Macroeconomic Fluctuations, Foreign Aid Shocks and the Forecast of Economic Growth Rate in Nigeria

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1 IOSR Journal of Economics and Finance (IOSR-JEF) e-issn: , p-issn: Volume 8, Issue 2 Ver. III (Mar. - Apr. 2017), PP Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae in Nigeria Ayeni, R. K. (Ph.D) Deparmen of Economics, Ekii Sae Universiy, Ado Ekii, Nigeria Absrac: The sudy examined effeciveness of foreign aid flows also called official developmen assisance in increasing economic growh in Nigeria. The main objecive was o empirically analyze he impac of foreign aid flow and is domesic saving counerpar on he economic growh in Nigeria under he assumpion of sable and unsable macroeconomic indicaors wih he aim of knowing wha deermines he effeciveness of official developmen assisance in an economy. Time series daa were used sourced from various sources such as he Cenral Bank of Nigeria saisical bullein, and World Bank daabank. The sudy employed Augmened Dickey fuller (ADF) o ascerain he saionariy of he ime series properies of he research variables. The sudy made use of Auo-regressive disribued lag (ARDL) Bound Tesing approach o co-inegraion error correcion mechanisms(ecm) o deermine he dynamic relaionship beween foreign aid flows and Economic growh in Nigeria. VAR and Granger Causaliy ess were used o explain he ransmission of socks among he variable and o forecass economic growh rae and official developmen assisance effeciveness. The findings from he sudy reveal ha here is disequilibrium in he growh rae of GDP in Nigeria. In he shor-run he combinaion of domesic saving and foreign aid variables end o correc he disequilibrium bu a slow speed of adjusmen. Given all macroeconomic indicaors in Nigeria as sable, domesic saving and foreign aid are more effecive o increase he growh of he economy. Wih he unsable naure of macroeconomic indicaors in Nigeria especially, he increasing rae of inflaion and exchange raes and he low expor rae, official developmen assisance, ha is foreign aid, end o be impacing negaively on he economy raher han posiive. Tha means foreign aid becomes less effecive in he face of unsable exchange rae, inflaion rae and low expor. Based on he findings, he sudy recommends ha, Policy measures ha will diversify he economy, improve expor and encourage a more sable exchange rae should be pu in place o allow a more effecive uilizaion of foreign aids in he economy. Keywords: GDP growh rae, Official Developmen Assisance, Saving rae, Exchange rae, ARDL I. Inroducion Foreign aid or foreign assisance, by definiion, are designed o promoe economic developmen and welfare and are provided as eiher grans or subsidized loans by Developmen Assisance Commiee (DAC) of he Organizaion for Economic Cooperaion and Developmen (OECD).The DAC classifies foreign aid flows ino hree broad caegories. Official developmen assisance (ODA) which is he larges, consising of aid provided by donor governmens o low- and middle-income counries. Official assisance (OA) is aid provided by governmens o richer counries wih per capia incomes higher han approximaely $9,000 (e.g., Bahamas, Cyprus, Israel and Singapore) and o counries ha were formerly par of he Sovie Union or is saellies. Privae volunary assisance includes grans from non-governmen organizaions, religious groups, chariies, foundaions, and privae companies. The global communiy has long considered ha developing counries need a vas inflow of foreign resources in order o fill he savings and foreign exchange gaps associaed wih a rapid rae of capial accumulaion and growh needed o prevail widespread povery and o increase living sandards. The various form of inflow of foreign aid was welcome in developing counries o bridge he gap beween savings and domesic invesmen and herefore, o accelerae growh [1].Foreign assisance has significan role for every naional economy regardless of is level of developmen. For he developing counries, i is used o increase accumulaion and rae of invesmens o creae condiions for more inensive economic growh. Even he inernaional communiy shares he view ha foreign capial inflow o developing counries is necessary o foser economic developmen and povery eradicaion. For example, in he 1999, former Unied Naions (UN) Secreary General, Koffi Annan while delivering a speech in he World Economic forum in Davos, Swizerland proposed ha sae; privae invesors and civil sociey should join hands ogeher o achieve economic developmen. Nigeria is a counry which is well endowed wih boh human and naural resources; a counry ha was known o be a larges exporer of agriculural commodiies like cocoa, coffee and rubber and among ohers. Bu, since he discovery of oil booms in he year 1958, Nigeria has mosly depended on proceeds from he sale of crude oil a he expense of oher producive secors such as solid minerals (in, iron ore, coal, limesone, DOI: / Page

2 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In biumen, niobium, lead, zinc ec.), which are available, manufacuring and agriculure. The counry s overdependence on oil amids he declining sae of oher producive secors has weakened he non-oil secor of he economy. This has also classified Nigeria under he developing economies mean o enjoy he firs caegory of foreign aid, ha ids he official developmen assisance. Furhermore, he remendous revenue accruing from oil and mismanagemen of such revenue realized has reduced Nigeria o a mono-culural economy. This made Nigeria economy producive capaciy runs below expecaion and led o inadequae savings and deerioraing erms of rade, high exchange rae, inflaion rae and unemploymen rae. The economy enered a recession recenly. As a December 2016, inflaion rae was 18.55, parallel exchange rae was abou 485 naira o a dollar and he growh rae was negaive. GDP annual growh rae in Nigeria fell from 2.11% in he las quarer of 2015 o -0.36%, in he firs quarer of 2016, and furher o and in he second and hird quarers of 2016 respecively [2] The world invesmen repor capures Nigeria as he op FDI desinaion in Africa in 2011, wih $8.92bn, up from $6.10bn recorded in Souh Africa is nex wih $5.81bn while Ghana $3.22bn, Congo $2.93bn and Algeria $2.57bn [3]. Also beween 2014 and 2016, Nigeria ranked second among he op en African counries ha enjoyed official developmen assisance as shown in Table 1 below. Table 1: Top 10 ODA Recipiens by Recipien in Africa Counry USD million Percenage Ranking Ehiopia s Egyp Kenya nd Tanzania Nigeria D R Congo rd Morocco Mozambique Souh Sudan Uganda h oher recipiens Toal Source: hp// Developmen aid a a glance, 2016 ediion Despie he fac ha Nigeria is one of he op desinaion of official developmen assisance in Africa, i is sill incredible ha we could no ascerain and confirm where hose foreign capial are being channeled because Nigeria economy is sill suffering from lack of infrasrucural faciliies, hosile environmen, backwardness in echnology, problem of unemploymen and over-dependence on impored producs amongs oher facors and recenly in economic recession. As he economy of Nigeria recenly dropped o a recession, i is herefore, essenial o empirically invesigae wheher he role of foreign aid wih respec o he economic growh, can help revive he economy in he long-run. One of he main reasons for giving foreign aid, he mos noable argumen is o bridge he gap beween domesic saving and domesic invesmen and herefore, o accelerae growh.based on hese observaions on foreign aid flows and economic growh in Nigeria, we raise wo major empirical quesions: does foreign aid flows promoe or reard economic growh? and, Under wha macroeconomic condiions does foreign aid and saving rae become more effecive o increase he growh rae of he economy? Thus, his paper aemps o answer he above quesions by empirically analysing he impac of foreign aid flow and is domesic saving counerpar on he economic growh in Nigeria under wo major assumpions. The firs is he sable macroeconomic indicaors assumpion, while he second is he unsable macroeconomic indicaors assumpion. II. Brief Review Of Lieraure [3], examined aid, macroeconomic policy environmen and growh in sub-saharan Africa, using a panel regression model covering weny Sub-Saharan African counries. His esimaion was done wih OLS and TSLS over a period of 1970 o His empirical finding showed ha a sound macroeconomic environmen is sine qua non for he effecive conribuion of aid o susainable growh. [4], analyzed he impac of foreign aid on economic growh in Nigeria for he period , using coinegraion echniques and he empirical analyses rely on he neo-classical approach. Empirical finding shows ha aid flows has significan impac on economic growh in Nigeria. [5], re-examined foreign aid led growh in Wes Africa. The sudy concluded ha panel co-inegraion resuls indicae a long run relaionship beween aid and growh in he whole panel. There is evidence of unidirecional causaliy from foreign aid o economic growh, and from economic growh o foreign aid and here are cases where boh variables are independen. DOI: / Page

3 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In [6], invesigaes he correlaion beween foreign aid and growh in per capia GDP using annual daa from he 1960 o 1997 for a sample of 71 aid-receiving developing counries. This paper concludes ha he effec of foreign aid on economic growh is posiive, permanen, and saisically significan. [7], address direcly he mechanisms via which aid impacs growh. Using panel daa for sample of 25 Sub- Saharan African counries over he period 1970 o 1997, he auhors deermined ha foreign aid has a significan posiive effec on economic growh. [8], use panel VAR analysis as well as Granger causaliy es for idenifying he links beween he capial flows and growh along wih savings for 18 Asian and Lain American developing counries over he period of which suggess ha his link exiss. [9], wih he use of panel daa regression, aemped o quanify he impac of foreign aid on economic growh in developing counries over he period Making use of cross-counry daa comprising hiry-nine counries, he found evidence ha foreign aid significanly and negaively correlaes wih growh in developing counries. [10], examines he inerplay of foreign aid, exernal deb and economic growh in Nigeria, covering he period , using seemingly unrelaed regression esimaion (SURE) model and he resuls show ha foreign aid has posiive impac on growh in Nigeria. [11], examined an empirical analysis of he impac of foreign aid on capial generaion in Nigeria ranging from , using Ordinary Leas Squared (OLS) echnique and he resuls derived showed ha foreign aid conribued negaively o capial generaion in Nigeria and he accompanying variable which was exernal deb also has a negaive conribuion o capial generaion. [12], examined foreign aid, Domesic savings and Economic growh in Souh Asia, covering he period 1960 o 2008, using simulaneous equaion sysem and he resul indicae ha aid has posiive and significan effec on he growh raes of he five naions sudied. [13], analysis he ineracive effec of aid and policy susainable economic growh in Zimbabwe from , using Ordinary Leas Square (OLS) echnique and he resul shows ha foreign aid and real GDP (economic growh) have a negaive relaionship. [14], examined he impac of foreign aid and domesic savings on economic growh in he WAMZ counries, covering he period 1980 o 2012, using panel daa Analysis and he resuls indicae foreign aid is negaively relaed wih economic growh. [15], examine he impac of foreign capial flows on he growh performance of he Nigeria economy, over he period , using muliple regression analysis and he empirical resuls shows ha foreign capial inflows had a posiive and significan effec on economic growh. [16], Examined he link beween foreign aid and economic growh in Nigeria, covering he period 1981 o 2012, using ordinary leas square, Augmened Dickey Fuller (ADF) es, Johansen co-inegraion es and he resul shows a negaive and non-significan relaionship beween foreign aid o Nigeria and GDP. [17], examined he relaionship beween foreign direc invesmen and economic growh in 68 developing counries,using panel daa, covering he period and he resul shows ha negaive relaionship exis beween foreign direc invesmen and economic growh. [18], examined he nexus beween foreign direc invesmen and economic growh in 32 counries (15 OECD and 17 non- OECD), using panel daa, covering he period and he empirical findings show (posiive for OECD bu negaive effec for non- OECD). [19], examines he effeciveness of foreign aid, foreign direc invesmen and economic growh in seleced 28 Asian counries, covering he period , using saic and dynamic panel daa echniques and he resul shows ha inflow of foreign direc invesmen and foreign aid were significan facors negaively affecing economic growh. [20], in a sudy of 77 counries over sub-periods , and , show ha foreign aid posiively affecs economic growh in developing counries. This is consisen wih heory of foreign aid, which assers ha overseas developmen assisance acceleraes economic growh by supplemening domesic capial formaion [1]. [21], conduc a causaliy es beween foreign aid and economic growh for four Asian and four African counries and find ha excep for Kenya and Nepal, foreign aid is posiively and significanly relaed o economic growh. III. Theoreical Background, Model Specificaion And Esimaion Two-Gap Analysis was employed as he heoreical framework for our model. The Two-Gap analysis of developmen is conained in he Pos-Keynesian growh models for closed economies as designed by Harrod and Domar. They ried o idenify he pre-condiions for he economic growh of marke economies as domesic savings and foreign aid. These wo precondiions are essenially rooed in he Nigerian economy and hese are characerized by inadequae domesic savings which definiely has effec on invesmen hereby resuling in he DOI: / Page

4 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In SAVING GAP. To close his gap according o he model requires foreign aid flows. Nigeria is also characerized by insufficien foreign earnings arising from inabiliy o expor vis-à-vis high imporaion leading o shor fall in foreign exchange. This leads o a foreign exchange consrain called a TRADE GAP. This can be correced by foreign aid. The wo-gap model of growh has been adoped by many auhors as a ool o bring economy o bear on he pah of growh and if possible, liberae he economy. This sudy builds on he work of [18], which ook is roo from wo-gap modelwih lile modificaion. The model specificaion considers he Gross domesic produc growh rae (GDPGR) as dependen variable, while Foreign aid proxy wih Official Developmen Assisance (ODA), inflaion rae (INF), Exchange rae (EXR), Expor (EXP), Savings rae (SA), are independen variables. Two forms of he model were specified as a modificaion o previous auhors specificaions. The firs form specified economic growh rae as solely a funcion of domesic saving rae (SAV) and foreign assisance rae (official developmen assisance ODA) as suggesed by he wo gap model, holding oher macroeconomic variables consan. This is shown in equaion 1. GDPGR f ( SAV, ODAR )... 1 The second form of he model is specified relaxing he assumpion of consan macroeconomic indicaors as currenly winessed in he Nigeria economy, high rae of inflaion, high exchange rae, and low expor rae. The model is specified hus; GDPGR f ( SAV, ODAR, INF, EXR, EXPR )... 2 The sudy employed he coinegraion and he vecor error correcion echniques o measure he long run equilibrium and he shor-run dynamic relaionships among he variables. Equaions 1 and 2 are saed explicily gdp 0 1sav 2odar e as follows: gdp inf exr exp r sav odar e Where; gdpgr = Gross Domesic Produc Growh rae inf = inflaion rae exr = exchange rae expr = expor rae sav = savings rae oda = official developmen assisance, a measure of foreign aid. This sudy used annual daa on Gross Domesic Produc growh rae, Official Developmen Assisance, Expor Rae, and Saving rae. The daa were sourced from World Bank daa bank while oher variables such as Exchange rae (EXR), Rae of Inflaion (INF) included as macroeconomic conrol variables were sourced from Cenral Bank of Nigeria (CBN) saisical bullein. To ge a beer resul of fiing and make hese variables in he same order of magniude, we make appropriae ransformaions o GDP, Expor and ODA, whose unis are billion while he inflaion rae and EXR say he same. X X i growh 100 *log X 1 where X gdp,exp, oda IV. Descripive Saisics Of Daa 4 5 Fig. 1.0: Comparaive Trend Analysis of Growh rae, Saving rae and Foreign Aid DOI: / Page

5 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In From he rend analysis above GDP growh rae (GDPGR) appears o be more volaile han he official developmen assisance growh rae (ODAR) a proxy for foreign aid. The rae a which foreign aid grows is slower han he growh rae of he economy. Foreign aid seems o be very low beween 1990 and These periods were he miliary regimes when Nigeria suffered series of diplomaic sancions ha did no favour foreign aids. There is a jump in GDP growh rae beween 2003 and 2005 and from 2011and in foreign aid in 2005 in figure 1. These periods were he period of resoraion of civilian governmen in Nigeria; hence sancions were removed on he Nigeria economy ha araced inernaional assisance. I is o be observed also ha while official developmen assisance remained sable beween 2007 and 2014, growh rae of he economy flucuaes. Economic growh rae in Nigeria became negaive in 2016 despie he coninuous flow of developmen assisance ino he economy. V. Empirical Resuls And Discussion To es for saionariy of he variables, he Augmened Dickey Fuller (ADF) uni roo es was conduced on each series. Accordingly he null hypohesis in each case is ha here is a uni roo in each series ha is each variable is non-saionary. The resul is presened in Table 2. From he resul in Table 2, ADF es shows ha GDPGR, SAV and ODAR are saionary a levels while oher variables, EXR, INF and EXPR are saionary a firs difference. Tha means he condiion for Johansen coinegraion echnique is me for equaion 3 bu no me for equaion 4. The resuls of he Johannsen coinegraion echnique for equaion 3 are repored in Tables 3 and 4. Table 2: ADF Uni Roo Tes Resul A levels 1 s Difference Variable ADF Tes 1%CV 5%CV ADF Tes 1% CV 5% CV Level of Inegraion GDPGR I(0) EXR I(1) SAV I(0) INF I(1) EXPR I(1) ODAR I(0) Table 3.: Unresriced Coinegraion Rank Tes (Trace) Unresriced Coinegraion Rank Tes (Trace) Hypohesized Eigenvalue Trace 0.05 Criical Prob.** No. of CE(s) Saisics. Value None * A mos A mos Trace es indicaes 1 coinegraing eqn(s) a he 0.05 level Table 4: Unresriced Coinegraion Rank Tes (Maximum Eigenvalue) Coinegraion Rank Tes (Maximum Eigenvalue) Hypohesized Eigenvalue Max- Eigenvalue Saisic 0.05 Criical Prob.** No. of CE(s) Value None * A mos A mos Max-eigenvalue es indicaes 1 coinegraing eqn(s) a he 0.05 level Boh he race es and he maximum eigenvalue ess repor ha here is one coinegraing equaion in equaion 3. The normalized long-run equilibrium relaionship, normalized o gdpgr, is given in equaion 5. (Noe sandard errors in parenhesis). This is he long-run dynamic relaion beween economic growh rae and he wo sources of financing invesmen, given all macroeconomic indicaors as consan. gdpgr sav odar ( ) ( ) ( ).5.0 The resul in equaion 5.0 shows ha, holding all macroeconomic indicaors consan, here is a posiive long-run relaionship beween domesic saving and economic growh; likewise beween foreign assisance and economic growh. An increase in boh gaps, he domesic and he foreign, will increase economic growh. Tha is he long-run marginal effecs of saving rae and foreign assisance rae on economic growh rae are posiive when macroeconomic variables like exchange rae, inflaion rae and expor rae are all sable. DOI: / Page

6 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In Table 5: Unresriced ECM (Shor-run Dynamics) Dependen Variable: D(GDPGR) Coefficien Sd. Error -Saisic Prob. ECM(-1) D(GDPGR(-1)) D(GDPGR(-2)) D(SAV(-1)) D(SAV(-2)) D(ODAR(-1)) D(ODAR(-2)) C R-squared The inerpreaion of he error correcion mechanism in Table 5 is as follows. The presence of coinegraion beween GDPGR and he se of domesic saving and foreign assisance variables show ha here exiss a long run equilibrium relaionship in he model. The negaive value of he ECM coefficien ( ) confirms ha here is disequilibrium in economic growh rae in he shor run which he se of variables in he model are rying o correc in he long run. Tha is here is change in economic growh rae (measured by GDPGR), DGDPGR 0, if eiher here was a disequilibrium las period (ECM 0) in which case some changes in all he exogenous variables (domesic saving and foreign aid) are necessary o resore equilibrium, or here was a change in he exogenous variables in he curren period which because of he equilibrium condiion (as shown in he coinegraing equaion), implies ha GDPGR should also change. The rule of humb is ha if he coefficien of ECM is greaer han zero (posiive) i means here is a surplus of he dependen variable, which is economic growh rae, a reducion in savings and foreign aid is herefore required o resore equilibrium in he long run. Bu if oherwise he coefficien is less han zero (negaive) as i is in Table 5, here is deficiency in growh rae of GDP and increase is required hrough he se of exogenous variables o resore equilibrium in he long run. The resuls in Table 5 hus show ha here is disequilibrium in growh rae of gdp in he shor-run which he se of saving and foreign assisance variables end o be correcing. The speed a which his adjusmen is made in he shor run is capured by he magniude of he ECM coefficien. The speed here is , which is slow. Tha means improvemen in he domesic saving and inflow of foreign assisance condiions in he shor run can correc abou 36.6% of he deficiency in economic growh rae in he long run, given ha all oher macroeconomic indicaors are sable. Since all variables in equaion 4 are no saionary a he same level as shown in he resul in Table 2, he condiion for Johansen co-inegraion echnique is no me for esimaing equaion 4, ARDL Bound esing coinegraion approach developed by Peseran, Shin and Smih (2001) was preferred o es he long-run equilibrium relaionship among he variables. The bound es regression is heoreically specified in wo ways, he original and he E-views version. The original version of he specificaion in equaion 4.0 is as shown below: (log gdpgr ) 0 j (log gdpgr j ) 1 (log inf j )... 3 (log exp r j ) 4 (log sav j ) 5 (log oda... log(inf ) log( exr ) log(exp r ) log( sav where j 1,2, j 1 (log exr 2 ) log( gdpgr 0 ) log( oda 5 j 1 )... 1 )... ) e Equaion 6 is he ARDL model of he economic growh rae wo gap relaionship which is also known as he unresriced ECM. The lagged firs difference AR variables are he shor-run dynamics while he DL variables are he long run impacs. Using E-views 9 version, he maximum lags for he endogenous and exogenous variables were seleced in such a way ha he degree of freedom (defined as n-k) was no less han 30. The Linear Trend opion was seleced because he wo major variables and mos of he conrol variables were rended. The appropriae lag selecion for he opimal lag was deermined using he Schwarz (SC) crierion. An ARDL(2, 3, 2, 0, 1, 0) was seleced ha is, 2 lags was seleced as opimal for gdpgr, 3 lags for exr, 2 lags for sav, zero lag for inf, 1 lag for expr and zero lag was seleced for odar. The resul is shown in Table 6 in Appendix 1. I is also he es regression on which he Bound es was conduced. The Bound es was conduced on he unresriced ECM in Appendix 1, by conducing he F saisics of he hypohesis, H 0 agains he alernaive. As a check we perform a Bounds F-es of H : 0 1 2, if he F-saisic is greaer han he Criical Value Bounds for he upper bound I(1), his would suppor he conclusion ha here is a long-run relaionship beween he variables. If he compued F saisic falls below he lower bound we would conclude ha he variables are I(0), so no coinegraion is possible by DOI: / Page

7 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In definiion. Finally if he F saisics falls beween he bounds, he es is inconclusive, we may rely on he resul of Granger causaliy and/or he shor-run analysis. The resul of he Bound Tes is shown in Table 7. Table 7: ARDL Bound Tes Included observaions: 31 H 0: No long-run relaionships exis Tes Saisic Value K F-saisic Criical Value Bounds Significance I0 Bound I1 Bound 10% % % % In Table 7.0, he value of our F-saisic is , which is greaer han he upper bound a boh 5% and 1% level of significance. As he value of our F saisic exceeds he upper bound we conclude ha here is evidence of a long-run relaionship among he variables. We can herefore esimae boh he shor-run and he long-run dynamics form he underlying ARDL resul of Appendix 1. The resul is shown in Table 8. Table 8: ARDL Coinegraing and Long run Forms Coinegraing Form (Shor-run Dynamics) Variable Coefficien Sd. Error -Saisic Prob. D(GDPGR(-1)) D(EXR) D(EXR(-1)) D(EXR(-2)) D(SAV) D(SAV(-1)) D(INF) D(EXPR) D(ODAR) D(@TREND()) CoinEq(-1) Long Run Coefficiens Variable Coefficien Sd. Error -Saisic Prob. EXR SAV INF EXPR ODAR C The ARDL Resuls in Table 8 presen boh he shor-run dynamic, ha is error correcion mechanism and he long-run dynamics of he relaionship beween foreign aid and economic growh given a se of macroeconomic indicaors ha are unsable. The resuls are inerpreed in hree dimensions. The firs is he shor-run adjusmen of economic growh o changes in foreign aid, exchange rae, domesic saving, inflaion rae and expor growh rae simulaneously. This is he componens of he shor-run dynamic capured by he coefficiens of coineq.1, which is he ECM (-1) coefficien. The coefficien is , significan a 10% as shown by he probabiliy (0.0516). This implies ha he adjusmen is in he righ direcion and he speed of adjusmen is Economic growh in Nigeria is deficien, as shown by he negaive sign of he ECM coefficien. This deficiency is gradually resored hrough changes in he se of exogenous variables over ime. The speed a which economic growh adjus o his resoraion is The second influence is capured by he coefficiens of he shor-run and long-run marginal effecs. These are measures of he shor run and long-run impacs of he exogenous variables on economic growh. The resuls are summarized in Table 9 Table 9: Shor-run and Long-run Marginal Impacs on Economic growh rae. SHORT RUN LONG RUN Coefficien Relaionship Level of Significance Relaionship Level of Significance ODAR Negaive low level (10%) Negaive no significan EXR Negaive no significan Posiive low level (10%) SAV Posiive High level (1%) Negaive no significan INF Negaive no significan Negaive no significan EXPR Negaive significan (5%) Posiive low level (10%) DOI: / Page

8 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In VI. VAR Forecasing Of Economic Growh Rae And Foreign Aids Par of he objecives of his paper is o forecas he hree macroeconomic variables ha relae he economy wih he global economies. These are he GDP, EXR and ODA. We rely on he dynamic forecas using he impulse response funcion of he VAR. A VAR model describes he evoluion of a se of k variables (called endogenous variables) over he same sample period ( = 1,..., T) as a linear funcion of only heir pas evoluion. The variables are colleced in a k 1 vecor y, which has as he ih elemen yi, he ime observaion of variable yi. For example, if he ih variable is GDP, hen yi, is he value of GDP a. A (reduced) p-h order VAR, denoed VAR(p), is y c 1 y 1... p y p where c is a k 1 vecor of consans (inercep), Φi is a k k marix (for every i = 1,..., p) and is a k 1 vecor of error erms The i-periods back observaion y i is called he i-h lag of y. Thus, a ph-order VAR is also called a VAR wih p lags. {y} is covariance-saionary if Ey and E(y -Ey )( y j -Ey j ) are independen of for any j. An imporan preliminary sep in VAR and impulse response analysis is he selecion of he lag order. In his paper we use some commonly used lag-order selecion crieria o choose he lag order, such as AIC and he SC.All he crieria sugges on lag. The resul of he VAR is shown in Appendix II. Impulse Response Funcion The impulse response funcion of VAR is o analysis dynamic effecs of he sysem when he model received an impulse, innovaion or a shock. For our VAR model, we have four macroeconomic variables, GDPGR, EXR and ODAR. This secion presens a en-period forecas of he response among he variables if here is a shock o any of hem. In order o display he response funcion clearer, we plo he char as in figure 2. Figure 2: Impulse Response Funcion of GDPGR, EXR and ODAR From figure2, he response of GDP growh rae o a one sandard deviaion shock o exchange rae clusers below one. Tha means a uni shock o exchange rae generae a less proporionae response from economic growh rae. Onn he oher hand, a uni shock o economic growh rae generaes a more han proporionae negaive response from exchange rae. Tha is for he nex en periods, any shock o economic growh will coninue o worsen exchange rae in he Nigeria economy. DOI: / Page

9 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In The response of GDP growh rae o he official developmen assisance for he en year period seems o be very low and negaive. A one sandard deviaion shock o official developmen assisance generaes a negaive response from posiive flucuaion in he firs five periods and hen become negaive. When he impulse is ODAR, he response of exchange rae is all negaive a each responsive period; he values flucuae around he line zero. On he oher hand he response of ODAR o shock received by exchange rae is only negaive a he firs wo periods and posiive for he oher periods. The values also clusered around zero. The quesion now is which variable is useful o forecas economic growh rae, given he impulse responses above? We use Granger causaliy es o evaluae he forecas abiliy of he ime series variables. a echnique for deermining wheher one ime series is useful in forecasing anoher. I can deermine wheher here is causaliy relaionship beween variables. The resul is presened in Table Table 10: Granger Causaliy Tes Null Hypohesis: Obs F-Saisic Prob. Decision EXR does no Granger Cause GDPGR Rejec he null GDPGR does no Granger Cause EXR Accep he null ODAR does no Granger Cause GDPGR Accep he null GDPGR does no Granger Cause ODAR Rejec he null ODAR does no Granger Cause EXR Accep he null EXR does no Granger Cause ODAR Accep he null The direcion of causaliy from Table 10 runs from exchange rae o economic growh rae. Tha means, he sabiliy of exchange rae can be used o predic how sable he growh of he Nigeria economy would be. In like manner, he direcion of causaliy runs from economic growh and exchange rae o official developmen assisance. This also implies ha he macroeconomic condiions of economic growh rae and exchange rae sabiliy are he major predicors of effeciveness of foreign aids (official developmen assisance). VII. Conclusion The following inferences are drawn from he all he analyses in his sudy: There is disequilibrium in he growh rae of GDP in Nigeria. In he shor-run he combinaion of domesic saving and foreign aid variables end o correc he disequilibrium bu a slow speed of adjusmen. Given all macroeconomic indicaors in Nigeria as sable, domesic saving and foreign aid are more effecive o increase he growh of he economy. Wih he unsable naure of macroeconomic indicaors in Nigeria especially, he increasing rae of inflaion and exchange raes and he low expor rae, official developmen assisance, ha is foreign aid, end o be impacing negaively on he economy raher han posiive. Tha means foreign aid becomes less effecive in he face of unsable exchange rae, inflaion rae and low expor. Domesic saving, on he oher hand, becomes insignifican o increase economic growh rae when here is high inflaion rae. This is jusified as people prefer o spend money raher han save when here is coninuous rise in inflaion rae. An improvemen in Expor rae hrough foreign direc invesmen would increase economic growh rae in he long-run. Bu he presen saus of expor in he counry has no significanly increase he growh rae of he economy. I has a negaive impac on economic growh. This may be jusified from he angle of overdependence on impored consumer goods and raw maerials in he counry. Macroeconomic condiions of economic growh rae and exchange rae sabiliy are he major predicors of effeciveness of foreign aids (official developmen assisance) in Nigeria. Any shock ha desabilizes exchange rae in Nigeria will reduce he growh rae of he economy. This probably one of he causes of economic recession currenly winessed in he counry. The findings in his sudy, ha foreign aid has posiive relaionship wih economic growh especially in a sable macroeconomic environmen is in line wih he findings of [11], [5] and [6]. Also findings of [13] suppor i. Policy measures ha will diversify he economy, improve expor and encourage a more sable exchange rae will allow a more effecive uilizaion of foreign aids in he economy. Foreign aid flows should be used more on impors of capial goods raher han impors of consumpions goods. The sraegy for expor diversificaion mus be adoped o aain he bes possible oucomes. An imporan ask for he governmen of Nigeria now is o inroduce effecive financial policies o improve he efficiency of he domesic financial secor as a pre-requisie for he achievemen of posiive spillovers of foreign capial inflows. DOI: / Page

10 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae In References [1]. Chenery, H.B and Srou, A.M (1966), Foreign Assisance and Economic Developmen American Economic Review, 56, [2]. CBN (2017), Cenral Bank of Nigeria, online publicaion, available a hp// (2012) [3]. Salisu (2007) Examined aid, macroeconomic policy environmen and growh in sub-saharan Africa. Pakisan Journal of Applied Economics, Vol.20 Nos. 1 & 2 (1-12), [4]. Fasanya and Onakoya (2012) Impac of foreign aid on economic growh in Nigeria. Inernaional Journal of Economics and Financial issues. Vol. 2, No. 4, pp [5]. Yakama (2013) Effec of foreign aid on growh in Wes Africa. Working papers in Managemen Birkbeck, Deparmen of Managemen BWPMA [6]. Karras (2006) Foreign aid and growh in per capia GDP in developing counries. Journal of Inernaional Developmen Vol. 18, Issue 1, pg [7]. Gomance, Girma and Morrissay (2005) aid and economic growh in sub-saharan African. World Insiue for Developmen Economics Research, Research paper No 2005/60 [8]. Gruben and McLead (1998) capial flows and growh along wih savings for 18 Asia and American developing counries. Qurerly Review of Economics and Finance, 38(3), [9]. Duc (2006) Impac of foreign aid on economic growh in developing counries. Opensax-CNX and licensed under he creaive commons Aribuion licence 2.0 Pg [10]. Peer N. Mba (2012) Inerplay of foreign aid, exernal deb and economic growh in Nigeria. Inernaional Journal of Economics and Finance; Volume 4, no 8; ISSN X E-ISSN [11]. Chinecherem, Ezerekwe and Uju (2015) Impac of foreign aid on capial generaion in Ngieria. Inernaional Journal of Economics, commerce and managemen; vol iii,, issue 9, Sepember ISSN [12]. Hemc and Basne (2013), examined foreign aid, Domesic savings and Economic growh in Souh Asia. Inernaional Business & Economic Research Journal- November 2013 volume 12, number 11. [13]. Javid and Qayyum (2011) Ineracive effec of aid and policy suiable economic growh in Zimbabwe. The Auhors Journal Compilaion: African Developmen Bank. [14]. Arawomo, Badejo and Oshoa (2015),examined he impac of foreign aid and domesic savings on economic growh in he WAMZ counries. Journal of Economics and Business Research vol. 21 No 2 (2015) [15]. Ekwe and Nyiama (2014) Impac of foreign capial flows on he growh performance of he Nigeria economy. Inernaional Journal of Economics and Finance: Vol. 6, No 4, Pg [16]. Sella M. and Diimi A. (2014), The Link beween foreign aid and economic growh in Nigeria. Inernaional Journal of Economics pracices and heories, Vol.4, No 6, 2014, e-issn [17]. Salz (1992) Foreign direc invesmen and economic growh in 68 developing counries. RivisaInernaionale Di Science Economichee Commerciali, 39, [18]. De Mcllo (1999) Nexus beween foreign direc invesmen and economic growh in 32 counries (15 OECD and 17 non OECD). Oxford Economic papers, 51(1): [19]. Tiwari (2011) Effeciveness of foreign aid, foreign direc invesmen and economic growh in seleced 28 Asian counries. Global Economy Journal, Vol. 11, pg 1-28, 2011 [20]. [21]Fayissa and El-Kaissy (1999), Foreign aid and Economic Growh of Developing Counries (LDCs): Furher Evidence, Sudies in Comparaive Inernaional Developmen. [21]. Dhakal, Upadlyaya and Upadhyay (1996) Causaliy beween foreign aid and economic growh in four Asian and four African Counries. Rivisa Inernaionale Di Science Economiche e Commerciali, 43: APPENDIX I Dependen Variable: GDPGR Seleced Model: ARDL(2, 3, 2, 0, 1, 0) Table 6: ARDL RESULT Variable Coefficien Sd. Error -Saisic Prob.* GDPGR(-1) GDPGR(-2) EXR EXR(-1) EXR(-2) EXR(-3) SAV SAV(-1) SAV(-2) INF EXPR EXPR(-1) ODAR C DOI: / Page

11 Macroeconomic Flucuaions, Foreign Aid Shocks and he Forecas of Economic Growh Rae R-squared Mean dependen var 5.4 Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) APPENDIX II Vecor Auoregression Esimaes GDPGR WXR ODAR GDPGR(-1) [ ] [ ] [ ] WXR(-1) [ ] [ ] [ ] ODAR(-1) [ ] [ ] [ ] C [ ] [ ] [ ] R-squared Adj. R-squared F-saisic DOI: / Page