A continuum of combinations of spending and absorption is possible as response to scaled up aid. The decisions on the level of absorption and spending can be taken independently of each other, although the overall effect on the economy is a combination of the two decisions. The four cases at the respective end of the spectrum are summarized in Table 1. Each combination affects key economic variables in a different way, ranging from no impact on the aggregate demand to crowding out of the private sector or loss of competitiveness. The optimal choice of instruments has to be taken against the background of the specific country characteristics, policies in place, and government’s objectives.

Most often, increased aid is both absorbed and spent to some degree. The increase in aid usually leads to higher demand for imports and domestically produced non-tradable goods, including public services. This can cause the real exchange rate to appreciate, because prices of nontradables become higher than those of tradables, thereby undermining the performance of the export sector, especially of non-traditional exports.

## **Box 1: Experience of other African countries**<sup>**5**</sup>

The experience of other African countries to a surge in aid inflows has been mixed. Based on the characteristics of the economy, the policy response has covered almost the whole spectrum of spending and absorption combinations (Table Box-1). There has been no evidence of Dutch disease in most countries, but it cannot be ruled out as a problem for the future. The absence of currency appreciation and loss of competitiveness indicates that for most of these countries non-price export supply constraints are more important than price developments.

**Table Box-1:** Policy response to aid surge in other African countries

||Not spent|Partlyspent|Mostlyspent|Fullyspent|
|---|---|---|---|---|
|Not absorbed|_Ghana_|||_Tanzania_|
|Partlyabsorbed|_Ethiopia_||_Uganda_|_Mauritania_|
|Mostlyabsorbed||_Sierra Leone_|_Rwanda, Burundi_|_Mozambique_|
|Fullyabsorbed|||||

_Source_ : Foster and Heller (2007), Foster and Killick (2006), Gupta et al. (2006)

# 3.2. <u>Aid flows to Burundi</u>

Data on aid is available from different sources. The data used in this section is obtained from the IMF to ensure consistency between the external and fiscal accounts. It may therefore differ from donor reported aid flows published by the OECD, used in section 4, due to various reasons such as inclusion of off-budget aid or technical assistance delivered outside the recipient country in the OECD dataset.

Levels of external aid to Burundi have increased substantially since the Arusha peace agreement in 2000. Following the eruption of the civil war in 1993, almost all donor support was suspended from 1996 until late 2000 when the signing of the Arusha peace agreement marked the start of a transitional period. Donors have resumed their support and aid inflows have increased slowly since 2000 with a substantial surge since 2005 – when a new constitution was adopted and a new president took office – reaching levels of over US$ 300 million in 2007, equivalent to more than 30 percent of GDP (Figure 2).

> 5 Detailed information about the composition of aid for each country was not available to undertake further in-depth comparisons.

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