The impact of foreign aid on the fiscal behaviour of the Ugandan government.



* Foreign aid is a significant element of Uganda's long-run fiscal system.

* Aid is associated with increased tax collection effort and public spending in Uganda

* Development assistance is also associated with reduced domestic borrowing in Uganda.

* Aid is not sufficient to balance Uganda's budget.

* Budget spending plans in Uganda have been adjusting to tax revenues.

Foreign aid donors hope that their efforts will contribute to the development of the target country and provide the necessary resources to fill gaps in the sectors seen as relevant. However, because foreign aid will often be distributed through the state, understanding its effects on the fiscal behaviour of governments is a necessary condition for its effective and successful deployment. The new incentives and conditions created by the addition of aid to the action of the state will disrupt how it disposes of the fiscal tools of tax revenues, expenditure and public debt in uncertain ways. Although there is an expectation that aid will increase spending, raise taxation and decrease borrowing, this is clearly too general a statement to always hold true. The existing body of research shows that country-based evidence is the only way to reliably explore these dynamics as experiences between countries vary due to their different institutional foundations.

On average, between 1990 and 2006, Uganda received foreign aid worth 11 per cent of its GDP. This long-term interaction of aid with government spending, tax revenues and public borrowing, appears to have led to a situation where development assistance has become incorporated into the country's fiscal calculations on par with those other variables. Indeed, given that governments may count on foreign aid when planning their policies it can be argued that the effectiveness of foreign aid is best ensured by transparent, reliable and predictable aid contributions. This seems certainly to be true in the case of Uganda's long experience with development assistance.

The dynamic of aid and fiscal policy has been explored in several other African countries. In Ghana, aid has been found to increase the tax base, facilitating higher revenues and thus allowing the government to increase spending without needing to borrow more. On the other hand, in Zambia international aid has been reported to discourage efforts at tax collection and to increase government borrowing. This has not been the case in past studies of Malawi and Uganda...

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