After decades of neglect the HIV/AIDS epidemic has rightly become one of the highest priorities on the global agenda. Funding pledges from the donors have doubled resource commitments between 2002 and 2004 to over $6 billion. That surge in funding belies the volatile nature of contributions to HIV/AIDS initiatives at the country level. The paper analyzes the impacts of abrupt HIV/AIDS funding on macroeconomic stability, fiscal health and the development of health institutions. The macroeconomic effects are ambiguous, but depend on the overall level of aid flows, as well as those for HIV/AIDS, the management of foreign exchange inflows, and effective spending policies. The fiscal ramifications revolve around the jump in external funding that reached around 1000% in Lesotho and Swaziland, and 650% in Zambia between 2002 and 2004, and the required rapid scale up if resources are to be used productively. At the same time, the new HIV/AIDS monies are swamping public health budgets in some cases exceeding 150% of the government’s total allocations for health. The vertical HIV/AIDS programs and the set aside funding threaten to undermine the very institutions that will need to carry forward the long term HIV/AIDS prevention and treatment agenda for each country. Health systems are already fragile, and governance problems and uneven productivity compound the challenges. Health institutions require funding and attention to strengthen them in the fight against HIV/AIDS.
While the committed funds are desperately needed, solutions to the dilemma will require creative options to ensure the flow of funds, manage the economic implications and ensure effective service delivery. These are explored in the concluding section.
