Making Fiscal Space Happen: Managing Fiscal Policy in a World of Scaled-up Aid, Issues 2006-2270
International Monetary Fund, Dec 1, 2006 - Business & Economics - 53 pages
Debt relief and the scaling up of aid to low-income countries should allow for greater fiscal space for expenditure programs to create long-term growth and lower poverty rates. But designing a suitable medium-term fiscal framework that fosters a sustainable delivery of better public services and infrastructure while maintaining a credible commitment to fiscal prudence confronts many challenges. This paper discusses what low-income countries can do to shape fiscal policy frameworks that are ambitious in trying to absorb additional aid while still ensuring longer-term sustainability for government expenditure programs and finances. It suggests what approaches can be used to manage the greater fiscal policy risks associated with a scaled-up aid environment, including coordination with monetary policy. The paper also discusses what institutional changes are needed if donors and countries are to facilitate the implementation of a higher level of aid-financed spending programs.
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Enhancing the Management of Fiscal Risk
Institutional Approaches to Facilitate Fiscal Management with ScaledUp Aid Flows
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additional aid adjustment African Development Bank aid environment aid flows aid inflows aid shock aid shortfalls aid volatility alignment ambitious approach assessment budget support budgetary Burkina Faso central bank countries currency union debt relief debt sustainability deficit disbursements domestic financing domestic revenue donor coordination economic effects enhanced Ethiopia expansion expenditure path expenditure programs external assistance external resources fiscal anchor fiscal balance fiscal policy framework fiscal programming fiscal risks fiscal rules fiscal space formulate Ghana government's grants growth higher IMF-supported programs implementation implied increase investment LICs liquidity long-term macroeconomic medium-term fiscal ministries monitor MTBF MTEF MTFF nominal exchange rate outer limit particularly percent of GDP PFM reforms potential Poverty Reduction priorities projects ratio real exchange rate recipient reduce reserves Ring Fencing Rwanda scaled-up aid scaling scenario analysis social sectors spending programs strategy strengthen taking account Tanzania target volatility of aid WAEMU World Bank