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Fiscal Effects of Aid in Ethiopia


The study looks at the (broad) public sector 'fiscal response' to foreign aid inflows, time series impact of aid on fiscal aggregates. Such aggregate fiscal effects over time are likely to be important determinants of aid effectiveness. The objectives of the study are, to identify the effects of aid on public sector aggregates, specifically to identify the effect of aid on government revenue (taxation), recurrent expenditure, capital expenditure & domestic borrowing. The study employed qualitative and empirical methodologies. Vector autoregressive methods are applied to 39 years of annual data in Ethiopia to model the effect of aid on fiscal behavior. Results suggest that: first, an increase in grants and an increase in foreign loans results in an increase in recurrent budget expenditure and a decrease in capital budget expenditure. This might show the existence of fungibility. Second, an increase in grants, foreign loans and ODA results in an increase in domestic borrowing. This might require policy measure towards the decrease in the domestic borrowing. Third, an increase in grants results in an increase in tax revenue and on the contrary an increase in foreign loans results in a decrease in tax revenue. This unclear effect might have been caused by the different nature of grants and foreign loans. As the total effect is represented by the ODA, an increase in ODA results in an increase in the tax revenue which implies that ODA does not discourage taxation efforts. Fourth, a rise in ODA results in an increase in the tax revenue, domestic borrowing, recurrent expenditure and capital expenditure, i.e. a rise in all fiscal aggregates. This could probably be the effect of part of the ODA which is not included in the budget. And this may require the need for developing systematic guidelines as to how all ODAs should be indicated in the budget.

Corporate Author: 
Getnet Alemu (Editor) & Ethiopian Economic Association/Ethiopian Economic Policy Research Institute
Ethiopian Economic Association (EEA)
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Cataloge Date: 
Broad Subject heading: 
Industry And Finance
Call Number: 
330.963 PRO 2009
Serial Key Title: 
Proceedings of the Sixth International Conference on the Ethiopian Economy
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Content type: 
Publication date: 
2013-05-27 23:09:00
Forum or Discussion date: 
2013-02-27 15:02:19
Place of publication: 
Addis Ababa, Ethiopia
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