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Scaling-up HIV/AIDS financing and the role of macroeconomic policies in Kenya

Conference paper prepared for the Global Conference on Gearing Macroeconomic Policies to Reverse the HIV/AIDS Epidemic, Brasilia, 20-21 November 2006

Degol Hailu1

International Poverty Centre
United Nations Development Programme (UNDP)

June 2007

SARPN acknowledges the International Poverty Centre as the source of this document:
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Kenya represents an unusual case study of a country in which HIV/AIDS financing has been on the rise while total ODA and public spending on health have been falling. Governments in lowincome countries have often implemented restrictive macroeconomic policies when they are afraid of the inflationary impact of increased ODA. In contrast, the Government of Kenya has resorted to such policies even when ODA has been markedly declining. Whatever aid inflows Kenya has received, they have been neither fully spent nor fully absorbed. One third of ODA has been used to retire domestic debt and another third has been added to reserves. Moreover, the Government tried to achieve an unusually low inflation rate of 3.5 per cent. It also succeeded in cutting its fiscal deficit in half during the dramatic increase in external HIV/AIDS financing. So there has been little danger of a rise in inflation due to expansionary fiscal policies. Related to this, there has also been little danger of appreciation of the exchange rate—namely, a ‘Dutch Disease’ effect that could have undermined the international competitiveness of Kenyan exports. Thanks to a scaling-up of HIV/AIDS financing, Kenya has been able to achieve a significant reduction in the infection rate of the disease although much of the additional financing was directed through non-governmental channels. Arguably, Kenya could have achieved much more had total public health expenditure also been increased and had the Government implemented more expansionary fiscal and monetary policies in support of an aggressive campaign against the epidemic.

  1. Thanks go to Terry McKinley, Acting Director of the International Poverty Centre (IPC), for providing extensive comments on this paper, which significantly improved its contents. I also thank Ben Fine, professor at the School of Oriental and African Studies, University of London and Eduardo Zepeda, senior researcher at IPC, for serving as the external and internal peer reviewers respectively. They gave many valuable comments and suggestions.

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