The fiscal management of permanent and temporary foreign aid: Evidence from sub‐Saharan Africa

This paper argues that whether aid receipts are permanent or temporary is an important yet overlooked determinant of the fiscal management of foreign aid. I present a theoretical framework that shows that permanent aid and temporary aid differently affect the recipient governments' choice between taxes and debt issuance. Empirically, I assess how the fiscal deficit responds to permanent aid and temporary aid in a panel of sub‐Saharan African aid‐recipient countries. Results show that while permanent aid leads to higher deficit, temporary aid reduces the deficit. The different responses of government spending to permanent aid and temporary aid help explain this pattern. Results provide important policy implications for the design of foreign aid programmes to developing countries.