donor community increasingly recognizes the fiscal potential that can come from

Donor community increasingly recognizes the fiscal

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donor community increasingly recognizes the fiscal potential that can come from greater “alignment and harmonization” of donor resources. If external resources can be used more efficiently (reducing donor conditionality, eliminating aid-tying, cutting administrative overheads, achieving greater consistency in the meshing of donor spending in a sector, and reducing the administrative overload imposed on recipient country program managers), the more fiscal space that can be created. 3
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Government policies that foster significant improvements in the efficiency through which it allocates resources may also facilitate higher and more effective spending in both the public and private sectors. For example, if a government can improve the quality of its own health services, households, even if required to pay user fees, may be able to save resources by reducing spending on inefficient private sector health providers. Conversely, not spending enough in a sector such as health may weaken the sector to the extent that it would, in the future, be costly and time consuming to “rebuild” it. Creating fiscal space by allowing cutbacks in a sector may ultimately be more costly in fiscal space over time. External grants can clearly provide fiscal space, in contrast to borrowing. But a sustained and predictable flow of grants is essential, since it reduces the uncertainty as to whether the grant is simply of a one-time character and creates the potential for a scaling up of expenditure to be maintained in the future. Regrettably, few donors now are willing to make external assistance commitments for more than 1 or 2 years. Moreover, the experience of many countries is that grants can prove highly volatile, as a consequence not only of donor decisions and bureaucratic processes but also due to policy slippages by recipient governments (see below). Thus, the fiscal space entailed by additional grants (or concessional loans) may be less than is apparent on the surface. Expanding programs that entail a “permanent” employment of workers is subject to the risk that further assistance may not come or that the additional fiscal space from any growth-engendered increase in domestic revenues is insufficient. It is risky for government policy makers to assume there is scope for an easy downsizing of a program or cutbacks elsewhere. Temporary employment contracts or the design of programs that may facilitate flexible downsizing may be desirable, but often precluded by labor legislation or political economy pressures. Note the difficulties encountered by Zambia in transferring contracts from the public service commission to hospital boards (a shift strongly opposed by the public service union). Perhaps more relevant, when programs are implemented that have high costs of downsizing (e.g., antiretroviral treatment of AIDS patients), finance officials may be cautious about exploiting readily available, but only short-term assistance.
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  • Spring '14
  • KevinP.Moenkhaus

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