ABSTRACT:

The renewed debate on the desirability of foreign aid in bridging the gap resource required for economic growth in Nigeria necessitated this investigation. After preliminary evaluation of the data which indicated the non-normality and integration of all the variables at first difference, the study deployed the Johansen Co-integration method in seeking evidence of possible long run relationship. The result showed foreign aid as positive and statistically significant at 5 percent level in influencing economic growth in the long but not in the short run. The study conducted some post estimation diagnostic tests in order to confirm the validity and robustness of the model. Durbin Watson statistics provided evidence of a negative serial correlation in the residuals. The Breusch-Godfrey Serial Correlation revealed the absence of serial correlation between the variables. The Breusch Pagan test established the presence of homoscedasticity for some of the variables. The foreign aid was also found to Granger-cause economic growth. The research result revealed that while foreign aid was positively related, it was did significantly impact economic growth. The study supported the applicability of the gap theory in the Nigerian situation. In this case foreign aid did fill savings and/or external finance gap and helped propel the economy towards achieving targeted growth rate objectives. In order to further improve utilization effectiveness of foreign aids, the study recommended that aid donors should attach conditionalities that further compel recipient monetary and fiscal authorities policies to fight corruption and reduce wastes. Furthermore, recipient countries like Nigeria should seek more favourable terms of trade with developed countries rather than just foreign aid.