Aid flows
Making fiscal space happen: managing fiscal policy in a world of scaled-up aid
Managing the negative impacts of well intentioned aid
Authors:
P.S. Heller; M. Katz; X. Debrun; T. Thomas; T. Koranchelian; I. Adenauer
Publisher:
International Monetary Fund , 2006
The G8 countries have committed to double aid flows to developing countries by 2010. Although these funds offer great opportunities to recipient countries, aid inflows of such magnitude pose significant macroeconomic challenges to low income countries (LIC). This paper considers how LICs should manage fiscal policy in a scaled-up aid environment.
The authors highlight several approaches to strengthening fiscal policy management in the context of increased aid inflows; these include self-insurance, assessing short-term financing risks, risk pooling, self-protection and fiscal credibility.
The adoption of such fiscal policies depends on a country’s capacity for implementation. If donors and countries are to facilitate the implementation of a higher level of aid-financed spending programmes the following institutional changes are needed:
- a strengthening of donor efforts in LICs
- efforts by recipient countries to facilitate donor coordination and strengthen aid management
- a medium-term perspective on the fiscal framework
- a strengthening of the institutional mechanisms for monetary and fiscal policy coordination
- development of a capacity for independent audits of the fiscal policy framework
