Effects of Foreign Aid on Public Expenditure
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Foreign aid represents an important source of finance in most developing countries. It is estimated that foreign aid accounts for about 10 percent of the GDP and 40 – 70 percent of the government’s annual expenditure budget in Sub-Saharan Africa (SSA). It is estimated that over 90 percent of foreign aid projects in Sub-Saharan Africa (SSA) are implemented by foreign consulting firms. Critics of argue that foreign aid substitutes domestic resources through declined savings, reduced government tax revenue and increased government consumption. Aid reduces fiscal deficit in these countries and sets free other resources which can be utilized for debt service and other expenditures. There is need to analyze the effects of aid on the budget process by establishing the link between foreign aid and public expenditure.
In spite of this massive foreign aid, developing countries are still poor today. In fact, no amount of foreign aid to a developing country like Uganda will solve its development predicament without addressing the core fiscal constraints facing the country, which are more often a result of misdirected or extravagant public expenditure projects, weaknesses in tax administration and corruption. The amount of annual public revenue lost through these loopholes is probably three to five times the foreign aid inflows.
Uganda is a country hailed by international donors, especially the World Bank and the International Monetary Fund, as an African economic success story. The country depends on foreign aid for nearly 50 percent of her budget which has now been reduced to nearly 33 percent in the current financial year .Foreign aid is important in Uganda because it finances free primary education, free basic health care, and infrastructure rehabilitation and maintenance. However, is it true that without foreign aid Uganda would lack revenue to meet those public expenditure needs?
Uganda has had a large
INTRODUCTION
1.1 Background to the study
Foreign aid represents an important source of finance in most developing countries. It is estimated that foreign aid accounts for about 10 percent of the GDP and 40 – 70 percent of the government’s annual expenditure budget in Sub-Saharan Africa (SSA). It is estimated that over 90 percent of foreign aid projects in Sub-Saharan Africa (SSA) are implemented by foreign consulting firms. Critics of argue that foreign aid substitutes domestic resources through declined savings, reduced government tax revenue and increased government consumption. Aid reduces fiscal deficit in these countries and sets free other resources which can be utilized for debt service and other expenditures. There is need to analyze the effects of aid on the budget process by establishing the link between foreign aid and public expenditure.
In spite of this massive foreign aid, developing countries are still poor today. In fact, no amount of foreign aid to a developing country like Uganda will solve its development predicament without addressing the core fiscal constraints facing the country, which are more often a result of misdirected or extravagant public expenditure projects, weaknesses in tax administration and corruption. The amount of annual public revenue lost through these loopholes is probably three to five times the foreign aid inflows.
Uganda is a country hailed by international donors, especially the World Bank and the International Monetary Fund, as an African economic success story. The country depends on foreign aid for nearly 50 percent of her budget which has now been reduced to nearly 33 percent in the current financial year .Foreign aid is important in Uganda because it finances free primary education, free basic health care, and infrastructure rehabilitation and maintenance. However, is it true that without foreign aid Uganda would lack revenue to meet those public expenditure needs?
Uganda has had a large
References: C. Adam. (2005). Aid, Public Expenditure and Dutch Disease Ideas.repec.org/p/wpa/www.pdc/0409027.htlm Devarajan S. A.S. Rajkumar and V. Swaroop. 1998. “What does aid to Africa finance?” AERC/ODC project on Managing a Smooth Transition from Aid Dependence in Africa, Washington, D.C. Mwenda. A. (2006). Foreign Aid and the weakening of Democratic Accountability in Uganda www.cato.org/pubs/fpbriefs/fpb88.pdf Njeru, James. 2004. “The impact of foreign aid on public expenditure: The case of Kenya”. African Economic Research Consortium, Research paper no. 135 (March) Tabi A White, H. 1994. “The Macroeconomic impact of Development aid: A critical survey”. Journal of Development Studies, 21(2).163-240.