The Fiscal Response to External AID: A Vector Autoregressive Analysis (VAR) for Ethiopia,
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Date
2008-07
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A.A.U
Abstract
The main objective of this is study is access the fiscal response to external and in flows in Ethiopia . specifically study the impact of foreign aid on public expenditure ,revenue and domestic borrowing in Ethiopia. The paper provides a critical review of literature on the and –fiscal relation ,and then applies a1R/TCM and impulse response analysis using data for the period 1967-2007 .the study is a good indication that dis-aggregated data utilization could point out which
variables are responsive to change in external shocks. By studying the particular fiscal dynamics in Ethiopia using three separate models . the study finds that foreign aid in the form of grant and loans bad a positive impact on government expenditure (loan being) pro –investment and grant being pro-consumption )both have a negative impact on domestic borrowing (domestic borrowing being more elastic to a change in grant) and indirect tax collection and no effect on the direct one. More over ,by incorporating total ODA inflow in a separate models, the study tried to analyze the joint impact of budgetary grant and loan . and that of off budgetary ODA. The result support the conclusion that aid inflows increase public expenditure and biased to be pro- investment . White total ODA flows have a negative impact on revenue of the government and borrowing from domestic sources, suggesting that aid and domestic borrowing are close substitute s and that higher aid flows displace domestic revenues . in the final analysis to mitigate the undesirable impact of aid , building better national capacity to collect domestic revenue and regulatory schemes by donors to avoid possible problems of aid tangibility should be put in place .
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The Fiscal response to External AID for Ethiopia