The domestic saving rate in Ethiopia has been far below what is required for a rapid and sustainable economic growth to have any effect on poverty reduction and self-sustaining development. The poor performance of saving is one of the critical factors for the country to rely on foreign aid. This systematical review attempts to examine the relationship between domestic savings and aid in the context of Ethiopia during the period 1996to 2018 using aARDL framework. What is more, by disaggregating aid according to its source, the impact of aid from bilateral and multilateral donors on domestic savings is also differentiated and analyzed. The finding is consistent with the view that aid crowds-out domestic savings in the long run, though its impact in the short run is insignificant. Given the motivations for giving bilateral and multilateral aid are distinct, the finding points that their impact is also not alike i.e. bilateral aid crowds-out domestic saving significantly whereas multilateral aid crowds-in domestic saving. The causality test performed points that there exists two-way causation between the two variables. In other words, the feedback effect suggests that high inflows of aid cause low domestic savings and low domestic savings attract high inflows of aid.
Keywords: domestic saving, foreign aid, multilateral aid, unilateral aid, crowd-out analysis