Foreign aid shocks and macroeconomic adjustment mechanisms in WAEMU countries : an approach based on a computable general equilibrium model

This paper assesses consequences of foreign aid reduction on WAEMU economies and the various adjustment mechanisms that must be implemented internally to support this situation. Indeed, using a computable dynamic recursive general equilibrium model of Décaluwé et al., (2013) calibrated on each countries SAMs, results indicate that 30% decrease in foreign aid will affect government's saving, income and expenditures, and consequently public and private investment as well as the GDP growth rate. Offsetting this foreign aid drop through an adjustment of direct and indirect taxation leads to a slight decline in income, consumption and a deterioration of household welfare. Thus, overall, the results show that a drastic reduction of foreign aid in WAEMU countries will have more perverse repercussions in countries which are the most dependent on foreign aid. However, some economies such as Ivory Coast, Senegal and Burkina Faso would adjust more rapidly than those of other countries. One of the main contributions of this study is to provide economic policy makers in WAEMU countries with evidence of the possibility of budgetary arbitrage and fiscal adjustments for the financing of WAEMU countries economies facing a situation of partial or complete abolishment of foreign aid.