Advances in Management and Applied Economics

The Effect of Foreign Aid on Real Exchange Rate in Ghana

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• Abstract

  This paper assesses the effect of foreign aid inflows on real exchange rate in Ghana in order to test the hypothesis that large foreign aid inflows might lead to the appreciation of the real exchange rate of the recipient country and thus, impact negatively on its trade position, a case known as “The Dutch Disease” effect. Using the ordinary least squares method of estimation, the paper finds that although foreign aid inflows to Ghana are quite high, foreign aid inflows have positive impact on the real exchange rate. In other words, foreign aid inflows lead to the depreciation of the cedi, implying that “The Dutch Disease” hypothesis of large foreign aid inflows is rejected in the case of Ghana. In terms of policy recommendation, the results suggest that Ghana can still receive aid without fear of harming its exports competitiveness.