Using ODA to Accumulate Foreign Reserves in Sub-Saharan Africa
Source: UNDP International Poverty Centre
The UNDP International Poverty Centre has published another briefing in its useful “one-pager†series. The latest publication looks at why ODA is being used to such an extent to accumulate foreign reserves in sub-Saharan Africa.
According to the recent IMF report “The IMF and aid to sub-Saharan Africa, 2007†only 63% of aid flows to the region were “absorbed†during 1999-2005. This means that 37% were not spent and instead were used to stockpile reserves in the country. Rising reserves are part of a trend in Africa that is encouraged by the IMF since the financial crisis of the 1990s. However reserves in developing countries are now roughly three times that of rich countries.
This trend is largely a response to capital account liberalisation and free movement of capital in and out that have made access to liquid money important. Reserves are also a defence against aid volatility.
But current IMF advice and reserve accumulation practice seem to addressing the symptom rather than the cause of the problem. More active management of capital accounts and vastly improved predictability in aid disbursements by donors would reduce the need for such high reserves and free up money to be spent as it was intended – i.e. to address the real needs of the country in addressing poverty and injustice and attaining the MDGs.
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