Fiscal Response to Foreign Aid Inflows in Nigeria

Omo Aregbeyen and Ismail Fasanya

The IUP Journal of Applied Finance, 2014, vol. 20, issue 2, 37-56

Abstract: This paper analyzes the fiscal response of the government to aid inflows in Nigeria during the period 1961 to 2009. This is against the backdrop of the fact that no study has analyzed the peculiar fiscal response/behavior of the government in Nigeria vis-à-vis aid flow over time. Yet, the fiscal response of the government had significantly determined and shaped the growth path of the economy. The empirical analysis is anchored on the Heller type fiscal response modeling analytical framework and combines several procedures in modern econometric analysis/estimation techniques. The findings show that aid inflows had significant impact on the fiscal reactions of government in Nigeria: government expenditure, particularly capital (development) expenditure, increased in response to aid flows, tax efforts were relaxed, while domestic borrowing declined. Aid flows also provide free resources to increase recurrent (routine) spending, thus confirming the aid fungibility hypotheses. Since aid inflows cannot be permanently relied upon, it is advised that the government place a premium on improving its tax efforts as well as cut down recurrent expenditures.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjaf:v:20:y:2014:i:2:p:37-56

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