In Brief
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Could countries handle a sudden doubling in their aid? What would they spend the increased aid on, and how can we ensure that the additional spending will reduce poverty? The IMF is part of a multinational effort to find out. And time is short, because the world's major industrial countries have pledged to double the aid they give to sub-Saharan Africa by 2010.
The IMF is working on 10 African country case studies to assess the economic effects of the spending of increased aid. The idea is to find out whether a dramatic boost in aid, promised at the G-8 Gleneagles Summit in 2005, can help countries meet the poverty-fighting Millennium Development Goals (MDGs).
The project was conceived in September 2007, when the United Nations established an MDG Africa Steering Group, which brings together the leaders of multilateral institutions- including the IMF-to identify practical steps needed for Africa to achieve the MDGs. A working group is looking at issues such as education, agriculture, health, trade, statistics, aid predictability, and how development partners can work more effectively on the ground to help Africa reach the MDGs.
The IMF has developed scenarios that will show how macroeconomic policy can be designed to fully spend and absorb the international commitments, which doubles aid to Africa to an average of $105 per capita by 2010. The scenarios are currently being calibrated for use in the case-study countries-Benin, the Central African Republic, Ghana, Liberia, Niger, Rwanda, Sierra Leone, Tanzania, Togo, and Zambia.
The scenarios are based on sector-wide expenditure analyses by the country authorities and development partners.
Among other approaches, the IMF is using a new, state-ofthe- art model to analyze the effects of increased aid on key variables such as real growth, inflation, the exchange rate, and the current account balance, and to assess how different policy choices can help or hinder progress. The model looks, in particular, for possible "Dutch disease" effects. These occur when aid surges lead to real exchange rate appreciations that make exports more expensive.
A first set of results for an initial set of countries is expected in September 2008. The work on the remaining countries will be completed before the end of 2008.
The recommendations of the MDG Africa Steering Group-and more details on the entire effort-are...
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