How effective budgeting supports poverty reduction

• Author: Andrew Berg
• Position: IMF African Department
• Pages: 90-91

Page 90

Greater progress toward meeting global poverty goals in Africa by 2015 will require further increases in government spending on critical public services. This will often mean higher spending on public sector wages to pay the nurses, doctors, and others who are essential to providing these services. But if programs supported by the IMF restrict spending with tight deficit targets-and sometimes wage bill ceilings that limit hiring and wage increases-can progress still be made toward poverty reduction?

Given the scarcity of resources, the answer lies in effective budgeting. There is not enough foreign exchange to pay for critical imports; aid, although sometimes large as a share of recipient-country GDP, generally remains much below needs, and below recent commitments of donor countries; and tax revenue is small relative to GDP. In addition, there are not enough skilled people to teach, cure diseases, manage spending programs, or even run private businesses.

In this difficult environment, the main responsibility of the IMF is to promote stronger macroeconomic fundamentals: notably low inflation, stable exchange rates, debt sustainability, good public financial management, and strong financial systems. These fundamentals are the prerequisite for sustained growth and poverty reduction. They help support the vibrant private sector that creates employment and raises incomes, and they provide the tax base for higher domestic revenues that can create a sustainable basis for more education and better health care.

The IMF is also adapting its policies and operations to help its member countries make difficult choices in ways that best promote growth and poverty reduction. Let's look at how this is occurring in sub-Saharan Africa.

Using aid effectively

Although Africa lags behind most other regions, progress has been made in recent years toward the achievement of the Millennium Development Goals (MDGs). With strong macroeconomic policies-often facilitated by IMF policy advice, program support, and technical assistance, and aided by financial resources from debt relief-growth over the past three years has been in the 5-6 percent range, inflation has been in the single digits, private capital inflows have been increasing, and pro-poor public spending is up. To get closer to achieving the MDGs, however, African countries need faster growth.

One way the IMF is adapting is by making...