John Serieux

Terry McKinley

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United Nations Development Programme
Why Not ‘Front-load’ ODA for HIV/Aids?
   February, 2007          Number  29
by John Serieux, Assistant Professor, Dept. of Economics, University of Manitoba
and Terry McKinley, Acting Director International Poverty Centre
Global funds available to combat HIV/Aids are estimated to
reach about US$ 9 billion in 2007. Although this amount will be only
about half of what is needed, it is, nevertheless, substantial. Used
effectively, such donor financing could help stem the pandemic’s
spread and mitigate its effects. In fact, disbursing the balance of
such financing early on - ‘front-loading’ it - should be a priority.
But there is considerable resistance to doing so. Why is this the case?
Two major concerns predominate. Donors and recipient-country
central banks worry about destabilizing the economies of
countries. Recipient governments worry about the volatility of
donor disbursement. So a gradual phasing in of ODA is often
preferred, on all sides. But is this the approach best suited to
confront a human development crisis of such magnitude? Moral
imperatives aside, one can also make practical arguments that
‘front-loading’ would improve ODA’s effectiveness.
The effectiveness of ODA depends on three conditions: (1)
governments are able to use the ODA to increase spending aimed at
combating the epidemic; (2) the foreign exchange provided through
ODA is used to increase relevant imports; and (3) HIV/Aids spending
reaches its intended target and is applied, quickly and effectively,
to its intended objective.
However, recent trends in developing countries suggest that the
first two of these imperatives are not being fulfilled. Governments are
tightening up their budgets and thus not spending all available ODA.
And central banks are stockpiling reserves instead of releasing them
for needed imports. The Figure shows that in developing countries
from 1998 to 2006 a) the fiscal balance of central governments moved
from -3.7 per cent of GDP to only -0.5 per cent; and b) reserves rose
from about US$ 691 billion to almost US$ 3 trillion.
In sub-Saharan Africa, the fiscal balance of central governments was
projected to reach a surplus of 0.4 percent of GDP in 2006 (compared
to -3.7 percent in 1998) while reserves were projected to reach about
US$ 123 billion (compared to only about US$ 28 billion).
Governments have adopted an excessively cautious stance because
of the numerous financial, debt and balance of payments crises of the
1990s. They are afraid, in particular, that more (ODA-related) spending
will increase the prices of domestic goods and services. By causing
wages to increase and the exchange to appreciate, such inflation
would make the country’s exports more expensive to produce and
less competitive abroad. This is the so-called ‘Dutch disease’ effect.
However, the evidence for this effect is weak. Moreover, if ODA is
successful in mitigating some of the detrimental effects of HIV/Aids,
it is likely to rule out such an effect by encouraging the use of excess
capacity and improving all-round productivity. In this context, when
governments spend the available ODA and central banks sell the
corresponding foreign exchange, the related price and exchange rate
effects are likely to be both moderate and transitory.
ODA is urgently needed to treat the mounting number of people
living with Aids and halt and reverse the deadly spread of the
pandemic. In this fundamental sense, the sooner ODA is disbursed,
the better. A maximal effort early on would also imply the need for
less ODA in the future because fewer people would need to be
treated and, by safeguarding human capabilities, higher future
productivity would be assured. These are sufficient reasons for
front-loading HIV/Aids financing.
However, there are other compelling reasons to adopt such a
strategy. The effectiveness of government spending in combating
the disease (i.e., whether expenditures are properly targeted and
have their intended impact) depends on building up national
capacities, in the form of extensive public investment in infrastructure,
institutions and human resources. The sooner such capacities are
created, the more effective ODA would be. This would imply that the
marginal rate of return of even scaled-up future aid flows (the welfare
impact per additional US dollar) would remain high.
The need to manage the volatility of ODA is further justification for
front-loading ODA. Central banks should, indeed, have some latitude
to accumulate international reserves (in combination with deferred
spending by governments) early on so that they can smooth future
expenditures if ODA drops. Having such a buffer is critical because
once treatment of HIV/Aids is initiated, interruption (because of lack
of funds) can be disastrous. But such a stance should not be confused
with amassing reserves to protect the currency and short-circuiting
the resulting monetary impact of government expenditures by
‘sterilization’ (which drives up interest rates). This latter approach
contradicts the whole purpose of providing HIV/Aids financing
and undermines its effectiveness.
Reference:
John Serieux. 2007. “Managing the Exchange Rate Consequences of Scaling up HIV/Aids Financing.”
Conference Paper for the international conference on “Gearing Macroeconomic Policies to Reverse the
HIV/Aids Epidemic” jointly sponsored by IPC and the HIV/Aids Group of UNDP.
0
-0.5
-1
-1.5
-2
-2.5
-3
-3.5
-4
Fiscal Balance (% of GDP),  dotted line
Reserves (US$ Billions),  solid line
Source: IMF, World Economic Outlook 2006, Tables 18 & 35. * denotes projected.
1998 2000 2002 2004 2006*
4000
3500
3000
2500
2000
1500
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500
0

Managing the Exchange Rate Consequences of Scaling up HIV/Aids Financing.” Conference Paper for the international conference on “Gearing Macroeconomic Policies to Reverse the HIV/Aids Epidemic” jointly sponsored by IPC and the HIV/Aids Group of UNDP.

Why Not ?Front-load? ODA for HIV/Aids?

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Why Not ?Front-load? ODA for HIV/Aids?

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