Effect of Foreign Aid on fiscal behavior: a case of Uganda

Abstract

This study examines the effect of foreign aid on the fiscal behavior of Uganda. Particularly, the study exposes the impact of foreign aid on domestic revenue mobilization, government spending, and external financing with a particular focus on Uganda. This study adopted an Autoregressive Distributed Lag (ARDL) regression model on data related to domestic revenue, government spending, and external financing as well as data on foreign aid. The key results indicate that in the long run, an increase in foreign aid leads to a reduction in domestic revenue mobilization. Furthermore, the results also indicate that an increase in foreign aid will increase government spending in the long run. Foreign aid has a positive effect on external financing, that is to say, an increase of in foreign aid will lead to an increase in external financing. The key policy message includes the implementation of careful monitoring, improved finance management and reduced domestic borrowing as policy conditions attached to aid, improvement in government’s revenue mobilization efforts, effective management of the country’s debt, deliberate action to direct revenue resources toward investment expenditure as well as handling foreign aid with utmost efficiency to avoid price instability.