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The impact of foreign aid on public expenditure: The case of Kenya

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  • James Njeru

    (Moi University, Eldoret, Kenya)

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.

Suggested Citation

  • James Njeru, 2003. "The impact of foreign aid on public expenditure: The case of Kenya," Working Papers 135, African Economic Research Consortium, Research Department.
    • Handle: RePEc:aer:wpaper:135
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    Cited by:

    1. AfDB AfDB, 2006. "Working Paper 85 - On Measuring Indebtedness of African Countries: A Stochastic Frontier Debt Production Function," Working Paper Series 2299, African Development Bank.
    2. Andaleeb KAOSAR & Idrees, M., 2010. "Testing The Aid-Growth Nexus For South Asia, 1971-2005," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(2).
    3. Ojiambo Elphas & Jacob Oduor & Mburu Tom & Wawire Nelson, 2015. "Working Paper 226 - Aid Unpredictability and Economic Growth in Kenya," Working Paper Series 2169, African Development Bank.
    4. Mahmoud M. Sabra & Shaker Sartawi, 2015. "Development Impacts of Foreign Aid on Economic Growth, Domestic Savings and Dutch Disease Presence in Palestine," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(11), pages 532-542, November.
    5. Hassan Tasleem, 2021. "Impact of Public Debt on Health and Education in SAARC Countries," Journal of Education and Social Studies, Science Impact Publishers, vol. 2(2), pages 52-58.
    6. Chiara Del Bo & Massimo Florio & Silvia Vignetti & Emanuela Sirtori, 2011. "Additionality and regional development: are EU Structural Funds complements or substitutes of national Public Finance?," Working Papers 201101, CSIL Centre for Industrial Studies.
    7. Nkamleu, Guy Blaise, 2006. "On measuring indebtedness of African countries: A stochastic frontier debt production function," MPRA Paper 14661, University Library of Munich, Germany.
    8. repec:lje:journl:v:19:y:2015:i:1:p:71-103 is not listed on IDEAS
    9. AfDB AfDB, 2006. "Working Paper 85 - On Measuring Indebtedness of African Countries: A Stochastic Frontier Debt Production Function," Working Paper Series 2219, African Development Bank.
    10. Petr Blizkovsky & Roman Emelin, 2020. "The Impact of Official Development Assistance on the Productivity of Agricultural Production in Ghana, Cameroon and Mali," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 12(2), June.
    11. Ezebuilo Romanus Ukwueze, 2015. "Determinants of the Size of Public Expenditure in Nigeria," SAGE Open, , vol. 5(4), pages 21582440156, December.
    12. Wasiu O. Abimbola, 2021. "The Role of Foreign-Aid-To-Health in Public Health Expenditure Impact on Economic Growth in Nigeria: An Interactive Term Approach," RAIS Conference Proceedings 2021 0149, Research Association for Interdisciplinary Studies.
    13. Sadia Shabbir & Hafiz M. Yasin, 2015. "Implications of Public External Debt for Social Spending: A Case Study of Selected Asian Developing Countries," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 20(1), pages 71-103, Jan-June.
    14. Arcade NDORICIMPA, 2017. "Analysis of Asymmetries in the Tax-Spending Nexus in Burundi," Journal of Economics and Political Economy, KSP Journals, vol. 4(1), pages 53-70, March.
    15. Samson Adeniyi Aladejare, 2022. "Are public spending determinants significant in per capita budget spending decisions in Nigeria?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 192-206, January.
    16. Rabia Butt & Attiya Yasmin Javid, 2013. "Foreign Aid and the Fiscal Behaviour of Government of Pakistan," PIDE-Working Papers 2013:96, Pakistan Institute of Development Economics.

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