Monitoring the impact of the financial crisis on national education financing: A cross country study

2011/ED/EFA/MRT/PI/04 Background paper prepared for the Education for All Global Monitoring Report 2011 The hidden crisis: Armed conflict and education Monitoring the impact of the financial crisis on national education financing: A cross country study Katerina Kyrili and Matthew Martin 2010 This paper was commissioned by the Education for All Global Monitoring Report as background information to assist in drafting the 2011 report. It has not been edited by the team. The views and opinions expressed in this paper are those of the author(s) and should not be attributed to the EFA Global Monitoring Report or to UNESCO. The papers can be cited with the following reference: Paper commissioned for the EFA Global Monitoring Report 2011, The hidden crisis: Armed conflict and education For further information, please contact efareport@unesco.org

MONITORING THE IMPACT OF THE FINANCIAL CRISIS ON NATIONAL EDUCATION FINANCING: A CROSS COUNTY STUDY A DFI study for the 2011 GMR, UNESCO By Katerina Kyrili & Matthew Martin 1

I. INTRODUCTION The global financial, food and oil price crises have hit low-income developing countries (LICs) hard. The most severe phase, which brought sharp falls in growth rates, exports, private capital inflows and exchange rates, is now over for many LICs. However, in the absence of extensive social protection systems, it drove millions of people into poverty. Before the crises, many LICs were off track to attain the Millennium Development Goals (MDGs), including Education for All (EFA), and needed to accelerate MDG expenditures dramatically to achieve them. The crises sharply reduced tax revenues, creating a large fiscal hole in many LICs, which has not been filled even in 2010. This makes it even harder for their governments to maintain or accelerate MDG spending, and adds demands to increase spending to protect the poor from the consequences of the crises and revive growth. The 2010 Global Monitoring Report analysed the likely consequences of the global financial crisis for progress towards EFA. It found that many countries had begun to reassess their public spending plans due to increasing fiscal pressure as a consequence of the crisis, with increasing signs of education spending cuts in Sub-Saharan African countries budgets produced in 2009. 1 However, there was also evidence that education spending was being protected from cuts (compared to health and other MDG spending). It also found that, in spite of the crisis, SSA LICs has considerable potential fiscal space to increase spending on the MDGs and EFA by mobilising more financing, without compromising macroeconomic or debt sustainability or risking excessive aid dependence. At the time of preparing the 2010 GMR, most LIC budgets had been issued in Q4 2008 and therefore largely ignored the financial crisis: the scale of its impact was likely to have been undrestimated. As a result, UNESCO has commissioned a study to update analysis of the impact on growth, revenues and education spending in IDA only countries using December 2009 and March-June 2010 budgets; as well as of potential fiscal space to expand spending during the 2011-15 period to reach EFA. It is vital to remember that even before the crises, many countries were off track to meet EFA goals. This study therefore also looks in more detail at whether LIC education spending plans are likely to allow them to meet the EFA goals, especially for off track countries. Chapter 2 presents the impact of the crisis on growth, revenues and expenditures in IDA only countries; Chapter 3 looks at how expenditures on total and primary education have changed and whether planned spending will be sufficient to reach the EFA goals; Chapter 4 analyses whether countries have fiscal space to be able to finance more spending without compromising sustainability; and Chapter 5 summarises conclusions and recommendations. 1 For more detail, see Martin and Kyrili 2009. This found that December 2008 budgets ignored the crisis, March 2009 budgets began to include the impact, and June 2009 budgets included the impact more fully. 2

II. IMPACT OF THE CRISIS ON LIC GROWTH AND BUDGETS 2.1. Impact on Growth and Poverty Reduction The financial crisis had a severe impact on low-income countries: in 2009, they saw sharp falls in growth rates, exports, private capital inflows and exchange rates partly due to the freezing of global credit and trade finance markets. Coming on the heels the 2008 food and oil price crises, it brought particularly sharp real GDP growth shortfalls, equivalent to 2-3 years of recent GDP gains, with lower real growth rates in almost all LICs in 2009, and sharp falls in regional averages as shown in Figure 1 below. Figure 1 2 also shows that growth is expected to recover sharply in 2010 and slightly more in 2011. Trade and financial markets have already recovered sharply, driven especially by rapid recovery in Brazilian, Chinese and Indian markets for LIC goods, but also by slower and more fragile recovery in major OECD economies. However, in virtually all regions and countries, growth will be higher in 2010 and 2011 than in 2009. 9 8 7 Figure1 Real GDP Growth 6 5 % 4 3 2 1 0-1 East Asia&Pacific Europe& Central Asia Latin America& Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 2008 2009 2010 2011 Source: IMF REO 2010 and WDI Overall, European and Central Asian IDA countries will have been hardest hit, losing more than 16 percentage points of growth compared to a continuation of 2008 levels; East Asia and the Pacific more than 8 points; South Asia and Latin America 3; and Sub-Saharan Africa 2. Only Middle Eastern and North Africa IDA countries have been relatively unaffected. It is also important to remember that UN estimates indicated that around 7% growth (4% per capita) would be needed to reach the MDGs across IDA countries: instead of this, 2009 saw virtually zero per capita growth in SSA and South Asian LICs; and negative per capita growth in East Asia, Europe and Central Asia, and Latin America. Only the Middle East is likely to have made any marginal progress in reducing poverty, making 2009 virtually a lost year for MDG1. 2 Figure 1 one presents the average per region for all IDA countries. The number of countries per region varies and consequently there are regions with small number of countries eg LAC has only 3. For a list see Annex. 3

Focusing on the region with the majority of IDA countries, Figure 1b below presents the changes in real per capita GDP growth in Sub-Saharan Africa. Figure 1b: Per capita GDP Growth in Sub-Saharan Africa 4 3 3.0 2.3 3.1 % 2 1 0 0.9 2008 2009 2010 2011 Source: IMF REO 2010 2.2. Impact on Government Revenue and Expenditures The impact on LIC government budget revenue was equally dramatic and is continuing. Slower growth, falling remittances, falling exports and imports shrank the revenue base of almost all IDA countries, limiting their ability to finance expenditures essential for their development. Revenues fell in 2009 by US$53 billion if compared to 2008 levels, and in 2010 they were still US$11.9 billion below 2008. 3 As presented in Figure 2, declines took place in all regions in 2009 and are expected to continue in East Asia and Europe and Central Asia. Despite increases in 2010, SSA, Middle East and South Asian revenues will not reach pre-crisis levels as % GDP by the end of 2010. Among the countries facing the most severe declines (where revenue in 2010 was still more than 5% of GDP below 2008 levels) were six countries which are off track for EFA Eritrea, the Kyrgyz Republic, Lesotho, Niger, Nigeria and Yemen. 4 Other off-track countries with important declines (more than 2% of GDP) included Bhutan, Burundi and Rwanda. Madagascar and Zambia (on track before the crisis) also suffered large shortfalls. Overall, 50% of off-track countries will have revenue levels in 2010 lower as % of GDP than 2008. 3 This calculation is based on IMF fiscal data. It includes only the central government revenue of the Nigerian government. If the consolidated revenue (including revenue to states) is included, the combined shortfall for 2009 and 2010 is US$91 billion. The World Bank estimates LIC revenues fell by 4.3% of GDP in 2009 (GEP 2010), creating a hole of US$35-50 billion. IMF (2010) estimates gaps at an average US$25 billion more in 2009-10, but this is based on external needs for balance of payments. 4 Plus 6 countries where progress is uncertain (Angola, Cameroon, Chad, Congo Republic, Sierra Leone, Sudan) 4

Figure 2 Revenues/GDP Sub-Saharan Africa South Asia 17.1 18.1 20.9 19.3 19.9 19.3 Middle East & North Africa 27.5 27.5 32.7 Latin America& Caribbean 27.2 27.7 28.9 Europe& Central Asia 19.0 21.2 23.5 East Asia&Pacific 23.5 22.4 21.3 0 5 10 15 20 25 30 35 2010 2009 2008 Source: IMF REO 2009-2010, IMF country reports and national budget documents As shown in Figure 3, expenditures follow a slightly different trend: despite declines in revenues, total expenditures as a percentage of GDP on average increased. Nevertheless, they fell in South Asia and the Middle East in 2009 and 2010. In addition, in 2010 they fell in Europe and Central Asia and East Asia/Pacific, and Sub-Saharan Africa s increase became relatively marginal (0.2% of GDP) as attempts at fiscal stimulus to counteract the crisis began to unwind in many countries. Behind the regional averages lie some sharp country-specific falls. Among countries off-track for EFA, Djibouti, Eritrea and Yemen cut expenditure by more than 5% of GDP during 2008-10; Bhutan, Ghana, Kyrgyz and Mauritania by more than 2%. Ten of 26 off-track countries for which data are available (40%) cut their spending as % of GDP. 5 Figure 3 Expenditures/GDP Sub-Saharan Africa South Asia 27.5 28.3 28.5 29.0 29.9 28.4 Middle East & North Africa 34.0 36.3 40.9 Latin America& Caribbean 28.5 30.4 31.3 Europe& Central Asia East Asia&Pacific 27.1 29.5 28.9 29.7 30.9 29.7 0 5 10 15 20 25 30 35 40 45 2010 2009 2008 Source: IMF REO 2009-2010, IMF country reports and national budget documents 5 A further 4 countries whose progress on EFA is uncertain also implemented large cuts (Angola, Comoros, Congo Republic, Sudan) as well as 2 on-track (Madagascar, Zambia) and 2 attained (Maldives, Mongolia). 5

2.3. Impact on Fiscal Deficits As a result of these combined trends in revenue and expenditure, two-thirds of IDA contries will increase their fiscal deficits (excluding grants) between 2008 and 2010. This is because most countries chose to respond to the crisis by mobilising more grants, or increasing their domestic or external borrowing, so as to protect expenditures using an increased deficit. Table 1 below presents the average fiscal balance after grants per regional group and for all IDA countries. Overall, deficits increased by 2.6% in 2009 but are expected to fall by 0.6% in 2010. In 2009, every region increased its deficits, but in 2010 all except East Asia are expected to reduce them, and this reduction will accelerate in 2011. Among the off-track countries for EFA, 15 of 26 will have increased deficits during 2008-10. However, while 16 increased deficits in 2009, 15 are trying to cut them in 2010. Among Sub-Saharan African countries, while half are still increasing deficits in 2010, three quarters will be cutting them in 2011. Off-track countries which will be cutting deficits by more than 2% of GDP in 2010 include Guinea, Lao, Niger and Nigeria; and countries with similar plans in 2011 include Eritrea, Ghana, Malawi and Nigeria. Earlier analysis for Oxfam (Martin and Kyrili 2010) indicated that the vast bulk of this deficit adjustment was being achieved by expenditure cuts as % of GDP, which have been taking place in 5 of 6 regions (excepting Sub-Saharan Africa) in 2010, with particularly sharp cuts in Asian countries. In 2011, there is also expected to be a very sharp cut in expenditure as % of GDP in Sub-Saharan Africa (from 30.7% to 29%). Though most of this cut will be concentrated in oil producing countries, especially Nigeria, more than two-thirds of Sub- Saharan IDA countries will also be cutting expenditure. In other words, much of the fiscal space given to countries to respond to the crisis through stimulus in 2009 will disappear in 2010, and especially in 2011. This highlights the need to continue analysing in 2011 the reaction to the crisis, as countries increasingly seek to (or are advised to) implement an exit strategy from fiscal stimulus, to ensure that it does not cut essential MDG-related (including education) spending. An excessive compression of spending is unnecessary (as shown in Chapter 4) and could throw the MDGs much further off track. Table 1 Fiscal balance excluding grants (%GDP) 2008 2009 2010* 2011* East Asia&Pacific -6.2-8.5-8.4 na Europe& Central Asia -3.7-8.3-9.9 na Latin America& Caribbean -5.3-7.1-6.7 na Middle East & North Africa -8.3-8.8-6.5 na South Asia -11.6-15.4-12.4 na Sub-Saharan Africa -6.6-9.0-8.6-7.6 Average -6.8-9.4-8.8 na Source: IMF country reports, IMF REO 2009 & 2010 and national budget documents * IMF projections 6

3. IMPACT OF THE CRISIS ON EDUCATION EXPENDITURES As discussed in section 2.2, on average IDA countries expenditures have risen (though they are now being cut), but many countries had to cut expenditures (including 40% of countries which are off-track for EFA) even in 2009. This section analyses the degree to which, in this context, countries were able to protect essential education spending and continue progress to EFA. It looks first at total education spending, and then at basic spending targeted on EFA. The sources of all education spending data are 2009 and 2010 budget documents. The 2008 values are almost all outturns; 2009 values are outturns unless otherwise indicated; and 2010 values are budgeted. Budget document data provide the most up to date information making analysis as real-time as possible. However, they do mean that data presentations and calculations may vary by country, especially for education where some countries classify data by activity (more closely related to EFA) whereas others classify by Ministry. 3.1. Total Education Expenditures 6 Based on 2009 and 2010 budget documents, Table 2 presents the trends in education spending as a percentage of GDP and of total expenditures (recurrent and capital), for 25 IDA countries with data available 7. It is amazing that many countries still do not break down expenditures by sector in budget data which are publicly available online, thereby restricting this analysis. As a percentage of GDP, education spending rose in 55% of countries in 2009 and will rise in 55% in 2010. However, as a percentage of total expenditure, 64% of countries saw declines in 2009 though in 2010 it is forecast to rise in 55%. By the end of 2010, 52% of countries will have higher spending as % of GDP in 2008, with 30% lower and the remaining 18% virtually the same. On the other hand, as a proportion of total spending, 44% will have seen falls and only 41% rises. It seems that education expenditure has not been protected to the same degree as it was in early-mid 2009 budgets, implying that as overall budget cuts have become more severe, education has taken its share of the cuts, jeopardising progress towards MDG2 and EFA. Expenditures in real terms increased in three-quarters of IDA countries (20) and declined in 7 in 2009, compared to 2008. In the case of Niger declining real expenditures in total education continue in 2010. In Moldova and Nicaragua, although educational spending was protected in 2009, declines are budgeted to take place in 2010. Of the nine countries which are off-track for EFA for which data are available, 8 Ghana, Mauritania, Niger and Senegal will have cut education spending between 2008 and 2010 as a proportion of both GDP and total spending. In addition, Mali and Mozambique have cut spending on at least one indicator in one year, and Lesotho will have seen stagnation as % of the budget in 2009 and a sharp fall as % of GDP in 2010. Three others for which EFA 6 Trends in nominal terms are available in the Annex tables in excel format. 7 All data are for national fiscal years: in almost all countries this matches the calendar year. 8 Approximately 8 more countries of which 5 are off-track for EFA could be included in the final version of this study once it is updated for June-July budgets and more data are collected. 7

progress is unclear (Angola, Chad, DRC) are also seeing cuts in terms of GDP and in total expenditures. For Lesotho, Mali, Mozambique, and Nepal, a separate study of case experiences will provide more detail explaining these trends. Table 2: Impact of Crisis on Total Education Expenditures % GDP % total budget in ml local currency, real 2008 2009 2010 2008 2009 2010 2008 2009 2010 Angola 4.9 3.9 3.6 7.9 8.7 8.5 201,291 199,320 229,129 Benin 5.0 4.8. 14.9 14.3. 150,403 150,347. Burkina Faso 2.3 2.6 2.7 10.4 9.5 10.6 82,200 96,004 106,745 Cambodia 0.4 0.5 0.5 3.2 2.9 2.8 184,200 204,750 232,198 Cameroon 1.1 1.5 1.5 5.0 6.7 6.5 113,368 148,643 162,843 Central African Rep. 1.6 1.5 2.1 8.8 8.2 10.0 13,261 13,991 20,356 Chad (in US$) 2.1 2.1 2.2 10.1 9.2 8.9 177 135 149 Congo Rep. 1.2. 1.3 4.4. 4.6 60,008. 64,486 DRC. 3.7 3.6. 9.7 7.2. 194,534 320,193 Cote d'ivoire 4.7 4.9 5.3 21.5 21.2 24.6 496,906 531,300 600,943 Ghana 9.0 6.8 7.4 21.8 20.4 20.3 1,546 1,233 1,734 Guinea-Bissau 2.3 1.8 2.7 8.7 6.1 11.4 8,592 7,190 11,101 Guyana 6.4 6.9 6.9 16.1 16.0 15.7 18,459 19,762 20,577 Lesotho 9.0 11.8. 16.1 16.2. 1,247 1,724. Mali 4.2 4.6 4.4 18.7 20.2 16.5 165,238 190,765 193,147 Mauritania 4.8 4.4 4.1 21.9 13.7 14.6 38,169 32,911 34,789 Moldova 2.5 3.2 3.0 10.6 10.2 9.8 1,581 1,875 1,813 Mongolia 7.4 7.0 4.9 16.9 18.6 18.1 424,935,148 495,940,746 499,037,101 Mozambique 6.2 6.5 6.4 22.6 23.2. 14,859 16,574 16,975 Nicaragua 3.7 4.1 3.9 16.0 16.9 16.9 4,519 5,194 4,899 Niger 4.1 3.8 3.4 17.5 13.2 12.8 98,580 92,771 86,555 STP. 4.9 4.5. 9.3 6.3. 140,975 141,462 Senegal 4.8 3.6 4.2 17.3 11.6 14.2 286,954 214,964 263,748 Sierra Leone 1.2 1.5 1.8 5.9 6.5 10.8 72,525 88,553 109,870 Timor-Leste. 10.6 14.2. 6.9 11.2... Vietnam 3.5 3.9 3.6 10.4 12.9 11.8 51,465,000 41,750,926 63,513,889 Zambia 3.8 4.0 4.4 16.2 17.2 19.9 2,118,500 2,317,460 3,069,224 Source: Author's calculations based on countries' national budget documents Note: 2008 and 2009 values are mostly outturns and 2010 are budgeted values indicate increase if compared to the previous year indicate decrease if compared to the previous year indicate increase in 2010 reaching =>pre crisis level 8

3.2. Basic Education Expenditures Looking at primary/basic education spending, which is more specifically targeted on EFA, detailed data are available for only 13 countries others do not disaggregate Ministry of education spending in publicly available data to allow accurate tracking of EFA spending. In 2009, expenditures on primary/basic education fell in 30%, rose in 30% and stagnated in 40% of countries as a % of GDP. However, 75% of countries cut them as a proportion of total spending. In 2010 the situation is similar, with 4 countries (Angola, DRC, Mali and Mozambique) cutting spending as % of GDP, and 5 as % of total spending. Overall, between 2008 and 2010, one-third of countries will have increased primary/basic spending as a % of GDP, while the other two-thirds will only restore it to 2008 levels in 2010; on the other hand, 50% are planning a lower proportion of total expenditure and only 50% a higher proportion. Explanations for these trends vary considerably Countries such as Angola, Ghana and Mauritania cut primary education expenditures in line with total education spending cuts in 2009 Nicaragua, a country on track to achieve EFA, chose to allocate the increased in the total education budget towards secondary education. Countries like Benin, despite declines in the total education budget, managed to sustain primary education expenditure as percentage of GDP. Mali s primary education spending fell due to a delay in the new basic education programme funded by donors. For Lesotho, Mali, Mozambique and Nepal, more detail will be provided in the separate study of case experiences. in ml loc Table3:Primary/ Basic Education Expenditures % GDP % total budget in ml local currency (real) (no 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2 Angola 3.3 2.3 2.2 5.4 5.1 5.2 136,885 116,898 139,237 136,885 13 Benin 3.2 3.2. 9.6 9.4. 97,112 99,141. 97,112 10 Cambodia 0.4 0.4 0.4 2.9 2.4 2.3 166,550 172,552 190,501 166,550 17 Cameroon 1.1 1.5 1.5 5.0 6.7 6.5 113,368 148,643 162,843 113,368 15 DRC. 0.1 0.0. 0.4 0.0. 7,553 1,766. 11 Cote d'ivoire 3.0 3.0 3.2 13.5 13.0 15.0 313,500 326,052 367,134 313,500 32 Ghana 4.6 4.0 4.5 11.0 12.1 12.3 784 730 1,050 784 Lesotho 1.9 2.0. 3.4 2.7. 262 291. 262 3 Mali 2.7 3.2 2.8 11.9 14.0 10.6 104,662 132,302 124,519 104,662 13 Mauritania 0.4 0.5. 1.8 1.4. 3,145 3,380. 3,145 3 Moldova 0.9 1.0 1.0 3.8 3.4 3.1 568 625 584 568 6 Mozambique 2.2 2.2 2.1 7.9 7.7. 5,189 5,515 5,620 5,189 5 Nicaragua 2.5 2.3 2.6 10.7 9.5 11.4 3,029 2,927 3,316 3,029 2 Source: Author's calculations based on countries' national 2009 and 2010 budget documents indicate increase if compared to the previous year indicate decrease if compared to the previous year indicate increase in 2010 reaching =>pre crisis level 9

Looking at real primary/basic education expenditure, declines took place in 2 countries in 2009, and in 1 (DRC) in 2010. The case of DRC is interesting, as total education increases in real terms but with a strong shift from primary education to secondary in 2010. A further way to analyse education spending trends is through their impact on per capita spending per primary/basic school child. Table 4 shows generally rising trends in all countries. In addition, spending fell in Angola, Benin, Cote d Ivoire and Nicaragua in 2009, and in Mali in 2010. Table 4. Primary/Basic Education Expenditures per child, US Primary education expenditrues per school age child, US Primary education excpenditures, per enrolled child, US 2008 2009 2010 2008 2009 2010 Angola 593 531 902 464 427 513 Benin 154 148. 135 134. Cambodia 21 23 25 18 19 20 Cameroon 86 108 115 79 101 111 DRC. 2 0.3. 2 0.4 Cote d'ivoire 216 211 233 297 296 335 Ghana 213 234 307 212 235 313 Lesotho/1 85 99. 74 87. Mali 115 138 127 128 149 140 Mauritania 25 27. 26 28. Moldova 352 384 388 361 371 363 Mozambique 50 53 75 44 48 52 Nicaragua 194 191 230 166 161 194 Source: Author's calculations based on countries' national budget documents indicate increase if compared to the previous year indicate decrease if compared to the previous year indicate increase in 2010 reaching =>pre crisis level 3.3. Are Countries Spending Enough to Reach EFA? Finally, it is vital to show whether the increases in primary education spending are matching the annual growth rates needed to reach EFA and the medium-term education goals of the country, as presented in the medium term EFA spending plans constructed by the governments, supplied by UNESCO. Table 5 below shows that in 2009, of 8 countries, only Mali, reached the growth rate in primary education spending needed to achieve EFA. Overall, average spending rose by 5.5% less than required, and even fell in Benin and Cote d Ivoire. On the other hand, in 2010, Cambodia and Mali fell well short of needed increases, while DRC and Ghana exceeded them and Cote d Ivoire matched them. 10

Table 5: Are Countries Spending Enough to Reach EFA? Annual growth rate in primary education budget needed Actual growth rate in primary education budget 2009 2010 2009 2010 Benin 7.3% 9.6% -1.1%. Cambodia 18.6% 17.3% 6.7% 6.7% Congo, Dem. Rep. 18.2% 17.1%. -79.8% Cote d'ivoire 13.2% 12.5% -0.4% 13.0% Ghana 17.3% 16.7% 10.9% 33.4% Mali 5.8% 5.6% 22.5% -6.0% Mauritania 17.0% 15.8% 9.8%. Mozambique 12.6% 4.2% 9.8% 7.8% Source: Author's calculations based on national budget documents and UNESCO 11

IV. FISCAL SPACE IN LOW-INCOME COUNTRIES: COULD THEY FINANCE HIGHER SPENDING? 4.1. Fiscal Space Concept, Literature and Methodology Last year s background report for the GMR introduced the concept of fiscal space and the related literature (ActionAid 2007; IMF 2005; and Rathin et al 2007). Fiscal space represents the ability of the government to generate resources by mobilising external and domestic borrowing and grants, or domestic revenues, thereby financing its expenditures. The 2010 GMR used the concept of fiscal space to create a fiscal space index, identifying the available fiscal instruments low income Sub-Saharan African countries had to respond to the global financial crisis (Martin and Kyrili 2009). It argued that government should use any additional fiscal space it has to finance projects essential towards achieving EFA and its other MDGs, especially if the country is off track for reaching the EFA goals by 2015, because they produce short or long term economic and social benefits such as increased productivity, health and general welfare of pupils and their communities, through higher returns to human capital, reduction in crime and better governance (see also Acemoglu and Angrist 2000; Barro 1991; Benhabib and Spiegel 1994; Gottfredson 1985; Lochner and Moreti 2003; Moreti 1998; and Psacharapoulos and Patrinos 2004). To identify the fiscal space of IDA-only countries and the fiscally viable ways they have to react towards the fiscal hole, we update the fiscal space index developed for the UNESCO 2010 GMR (Martin and Kyrili 2009), using the same indicators and thresholds (?). As in the previous study, country fiscal space is first assessed using three indicators, namely i. sustainable borrowing levels (external and external) ii. feasible levels of domestic revenue mobilisation; and iii. aid levels above which countries are considered excessively aid-dependent. The thresholds for these indicators and data sources (1 year updated) are the same as in 2009. For more details on the thresholds used, see annex. In a second stage, two check indicators are introduced (fiscal balance and inflation), to avoid financing provoking macroeconomic instability via excessive deficits or inflation. The 2010 forecasts are used for inflation, to eliminate the temporary inflationary impact of the food and fuel crises. In addition, thresholds for these indicators are slightly higher (5% deficit/gdp and 12.5% inflation) to match the IMF definition of mature stabilisers (IMF 2005). 9 4.2. Fiscal Space Country Results 2010 Looking at the three main indicators for 54 IDA countries, only 8 have high fiscal space, 26 moderate, 18 low and 2 (Burundi and Liberia) none. In more detail, as shown in Diagram 1: the majority (29) have critical levels of debt: 19 for domestic debt and 17 for external. Four (Djibouti, Gambia, Guinea-Bissau and Togo) would be advised to borrow neither domestically nor externally. a large number of countries (30) are above a reasonable target level of domestic revenue. This threshold should not be seen as a strict limit for all countries, meaning that some could still mobilise additional tax revenues. However, it would be desirable for them to avoid excessive efforts to increase tax burdens on the domestic economy. 9 For more details on the index, indicators and thresholds see the Appendix. 12

50 of 54 countries can absorb more grants, with the exception of Afghanistan and Guinea- Bissau. For 15 of these, increased grants seem to be the only feasible way to finance their planned educational expenditures. 10 Including the additional check indicators, as shown in Diagram 2, the numbers of countries with no and low fiscal space increase to 4 and 24 respectively, whereas the numbers with moderate and high fall to 21 and 5. Table 6 below shows all countries levels fiscal space. Table 6: Fiscal Space in IDA-only Countries Not Adjusted for check indicators Adjusted for check indicators No space Burundi Liberia Angola Guinea Burundi Liberia Low space Afghanistan Tajikistan Afghanistan Malawi Angola Togo Bhutan Mauritania Côte d'ivoire Tonga Congo, Dem. Rep. Nicaragua Congo, Rep. Yemen, Rep. Congo, Rep. São Tomé and Principe Djibouti Vietnam Côte d'ivoire Senegal Gambia, The Djibouti Solomon Islands Ghana Gambia, The Tajikistan Guinea-Bissau Ghana Togo Guyana Guinea-Bissau Tonga Kenya Guyana Vietnam Mauritania Honduras Yemen, Rep. São Tomé and Principe Solomon Islands Kenya Kyrgyz Republic Moderate space Bangladesh Lesotho Bangladesh Niger Benin Malawi Benin Nigeria Bhutan Moldova Burkina Faso Sierra Leone Burkina Faso Mongolia Cameroon Sri Lanka Cameroon Mozambique Central African Rep. Sudan Central African Rep. Nicaragua Chad Tanzania Comoros Nigeria Comoros Vanuatu Congo, Dem. Rep. Senegal Ethiopia Zambia Ethiopia Sierra Leone Lao PDR Guinea Sri Lanka Lesotho Honduras Sudan Moldova Kyrgyz Republic Vanuatu Mongolia Lao PDR Zambia Mozambique High space Cambodia Niger Cambodia Uganda Chad Tanzania Madagascar Madagascar Rwanda Mali Mali Uganda Rwanda 10 In addition, 5 further countries which are not included in the table or diagrams due to lack of comprehensive information (East Timor, Eritrea, Kiribati, the Maldives and Nepal), could also afford to absorb more grants. 13

4.3. Change in Sub-Saharan Africa s Fiscal Space Since 2009 How has the crisis affected fiscal space? To judge this we compare fiscal space in the 2009 and 2010 background studies, focussing on Sub Saharan Africa which was analysed in both, but adjusting the 2009 results for the changes in deficit and inflation thresholds noted above. In 2009, 11 2 countries had no fiscal space, 13 low, 14 moderate and 6 high. Since the onset of the crisis, the situation for low income Sub-Saharan African countries has slightly changed for the better: while the same 2 countries (Burundi and Liberia) continue to be without fiscal space, only 10 countries have low space, 16 moderate and 7 high. Chad, DRC, Niger, Sudan and Zambia have all increased space while Mozambique has reduced space. Table 7 below presents the fiscal space for SSA countries before and currently. No space Low space Moderate space High space Table 7. Change in Fiscal Space for SSA LICs 2009/10 vs 2008/09 2008/9* 2009/10 Not Adjusted Adjusted for check indicators Not Adjusted Adjusted for check indicators Congo, Rep. Principe Congo, Rep. Mauritania Congo, Rep. Togo Congo, Rep. Mauritania São Tomé & São Tomé & DRC Sudan Djibouti Principe Djibouti Côte d'ivoire Principe Djibouti Togo Ethiopia Senegal Gambia, The Djibouti Senegal Gambia, The Zambia Gambia, The Sudan Ghana Gambia, The Togo Burundi Liberia Burundi DRC Burundi Liberia Burundi Guinea- Bissau Liberia Guinea Liberia São Tomé & Côte d'ivoire Mauritania Côte d'ivoire Malawi Côte d'ivoire Principe DRC Malawi São Tomé & Guinea- Bissau Ghana Ghana Togo Ghana Guinea- Guinea- Bissau Guinea Zambia Kenya Bissau Kenya Kenya Mauritania Kenya Benin Lesotho Benin Nigeria Benin Lesotho Benin Mozambique Burkina Faso Malawi Burkina Faso Sierra Leone Burkina Faso Malawi Burkina Faso Niger Cameroon Niger Cameroon Cameroon Mozambique Cameroon Nigeria Chad Nigeria CAR CAR Nigeria CAR Sierra Leone CAR Senegal Chad Comoros Senegal Chad Sudan Comoros Sierra Leone Comoros DRC Sierra Leone Comoros Tanzania Ethiopia Lesotho Ethiopia Sudan Ethiopia Zambia Guinea Niger Guinea Zambia Lesotho Madagascar Rwanda Madagascar Rwanda Chad Tanzania Madagascar Mali Uganda Mali Uganda Madagascar Rwanda Mali Mozambique Mozambique Mali Uganda Rwanda Tanzania Tanzania Niger Uganda Source: Author's calculations * same as UNESCO 2010 GMR study using the latest IMF thresholds After including the two additional check indicators, the picture also improves slightly, with 5 countries increasing their space (DRC, Ethiopia, Guinea-Bissau, Sudan and Zambia) and only 3 seeing it fall (Guinea, Mozambique and Tanzania), as shown in Table 8 below. 11 These results exclude Zimbabwe as it is not included in our current sample. 14

Table 8: Changes in Fiscal Space Levels Country Name Change in category Indicator changed Congo, D.R. No to low revenue Ethiopia Low to moderate inflation Guinea Low to no deficit Guinea-Bissau No to low deficit Mozambique High to moderate revenue, deficit Sudan Low to moderate revenue Tanzania High to moderate deficit Zambia Low to moderate revenue indicates deterioration indicates improvement 4.4. Fiscal Space and Progress Towards Universal Primary Education Among these countries, some have a more urgent need to generate resources and finance essential educational programmes: notably those which are off track in meeting EFA goals by 2015. Table 9 therefore compares fiscal space and country progress towards EFA. 12 Of 39 countries for which information is available, 7 have already achieved the UPE goals and 5 are on track to do so, but the vast majority, 27, are off track according to UNESCO. These especially need to intensify their spending efforts to achieve the targets, and therefore to mobilise more financing. What financing options do they have? The proportion of off-track countries with different levels of fiscal space is broadly similar to the overall sample of IDA countries (50% moderate, 33% low, 12% high, 3% none). One adjusted for the additional indicators, there is a slightly lower proportion of countries with fiscal space (none +1%, low +3%, moderate -3%, high -1%). The main difference emerges when examining the options countries have for financing their education expenditure. While less than 28% of IDA countries have aid grants as their sole option, 56% of off track countries (14 13 ) are in this situation. Of the 27 off-track countries, 25 could absorb more grants and the other two (Burundi and Guinea) would have least risk posed to their macroeconomic stability if more grants were provided). In other words, those countries most in need of increasing their education expenditure will not be able to do so unless donors provide increased grants. 12 The sample is only 39 countries due to limited data on progress towards EFA. It could be expanded in the final version if UNESCO can provide more (eg estimated) information. 13 Bhutan, Cote d Ivoire, Djibouti, Ethiopia, Gambia, Ghana, Kenya, Kyrgyz Republic, Malawi, Mauritania, Senegal, Senegal, Togo and Yemen. 15

EFA Progress Achieved On track Off track TABLE 9: EFA PROGRESS AND FISCAL SPACE TNER for fiscal space, fiscal space, Country latest year not adjusted adjusted Sao Tome and Principe 99 low low Tonga 99 low low Maldives 98 moderate/low low/no space Tanzania 98 high moderate Tajikistan 97 low low Mongolia 97 moderate moderate Honduras 97 moderate low Madagascar 96 high high Zambia 93 moderate moderate Nicaragua 91 moderate Low Cambodia 90 high high Benin 83 moderate moderate Kyrgyz Republic 93 moderate Low Bangladesh 92 moderate Moderate Malawi 92 moderate Low Vanuatu 89 moderate Moderate Lao PDR 84 moderate Moderate Togo 83 low Low Nepal 80 na Na Bhutan 80 moderate Low Mauritania 80 low Low Rwanda 79 high High Kenya 76 low Low Mozambique 76 moderate Moderate Yemen, Rep. 75 low Low Burundi 75 no space No space Guinea 73 moderate No space Lesotho 73 moderate Moderate Senegal 72 moderate Low Ethiopia 66 moderate Moderate Nigeria 65 moderate Moderate Ghana 65 low Low Gambia, The 63 low Low Mali 61 high High Cote d''ivoire 56 low Low Burkina Faso 48 moderate Moderate Eritrea 47 na Na Niger 44 high Moderate Djibouti 38 low Low Source: UNESCO prohections of UPE achievement by 2015 16

Diagram 1: Financing Sources with Fiscal Space Aid Mauritania Guyana Moldova Congo R. Vietnam Vanuatu Bhutan Tajikistan Kenya Mozambique Mongolia Kyrgyz R. Cameroon Ghana Nigeria Senegal Tonga Nicaragua Angola Lesotho Malawi Benin São Tomé and Principe Honduras Niger Djibouti Chad Cambodia Gambia CAR Cote d Ivoire Tanzania Rwanda Sierra Leone Mali Togo Sri Lanka Madagascar DRC Uganda Yemen Burkina Faso Lao Comoros Guinea Bangladesh Zambia Ethiopia Sudan Solomon Islands Debt No space: Burundi, Liberia Afghanistan Guinea-Bissau Revenue 17

Diagram 2: Financing Sources with fiscal space (corrected for high fiscal deficits or inflation) Mauritania Aid Guyana Vietnam Tajikistan Nigeria Congo R. Senegal Vanuatu Kyrgyz R. Niger Malawi Tanzania Cameroon Moldova Bhutan Tonga Kenya Mozambique Mongolia Honduras Lesotho Benin São Tomé and Príncipe Ghana Djibouti Madagascar Lao Rwanda Nicaragua Cote d Ivoire CAR Uganda Sri Lanka Mali Togo Sudan Gambia Burkina Faso Chad Cambodia Yemen Zambia Ethiopia Comoros Bangladesh Sierra Leone Solomon Islands Debt No space: Angola, Burundi,Guinea, Liberia DRC Afghanistan Guinea-Bissau Revenue 18

5. Conclusions This study has shown that the impact of the crisis on education spending and progress to EFA in low-income countries has been far more severe than it looked a year ago. It brought: growth shortfalls equivalent to 2-3 years of recent GDP gains, with European and Central Asian LICs hardest hit, and per capita growth well short of levels needed to attain MDG1; a fiscal revenue hole of US$65 billion for 2009-10 combined, compared to 2008 levels, reducing revenues as % of GDP in 50% of countries which are off track for EFA; average increases in expenditure to combat the impact of the crisis in 2009, followed by cuts in 2010 in most regions and countries. During 2008-10, 10 of 26 off-track countries cut their spending as % of GDP. increased fiscal deficits in 2009 but reductions in 2010 and expected sharper reductions in 2011, with 60% of all LICs and 75% of African LICs due to cut deficits in 2010-11. Overall, the fiscal space which was given to countries to combat the crisis is now disappearing in many countries, and this will accelerate in 2011. It will be vital that fiscal space is reopened (and indeed expanded considerably, especially by setting higher deficit targets in IMF programmes) if countries are to reach EFA goals. The picture on education spending is mixed: overall education spending has risen in 52% of countries as % of GDP, but fallen in more countries than it has risen as % of total expenditure. Education budgets have not been protected to the same degree as was apparent in 2009 budgets. These cuts are hitting at least half of the off-track countries for which data are available. spending on primary education has been more protected, and is equal to or higher than 2008 as % of GDP in all countries, though only in 50% as % of total budget expenditure. spending has generally risen in nominal US$ per school-age or enrolled child most important, spending in 2009-10 fell way short of levels needed to reach EFA according to country plans submitted to UNESCO. The financial crisis has therefore driven countries even further from reaching EFA. It is essential that expenditure levels in off-track countries are dramatically increased, and that constant monitoring of expenditure levels continues to check this is occurring. LICs have varying degrees of fiscal space to fund the increases in expenditure needed to reach their EFA goals. Updating the 2009 fiscal space index, the analysis finds that: more than half of LICs have high risk levels of unsustainable debt. a similar proportion have already reached reasonable target levels of domestic revenue. however, 90% could absorb higher grants without being excessively aid dependent or provoking higher inflation. there have been minor positive changes in space comparing 2010 with 2009 the fiscal space of EFA off-track countries is broadly similar to the wider group however, a much higher proportion (56% compared to 28%) of off-track countries have grants as their only sustainable financing option, and all could absorb more grants. Those countries most needing to increase education spending to reach EFA goals will not be able to achieve this through greater financing unless donors provide higher levels of grants. It is essential that donors pledge higher levels of grants for education in developing countries at the forthcoming MDG review summit in September 2010. 19

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Annex Annex Table 1 Revenue and Expenditure trends in IDA countries Revenue excluding grants (% GDP) Expenditures (% GDP) 2008 2009 2010 2008 2009 2010 East Asia &Pacific Cambodia 8.5 11.4 11.7 12.4 16.2 17.0 Lao PDR 14.3 13.2 13.3 17.7 23.1 21.1 Mongolia 42.6 37.4 29.2 43.4 37.6 27.2 Solomon Islands 27.5 27.6 27.2 47.3 51.1 51.1 Tonga 22.2 22.4 22.4 27.3 32.2 32.2 Vanuatu 21.8 20.2 21.9 26.3 25.5 29.3 Vietnam 27.7 24.5 23.6 33.5 30.2 30.2 Timor-Leste...... Europe &Central Asia Kyrgyz Republic 28.5 18.5 18.8 29.6 28.3 27.6 Moldova 21.4 27.6 20.6 23.7 30.8 30.3 Tajikistan 20.5 17.5 17.5 28.2 29.5 28.8 Latin America &Caribbean Guyana /1 25.9 28.8 29.2 29.0 30.4 30.8 Honduras /1 26.3 24.8 25.0 27.3 28.7 28.7 Nicaragua /1 29.4 29.6 32.6 29.1 32.1 34.5 Middle East &North Africa Djibouti 28.8 28.8 28.1 40.6 37.9 35.4 Yemen, Rep. 36.5 26.2 26.9 41.2 34.6 32.6 South Asia 0.0 0.0 0.0 0.0 0.0 0.0 Afghanistan 6.9 7.7 8.2 19.4 21.7 21.7 Bangladesh 10.8 10.4 10.7 15.9 14.1 15.7 Bhutan 24.6 22.4 22.4 43.7 40.0 40.0 Maldives 44.3 31.5 35.9 62.8 65.1 54.8 Nepal 14.4 15.6 16.0 17.2 23.8 22.8 Sri Lanka 14.9 14.8 15.4 14.9 14.8 15.4 Sub-Saharan Africa Angola 50.5 35.5 39.3 41.6 42.9 36.3 Benin 19.4 18.4 20.6 21.2 24.7 26.4 Burkina Faso 13.1 13.6 13.3 21.2 24.1 23.1 Burundi 18.5 26.4 16.2 44.2 46.9 48.3 Cameroon 20.0 17.6 16.4 19.6 18.4 19.3 Central African Republic 10.4 10.8 10.7 16.7 15.8 18.9 Chad 26.4 16.7 22.0 23.4 30.6 25.8 Comoros 13.1 14.0 13.6 26.0 24.1 22.0 Congo, Dem. Rep. 18.5 16.8 18.9 23.0 25.7 37.2 Congo, Rep. 46.2 29.1 41.1 23.8 24.8 20.9 Côte d'ivoire 17.1 18.3 18.9 21.1 21.1 22.3 Eritrea 18.2 13.1 13.1 42.1 30.4 34.1 Ethiopia 12.0 12.0 14.1 18.9 17.2 20.2 Gambia, The 20.5 25.1 25.4 22.2 27.3 26.6 Ghana 22.8 22.5 25.8 42.0 37.2 39.0 Guinea 15.6 16.4 19.2 17.4 24.0 20.9 Guinea-Bissau 9.1 9.0 10.3 21.0 22.5 23.9 23

Kenya 20.8 21.2 21.9 26.8 28.3 29.4 Lesotho 62.7 65.5 47.0 59.1 69.1 66.9 Liberia 24.1 26.8 30.9 27.1 28.6 37.3 Madagascar 13.2 10.8 10.1 18.7 15.4 13.4 Malawi 21.7 23.0 24.9 39.4 37.1 40.1 Mali 15.5 16.6 16.8 21.2 26.0 25.3 Mauritania 25.3 25.3 25.5 33.2 29.4 30.0 Mozambique 16.0 17.8 18.4 27.9 32.9 31.9 Niger 18.4 13.9 13.4 22.8 24.2 21.3 Nigeria 32.8 19.4 26.8 29.2 29.5 34.2 Rwanda 14.9 12.8 12.8 24.8 25.9 25.0 São Tomé and Principe 17.7 17.0 19.0 54.6 53.0 46.5 Senegal 19.6 18.5 19.3 26.5 27.0 26.3 Sierra Leone 11.4 12.1 11.3 20.7 22.7 22.8 Sudan 21.3 14.7 17.0 23.2 18.8 20.6 Tanzania 17.3 16.7 17.2 27.9 29.4 27.5 Togo 17.0 19.0 17.5 19.5 24.6 24.2 Uganda 12.8 12.5 12.5 18.6 18.0 17.3 Zambia 18.6 15.7 15.9 23.8 22.9 21.8 Source: IMF REO 2009 &2010, IMF country reports, national budget documents 1: in revenues grants are included 24

Annex Table 2 Fiscal Balance excluding grants (% GDP) 2008 2009 2010 East Asia &Pacific Cambodia -3.9-4.9-5.3 Lao PDR -3.4-9.9-7.8 Mongolia -0.8-0.3 2.0 Solomon Islands -19.8-23.5-23.9 Tonga -5.1-9.8-9.8 Vanuatu -4.6-5.3-7.4 Vietnam -5.8-5.7-6.5 Timor-Leste... Europe &Central Asia Kyrgyz Republic -1.1-9.8-8.8 Moldova -2.2-3.2-9.6 Tajikistan -7.7-12.0-11.3 Latin America &Caribbean Guyana -11.1-11.0-12.2 Honduras /1-1.0-3.9-3.7 Nicaragua -3.8-6.3-4.3 Middle East &North Africa Djibouti -11.8-9.1-7.3 Yemen, Rep. -4.7-8.4-5.7 South Asia Afghanistan -12.5-14.0-13.5 Bangladesh -5.1-3.7-5.0 Bhutan -19.1-17.6-17.6 Maldives -18.5-33.6-18.9 Nepal -2.7-8.2-6.8 Sri Lanka... Sub-Saharan Africa Angola 8.9-7.4 3.0 Benin -1.8-6.3-5.7 Burkina Faso -8.1-10.5-9.8 Burundi -25.7-20.5-32.1 Cameroon 0.4-0.8-2.9 Central African Republic -6.3-5.0-8.1 Chad 3.0-13.9-3.8 Comoros -13.0-10.1-8.4 Congo, Dem. Rep. -4.5-8.9-18.2 Congo, Rep. 22.4 4.3 20.2 Côte d'ivoire -4.0-2.7-3.4 Eritrea -23.9-17.2-21.0 Ethiopia -6.9-5.2-6.1 Gambia, The -1.6-2.2-1.2 Ghana -19.2-14.7-13.2 Guinea -1.8-7.6-1.7 Guinea-Bissau -11.9-13.5-13.6 Kenya -6.0-7.1-7.5 Lesotho 3.6-3.6-19.9 Liberia -3.0-1.7-6.3 25

Madagascar -5.5-4.6-3.3 Malawi -17.7-14.1-15.2 Mali -5.7-9.4-8.5 Mauritania -7.9-4.1-4.5 Mozambique -11.9-15.1-13.5 Niger -4.4-10.3-7.9 Nigeria 3.6-10.1-7.4 Rwanda -10.0-13.1-12.1 São Tomé and Principe -36.9-36.0-27.5 Senegal -6.9-8.5-7.0 Sierra Leone -9.4-10.6-11.4 Sudan -1.9-4.1-3.6 Tanzania -10.6-12.7-10.3 Togo -2.5-5.6-6.7 Uganda -5.7-5.5-4.7 Zambia -5.2-7.2-5.9 Source: IMF REO 2009 &2010, IMF country reports, national budget documents 1: grants are included 26