Foreign Aid and Fiscal Stance in Nigeria: A Disaggregated Analysis

Abstract

This paper examines the relationship between foreign aid and fiscal stance (government expenditure) in Nigeria covering the period from 1981 to 2018. It employs the Augmented Dickey Fuller (ADF) and Philip Perron (PP) unit root tests to determine the stationarity property of the data while the ARDL Bound testing cointegration approach was adopted to ascertain the long-run relationship between the variables. The Two-Stage Least Square estimation technique was utilized to determine the impact of total foreign aid and four different types of foreign aid on government expenditure. The results of the ADF and PP tests results revealed that the variables are a combination of I(0) and I(1). While the ARDL Bound testing co-integration test results indicate that the variables are cointegrated. The results of the Two-Stage Least Square (2SLS) showing the impact of total foreign aid and the four different categories of foreign aid on fiscal stance (total government expenditure), revealed that total foreign aid does not have an impact on government expenditure. While the results for the four different categories foreign aid shows a positive relationship between these aids and total government expenditure with bilateral aid from Nordic countries having the largest impact followed by bilateral aid from main trading partners of Nigeria, multilateral aid and the top- five growth induced aid donors based on 2013 commitment. The study recommends that the government should partner with Nordic countries for foreign assistance to finance its expenditure since foreign aid from these countries has more impact on government expenditure than other forms of foreign aid.