Sierra Leone: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

The impact on growth would be constrained if Sierra Leone’s limited absorptive and administrative capacity is not addressed, emphasizing the importance of sustained implementation of the government’s structural reform agenda. Delays in the implementation of public financial management reforms could hamper the productivity of public spending and result in a lower level of capital accumulation than predicted by the model. In addition, the weak business environment coupled with shortages in human capital and the poor state of infrastructure (in particular, electricity supply and the transportation network) could result in a weaker supply response to the increased demand for nontradable goods and services than envisaged under the model.

Tanzania

An increase in aid inflows to levels consistent with the Gleneagles commitments would imply a significant increase in the existing amount of aid to Tanzania, from 8 percent of GDP (2010) to 14 percent. Under the Gleneagles scenario, ODA per capita would reach $85 in 2011/12, increasing overall ODA from $1,704 million in 2008/09 to $3,600 million in 2011/12 (Table A1.8).

Table A1.8.Tanzania: ODA Scaling-Up Summary ($US million)
FY08/09FY09/10FY10/11FY11/12Average,

FY09/

10-11/12
Total

FY08/

09-11/12
ODA (current projections)1,7042,1052,0402,0302,0587,879
ODA per capita (current projections)4251484749
ODA (with Gleneagles)1,7042,1052,1853,6962,6629690
ODA per capita (with Gleneagles)4251758570
Additional ODA under Gleneagles scenario0014516666041811
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

Infrastructure and education remain priority sectors and, therefore, are the main areas requiring substantial additional external funding (Figure A1.15). Out of external funding requirements averaging $760.8 million annually, infrastructure required $283.9 million, followed by the education sector with $222.4 million. The health sector ranked third, with an annual average of $149.3 million, and $68.9 million was allocated for agriculture.

Figure A1.15.Tanzania: Average Expenditure by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The model-based analysis suggests that aid scaling up of this magnitude would have a significant impact on the level of GDP (Figure A1.16) and help sustain progress toward meeting the MDGs. Tanzania has moved toward achieving the MDGs, especially on universal primary education, reversing HIV/AIDS, and access to safe drinking water. However, Tanzania’s lack of infrastructure is a binding constraint on economic transformation and rapid poverty reduction, not only in Tanzania itself but also in the region—pointing to scope for a sizeable growth payoff if extra aid is focused on removing infrastructure bottlenecks.

Figure A1.16.Tanzania: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: The baseline scaling-up scenario is an aid shock of 5 percent of GDP for five years, with full spending and absorption; scenario 1 shows full spending and partial absorption with full sterilization; scenario 2 shows full spending, partial absorption, and partial sterilization; and scenario 3 shows higher spending efficiency. x-scale measures t-years after the first year (t0) in the period of study.

Simulations indicate that an appropriate monetary policy response would be needed to contain the potentially sizeable, albeit temporary, price and exchange rate effects of the increased aid inflows. To limit the inflationary impact, the portion of the aid inflows spent domestically would need to be sterilized, either through foreign exchange sales that would ensure no crowding out of the private sector or through central bank liquidity instruments.

Efficiency of spending and the responsiveness of the private sector to infrastructure investment would be key factors in determining growth returns. Public spending in Tanzania has already increased substantially since 2000, putting pressure on public financial management systems to deliver strong value for spending, so use of additional aid would need to be tightly managed to ensure maximum benefits. Indeed, the government has a strong emphasis on improving public financial management, including through improving commitment control, expenditure tracking, and monitoring to enable tracking of actual budget execution against broader spending objectives. The government is also taking steps to ensure that annual budgets and short-term planning are better aligned with medium-term spending priorities, as laid out in a prioritized medium-term public investment plan. Similarly, a strong private sector response to public investment would be needed, underscoring that decisive actions to improve the business climate are essential.

Togo

The increase in aid to Togo required to meet the Gleneagles target amounts to 10 percent of GDP over the period under review. The Gleneagles scenario assumes that Togo’s annual aid inflows would have risen to 17 percent of GDP in 2010 and would decline to 14 percent of GDP after 20 years, compared with a benchmark of 7.5 percent of GDP after debt relief through the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative. Under the Gleneagles scenario, ODA per capita would have reached $85 in 2010, increasing overall ODA from $50 million in 2007 to $499 million in 2010 (Table A1.9).

Table A1.9.Togo: ODA Scaling-Up Summary ($US million)
Measure2007200820092010Average,

2008-10
Total,

2007-10
ODA (current projections)49.891.1149.1184.4141.5474
ODA as % of budget (current projections)10.115.122.125.220.8
ODA per capita (current projections)9.116.326.031.424.6
ODA (with Gleneagles)49.8192.7342.4499.2344.81,084
ODA as % of increased budget (with Gleneagles)10.127.339.547.638.1
ODA per capita (with Gleneagles)9.134.459.785.059.7
Additional ODA under Gleneagles scenario0101.6193.3314.8203.2610
Source: Authors’ illustration based on case study.
Source: Authors’ illustration based on case study.

The government of Togo has identified education, health, agriculture, and infrastructure as priority areas for scaling up (Figure A1.17). These priorities cover programs and projects that have been identified in the MDG needs-assessment exercise, but have not been integrated in the Poverty Reduction Strategy Paper. The education sector would receive 30 percent of the additional Gleneagles aid, with the goal of increasing the gross enrollment rate by an additional 10 percentage points and the literacy rate by 13 additional percentage points. A quarter of the Gleneagles resources would be dedicated to infrastructure, with particular attention to water and sanitation. In the health sector, Togo would implement key interventions to strengthen health systems and maternal health, and to address HIV/AIDS and malaria. Some 9 percent of the additional resources would be dedicated to the agriculture sector, with particular emphasis on food security and nutrition interventions.

Figure A1.17.Togo: Average Expenditure by Sector in the Gleneagles Scenario

Source: Authors’ illustration based on case study.

The model suggests that such an increase in aid would have a significant effect on Togo’s economy, considerably boosting economic growth and GDP per capita (Figure A1.18). The positive impact of higher aid on the accumulation of public and private capital is relatively large, given Togo’s low starting point after more than a decade without donor support and deteriorating capital stock. Government investment would increase from 8 percent of GDP to about 16 percent in two years. As a result, real annual GDP growth is projected to be 1 percent higher on average during the first 10 years. Although inflation and the real exchange rate would rise in the short term, the adverse impact on the tradables sector would be relatively limited. The very positive growth response is explained by the significant impact of higher aid on the accumulation of public and private capital.

Figure A1.18.Togo: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

The achievement of higher GDP growth rates following the aid increase will depend on the economy’s capacity constraints and on the strengthening of the private sector. In addition, the numerical simulations must be interpreted with some caution, reflecting a number of difficult-to-verify assumptions and considerable uncertainty about key macroeconomic relationships in Togo.

Zambia

The projected increase in ODA required to meet the Gleneagles commitment for Zambia is relatively modest. To meet the benchmark of US$85 per capita per year, ODA would have needed to rise by 0.9 percent of GDP in 2010 (Table A1.10), a modest increase compared with that required for many other sub-Saharan African countries. A scaling up of this magnitude would have increased overall ODA from $893 million in 2008 to $1,037 million in 2010.

Table A1.10.Zambia: ODA Scaling-Up Summary ($US million)
200820092010Total 2008-2010
ODA (current projections)8936669122,471
ODA per capita (current projections)765575
ODA (with Gleneagles)8936661,0372,596
ODA per capita (with Gleneagles)765585
Additional ODA under Gleneagles scenario00125125
Source: Authors’ calculations based on case study.
Source: Authors’ calculations based on case study.

The macroeconomic impact on Zambia from the assumed increase in ODA would be positive, but not large (Figure A1.19). An increase in aid of this magnitude would provide an estimated first-year boost to economic growth of 0.3 percentage point, with long-term annual growth rising by 0.15 percentage point. Although inflation would initially rise moderately and the real exchange rate would appreciate, the adverse effect on the tradable-goods sector is projected to be limited.

Figure A1.19.Zambia: Macroeconomic Impact of Aid under the Gleneagles Commitment

Source: IMF staff estimates.

Note: x-scale measures t-years after the first year (t0) in the period of study.

Model simulations indicate that the impact of higher levels of aid on the GDP path is sensitive to both the efficiency and the composition of the additional government spending. In addition, initial price and exchange rate movements are sensitive to the specific monetary and exchange rate policy responses. The model suggests that spending without selling commensurate foreign exchange would limit growth through crowding out of the private sector; maintaining a fixed exchange rate would raise inflation and output volatility; and increasing spending too rapidly could reduce spending efficiency and, thereby, the positive impact on the marginal productivity of private capital from increased government spending.

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