Second the likelihood of Dutch Disease problems can be minimized if grants are

Second the likelihood of dutch disease problems can

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consequences in terms of domestic interest rates) (see IMF, 2005). Second, the likelihood of Dutch Disease problems can be minimized if grants are used to finance the purchase of imports or for investments that relax key bottlenecks, particularly in sectors where absorptive capacity constraints cannot be easily overcome simply by imports. So it would be a mistake to assume that higher externally grants necessarily must create difficulties for a country’s export industry. Coherent and well-thought out policies can address many potential obstacles. Moreover even if, with all best efforts, the Dutch Disease issue remains a relevant concern, its consequences must be weighed against the long-term benefits of the spending that can be financed by higher foreign aid inflows, viz., investments that address key deficiencies in human capital or physical infrastructural bottlenecks that limit the capacity of a country’s economy to escape from a low-level poverty trap. The short-to- 7
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medium cost of some erosion of competitiveness may be thus worth accepting if the long- run benefits are large enough. Fiscal Sustainability : Explicit in the definition of fiscal space is the link to the concept of fiscal sustainability. This relates to the capacity of a government, at least in the future, to finance its desired expenditure programs as well as service any debt obligations (including those that may arise if the created fiscal space arises from government borrowing). 2 This has a number of implications. First, it suggests that exploitation of fiscal space requires a judgment that higher expenditure in the short term, and any associated future expenditures, can be financed from current and future revenues. If an expenditure project is debt financed, it should be assessed in terms of its impact on the underlying growth rate or by its effect on a country’s capacity to generate the revenue needed to service that debt. Second, the definition forces attention on the medium-term implications of the spending programs for which fiscal space is created in a given year. Are the expenditures for which fiscal space is created likely to be concentrated in the immediate term? Or are the desired expenditures likely to require future expenditures, in which case some fiscal space will be needed in the future as well? To illustrate, budgetary room could be made available in a given budget year to finance a meritorious objective—say, a one-time training program for government civil servants. Yet there are many types of government expenditures— particularly in the health sector, where the initial spending will have implications for subsequent spending on operations and maintenance that would require the availability of future budgetary resources. In particular, for many of the programs for which fiscal space is now being advocated in the health sector, the desire is for higher expenditures that can be sustained over a long period of time, e.g., antiretroviral treatment programs for AIDS patients. In either case, it would be insufficient to create fiscal space in the first year 2 In considering fiscal sustainability, it is necessary to consider issues of debt sustainability (as noted
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  • Spring '14
  • KevinP.Moenkhaus

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