Fiscal Management of Scaled-Up Aid

International Monetary Fund (IMF), April 2012, Pages: 67

The international community has committed to scaling up aid and improving aid delivery to low-income countries to help them meet the Millennium Development Goals. Other "emerging" donors, public and private, are increasing their assistance, and debt-relief initiatives are creating space for new borrowing. Remittances to low-income countries have been on a precipitous rise, and many countries are benefiting from high commodity prices. Fiscal Management of Scaled-Up Aid explores approaches to the sound fiscal management that will be required to ensure effective and sustainable use of these flows. With a medium-term perspective and efficient use of resources in mind, this paper addresses questions that shape fiscal policy response to scaled-up aid. Drawing on IMF Fiscal Affairs Department technical assistance to member countries, it outlines factors that should be taken into account in preparing an action plan for public financial management reform and proposes specific measures that will assist countries in strengthening fiscal institutions.

Abbreviations vii

Preface ix

Acknowledgments xi

1 Introduction 1

2 Establishing a Medium-Term Resource Envelope 4

3 Choosing an Expenditure Path 6
Time Profile of Aid 6
Absorptive Capacity Constraints 6
Spending and Debt Sustainability 8
Spending and Growth 10
Spending Efficiency 11 Expenditure Path and Fiscal Targets 12
Updating Baseline and Alternative Scenarios 16

4 Dealing with Aid Uncertainty and Volatility 17

5 Strengthening Institutions to Promote Effective
Utilization of Aid 20
Weaknesses of Existing Public Financial Management (PFM) Systems in Low-Income Countries 20
Overall Strategic Planning 25
Developing a Medium-Term Approach to Budgeting 25
Strengthening Budget Execution and Reporting 28
Integrating Donor Aid in the Budget Process 32
Strengthening PFM Systems, Including Their Capacity to Track Poverty-Reducing Spending 33
Formulating and Implementing PFM Action Plans 35
The Role of Technical Assistance in Supporting the Reform Process 39

6 Conclusions 42
Appendixes
1. Country Experiences with Scaled-Up Aid 45
2. Expenditure Efficiency—An Empirical Assessment 53
References 62

Boxes

1. Choosing an Expenditure Path When the Resource Envelope Is Expanding 9
2. Fiscal Targets in IMF-Supported Programs 14
3. Strengthening Public Financial Management in Postconflict and Disaster-Affected Countries 26
4. Current Medium-Term Fiscal Planning Practices 29
5. Short-Term Priorities for Public Financial Management Reform 30
6. Illustrative Expenditure Tracking Mechanism 34
7. Role of Donors in Promoting Effective Public Financial Management Reform 40

Figures

1. HIPC-AAP: PFM Performance by Key Categories 22

2. Fiscal ROSC Assessments, 1999–2005 22

3. PEFA Assessments Undertaken During 2005–06 23

4. CPIA: Quality of Partner Country PFM Systems in 2005 23
A1.1. Event Study: Aid Flows After an Aid Spurt 49
A1.2. Aid Volatility and Fiscal Institutional Quality 50
A1.3. Changes in Current Spending and Institutional Quality 51
A1.4. Changes in Capital Spending and Institutional Quality 51

Tables

1. Illustrative Platforms for Strengthening Budget Formulation in a Typical Low-Income Country 37
A1.1. Aid and Revenue, 1990–2004 46
A1.2. Total Aid, Loans, and Grants 47
A1.3. Selected Regression Results 48
A2.1. Countries Included in the Efficiency Analysis 54
A2.2. Spending and Outcome Indicators for the Efficiency Analysis 55
A2.3. Percent of Countries in Top Half of the Efficiency Distributions for Health by Income Level 57
A2.4. Percent of Countries in Top Half of the Efficiency Distribution for Education by Income Level 57
A2.5. Control Variables 58
A2.6. Correlation Matrix of Relative Efficiency Scores and Control Variables 60
A2.7. Truncated Regressions of Expenditure Efficiency Scores 61

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