Aid heterogeneity and fiscal response: the case of Pakistan

Imran Farooq, George Mavrotas and Danny Cassimon

No 2025.13, IOB Working Papers from Universiteit Antwerpen, Institute of Development Policy (IOB)

Abstract: The paper explores the effect of both temporary and permanent components of foreign aid grants and loans on Pakistan’s fiscal response over the period 1973 to 2020. It shows that temporary loans cause larger fiscal adjustments than grants, by boosting revenue and public investment while decreasing government consumption and domestic borrowing, with no effect on debt servicing. Conversely, temporary grants trigger revenue-based fiscal adjustments by raising revenue and debt service without affecting domestic borrowing or government investment, while lowering at the same time current expenses. Additionally, permanent loans lead to increased domestic borrowing without impacting revenue, along with higher current expenses and debt service, and reduced public investment. Permanent grants also lead to increased domestic borrowing due to lower revenues and a larger government. These findings highlight important policy suggestions for aid donors regarding the aid design for highly indebted aid recipient countries, advocating for grants over loans and initiating debt relief programs to prevent aid fungibility into debt servicing. The findings emanating from the paper seem also to suggest that donors should provide temporary aid for fiscal adjustments and permanent grants for investments. In contrast, expenditure-based fiscal adjustments should be conditioned on permanent loans that finance the government's current spending in recipient governments.

Keywords: foreign aid; aid heterogeneity; temporary aid; permanent aid; fiscal response (search for similar items in EconPapers)
JEL-codes: F35 O11 O23 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2025-12
New Economics Papers: this item is included in nep-fdg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://medialibrary.uantwerpen.be/files/2137/1d63 ... 18d-1b6d78ac0327.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iob:wpaper:2025.13

Access Statistics for this paper

More papers in IOB Working Papers from Universiteit Antwerpen, Institute of Development Policy (IOB) Contact information at EDIRC.
Bibliographic data for series maintained by Hans De Backer ().