The Impact of External Aid on Public Capital and Current Expenditures in Jordan (1979-2015)

Abstract

This study aims to examine the impact of external aids on the capital and recurrent components of the Jordanian government budget during the period 1979-2015. Two standard methods are used in the analysis. The first method is used to estimate the impact of external aids on capital expenditure, while the second is used to estimate  the impact on current expenditure. Based on time series data, stationarity tests, co-integration tests, and vector error correction model (VECM) were used as methods of estimation.

The results of vector error correction model showed that the adjustment coefficients in the equations of the current expenditure and the capital expenditure were negative and significant. This confirms the existence of a long-term relation between the economic variables used as well as capital and current expenditure in Jordan. The relationship also demonstrated that there is a positive effect of foreign aid on both capital and current expenditures, in the long and short terms. Accordingly, the study recommends adopting a package of policies aiming at: First, using foreign aid more efficiently to support the development process. Second, the government should increase its reliance on its own resources to finance its current expenditure, which may therefore reduce the disbursement of external aid to such expenditures.