Fiscal Response to Foreign Aid in an Aid-Recipient Economy: Reassessment for Pakistan

Pakistan is placed among the family of aid dependent developing countries and this characteristic of Pakistan’s economy makes it a pertinent case for scrutinizing budgetary response to aid. The present study looks at the impact of disaggregated aid flows on key fiscal variables in Pakistan using a fiscal response model applied to time series data over the period 1972 to 2016. The findings of the study paint quite a dismal picture prevailing in the country. Aid loans and grants are largely earmarked for development and non-development public spending respectively, and they tend to displace tax revenue in the country which is a grave adverse fiscal consequence of aid for the country.