The economy wide impact of HIV/AIDS and the funding dilemma in Africa: Evidence from a dynamic life cycle horizon

The HIV pandemic, even though it is still a major killer in Africa, seems to have been tamed medically into a chronic disease through advances in treatment drugs (ARTs). However, the full economic costs, over a lifecycle horizon, of keeping people on treatment and implementing prevention measures, are still not fully quantified and are unfolding. Indeed, the economic effects of the HIV/AIDS disease, and also the economic effects of various interventions, also need to be better understood. Sub-Saharan Africa (SSA) disproportionately bears the burden of HIV/AIDS compared to the rest of the word. Over 70% of the people living with HIV (PLWHIV) are resident in SSA, of which 82% are adults. It is evident that the productive segment of the population is afflicted by the devastating health effects of the pandemic. The economic impact of AIDS is felt at all levels of economic analysis: micro, meso and macro. At the micro level, the household experiences increased costs of healthcare expenditure. Additionally the household faces indirect costs of reduced earnings and income when the productive household members are infected. At the meso level, sectors that are labour intensive are faced with low labour productivity. The increased demand for healthcare implies that health sector incurs higher budget allocations, which may necessitate a reduction of the budgets of other government functions. At the macro level, there is loss in economy-wide productivity due to increased absenteeism of sufferers and carers of sick people. Increased mortality from AIDS leads to a reduction in total labour force supply. There is a change in the skill composition of the labour force if AIDS affects one category of skilled labour relatively more. And finally, aggregate savings decline as a result of households resorting to assets and savings for immediate health expenditures, and the reduced capacity to earn income. The advances made in treatment of HIV/AIDS since the advent of anti-retroviral therapies (ART) in 1996 have meant that people can live longer while on treatment. Ultimately HIV/AIDS has become a chronic ailment that continuously draws resources from the health system. The commitment by governments to avail ART to those who need it constitutes a long-term financial liability which can be conceptualised as a debt liability. The dilemma for SSA countries is that they continue to grapple with the challenge of finding adequate resources to finance their health systems and yet also have to increase expenditure for HIV interventions. In exploring the “moral duty of rescue” for PLWHIV, Collier, Sterck and Manning (2015) conclude that funding HIV interventions spans beyond the infected person and the governments of the affected countries, especially for resource poor countries. On the other hand, it is also evident that donor funding for HIV has been gradually dwindling and its sustainability is not certain. The purpose of this paper is to model the economy-wide impact of HIV/AIDS taking into account various modes of funding HIV/AIDS interventions for selected SSA countries. This study extends the previous CGE methodologies by incorporating updating equations that emphasize the cost impact channel of HIV/AIDS interventions. Specifically, given the long term debt liability feature of HIV interventions, the impact on the countries’ debt burden is explicitly modelled, in addition to the impact on growth rate in GDP, investment, private consumption and the trade account. The study countries are purposefully selected to fulfil one of three criteria. A country with high prevalence rates of HIV and (i) resource rich – Botswana, currently resource poor but with prospects of future natural resource exploitation - Uganda, and (iii) currently resource poor and no prospects of future natural resources exploitation -Malawi. We explore different ways of funding the HIV interventions including government capital expenditure, foreign grants, tax financing, domestic borrowing, and foreign borrowing including financial innovations such as diaspora bonds and future-flows securitisation, among others. We use a recursive dynamic model in order to capture the lagged effects of HIV/AIDS-related health effects and the HIV intervention investments over time. It is an adaption of the “core” version of the Maquette for MDG Simulations (MAMS) model developed by the Word Bank group and documented in (Lofgren, Cicowiez, & Diaz-Bonilla, 2013). Technically the model is comprised of a static (within-period) equilibrium solution where producers maximise profit and consumers maximise utility in a given set of institutional constraints, and a dynamic (between-period) equilibrium solution. For the dynamic component, exogenous variables are updated to reflect changes in HIV/AIDS induced population and labour supply growth rates, capital accumulation and total factor productivity growth changes. Additionally, the HIV related government expenditure patterns and sources of funding are updated over the model period. The dynamic module captures the tracking of assets and liabilities of the households and the government, a feature that makes it suitable to predict the impact of HIV intervention cost on debt sustainability. Model solutions are analysed and presented as comparative growth rates over the model horizon. The impact of HIV/AIDS –with no intervention is contrasted with the baseline results. Similarly the impact of HIV/ AIDS-with intervention and different sources of financing the cost of intervention is contrasted with the baseline. Results present the baseline growth path and deviations from the baseline caused by changes in exogenous variables, holding other factors constant. Specifically each country results will show the impact on growth rates in GDP, and as a share of GDP, growth in consumption (private and government), investment (private and government), exports and imports, domestic and foreign debt. At the intermediate level, sectoral growth rates and sector shares are reported. The mechanisms of adjustment: exchange rate dynamics, interest rate payments (domestic and foreign), and factor income changes are explicitly captured and reported.