Does The IMF Constrain Health Spending in Poor Countries? Evidence and an Agenda for Action

Executive Summary

Key Findings

The IMF has not done enough to explore a full range of fiscal policy options, including more ambitious but still feasible paths for higher government spending, including on health. As a consequence, the initial fiscal content (i.e., targeted deficits and spending) of some programs was too conservative. In particular, programs tended to favor domestic debt reduction or external reserve increases over additional spending even when macroeconomic conditions were quite favorable.

IMF programs do show considerable variation in targeted changes in government spending and fiscal deficits, so they are not just "one size fits all." And recent programs have shown some moderate additional fiscal flexibility. However, faced with huge uncertainty about key economic relationships (such as how future economic capacity and competitiveness would respond to additional public spending, or the likely persistence of higher aid), many IMF programs implicitly assumed, with insufficient justification, that the balance of risks was against additional spending. With a few commendable recent exceptions, the IMF has not done enough to explore the macroeconomic consequences of higher aid scenarios. IMF programs do adapt, mid-stream, if more aid is forthcoming, but this is not the same as taking the lead in exploring the macroeconomic consequences of higher aid. What the IMF Board and Management expected of the IMF staff in this area is still unclear, however, with a consequent risk of confused signals to donors and recipient governments. Empirical evidence does not support pushing inflation in low-income countries down to the very low levels (i.e., below 5 percent) targeted in many IMF programs. A major monetary expansion is not the answer to these countries' growth problems, because expectations of higher inflation would adapt quickly. However, the IMF should not be unduly risk averse by ruling out additional aid-financed government spending options just because they may put some upward pressure on prices.

Wage bill ceilings have been overused in IMF programs, especially in Africa. They are useful as a temporary device when a loss of control over payrolls threatens macroeconomic stability, but such situations are likely to be rare. IMF programs have not imposed ceilings on wages or hiring in health (or education), but attempts by the IMF to accommodate hiring for these sectors within aggregate wage bill ceilings could not be monitored or enforced. So hiring in the health sector could be adversely affected in practice.

Fragmentation of planning and budgeting processes often undermines the ability of ministries of health to make an effective case for greater budgetary resources. Donors have contributed to this segmentation of budgetary processes by financing activities outside of the budget and funding activities that were not always well-aligned with a country's priorities.