Impact Of Foreign Aid On Inflation In Nigeria

Abstract

This study examines the impact of foreign aid on inflation in Nigeria over the period 1990–2024, with particular emphasis on the roles of exchange rate and money supply in the aid–inflation nexus. Specifically, it investigates whether foreign aid significantly influences inflation, evaluates the role of exchange rate dynamics, and assesses whether money supply strengthens or weakens the impact of aid on price stability. Annual time-series data were analyzed using descriptive statistics, correlation analysis, the Augmented Dickey– Fuller (ADF) unit root test, the Johansen cointegration test, and the Dynamic Ordinary Least Squares (DOLS) estimator for long-run analysis. The unit root results confirm that all variables are integrated of order one, I(1), while the Johansen test identifies two long-run cointegrating relationships. The DOLS estimates reveal that foreign aid exerts a positive and statistically significant effect on inflation (β = 29.0017; p = 0.0016), while exchange rate depreciation also significantly increases inflation (β = 0.1201; p = 0.0324). In contrast, money supply shows a positive but statistically insignificant effect (β = 0.9654; p = 0.3022). The model explains approximately 82.7% of variations in inflation (R² = 0.8274). The findings indicate that foreign aid inflows and exchange rate instability are major long-run drivers of inflation in Nigeria, whereas money supply plays a weaker independent role. The study recommends directing aid toward productive sectors, strengthening exchange rate stabilization measures, and enhancing fiscal–monetary policy coordination to safeguard price stability.