Aid fungibility and government spending in Africa: evidence from instrumental variable panel quantile regression

This study investigates the impacts of foreign aid on government spending for 54 African aid-recipient countries with the distinction between on-budget and off-budget aid at the aggregate level. Applying instrumental variable panel quantile regression, the results indicate that, generally, the on-budget aid is partially fungible but the degree of fungibility decreases in the high-level government spending countries (higher quantile). On the other hand, off-budget aid is generally nonfungible though partial fungibility is significant in the low-level government spending countries (10(th) to 30(th) quantile). In addition, the impact of total aid is downward biased at various quantiles when the distinction between on-budget and off-budget aid is not made. Besides, the trade openness, the short-run shock on government spending and the quality of governance are also important determinants of government spending.