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"THE FISCAL RESPONSE TO EXTERNAL AID: A VECTOR AUTOREGRESSIVE ANALYSIS (VAR) FOR ETHIOPIA"

ADDIS YIMER G/EGZIABHEAR


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    <dct:title>"THE FISCAL RESPONSE TO EXTERNAL AID: A VECTOR AUTOREGRESSIVE ANALYSIS (VAR) FOR ETHIOPIA"</dct:title>
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    <dct:description>&lt;p&gt;The main objective of this study is to access the fiscal response to external aid inflows in Ethiopia, specifically&lt;br&gt; to study the impact of foreign aid inflows on public expenditure, revenue and domestic borrowing in Ethiopia.&lt;br&gt; The paper provides a critical review of literature on the aid-fiscal relation, and then applies a VAR/VECM&lt;br&gt; and impulse response analysis, using data for the period 1961-2007.The study is a good indication that&lt;br&gt; disaggregated data utilization could point out which variables are responsive to changes in external shocks. By&lt;br&gt; studying the particular fiscal dynamics in Ethiopia using three separate models, the study finds that foreign aid&lt;br&gt; in the form of grant and loan has had a positive impact on government expenditure (loan being pro-investment&lt;br&gt; and grant being pro-consumption), both have a negative impact on domestic borrowing (domestic borrowing&lt;br&gt; being more elastic to a change in grant) and indirect tax collection and no effect on the direct one. Moreover, by&lt;br&gt; incorporating total ODA inflow in a separate model, the study tried to analyze the joint impact of budgetary&lt;br&gt; grant and loan, and that of off -budgetary ODA. The results support the conclusion that aid inflows increase&lt;br&gt; public expenditure and are biased to be pro- investment. While total ODA flows have a negative impact on&lt;br&gt; revenue of the government and borrowing from domestic sources, suggesting that aid and domestic borrowing are&lt;br&gt; close substitutes and that higher aid flows displace domestic revenues. In the final analysis to mitigate the&lt;br&gt; undesirable impacts of aid, building a better national capacity to collect domestic revenue and regulatory&lt;br&gt; schemes by donors to avoid possible problems of aid fungiblity should be put in place&lt;/p&gt;</dct:description>
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