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Foreign Aid In Ethiopia

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Now a day’s most of foreign aid to Ethiopia comes from the western countries and other multilateral organizations. Comparatively the total flow of foreign aid has increased under the current regime due to changes in policies which meet the interests of donors, and adoption of a market-oriented economic system. Since the policy change by the present regime the magnitude of aid has increased continuously. Following the change of government in 1991 and the adoption of the structural adjustment program in 1992 in particular, the country has received a significant amount of aid. A large inflow of concessionary loans and grants has occurred since 2001, following the issuance of the first poverty reduction strategy paper (known as the Sustainable …show more content…
Although there was an increasing ODA inflow, the savings-investment gap was as high as 20 percent of GDP, leaving a huge gap to be bridged by non-ODA inflows (Getnet Alemu, 2009).
The role of foreign aid on economic growth in Ethiopia

The presence of a resource gap (saving-investment, fiscal and foreign exchange gap) in less developed countries forces those country to look outward for foreign aid in order to fill the gaps, these gaps are perceived to be the binding constraint for economic growth( Tasew Tadesse, 2011). As Ethiopia’s economy is characterized by a massive inflow of foreign aid, it is important to review studies conducted on this area.

The most permanent feature of the Ethiopian economy is the presence of resource (financial) gap. The resource gap can be explained as the presence of savings investment gap, foreign exchange gap and fiscal gap. In Ethiopia, in the near past years the savings-investment gap has been widening from an average of 1.1% of GDP during the Imperial period (1960-74) to 6% of GDP during the Derg period (1974-91) to 11.7% of the GDP in the EPRDF (1991- 2008) (Tasew Tadesse 2001). The presence of resource gap pushes the country to rely on an inflow of foreign aid to close the …show more content…
(2002) examined the effect of foreign aid on public spending with particular reference to the case of aid fungibility in Ethiopia. The analysis was made using OLS estimation. In estimating the short run effect, he used Error Correction Model. The estimated effect in education and agriculture sectors were marked by non-fungiblity in which case the sect oral aid impact on sect oral spending have crowding in effect. However, for transport and communication and construction sector, aid fungiblity seems to exist which means that there is crowding out effect. In this case, the sect oral aid effect on the sectors spending is negative. For non-developmental expenditure, aid is found to be positively affecting debt servicing expenditure but insignificant for general service and defense

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