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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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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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