I. Introduction

Southern Africa is the worst impacted by AIDS; in three countries in this sub-region, the national adult HIV prevalence rate now exceeds 20%. These countries, which have the highest adult HIV prevalence in the world, are Swaziland (25.9%), Botswana (24.8%), and Lesotho (23.6%) (UNAIDS, 2010). The HIV/AIDS epidemic, a major development threat, is responsible for slowing the rate of growth of the gross national product of many heavily affected countries and increases overall health expenditures for both medical care and social support at the same time that it is claiming the lives of doctors and nurses in the those countries. HIV/AIDS is not only expensive to treat but also disproportionately affects poorer populations, causing impoverishment through disability. In addition, it not only impairs government capacities, it also makes additional demands on governments to address pressing health and other social issues.This scourge of our time takes the lives of children and young adults, especially women, and leads to dramatic declines in life expectancy.Especially in the short-term, the loss of a large segment of prime-age adults, particularly women, devastates households while in the long-term, it creates macroeconomic threats just as losses in human capital formation pose a further risk by influencing the intergenerational transfer of knowledge.

There is evidence that antiretroviral therapy (ART) dramatically slows the progression of HIV infection and AIDS by sharply depressing viral load, improving the cluster of differentiation (CD4) cell counts, and delaying clinical progression to AIDS and fatal complications (Khan et al, 2001; Econsult, 2007). However, financing these ART programs has become very challenging with the international debt crisis, reduced prospects for aid and domestic revenues and the need to implement fiscal consolidation in these economies.Affected countries such as Botswana, Lesotho and Swaziland have no choice but to rely more on their own budget to fight the epidemic. The question then is: if these countries use public revenues to fund the intervention against HIV/AIDS, will there not be increase in their debt burden or some negative externalities on other public funded programs? Utilizing a calibrated macro-econometric model, this paper shows that this will not be the case if public finances are used accordingly to achieve socially optimal reduction targets in the HIV prevalence rate. Instead, it will eventually alleviate the debt burden of these countries.

The rest of this paper is organized as follows. Section 2 presents some stylized facts on the HIV/AIDS scourge in Africa and in particular, Southern Africa sub-region while section 3 examines some relevant literature. Section 4 presents the model while section 5 describes its parameterization. The results and the fiscal implications are discussed in section 6 while section 7 concludes.