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Africa: Blocking Progress

AfricaFocus Bulletin
Sep 27, 2004 (040927)
(Reposted from sources cited below)

Editor's Note

If the international community did come up with the funds required for adequate support to fight HIV/AIDS, spending the money could still be blocked by International Monetary Fund (IMF) guidelines designed to limit government spending in the affected countries. A new report by ActionAid International USA and three other Washington-based groups, excerpted in this AfricaFocus Bulletin, argues that this outcome is both unacceptable and unnecessary.

The report contends that the trade-offs between inflation and public spending are by no means as clear as the IMF claims. In any case, the need for expanding public health systems to meet the current emergency must take priority. The policy options must be evaluated and decided by citizens and policymakers in the countries concerned rather than by inflexible IMF guidelines.

Another AfricaFocus Bulletin sent out today includes an essay focused on the World Bank's decision to reject the major conclusions of its Extractive Industries Review, as well as additional references on related topics.

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Many thanks to those of you who have already sent in your voluntary subscription payment to support AfricaFocus Bulletin. If you have not yet made such a payment and would like to do so, please visit http://www.africafocus.org/support.php for details.

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Blocking Progress: A Policy Briefing by ActionAid International USA, Global AIDS Alliance, Student Global AIDS Campaign, RESULTS Educational Fund (September 2004)
http://www.actionaidusa.org/blockingprogress.pdf

How the Fight against HIV/AIDS is Being Undermined by the World Bank and International Monetary Fund

Key Points

The Emerging Clash: "Washington Consensus" vs. Fighting HIV/AIDS:

The seven wealthiest governments (G7), who dominate IMF decisions and influence most other foreign aid donors have an unjustifiable preference for low inflation in developing countries. Poor countries with severe HIV/AIDS crises will not be able to significantly increase public health spending without the possibility of inflation also increasing slightly, but the G7 governments forbid higher rates of inflation. Effective treatment and prevention of HIV/AIDS in low-income countries will require that G7 governments change their policy position, allowing for desperately-needed increases in public health spending, that may however low the risk, result in slightly higher levels of inflation.

How it Works:

Most poor countries with severe HIV/AIDS crises are dependent upon foreign aid from wealthy countries, but must adhere to loan conditions from the IMF, World Bank and other bilateral and international creditors and donors. World Bank Complicity: Going Along With the IMF Conditions on Foreign Aid: The World Bank stands ready to lend large sums of money to fight HIV/AIDS but will only do so if borrowing countries first agree to adhere to IMF loan conditions, including those that keep inflation low (under 10% per year, or in many cases under 5%). The low-inflation loan conditions prevent higher levels of public spending. The World Bank should de-link their lending from IMF loan conditions. An Open Question: What is an Acceptable Level of Inflation?: Despite the G7's and IMF's preference for low rates of inflation, there is no consensus among economists on what is an appropriate level of inflation, or at what level inflation begins to undermine economic growth rates.

What Do the IMF's Low-Inflation Targets Have to Do With Fighting HIV/AIDS?:

In order to stay in favor with the G7 governments and IMF, and therefore keep access to foreign aid from other donors, borrowing countries must comply with the IMF's loan conditions to set strict limits on public spending in order to keep inflation low. But it is not possible for countries to vastly increase public spending on HIV/AIDS unless these restrictions on increased spending and low-inflation targets are fundamentally changed.

Is the Ability to Increase "Absorptive Capacity" Being Blocked By the IMF?:

There is a consensus among all major donors and health professionals that the ability of low-income countries to accept more foreign aid to fight HIV/AIDS must first be improved. To absorb and effectively utilize large new amounts of foreign aid for fighting HIV/AIDS, countries will need to hire more doctors, nurses, medical assistants, administrators and accountants, build and staff more clinics and transport drugs to distant outlying areas in the countryside, etc. In order for governments to build such absorptive capacity, they will first need to increase public health spending, but they cannot do so under current IMF demands to restrict public spending in order to keep inflation low.

Main Point: The Need For Weighing the Trade-Offs:

We believe local governments, elected officials, and public health officials in low-income countries should be able to choose for themselves how much more public spending they wish to engage in to fight HIV/AIDS according to their own priorities, and if inflation rises slightly as a result, they should be free to choose this as a trade-off based on those priorities.

Local officials should be free to choose among a range of scenarios for higher levels of public spending and any increases in inflation that result, and be able to map out the short-term and long-term costs and benefits of each scenario. The freedom of choice of scenarios should not be precluded from the outset by the G7 governments behind closed doors at the IMF in Washington DC by their insistence that public spending and inflation be kept unnecessarily low.

Executive Summary

This briefing explores the logic of International Monetary Fund (IMF) loan conditions to developing countries and why the IMF insists that keeping inflation low is more important than increasing public spending to fight HIV/AIDS in Africa, Asia, Latin America, and Eastern Europe. In 2003, funding levels for HIV/AIDS prevention and treatment are estimated to have reached almost $5 billion; meanwhile financing needs will rise to $12 billion in 2005 and $20 billion by 2007. But if these large increases in foreign aid become available, will low-income countries be able to accept them? Despite the fact that the global community stands ready to significantly scale-up levels of foreign aid to help poorer countries finance greater public spending to fight HIV/AIDS, many countries may be deterred from doing so due to either direct or indirect pressure from the IMF. ...the IMF has taken an extremist position that lacks adequate justification. ...

There are complex relationships between the levels of government spending, the money supply, inflation rates, and rates of economic growth. There is no doubt that macroeconomic stability is very important and that levels of deficit spending and inflation should not be allowed to rise out of control. Higher government spending could lead to slightly higher rates of inflation. However, while inflation certainly hurts the poor, not increasing public health budgets to fight HIV/AIDS also hurts the poor. The question is one of various trade-offs: how much more public spending would trigger how much higher inflation, and what are the short-term and long-term costs and benefits of a whole range of options that poor countries should consider? An equally important question is who should decide which trade-off is worth it the IMF in Washington DC or local policymakers in the poorest countries themselves?

We believe local policymakers and health professionals should have a range of options to choose from about trade-offs between slightly higher inflation and spending much more to effectively fight HIV/AIDS. We also believe that it is they who should decide, not unaccountable finance ministers of the world's seven wealthiest governments (G7) behind closed doors in Washington DC. ... the IMF's Board of Executive Directors, which decides its policies and approves its binding loan conditions for borrowing countries, is comprised of representatives dispatched from finance ministries of its 184 member countries. The G7 countries have the dominant share of voting rights and influence at the IMF. ...

Therefore, we call on citizens of the G7 countries, and particularly the United States, to hold their governments accountable for the decisions they make at the IMF Executive Board.

Policy Recommendations:

  • G7 Governments should issue clear policy positions on exactly how flexible they are willing to be in terms of increases in inflation levels that may result from higher public spending in countries that borrow from IMF.
  • G7 Governments should issue clear policy statements ensuring that they will take no actions on the IMF Executive Board that will result in undermining the fight against HIV/AIDS and other health crises.
  • G7 Governments should promise to lend their technical expertise to publicly provide an wide array of macroeconomic policy scenarios, that allow citizens and policymakers in low-income countries to make informed choices about the trade-offs and short and long term costs and benefits of increased public spending on HIV/AIDS and the slightly higher inflation that may result.

Ugandan Finance Ministry to GFATM: "No Thanks!"

In 2002, Uganda was awarded a $52 million grant from the Global Fund to Fight AIDS, TB and Malaria (GFATM), but the Ugandan finance ministry began to state that it could only accept the money if Uganda cut out $52 million from the existing health budget. The GFATM objected to this, since any grant that it awards must be in addition to current government spending. Thus set in motion a controversy which flared until December, 2003, when under public pressure, the finance ministry relented and finally agreed to let the first $18 million installment of the GFATM grant enter Uganda as additional monies to the existing health sector budget. However, senior officials in the Ugandan finance ministry have suggested that the following installments will not be additional.

Why would the Ugandan finance ministry take this position? Several important issues have arisen in this case, which stand to have wider implications for many other countries.

The first argument offered by the Ugandan finance ministry was that an excessive inflow of foreign aid into Uganda's domestic economy at one time could lead to an increase in the value of the local currency, the Ugandan Shilling, which could increase the spending power and consuming demand of Ugandans. In turn, more spending could lead to higher levels of inflation. This is known as "Dutch Disease," after profits from new oil sales flooded Holland's economy in the 1970s and was correlated with an over-valued currency that made their exports less competitive on world markets. However, the former IMF advisor and Columbia University economist, Jeffrey Sachs, wrote an open letter to the Ugandan Government in 2002 debunking concern over an appreciation of the Ugandan Shilling as the main reasoning of the finance ministry's decision. Sachs pointed out, "the risks of currency overvaluation from donor-financed health spending are way overblown I don't know of a single country case where increased donor-financed health spending to respond to epidemics such as HIV/AIDS has been a trigger for macroeconomic instability. On the contrary, there is real and shocking macroeconomic instability caused by the failure to respond to such epidemics, since these epidemics result in a cascading destruction of families, communities, and businesses."

The second reason offered by the Ugandan finance ministry for attempting to turn down the money awarded by GFATM was that the health sector budget ceiling for the current three-year period was already set as a sub-sector within the national budget ceilings that have been agreed upon with the IMF, and they were committed to strictly adhering to the current budget expenditure plans as laid out in their 3-year Medium-Term Expenditure Framework (MTEF). The MTEFs are three-year budget windows used by many governments to ensure strict adherence to spending plans for all sectors in the economy, including the social sectors such as health and education. The MTEFs can be effective at "ring-fencing" or protecting health budgets from over-spending by other ministries. At issue in the Uganda case may well be the rigidity of the fixed budget ceilings for the various sectors in the MTEFs. Because the ceilings for the first of the three years in the MTEFs are not flexible, the Ugandan finance ministry had no way of raising the health sector budget ceiling (thus the overall national budget expenditure ceilings) in order to make room for accepting the GFATM money. To accept the money would have meant violating the strict agreements on the overall national fiscal deficit level, the overall public expenditure level, and possibly the level of inflation that Uganda had committed to with the IMF. So Uganda was faced with a choice of either accepting desperately-needed money to fight HIV/AIDS or violating its loan conditions on the fiscal and monetary policies it had agreed to with the IMF. The IMF's original low -inflation target, to which everything else was subordinated, was not up for debate.

Another way of looking at the choice is: Which was Uganda more afraid of an outraged GFATM, HIV/AIDS advocates, and its own citizens or the IMF? Obviously, Uganda was very hesitant to violate its commitments made to the IMF, since the IMF has the power to signal to all of the other bilateral and multilateral creditors and aid donors if it thinks Uganda's economy is appropriately stable. When the IMF gives a green light signal, this opens the doors to millions of dollars from other donors and creditors around the world; but when the IMF gives the red light, aid form all of these other donors and creditors can be suspended. It is the tremendous power of this signaling affect that gives the IMF so much power over the world's poorest countries.

One thing that can be done in order to prevent the same problem from occurring in other countries whose finance ministries also use MTEFs is to critically scrutinize the METFs as planning devices, and find ways to make them more flexible so they can positively respond to newly-available and unanticipated funds that may become available during budget planning cycles. But ultimately, it will be the IMF's insistence on very low inflation targets that must be scrutinized and be brought into the center of public debates if countries are ever to be allowed to scale-up public health spending effectively to fight HIV/AIDS.

...

What Do the IMF's Low-Inflation Targets Have to Do With Fighting HIV/AIDS?

If budget planning begins with the IMF's low inflation targets, then everything else becomes subordinated to those low inflation targets, including how much money will ultimately be available to spend on AIDS. ...

... national and sector ceilings become the basis for planning 3-year budget planning in the MTEFs [Medium-Term Economic Frameworks does not make loans conditional on how borrowing governments decide to allocate funds among their various sub-sectors of the national economy. However the IMF does make loans conditional on not overspending on agreed national budget ceilings, budget deficit limits, and the subsequent impact these may have on the level of inflation. In turn, the health sector spending limits include ceilings on the "wage bill," or the money available for the salaries of public staff, such as doctors or health workers.

AIDS activists and health care professionals first became alarmed at the role of IMF low inflation targets resulting in limits on public spending in 2002 when Uganda attempted to turn down a $52 million grant from the Global Fund to Fight AIDS, TB and Malaria. Because accepting the grant would have violated Uganda's agreement on public spending reached with the IMF, the Ugandan Finance Ministry first claimed the money could only be accepted if it reduced the existing health budget by $52 million. [see above for this case]

The original IMF "structural adjustment" stabilization loans were meant to address the crisis of "hyperinflation" in the late 1970s and early 1980s. ...

Partially in response to these "debt crises," the key "structural adjustment" loan conditions then offered by the IMF and World Bank were designed to lower inflation to controllable levels. However, these resulted in massive cuts in overall national spending, and because the health and education budgets of many poorer countries had often comprised the largest portions of overall national budgets, these sectors consequently suffered the brunt of the massive budget cuts. By 1987, a UNICEF-sponsored study indicated that a combination of the global economic recessions, oil price increases, higher interest payments, and the severe cuts in social spending demanded by IMF budget austerity loan conditions had the effect of reducing such basic indicators of child welfare as nutrition, immunization levels and education. Among the consequences was reduced access to such services as health care and education as public expenditures were cut and user charges were introduced.

Long after the crises with hyperinflation had subsided (by the late 1980s), most public health systems have continued to suffer from insufficiently low budgets to meet the needs of their people. Since the dramatic budget cuts of the early 1980s, the cumulative long-term effect of this lowinflation budget austerity in IMF loan conditions over many years has been the chronic and sustained under-funding of public health systems in countries across the developing world over the last 20 years. And because any effort to effectively battle HIV/AIDS must be built on the foundation of an adequately funded and staffed national health system, these current levels of health spending must be vastly increased. ...

Further, the IMF claims that the increase in economic activity that is associated with higher government spending in low-income countries will lead to higher inflation, but much of the research used to justify this claim is based on the experiences of industrialized countries. There is no empirical evidence that this is actually the case in poor countries. Higher public spending in lower-income countries may not necessarily lead to higher inflation rates because unlike rich countries, most developing countries have "excess capacity," including high unemployment and a low levels of resource utilization (e.g., the existing factories are not producing at their maximum output). When there is such "slack" in the economy (under-utilized resources), the idea that increases in public spending somehow pushes an economy past its limits (creates inflation) in reality does not hold up based on the economics literature.

...

An OXFAM International study of IMF budget austerity demonstrated how unjustifiable deficit reductions diverted scarce resources that could be better applied to increasing education or public health spending. For example, one of the IMF's loan conditions for Senegal is for it to reduce its budget deficit from 4.0% of Gross Domestic Product (GDP) to 3.5% of GDP over a three year period. But if that extra 0.5% of GDP were used to increase spending in the health sector rather than for paying down the deficit, the national health budget could have been doubled for each year of the 3-year loan program. In another example, a 3-year IMF loan program for Cameroon is requiring that the government achieve a budget surplus by 2005 by moving from a 0.7% of GDP budget deficit in 2003 to a 0.7% budget surplus by 2005. However, Cameroon could have more than doubled its health spending over these three years if it could have shifted that 1.4% of GDP into the health sector budgets. ...

These kinds of calculations imply that if governments were free of such strict IMF deficit reduction loan conditions, they would be putting all of that revenue into public health. While they would not necessarily do so, the purpose here is to show the high costs of complying with often unjustifiable IMF budget austerity. Such IMF loan conditions have significant costs in terms of constraining what might otherwise be possible in the fight against HIV/AIDS.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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