A Study on the Impact of Foreign Aid on Economic Growth: The Case of Zanzibar – Tanzania

Foreign aid brings large contribution to economic growth in most of less developed countries. The intention of this research is to scrutinize the effect of ODA on economic growth of Zanzibar. Specifically, the study analyzed the relationship between ODA and domestic investment as well as its effect on government expenditure. The analysis of the study was done on time series data from 1980 to 2015.The data was analyzed using OLS model. The paper applied the Augmented Dickey Fuller (ADF) test to test stationary of data and the data were found to be stationary. The study also used Johansen co-integration to test for long run outcome of the variables on country’s economic growth. The outcomes under Johansen co-integration noted that ODA has positive effect on economic growth in the long run and it has long run impact of government expenditure. The results from OLS showed that ODA is not significant to economic growth but it is positively and significantly impacts government expenditures in Zanzibar. Moreover, the OLS results indicated the insignificance connection between ODA and local investment in Zanzibar. The study therefore recommends that since the results shows the ODA and domestic investment negatively related, it is the time for the government of Zanzibar to rethink the issue ODA and its impact on domestic investment and new policies and strategies are highly important to ensure that the foreign assistances are directly focused to direct investment activities that may respond quickly to economic growth and improving the welfare of people.