The macroeconomics of scaling-up aid: what we know in Kenya, Malawi and Zambia

Focusing on the cases of Kenya, Malawi and Zambia, this paper aims to identify how concerns about macroeconomic instability have curtailed an effective response to MDG scale-up. It compares spending and absorption before and during aid surge periods to demonstrate the stance taken by the macroeconomic authorities in each country.

Attention is drawn to a report issued by the International Monetary Fund (IMF) which assessed the macroeconomic implications of scaling-up aid in Benin, Niger and Togo. The report acknowledged that higher levels of aid will put moderate to sizable pressures on inflation and real exchange rates. Concerns about such macroeconomic outcomes often constrain the full use of aid. Policies become too restrictive to allow full spending and absorption, even when aid is scaled-up. In this paper, the spending and absorption comparisons show that:

• all of the aid was absorbed in Malawi, only 59 per cent was spent through government fiscal expansion. Malawi had lower international reserves, mainly because of high absorption - hence, full absorption of aid in Malawi did not result in macroeconomic instability 
• in Zambia, 39 per cent of the aid was absorbed and only 6 per cent was spent. As expected, the level of international reserves increased - despite the restrictive macroeconomic stance, Zambia experienced a less encouraging macroeconomic outcome 
• in Kenya, 33 per cent of the aid was absorbed and 22 per cent was spent - the level of international reserves almost doubled, the inflation rate fell, but the real exchange rate also appreciated.