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Millennium Development Goals

Aid and AIDS: policy changes and responses in Kenya, Malawi and Zambia

Dr Degol Hailu Acting Director, UNDP International Policy Centre

bout 4 million people are estimated to be living with the HIV virus in Africa. Life expectancy is reduced by about 20 years because of the disease, while the number of orphaned children has reached 12 million. The urgency of controlling the disease is beyond doubt. However, there is a debate about how effective the aid is allowed to be by the fiscal rules and conventions that surround it.

A

major cause for international concern is how far HIV and AIDS related external aid can be fully spent and absorbed. By absorption we mean the utilisation of foreign exchange, for instance, in importing goods and services. Spending means the utilisation of the domestic counterpart of aid for government consumption and expenditure. When aid is absorbed the balance of payments current account deficit (excluding aid) increases. This could be because of imports or increased domestic demand reducing what is exported. When aid is spent, the fiscal deficit (excluding aid) increases. This is due to either higher government expenditure or lower domestic revenue. A 2008 paper by the International Monetary Fund (IMF) entitled The Macroeconomics of Scaling Up Aid argued that scaling up aid will put moderate to sizeable pressure on inflation and exchange rates for Benin, Niger and Togo. Due to fears of such macroeconomic imbalances, countries are advised to restrain their fiscal expansion. This means macroeconomic concerns override public spending programmes aimed at achieving the Millennium Development Goals (MDGs). Is such a policy stance justified? The answer is no. There is an urgent need for largescale, broadly targeted government programmes to respond to the HIV and AIDS crisis. First, fiscal and monetary policies have to be expansionary in order to respond effectively to the epidemic. Second, full spending and absorption of aid must be encouraged. Third, micro-projects need to be co-ordinated with greater efficiency to stimulate supply responses.

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Fear of absorption and spending of aid If fears of macroeconomic instability lead to less than full absorption and spending of aid, it is useful to look at the cases of Malawi, Zambia, and Kenya. Between 2001 and

2005, Kenya, Malawi and Zambia had HIV and AIDS prevalence rates of about 14 per cent each among the adult population, defined as those in the 15–49 age group. By 2005 Kenya’s prevalence rate had fallen to 5.9 per cent. Nonetheless, controlling HIV and AIDS remains a pressing issue in this country. These three countries are facing a human development crisis, and while external aid has been flowing, particularly earmarked for HIV and AIDS control, aid has not been utilised fully, as shown in Tables 1, 2 and 3.

There is an urgent need for large-scale, broadly targeted government programmes to respond to the HIV and AIDS crisis.

In Kenya, 33 per cent of the aid was absorbed and 22 per cent was spent. The remaining balance was utilised to settle domestic debt and build up international reserves. The inflation rate fell and the exchange rate appreciated. While all of the aid was absorbed in Malawi, only 59 per cent was spent through government fiscal expansion,a resulting in low international reserves. The real exchange rate depreciated and the inflation rate fell by 15.4 percentage points. In Zambia, 39 per cent of the aid was absorbed and 6 per cent was spent. International reserves increased and the inflation rate declined, leading to an appreciation of the real exchange rate. What the ‘before and after’ aid surge story shows is that full absorption of aid in Malawi did not lead to macroeconomic instability. The restrictive macroeconomic stance in Zambia did not stop the exchange rate from depreciating. We can safely conclude Cyprus, 30 September - 2 October 2009

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