Impact of Foreign Aid on Saving in Nigeria.


Most developing countries strive to attract foreign aid because of its anticipated efficacy in fostering economic development in recipient countries.

This study examines the impact of foreign aid on savings in Nigeria, using a two step approach of Engle-Granger procedure in a co-integration analysis.

The study uses time series on a number of macroeconomic variables, spanning for the period 1970-2009. Secondary data were sourced from Central Bank of Nigeria (CBN) statistical bulletin (various issues).

Results indicate that in the long-run, foreign aid (ODA), impacts positively on national savings (GNS) and negatively in the short –run. On the contrary, the long-run effect of foreign direct investment (FDI), on national savings is negative and positive in the short-run.

The variables, gross domestic product (GDP) and interest rate impact positively on national savings both in the long and short run.

The error correction mechanism (ECM), term was found to be negative and significant, which confirms the existence of a long-run relationship between foreign aid and savings in Nigeria.

Based on the above findings, it is recommended that aid supporting institutions and policies require much strengthening in order to increase the magnitude of its impact.

Government should also, establish a civil society fund on aid effectiveness, results and accountability to support the review and independent accountability function of national civil society organizations in aid effectiveness for results and accountability.

Table Of Contents

Title                                            i

Approval Page                        ii

Dedication                              iii

Abstract                                    iv

CHAPTER ONE: Introduction

Background of the Study                               1

Statement of Problem                              4

Objective of the Study                                    7

Hypotheses                                                        8

Significance of the Study                                8

Scope and Delimitation of Study                       9

CHAPTER TWO: Literature Review

Conceptual Framework                                   10

Theoretical Framework                                     13

Empirical Literature                                          18

Limitations of Previous Studies                       24

CHAPTER THREE: Methodology

Theoretical Background                                          27

Model Specifications                                               29

Justification of the Model                                         31

Estimation Procedure                                                  31

Data                                                                                31

Econometric Software                                              31


Data, Analysis and Result                                       32


Summary, Conclusion and Recommendation               40



Background of Study

Fundamentally, two opposing views have emerged in development economics on the topic of macroeconomic effect of foreign aid on savings.

On the one hand, from the early theoretical development, it was learnt that the traditional pro-aid view, advocated aid on the premise that it complements domestic resources, eases foreign exchange constraints, transfers modern know-how and managerial skills, and facilitates easy access to foreign markets, all of which contribute to economic growth (Chenery and Strout, 1966, Papanek 1972, 1973 etc.).

On the other hand, based on the empirical evidence, the radical anti-aid view criticizes aid on grounds that it supplants domestic savings, worsens income inequality, funds the transfer of inappropriate technology,

Finances ineffective projects, and in general, helps sustain bigger, more corrupt and inefficient governments in the recipient countries (Griffin and Enos 1970, Weisskoff 1972 etc).

After World War II and until recently, Official Development Assistance (ODA) from developed countries was the principal source of external finance for developing countries.

The principal aim of foreign aid was to help alleviate poverty, provide emergency relief, assist with peacekeeping efforts and to increase infrastructural development.


Abiola, A.G and Olofin, O.P. (2008), Foreign Aid, Food Supply and Poverty Reduction in Nigeria – Examination of Possible Nexus. Obafemi Awolowo University, Ile-ife – Dept of Economics.

Abbott, G. C., (1973), “Two Concepts of Foreign Aid”, World Development,

Adebiyi (2005) Saving-Growth relationship in Nigeria: An Empirical Evidence. African Review of Money Finance and Banking, 159-178.

Adofu .I. (2010): Accelerating Economic Growth in Nigeria, The Role of Foreign Direct Investment. Department of Economics, Kogi State University, Anyigba.

Agarwal, P. (2001) “The Relation between Saving and Growth: Co- integration and Causality Evidence from Asia,” Applied Economics, 33, pp.499-51

Ajayi B (2004). ‘Issues of Globalisation in Africa: The Opportunities and the Challenges. Ibadan J. Soc. Sci. 2(1): 1-21.

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