Managing Aid Surprises

• Author: Oya Celasun/Jan Walliser
• Position: Economist in the IMF's Research Department/Sector Manager for Poverty Reduction
• Pages: 34-37

Countries cannot make full use of aid when it is unpredictable

Page 34

A Frequently voiced concern of countries that receive development aid is that assistance flows are not predictable. In most years, the amount of aid disbursed differs widely from the amounts expected, and because most aid recipients lack access to international capital markets, they cannot borrow externally when expected aid fails to arrive. as a result, recipient governments are forced to adjust spending plans at short notice when promised aid is not provided or when additional aid is disbursed unexpectedly. enhancing aid predictability has therefore been a key objective of the international agenda enshrined in the 2005 Paris Declaration on aid effectiveness.

A government's inability to predict aid flows affects not only the level of government spending but also its composition and effectiveness. Unexpected aid shortfalls could force governments to disproportionately cut investments in physical and human capital, while aid windfalls could disproportionately boost government consumption-which, unlike investment spending, can be adjusted without much delay and planning.

Thus, unpredictable aid may not only be more difficult to manage, but also affects how the money is spent, thereby reducing its intended impact. Such short-term distortionary responses to unexpected aid shortfalls and windfalls are more likely for budget aid-the kind of aid that flows directly into a government's budget-because recipients have full discretion on where to spend such aid.

Aid predictability and aid volatility are distinct concepts, although they are often used interchangeably. aid is predictable if recipients can be confident about the amount and timing of aid disbursements. aid is volatile if it moves up and down significantly between two time periods. although measuring predictability requires very detailed data, it is the more relevant concept in studying aid effectiveness issues.

Yet, little systematic empirical work is available about aid predictability. This article summarizes the results of our study (2008), which provides comprehensive empirical evidence on the predictability of aid.

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Promises, promises

Does aid arrive on schedule? We use two sources of data to examine this question. a first data set, comprising aid disbursements and commitments reported by donor agencies to the Development assistance Committee of the Organization for economic Cooperation and Development (OeCDDaC), has comprehensive time and country coverage. But it includes neither separate data on project and budget aid nor a direct measure of aid expectations, because aid commitments reported by donors do not necessarily correspond toPage 35 the amounts of aid expected by recipients. also, OECD-DAC data do not include detailed fiscal data to evaluate the impact of unpredictable aid on government spending.

A second, new data set-derived from IMF-supported programs-provides detailed information on joint macroeconomic programming exercises by IMF staff and recipient governments. It includes projections and outturns of aid and a large set of other fiscal and macroeconomic variables.

It can thus be used to identify aid expectations of recipient countries and differentiate between budget and project aid.

However, it has limited country and time coverage. Both data sets have advantages and disadvantages in addressing different research questions (see Table 2 in Celasun and Walliser, 2008).

Both data sets show that aid is highly unpredictable.

According to OECD-DAC data, during 1990-2005, on average, annual aid disbursements in sub-Saharan africa deviated from aid commitments by 3.4 percent of GDP. Other regions also show deviations of disbursements and commitments in the range of 1.7-2.4 percent of GDP during 1990-2005. But, contrary to the common belief that donors systematically disburse less aid than they commit, low aid predictability in both data sets is a result of disbursements falling short as well as exceeding expectations and commitments, in particular in sub-Saharan africa. This shows that managing unpredictable aid...