Impact of Foreign Aid on Public Expenditure in Nigeria: Application of Vector Error Correction Model

Abstract

This study explores the relationship between government expenditure and foreign aid in Nigeria using cointegration analysis and vector error correction model. Applying data for 43 years from 1970 to 2012, the results of Johansen and Enger- Granger cointegration test suggest that there is positive and long run relationship between foreign aid and government expenditure. We found also, that the coefficient estimate of the foreign aid is not significant in the long run but, in the short run effect of increase in foreign aid is more insignificant both in magnitude and level of significance. The study also finds that foreign direct investment and real gross domestic product have positive impact on the government expenditures i.e. they provide important information as determinants of government expenditure in Nigeria.