March 29, 2006
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The government of Ghana and its development partners recently agreed to introduce multi-donor budgetary support. This form of donor support aims to be effective by providing a continuous flow of aid to finance poverty related programmes chosen by the government. While innovative, the aid package will need to overcome many potential obstacles.Many developing countries are heavily dependent on aid, a situation worsened by severe debt problems. However, the ‘tied aid' packages of the last few decades, which include project aid using private firms in donor countries, have had limited success. They have been increasingly rejected by developing countries and the international community. In response, donors have sought ways to make aid more effective.
In 2003, the government of Ghana and its development partners agreed on an aid package called multi-donor budgetary support (MDBS). The Ghana Government will choose the areas to focus on, and donor approval will be required prior to release of funds. Aid will be allocated according to the priorities of the Ghana Poverty Reduction Strategy, in coordination with budget processes. A paper from the Institute of Statistical Social and Economic Research, Ghana, identifies the potential problems of MDBS along with strategies to overcome them.
MDBS, by coordinating the policies and procedures of development partners with government priorities, aims to reduce transaction costs (such as administrative costs), build up local skills and resources, promote country ownership of aid programmes, ensure spending on poor people and make aid flows predictable.
For programme effectiveness, however, the following problems will need to be addressed:
• MDBS will operate along with other forms of project aid, which undermines the aim of reducing transaction costs.
• Not all donors have signed up to MDBS, including Japan, one of the biggest donors.
• There is little evidence in the agreement that MDBS will actually overcome unpredictable aid flows, which is a major factor behind aid programme failure.
• Donors are likely to be influenced by each other and may, through working together, find reason to restructure their programmes and cut down on their grant components, though this has not happened yet.
The paper concludes that MDBS is an innovative strategy that could work in Ghana. However, donors and the Ghana Government are urged to consider the following:
• the need for trust and a well-designed, coordinated effort between the government and its development partners
• measures to reduce the debt burden so Ghana does not need to divert aid inflows to debt servicing
• eliminating other forms of project support to maximise MDBS effectiveness, or running all such projects along similar principles
• donor approval (to release funds) should be limited to issues arising from Ghana's poverty reduction strategy • donor influence should be minimised in implementing MDBS, especially when donor policy reversals occur.
