Foreign Aid and the Fiscal Behaviour of Government of Pakistan

This study examines the effect of foreign aid on the fiscal behaviour of the Government of Pakistan. It applies the Autoregressive Distributed Lag model to analyse the relationship that prevailed between grant aid, domestic borrowing, domestic revenue and development expenditure allocations during the period 1960 to 2010. The results reveal that foreign grants have adversely affected government’s fiscal responsibility. In fact it has reduced domestic revenue collection while amassing foreign debt. During periods of fiscal imbalances when cutting expenditures should have been the norm, both development and non-development expenditures were allowed to increase. The results also show that these effects vary considerably in relation to the mode aid was delivered. There is much scope for efficient utilisation of foreign financial resources while the foremost need is to improve revenue collection and discipline expenditures. It is up to the government and not the donor whether it uses the grants for reducing domestic borrowing or spending or increasing aggregate availability of resources.