When is aid destabilizing? Analysing profiles of aid flows in four low income countries

by | Mar 1, 2017 | Papers | 0 comments

Kilama Eric Gabin, Matthieu Boussichas, Patrick Guillaumont

Case Study, January 2017

This paper, building on the Chauvet and Guillaumont (2009) analysis of aid volatility, examines through country-case studies the cyclicality and stabilizing profiles of aid inflows.

Aid Inflows

The paper explored the implications of volatile global development assistance under different scenario and provided policy recommendations for developing country governments and development partners to deal with macroeconomic fluctuations. They identified four French speaking low-income countries in sub-Saharan Africa which received volatile aid flows; each of them corresponding specifically to one of the different aid profiles identified by Chauvet and Guillaumont (2009):

  • Procyclical and Stabilizing
  • Procyclical and Destabilizing
  • Contracyclical and Stabilizing
  • Contracyclical and Destabilizing.

Policy Lessons

Aid volatility affects government revenue and expenditures. Stronger reliance on domestic bank financing, lower investment rates and unstable taxes are the most likely costs associated with volatile aid inflows. Nevertheless, the level of international reserves accumulation seems to be associated with the stabilizing effect that could be achieved by increasing the absorptive capacity of the economy.As such, administrative and absorptive capacity constraints need to be addressed in the four developing countries reviewed to increase the stabilizing effect of foreign aid inflows.

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