The Implication of Foreign Aid on Economic Growth in Nigeria

Abstract

The shortage of domestic savings needed for investments and the import requirements necessary for a certain production level and earnings from foreign exchange has made the inflow of foreign aid necessary to drive growth in a developing nation like Nigeria. The objective of this study therefore is to investigate the implication of foreign aid on economic growth in Nigeria for a 40- year time period spanning from 1981 to 2020. Time series data on gross domestic product, official development assistance and technical cooperation grant were sourced from the Central Bank of Nigeria statistical bulletin and the World Development Indicators database. The Unit root test, Co-integration test and Error Correction technique were employed as the main analytical tools in the study. The variables were stationary at first difference, according to the Augmented Dickey Fuller stationarity test. The results of the Johansen co-integration test indicated that the variables have a long-term association. The ECM result showed that ODA has a positive relationship with economic growth (GDP) in Nigeria. Also, TCG positively impacted economic growth in Nigeria for the period covered by the study. The impact of ODA and TCG were however not statistically significant. Hence, it was concluded that foreign aid did not significantly drive economic growth in Nigeria. Based on the empirical findings of this study, the following recommendations were made; government should ensure that the official development assistance received from international donors is channeled to developmental projects which should be monitored closely to ensure that they are efficiently utilized. Also, the inflow of technical grant should be encouraged to ensure human capital development and sustain growth in Nigeria. Finally, sound policies should be put in place to enable Nigeria transition from being a recipient of foreign aid to being a donor country.