The impact of foreign aid on output growth and inflation in Ghana

Abstract

Foreign aid has become one of the most important sources of capital flows to developing countries in the present past. According to development theorists, this massive inflow of capital wilt fill the foreign exchange gap and propel developing countries into sustained growth and development. This study attempts to examine the impact of this massive capital inflow on the inflation and the growth of output in Ghana for the period under consideration. The principal objective of the study is to examine the impact of foreign aid on the real gross domestic product of Ghana. Specifically the study examines the relationship between foreign aid and output growth and also foreign aid and inflation. The analysis is guided by the hypothesis that foreign aid enhances output and raises the level of inflation. Based on the results of the analysis, we accept the hypothesis that foreign aid enhances output. We also accept the hypothesis that aid deflationary. The policy implication is that Ghana should invest aid monies in areas that that yield greater and faster returns, in directly productive activities. The country should also take more concessionary loans to reduce the overall debt burden of the country.