Macroeconomic Fluctuations, Foreign Aid Shocks and the Forecast of Economic Growth Rate in Nigeria

Abstract

The study examined effectiveness of foreign aid flows also called official development assistance in increasing economic growth in Nigeria. The main objective was to empirically analyze the impact of foreign aid flow and its domestic saving counterpart on the economic growth in Nigeria under the assumption of stable and unstable macroeconomic indicators with the aim of knowing what determines the effectiveness of official development assistance in an economy. Time series data were used sourced from various sources such as the Central Bank of Nigeria statistical bulletin, and World Bank databank. The study employed Augmented Dickey fuller (ADF) to ascertain the stationarity of the time series properties of the research variables. The study made use of Auto-regressive distributed lag (ARDL) Bound Testing approach to co-integration error correction mechanisms(ECM) to determine the dynamic relationship between foreign aid flows and Economic growth in Nigeria. VAR and Granger Causality tests were used to explain the transmission of socks among the variable and to forecasts economic growth rate and official development assistance effectiveness. The findings from the study reveal that there is disequilibrium in the growth rate of GDP in Nigeria. In the short-run the combination of domestic saving and foreign aid variables tend to correct the disequilibrium but at slow speed of adjustment. Given all macroeconomic indicators in Nigeria as stable, domestic saving and foreign aid are more effective to increase the growth of the economy. With the unstable nature of macroeconomic indicators in Nigeria especially, the increasing rate of inflation and exchange rates and the low export rate, official development assistance, that is foreign aid, tend to be impacting negatively on the economy rather than positive. That means foreign aid becomes less effective in the face of unstable exchange rate, inflation rate and low export. Based on the findings, the study recommends that, Policy measures that will diversify the economy, improve export and encourage a more stable exchange rate should be put in place to allow a more effective utilization of foreign aids in the economy.