Fiscal Space for Health:
Use of Donor Assistance
Dr. Pablo Gottret
Lead Economist
Human Development, South Asia Region
The World Bank
Colombo, March 18, 2009
Format
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What is fiscal space?
Sources of fiscal space
Fiscal space through donor financing
Aid effectiveness
– Volatility
– Fungibility
– Fiscal Contingencies
– Fragmentation
– Vertical Programming
• Key messages
• The Financial Crisis and Health
What is Fiscal Space?
• Fiscal space refers to the availability of budgetary room that allows
a government to provide resources for a desired purpose without
any prejudice to the sustainability of a government’s financial
position.
• Strong link to the notion of financial sustainability.
– Financial sustainability is the capacity of governments, in future,
to finance desired expenditure programs, service its debts, and
ensure its solvency.
– Financial returns generated by additional expenditure should
cover cost of borrowing
– Governments need to assess the availability of alternate source
of funds to replace donor funding (grants);
– Governments should be able to cover future recurrent costs, etc.
Types of Questions to Pose
•
How are you going to finance additional expenditure?
•
What are the implications for expenditure in future years and can these also be
financed?
•
Any implications for other sectors’ expenditures? If so, how will these be financed?
•
Is financing of today’s expenditures consistent with today’s macroeconomic policy
framework (exchange rates, inflation, growth)?
•
Do we need to worry about how these expenditure programs, if continued, will fit into
the medium-term budget and macroeconomic policy framework?
•
Does today’s expenditure create debt obligations that must be serviced in the future?
If so, will the expenditures have an impact on the underlying growth rate?
Key Expenditure Facts
•
Public spending accounts for less than 25% percent of total health spending in LICs, some
50% in MICs but over 60% in HICs:
–
•
Public spending on health is some $10 per capita in LICs, over $100 in MICs, and $2000 in
HICs:
–
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Policy-makers need to focus on improving formal risk pooling mechanisms in order to provide financial
protection and protect the poor.
Social health insurance accounts for some 1% of all health spending in LICs, 20% in MICs,
and 30% in HICs:
–
•
Policy-makers in LICs will be challenged to provide an essential package of basic services.
Out-of-pocket payments account for 70 percent of health spending in LICs, 40 percent in
MICs and 15 percent in HICs:
–
•
Policy-makers need to focus on private spending as well as public.
Policy-makers in LICs need to carefully evaluate whether they have the enabling conditions in place for
SHI to succeed.
While external sources on average account for only some 6 percent of total health
spending in LICs, in over 20 African countries, it accounts for more than 30 percent:
–
Policy-makers in LICs and MICs need to keep focused on internal sources of finance, as these sources
account for the bulk of their health revenues.
Is there Room to Increase Public
Expenditure on Health?
•
With share of government expenditure to GDP of 30% (about twice the
current average for LIC), and health’s share at 15% of the budget (Abuja
target for African countries), fiscal space is likely to be limited to around
4.5% of GDP.
•
Current average of public expenditure on health is about 1.35% in lowincome countries.
•
In an average country with GDP per capita of US$400 and population of
44 million, increasing public expenditure on health from 1.35% to (say) 5%
of GDP would raise per capita health spending by less than
US$15 per capita.
•
•
There may be upper limits to increasing health spending in low-income
countries without economic growth.
Sources of Fiscal Space
•
Government budget constraint:
G = Taxes + B (domestic) + ΔM + B (external) + Grants
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–
–
–
–
–
–
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Is there potential to increase tax revenue?
Can efficiency be improved?
Can expenditure be reprioritized?
Can borrowing be increased (domestic or external)?
Is there room to print money to finance expenditure?
Can you finance by receipt of grants?
What is the effect of debt relief (frees up fiscal space previously used for debt
service)?
Must be consistent within a reasonable macroeconomic framework (e.g.,
taking into account impact on the exchange rate, inflation rate, etc).
Fiscal Space* is Needed
*Budgetary room that allows a government to provide resources for a desired
purpose without any prejudice to the sustainability of its financial position
Aid
Expenditure
Efficiency
Revenue
Borrow ing
• Estimates of revenue effort may suggest that an additional several percent of GDP could be raised through domestic revenue
measures.
• Additional grants from donors are unlikely.
• Spending efficiency can be improved.
• Macroeconomic and debt management may suggest that new borrowing over the period should be limited.
• Seignorage (govt prints money which it loans to itself) is yet another, but generally limited, mechanism for creating fiscal space.
Source: World Bank, PREM:, 2007.
We were asked to talk about financing public
expenditure through donor funding
One of the MDGs on global partnerships for development itself recognizes
the need for donor assistance to attain MDGs. ODA is rising but is far short
of what is needed to meet the MDGs. Moreover, ODA is largely irrelevant for a large number of
countries in the region
Financing Public Expenditure via
Donor Funding
80
% of net ODA
70
60
50
40
30
20
10
0
1980
1990
Debt Forgiveness Grants
2000
Technical Cooperation
Administrative Costs
Program and Project Aid
Emergency and Food Aid
Much of the increase in aid is not directed towards financing the incremental
costs of attaining the MDGs.
Growth in Bilateral Donor
Assistance for Health
Aid Effectiveness

Aid has diminishing returns.

There are limits to country ‘absorptive capacity’.

Aid is fungible overall (can offset budget contributions) and among sectors.

Aid achieves better results in good policy environments.

Aid requires ownership by countries (e.g., donor imposed conditionalities or
preferences rarely work).

Aid is related to increased investments and growth.

Aid has high transaction costs for countries.

Aid makes governments accountable to donors as opposed to their citizens.

Aid in the form of grants instead of loans may reduce domestic resource
mobilization efforts.
Financing Public Expenditure via
Donor Funding
Trend in HIV/AIDS Financing Relative to Total DAH
2000-2005
Percent
100
80
60
40
20
0
16
84
2000
15
85
2002
Health
32
68
2004
43
57
2005
HIV/AIDS Financing
Large part of the increase is going to vertical programs.
Source: OECD DAC
Some Key Problems mentioned
about donor aid
• Volatility: Making it difficult to finance recurrent
expenditures
• Fungibility: Government expenditures decline as donor
funding increases and therefore there is no real
additional financing for health
• Distortions generated by donor funding, specially
through the financing of vertical programs
• Sustainability: Donor funding must be replaced at some
reasonable point in time for domestic financing. This
domestic financing must fit appropriately within the
domestic macroeconomic framework
Donors are not a really big player in
health financing in most counties
External Resources for Health, Average 2000-2006
India
Sri Lanka
Maldives
Pakistan
Afghanistan
Bangladesh
Nepal
Bhutan
0
10
20
Percent of Total Health Expenditure
Source: World Health Organization
30
Households (OOP) finance a large
proportion of health expenditures
Categories of Health Expenditure, Average 2000-2006
Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
0
20
40
60
80
Percent of Total Health Expenditure
Government
Out-of-pocket
Private (w/o out-of-pocket)
Source: World Health Organization
100
Donors seem to play an increasing role as a %of GE, but
some of the funding may be off budget
External Resources for Health, Average 2004-2006
Maldives
Sri Lanka
India
Pakistan
Bangladesh
Bhutan
Nepal
Afghanistan
0
20
40
Percent of Government Health Expenditure
Source: World Health Organization
60
Volatility is still an issue
50
External Resources for Health, 1995 - 2006
30
40
Bhutan
20
Nepal
10
Bangladesh
0
Afghanistan
1995
Source: World Health Organization
2000
Year
2005
No excessive donor concentration on
disease specific funding
Official Development Assistance for Health (ODAH) by Category
Average 2004-2006
Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
0
20
40
60
80
100
Percent of Total ODAH
Health Systems/Pop RH
Source: OECD DAC
Disease Specific
No excessive donor concentration on
disease specific funding
Official Development Assistance for Health
(as % of Government Health Expenditure)
Average 2004-2006
Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
0
50
100
Health Systems/Pop RH
Source: OECD DAC
150
200
Disease Specific
Fungibility of Aid
 Some evidence that aid is fungible: e.g., increasing aid for health
may imply that the government reduces expenditure on health
and spends it on something else.
 Some estimates show that only 3.6% of total aid is used to
finance health expenditure, even though health’s proportion in
total aid tends to be around 17%.
 Others have argued that it is important to distinguish between
aid that is in the budget versus aid that is off-budget.
Is Aid Fungible?
Some empirical evidence that aid is fungible, but there is high variance across
countries and across sectors.
How bad is the current crisis
Growth is expected to decline significantly across developed and developing
countries in 2009
•
Growth in emerging and
developing countries will fall
from 6.25% in 2008 to 3.25% in
2009 (World Bank, 2009)
•
GDP expected to decline by 4-6%
in the euro area in 2009 (World
Bank, 2009)
•
The US and Europe have been the
hit first, with US GDP falling by
3.8% (annualized) in the fourth
quarter of 2008 (World Bank, 2009)
•
Many currencies have experienced
large devaluations
How does the current crisis
compare with previous ones
East Asian Crisis (1997-1998), Argentinian Crisis (2001), Russian Crisis (1997-1998),
Peruvian Crisis (1988-92), Mexican Crises (1980s and 1990s)
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•
Previous Crisis
– Originated in developing countries
– Many countries had large fiscal &
external deficits
– A large part of the effort to resume
growth was to increase exports to
developed countries.
Current Crisis
– Originated in developed countries
– Many countries with better fiscal
positions also likely to face a
crisis.
– The importance of FDI has
increased
– Large number of poor countries,
especially in Africa are Aid
dependent for financing
government expenditure in
general and health in particular.
– Remittances constitute an
important source of foreign
exchange and direct support to
household in many developing
countries
From Crisis to Health Status
Economic
•Unemployment
•Foreign aid/FDI
•Tax Revenue
•Demand for exports
Household Income
Government Resources
Demand for health
services
Capacity of other actors
(NGOs, private sector)
Supply of health
Services / Quality
Access to quality
health care
Health Status
Potential consequences of the crisis
•
Women and Children are the worst affected. Nutrition outcomes and IMR increase
are decline at slower rates. The impact of outcomes tends to be more severe
in the poorest quintiles of the population.
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•
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Previous crises in Asia and LAC show the negative impact that crises can have
on health and nutrition outcomes - may have been the result of sharp reductions
of utilization of essential health services.
Devaluation increases the price of drugs in local currency and impacts access by the
population, specially the poor.
Faced with reduced income, households may increase demand for publically
financed (and in many countries provided) health services. However:
– Total public expenditures in social sectors in many crises countries (those
facing high external and internal imbalances) tend to be pro-cyclical.
– Government Health Expenditures (GHE) per capita in real terms declined in
all countries reviewed immediately after a crisis. This decline occurred even as
many countries protected GHE as a proportion of total government expenditures
– Capture of government services by the non-poor was known to have
increased during crises in some cases
Good and not so good efforts by
governments in past crisis
– Not so good
• Protecting expenditures for the whole sector as a proportion of
Government Expenditures.
• Targeting budgetary commitments which may be quite different from
actual government expenditures in health.
• Protecting expenditures without evaluating whether the
expenditures were pro-poor to start with.
– Good practices
• Supporting the financing of the initiation or expansion of a
sustainable safety net that tied essential health services to identified
financing on a per capita basis with an appropriate system of
monitoring and evaluation
THUS….
•
Fundamental objective of public policy in health during a crisis must be to
maintain/improve access to essential services by the population, especially
the poor and vulnerable –
•
From this perspective, protecting government health expenditures is not an
objective in itself, but maintaining/improving access to essential services is
Key Messages
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Domestic financing
– Low levels of public spending on health in many countries
– Large OOP with the corresponding implications regarding the absence of
financial protection from catastrophic spending
– Increasing expenditures in the short-term must take into consideration Fiscal
Space constraints
Donor funding for health is increasing rapidly but is largely concentrated in SSA.
– Donor funding is not as relevant as a percentage of Total Health Expenditures in
the SA Region
– However, Donor Funding is still important for the financing of certain government
programs
Challenges of current donor assistance for health in the region
– Insufficient resources
– Volatility
– Fungibility
The financial crisis
– Will impact the ability of governments to increase and even sustain current levels
of domestic expenditures in health
– Government must aim ensuring access to essential services specially for the
poor and vulnerable with particular attention to mothers and children that are the
hardest hit during crisis.
THANK YOU