The Fiscal Effects of Aid in Ghana

aid, fungibility, fiscal response, impulse response

A timeseries analysis of the impact of foreign aid on central government's fiscal budget in Uganda

A dynamic relationship between foreign aid and domestic fiscal variables in Uganda is analysed using a cointegrated vector autoregressive model over the period 1972-2008. Results show that aid is a significant element of long-run fiscal equilibrium, is associated with increased tax effort and public spending, and reduced domestic borrowing. Shocks to tax revenue are the pulling forces, while those to domestic borrowing, government spending and aid are the pushing forces of the system. In terms of policy, it is crucial for donors to increase the reliability and predictability of aid, coordinate aid delivery systems and also make aid more transparent

Modelling the fiscal effects of aid: An impulse response approach for Ghana

An important feature of aid to developing countries is that it is given to the government. As a result aid has the potential to affect budgetary behaviour. Although the (albeit limited) aid-growth literature has addressed the effect of aid on policy, it has tended to neglect the effect of aid on the fiscal behaviour of governments. While fiscal response models have been developed to examine the effects of aid on fiscal aggregates – taxation, expenditure and borrowing – the underlying theory is ad hoc and empirical methods used are subject to severe limitations. This paper applies techniques developed in the „macroeconometrics“ literature to estimate the dynamic structural relationship between aid and fiscal aggregates. Using vector autoregressive methods, an impulse response function is estimated to model the effect of aid on fiscal behaviour in Ghana. Results suggest that aid does not have a direct effect on the volume of government spending in Ghana but is treated as a substitute for domestic borrowing. Government spending does rise significantly following aid but this is principally due to an indirect effect arising from higher tax revenue associated with aid inflows. This, aid to Ghana has tended to be associated with reduced domestic borrowing and increased tax effort, combining to increase public spending

The fiscal effects of aid in Ghana

An important feature of aid to developing countries is that it is given to the government. As a result, aid should be expected to affect fiscal behaviour, although theory and existing evidence is ambiguous regarding the nature of these effects. This paper applies techniques developed in the ‘macroeconometrics’ literature to estimate the dynamic linkages between aid and fiscal aggregates. Vector autoregressive methods are applied to 34 years of annual data in Ghana to model the effect of aid on fiscal behaviour. Results suggest that aid to Ghana has been associated with reduced domestic borrowing and increased tax effort, combining to increase public spending. This constructive use of aid to maintain fiscal balance is evident since the mid-1980s, following Ghana’s structural adjustment programme. The paper provides evidence that aid has been associated with improved fiscal performance in Ghana, implying that the aid has been used sensibly (at least in fiscal terms). – aid ; fungibility ; fiscal response ; impulse respons

Foreign aid, public sector and private consumption in Uganda: A cointegrated vector autoregressive approach

This paper employs a cointegrated vector autoregressive model to assess the growth effect of aid in Uganda over the period 1972-2008. Results show that aid in Uganda has had both direct and indirect beneficial association with growth; that it is the productivity and not the stead state level of investment that contributes to achieving target growth rates; and that consumption spending is more beneficial to growth because it contributes to private incomes and consumption. In terms of policy, it is crucial to strengthen fiscal response to aid receipts and ensure aid funded projects are closely monitored and contract specifications are strictly enforced. Moreover, donors need to accept the politically unpalatable fact that aid has an important role in supporting consumption spending

Real exchange rate response to capital inflows: A dynamic analysis for Ghana

One of the most challenging problems in developing countries such as Ghana is exchange rate management, that is, 'getting the exchange rate right' especially in the context of exchange rate misalignment. The major research and policy question is what constitutes the equilibrium real exchange rate (ERER) and how can it be measured? Acknowledging the importance of fundamentals in determining the equilibrium real exchange rate, the paper concentrates on the effects of capital inflows (by decomposing capital inflows into official inflows, 'permanent' inflows and 'non-permanent' inflows). Vector Autoregressive (VAR) techniques are used to model the long-run equilibrium real exchange rate in Ghana, and based on a multivariate orthogonal decomposition technique, the equilibrium steady state path is identified which is used in estimating misalignments. As predicted by the Dutch Disease theory, results indicate that capital inflows tend to appreciate the real exchange rate in the long-run. Capital inflows is the only variable generating real appreciation in the long-run; technology change, trade (exports) and terms of trade all tend to depreciate the real exchange rate. The only variable that has a significant (depreciating) effect on the real exchange rate in the short-run is trade, implying that changes in exports are the major driver of exchange rate misalignment. It is also shown that the real exchange rate is slow to adjust back to equilibrium, implying policy ineffectiveness or inflexibility