Abstract

This study examined the impact of bilateral and multilateral aid on domestic savings of SSA countries, taking into account the role of institutional quality. A balanced panel data set consisting of 28 SSA countries from 1996 – 2015 was used. Random effects techniques were also used. Bilateral aid was found to have negative significant impact on domestic savings of SSA countries, reflecting a crowding-out effect; while the impact of multilateral aid on domestic savings of SSA countries was found insignificant. When the bilateral and multilateral aid variables were interacted with institutional quality, the coefficient of interaction between bilateral aid and institutional quality was insignificant, while that between multilateral aid was positive and significant, implying that the impact of multilateral aid on domestic savings depends on good quality institutions. Therefore, bilateral aid is a disservice to SSA countries since it crowds-out domestic savings regardless of institutional quality; however, multilateral aid can be beneficial to SSA countries if good quality institutions exist.

Key words: Bilateral aid, multilateral aid, domestic savings, Sub-Saharan Africa.