The impact of foreign aid on public expenditure: The case of Kenya
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Date
2003-11-01
Authors
James Njeru
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
Foreign aid represents an important source of finance in most countries in sub-Saharan
Africa (SSA), where it supplements low savings, narrow export earnings and thin tax
bases. In recent years the donor community has become more stringent about fiscal
discipline and good policies, which has led to freezing of donor funds to governments
that do not conform with aid conditionalities. The Kenyan government has experienced
such aid cuts in the past and this paper uses a welfare utility maximization function to
explore how government expenditure responds to fluctuations in aid flows. The empirical
results indicate that the flow of foreign aid does influence government spending patterns.
There is a positive and statistically significant relationship between the share of government
expenditure in gross domestic product (GDP) and the share of net disbursement of overseas
development assistance (ODA). While the study finds relatively little evidence that aid
leads to tax relief, there are strong indications that the government renders aid fungible
by financing recurrent expenditures. The effects of an aid freeze are strong in the short
term as the Treasury embarks on stringent fiscal measures to counteract the negative
effects.
Description
HC 800 .A1 A 342 2003
Keywords
Economic Assistance - Kenya , Kenya - appropriations and Expenditure , Economic Assistance , aid fungibility , public expenditure;