Potential Benefits and Risks of Increased Aid Flows to Burundi

Nielsen, Hannah; Madani, Dorsati

Potential Benefits and Risks of Increased Aid Flows to Burundi

2014

Nielsen, Hannah | Madani, Dorsati

Burundi has experienced a significant increase in aid flows in recent years. Currently, about half of the budget is funded by aid, mostly grants. The high external assistance has, however, not yet translated into high and sustainable growth rates. This paper analyzes (i) the policy response of the government to the aid surge and its impact on macroeconomic variables; and (ii) the allocation of external assistance and its implications for growth. Since not all aid affects economic development in the same way, aid disbursements are disaggregated by sector as well as by their lag in impacting growth. The analysis shows that Burundi has mostly spent and absorbed increased aid flows, but has until now not suffered significantly from the possible negative effects of an appreciating exchange rate and the related loss of competitiveness, but the possibility of a Dutch disease effect remains a risk. The country s low growth performance, despite high aid inflows, is not necessarily a sign that aid is ineffective or exceeding Burundi s absorptive capacity. It reflects that a large share of aid has been allocated to either humanitarian and emergency aid or long-run growth enhancing sectors. Therefore, the lagged impact of aid on economic growth is not yet visible. Furthermore, the composition of the domestically financed budget is biased toward recurrent spending, and therefore not directly growth enhancing. In addition, low and often unpredictable aid disbursement ratios aggravate the bias away from investment and toward government consumption. To boost short-term growth, the share of aid allocated to productive sectors, such as agriculture and the supporting infrastructure, needs to be increased. Firm commitments and timely disbursements of aid by donors are essential and the Government of Burundi needs to strengthen its capacity and mechanisms for donor coordination.

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accounting balance of payments capacity building capital formation commodity markets depreciation developed countries economic development economic growth economic recovery exchange rate expenditure exports external debt fixed capital food aid growth rate health services human capital import imports inflation interest rates international bank international trade natural disasters poverty reduction private investment private sector public debt public expenditure public finance public health public institutions public investment public services regression analysis repayment resource management returns sanitation structural adjustment

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Editorial

World Bank, Washington, DC

Otras materias

Private funds; Investment climate; Recurrent expenditure; Tradable goods; Financial crisis; Breakdown of expenditures; Higher interest rates; Shortfalls; Disbursements; Political instability; Current account deficit; Aggregate demand; High inflation; Capital outflows; Amortization; Foreign reserves; Trade balance; Export performance; Real effective exchange rate; Trading partners; Ministry of finance; Arrears; Budgeting; Development assistance; Recurrent expenditures; Creditors; Aid allocation; Financial transactions; Budgetary process; Holding; Development goals; Efficient allocation; Exchange rates; Public capital; Financial accountability; Donor coordination; Financial sector; External aid; External financing; School fees; Total public expenditure; Optimal choice; Debt stock; Expenditures; Gross fixed capital formation; Macroeconomic variables; Growth performance; Policy response; Higher expenditure; External shocks; External assistance; Inflation rate; Total exports; Dutch disease; Aid dependency; Interest rate; Investment spending; Central bank; Reserves; International reserves; Capital expenditure; Long-run debt; Fiscal impact; Domestic revenue; Return; Economic growth rates; Investing; Trading; International development; Capital flows; World development indicators; Net inflows; Annual growth; Total expenditure; Creditor; Fiscal deficit; Sustainable growth rates; Social expenditures; Total imports; Relative price; Foreign investments; Technical assistance; Capital account; Inflation differential; Nominal exchange rate; Poverty-reducing expenditures; Tax revenue; Transparency; Real exchange appreciation; Arrears accumulation; Development strategies; Foreign exchange; Absorptive capacity; Domestic debt; Programs; Budgetary practices; Social infrastructure; Currency appreciation; Fiscal accounts; Private consumption; Domestic funds; Net lending; Economic policy; Domestic resources; Investment levels; Government expenditures; Aid; Interest payments; Fiscal balance; Current account balance; Current account; Price increases; Macroeconomic management; Allocation of funds; Government policy; Investment rate; Government spending; Government consumption; Real exchange rate appreciation; Fiscal policy; Financial services; Investment level; Development issues; Domestic currency; Democratic governance; Money supply; Consumption expenditure; Allocation of resources; Foreign investors; Economic stability; Service delivery; Aid flows; Higher interest; Loan; Debt service; Interest rate policy; Public expenditures; Bill; Government expenditure; Higher inflation; Disbursement; Development partners; Real exchange rate; Domestic savings; Public expenditure management; Loss of competitiveness; Consolidation processes; Foreign direct investment; Budget support; Debt relief; Investment expenditures; Government securities; Monetary fund; Exchange rate appreciation; General budget support; Tax; Public external debt; Supply constraints; Constraints to growth; Petroleum price; International financial markets; Commercial laws; Humanitarian aid; Higher allocations

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Working Paper; Text

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Potential Benefits and Risks of Increased Aid Flows to Burundi

2014

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