Chapter 5 | Page 210 5.3.2.3 Absorption and fungibility of aid flow Absorption and spending are central in aid flow, which requires coordination of fiscal policy, exchange rate and monetary policy.102 Aid absorption is defined ‘as the fall in the non-aid current account balance that is attributable to aid’103. If aid comes in kind or the money is spent on imports, spending and absorption remain equivalent and do not translate into macroeconomic problems such as exchange rates and price levels.104 Berg et al showed that, in their sample countries (Mozambique, Tanzania and Uganda), spending exceeded absorption, which resulted in domestic liquidity and often led to inflation (in Mozambique) or a rise in interest rates and debt burden (Uganda and Tanzania).105 The ability to absorb and spend aid would be the most desirable and appropriate response. This can be achieved by a corresponding increase in imports and public spending.106 On the other hand, to absorb but not spend might be the best option for States experiencing high levels of inflation, low private investment and lower rate of returns on public expenditure.107 For these reasons, aid effectiveness is also related to the ability of the government not only to utilise the aid funds for the proposed purposes, but also to maintain adequate resources within these areas from the State budget. The fungibility effect is associated with financial aid when governments use aid money to substitute their own resources in a given area.108 Some argue that, while economists assume that aid is fungible and that fungibility is evident on the ground in terms of aid impact on development outcomes, most donors 102 Andrew Berg et al, 'The Macroeconomics of Managing Increased Aid Inflows: Experiences of Low-Income Countries and Policy Implications' (Paper presented at the WIDER Conference on Aid, Helsinki, 16-17 June 2006) [1]. 103 Shekhar Aiyar and Ummul Ruthbah, 'Where Did All the Aid Go?: An Empirical Analysis of Absorption and Spending' (IMF Working Paper WP/08/34, International Monetary Fund), 4. 104 Berg et al, above n 102, 13. 105 Ibid., 3. 106 Ibid., 13. 107 Ibid. 108 Ortiz, above n 15, 70-71.