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DK is the author of Development Expenditures and the Local Financing Constraint (1998).

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Development Expenditures and the Local Financing Constraint

release date: Jan 01, 1998
Development Expenditures and the Local Financing Constraint
April 1998 The inadequacy of local funds is a major financing problem in most low-income economies. It is undercutting the absorption of aid and the sustainability of development projects. Focusing on the local financing constraint sheds new light on issues of aid, fiscal reform, and the management of public spending. The fungibility of aid need not translate into resource flows to fill the local financing gap. Indeed, project aid can widen the local financing gap. To augment direct local financing of development, aid must be nonproject aid that can generate local currency. In the longer term, project aid's effect on local financing lies in its impact on growth and on expanding the base for tax revenues, seigniorage, and borrowing. When inadequate local financing limits project implementation and effective use of aid, local currency funds are more valuable than project aid, at the margin-and it becomes important to reallocate local funds, to leverage project aid, and to raise the quality of investment projects. A persistent gap in local financing complicates programs of fiscal reform. For such programs to be effective, the local financing gap has to be confronted directly by matching planned local fund expenditures against expected local fund receipts. This requires a transparent database to develop indicators and to monitor the allocation and use of local resources. This paper-a product of the Macroeconomics Division II, Eastern Africa Department-is part of a larger effort in the department to understand the effectiveness of development expenditures.

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