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The Fiscal Impact of Aid Flows: Evidence from Ethiopia

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  • Political Science

Abstract

untitled overty CentrePINTERNATIONAL The content of this page does not necessarily reflect the official views of the International Poverty Centre, IPEA or the United Nations Development Programme. International Poverty Centre (IPC) SBS – Ed. BNDES, 10º andar 70076 900 Brasilia DF Brazil Telephone: +55 61 2105 5000 www.undp-povertycentre.org [email protected] September, 2007 Number 43 by Pedro M. G. Martins, Visiting IPC Researcher, Institute for Development Studies, Sussex The Fiscal Impact of Aid Flows: Evidence from Ethiopia Foreign aid flows to developing countries have increased considerably in the last decade. This trend is driven mostly by the need to meet the resource gap in countries committed to fight poverty and achieve the Millennium Development Goals (MDGs). In sub-Saharan Africa, where aid inflows account for a significant share of GDP, the fiscal impact of aid is fundamental to assessing its effectiveness. This One Pager seeks to contribute to the debate on aid by presenting results from a traditional fiscal response model estimated for Ethiopia. The model focuses on the impact of foreign aid on government expenditure, revenue and domestic borrowing. Fiscal data for 1964-2005 were obtained from the IMF’s International Financial Statistics (IFS) database and complemented by secondary sources. A summary of the results is presented in the table, with aid disaggregated into its two main components, grants and loans. The coefficients denote foreign aid’s total impact on the remaining fiscal variables, over the period under consideration. The results suggest that foreign aid to Ethiopia has had a positive impact on government capital expenditure, but not a significant effect on recurrent spending (the coefficients are virtually zero). Moreover, aid loans seem to have had a stronger impact on government expenditure than grants, particularly on capital spending (with a coefficient of 0.30 for loans versus 0.06 for grants). These

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