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The Fiscal Implications of Scaling Up ODA to Deal with the HIV/AIDS Pandemic
May 2007
International Poverty Centre, United Nations Development Programme (UNDP)
The HIV/AIDS pandemic has motivated large increases in aid commitments and disbursements, with promises of further large increases in the near future. This aid is urgently required to address the emerging humanitarian crisis and implies immediate, large-scale increases in public expenditure. The central question that this paper examines is whether such increases can effectively address the epidemic without inducing macroeconomic disturbances, especially for those countries, particularly in sub-Saharan Africa, where there is already high aid dependence and parallel commitments to the other MDGs. For the aid to lead to a real resource transfer, the monetary authorities in the recipient countries must accommodate such inflows. However, the twin dangers of ‘Dutch disease’ effects and inflation provide motivation for resisting accommodation. This paper argues that although such dangers are real, they are
overemphasized: aid directed at HIV/AIDS is likely to have positive short- and long-term effects on production possibilities in the recipient countries and to be complementary to efforts to achieve the other MDGs. Furthermore, the increased fiscal deficit is a necessary condition for the appropriate resource transfer and is not likely, in itself, to have an inflationary impact. The danger of inflation lies in an effort by the monetary authorities to resist absorption. Recipient governments are understandably fearful of fiscal sustainability and debt sustainability because of the historical record of very high aid volatility and low predictability. However, spending that reduces the debilitating effects of HIV/AIDS is most likely to counteract such effects by raising government revenues in both the short and medium term. Nevertheless, donors have a responsibility to match disbursements to commitments on a more systematic and long-term basis, and reduce the dangers of volatility and unpredictability by shifting aid towards debt relief and grants. The possibility that aid-induced spending will quickly induce decreasing returns is an overly static and pessimistic view: aid targeted at HIV/AIDS can respond very elastically in the medium term and release the supply constraints that limit its effectiveness. Finally, many of the major impediments to aid effectiveness lie in donors’ behaviour, particularly their lack of co-ordination with one another and with the recipient country. In summary, although there are potential dangers in scaling up aid-supported spending to address the HIV/AIDS pandemic, they are manageable and provide no reason for delaying the immediate application of resources on a large scale.
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