Global Policy Forum

Aid Inflows, Debt Relief Yet to Translate into Reduced Poverty


By Stephen Ilungole

New Vision
March 20, 2006

Uganda like other sub-Saharan African countries still faces the challenge of keeping inflation rate below 10% and holding the shilling at bay against the dollar at the expense of poor medical care, substandard education, poor road network, rampant unemployment and having millions of the population still living on one dollar a day. The Government currently issues bonds to sterilise increased aid inflows. This works well in keeping inflation at bay but it has kept interest rates high. It is also costly to the Government since it pays interest on the bonds. The Government does not also want the shilling to appreciate for fear of hurting the export sector yet the need to double growth figures is urgent.

Participants at the International Monetary Fund's (IMF) roundtable meeting on debt relief and the challenges of increased aid in Lusaka, Zambia over the weekend agreed that there was need for increased debt relief instead of increased aid inflows. Rodrigo de Rato, the IMF managing director, concurred with the participants when he said, "What is the importance of reducing inflation to below 10% when there are no hospitals and when people are jobless."

Figures show that economic growth in sub-Saharan Africa has been in the highest in a decade and inflation has been the lowest in a quarter a century, showing the fruits of economic stabilisation were visible. However, this is not enough for Africa to meet the Millennium Development Goals (MDGs), which range from halving extreme poverty to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015. These form a blueprint agreed to by all the world's countries and all the world's leading development institutions. They have galvanised unprecedented efforts to meet the needs of the world's poorest.

But most African countries are likely to miss the target since 100% debt relief is unlikely in the near future. This is compounded by the fact that Africa's share of world trade has declined from 4% to 2%. Experts say if Africa had maintained its world trade growth, it could have been possible to do without the likes of IMF policies.

The Lusaka roundtable urged that impressive growth rates should translate into improved rural livelihoods. For sub-Saharan Africa to reduce rural poverty and achieve MDGs, their growth rates need to be much higher than the current 5.6%. The roundtable called for the beneficiaries of IMF policies to be involved in their formulation. This is because quite often when such policies fail, politicians claim they were imposed onto them by the IMF. De Rato said up to 25 million people are affected by HIV/AIDS in sub-Saharan Africa, while 2.5 million died of the disease and another one million died of malaria last year alone. "This is not good news for development," he said.

Financial sector reforms are critical to increasing growth and reduce poverty yet they are least developed in Africa. Improving public management systems is also critical in managing aid inflows, good governance and fight against corruption. "Without transparency, it's difficult to make policies work, reduce graft, increase growth and reduce poverty," de Rato said. He said too often policy advices are uncoordinated.

MP Beatrice Kiraso, the budget committee chairperson, said there has never been quantification on how much aid goes into addressing real poverty issues. She said most aid is used in buying plush project cars, paying for expatriate workers and consultants. "The money goes back to the donor countries but the beneficiary countries continue to repay," Kiraso said. She said poor governance was manifested in widespread corruption. "This can't make best use of government revenues, invest in infrastructure to improve households incomes, achieve intended growth because there is no transparency. This contributes to widespread poverty in most developing countries," she said. Kiraso told the roundtable that increased school enrolment without quality education and more health centres without doctors or medicine was not an end in itself. "Issues to do with wealth creation should be at the forefront," she said.

The roundtable also said there was need to prepare for the exit strategy, prepare for life after aid is withdrawn. The role of the private sector in carrying on after aid is withdrawn, was seen to be critical here. But there was also caution on debt relief beneficiaries from going back to unsustainable debts, which can easily happen. History has it that countries that eliminated debt ended up being highly indebted.

Dr Ezra Suruma, the finance minister, refuted claims that Uganda had no more room for aid inflows. "There is no maximum aid. We can take more. The problem is macroeconomics. It has no relation with what is on the ground. I do not know how to resolve this paradox. The question is does aid tackle real needs of the desperate poor. This remains a fundamental challenge," he said. Suruma wondered why donors cut aid as if it was meant for politicians or to improve the livelihoods of the poor.

The minister said he found a problem on how to reach the aid beneficiaries because of the way agreements were worded. "On paper, there is too much aid, but it is not on the ground. But if we are to meet MDGs, there must be a way of translating macroeconomics into microeconomics, real household incomes. It is far from being correct that Uganda has reached aid limits," Suruma told the roundtable.

He, however, admitted, "Yes, if it comes quite often, it can cause liquidity problems." Suruma was bullish about Uganda's growth in a separate interview with The New Vision, saying the 6% projected rate could still be achieved despite the rampant power shortages. "Manufacturing constitutes a small percentage of our gross domestic product. It is possible; we can still achieve higher growth rates because manufacturers are working night long," he explained. On leaving the shilling to appreciate, Suruma said de Rato had pledged to offer technical advice in April during a regional meeting in East Africa.


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