According to the results of this simulation, government investment expands more strongly than government consumption when compared to AID-HD. The expansion of infrastructure has a more positive impact on GDP growth, which increases by 0.6 percent compared to the baseline, as well as on absorption, private consumption and investment (Table 5). Given that the additional government demand is more intensive in traded commodities as opposed to government services, and given the higher growth, the exchange rate depreciates slightly more and the slowdown in export growth is milder while imports grow at a faster pace. In terms of contribution to GDP, all sectors expand more rapidly than in the BASE scenario while agriculture and industry grow faster than in AID-HD (Table A-5).

The development of the MDG and education indicators is less favorable than in the previous scenario (AID-HD), except for the poverty headcount, which declines to 32 percent compared to 33 percent in AID-HD and 35 percent in BASE. The human development indicators are, however, improved, when compared to BASE in spite of the fact that real government consumption and investment growth in the human development area did not increase. This emphasizes again the importance of infrastructure for the delivery of government services in education, health as well as water and sanitation (Table 6). Consequently, however, the switch towards a more educated labor force is less pronounced than in AID-HD, but stronger than in the baseline (Table A-6).

# _4.2.3. Additional aid allocated to agriculture (AID-AGR)_

The development of the agriculture sector is crucial for faster poverty reduction as it employs the majority of the population in rural areas. It is also currently the main contributor to GDP (Table A-5, Panel 3). The analysis of the latest household survey (EICV 2) showed that poverty has fallen the most during the previous years in households that depend on agriculture. The low use of modern inputs (such as fertilizers and improved seeds), the lack of extension services as well as poor water management, however, hamper the development of the agriculture sector. The poor condition of the necessary infrastructure in addition limits the extent of growth and transformation in the sector.

This scenario assumes that additional donor financing will be spent on agriculture, investing and raising growth in its capital stock, again accompanied by increased growth in real recurrent expenditure (operations and maintenance). A possible example for such an investment would be the World Bank project on land husbandry, water harvesting and irrigation that is currently under preparation. The larger agricultural capital stock has a positive impact on productivity growth in the agricultural sector. MDG and education indicators may improve due to indirect effects via higher household incomes. However, in the model there is no direct effect on MDGs and educational indicators from spending on agriculture (as opposed to spending on infrastructure).

The simulation outcome in terms of macroeconomic effects is very similar to that of AID-INF, except for an even stronger bias of government spending on investment at the expense of government consumption (Table 5). Annual GDP growth averages 6.5 percent, with the agriculture sector consequently growing faster than in the previous scenarios, whereas growth rates of the industry and services sector are between those of AID-HD and AID-INF (Table A-5).

The development of the MDG and education indicators is less positive than in AID-INF and AIDHD, but nevertheless more positive than in the baseline. The poverty headcount declines to 32 percent in 2020 similar to AID-INF (Table 6), highlighting the indirect positive impact of 11