Empirical evidence on aid volatility shows that it adversely impacts recipient countries. For instance, high aid volatility results in uncompleted projects, affects fiscal planning, and decreases the economic and social value of aid. Given these impacts of aid volatility, this study seeks to find out whether aid volatility is a problem in Tuvalu – a small country in the Pacific that is highly dependent on foreign aid. The study, the first of its type in Tuvalu, looks at the volatility of aid relative to other government revenues, and aid volatility by donor, type, and sector in the country. Furthermore, the study tries to identify the causes and costs of aid volatility and how to deal with it. The findings reveal that although aid volatility, at the coefficient of variation (CV) of 0.49, is lower than the volatility of most revenue sources to the government of Tuvalu (fisheries licence, dot TV, TTF), it is much higher than domestic (tax) revenue which has a CV of 0.20 and aid volatility of other aid dependent countries. Moreover, by breaking down aid by donor, type, and sector; it is found that aid from donors funding projects (including capital projects) is more volatile than aid from donors whose aid goes more into budget support and routine programs such as scholarships. Accordingly, volatility is higher in project aid than budget support and program aid. Moreover, it is revealed that multilateral aid is less volatile than bilateral aid. The main causes of aid volatility in the country relate to the lack of effective aid agreements between Tuvalu and its donor partners, late disbursements in committed aid from donors, the focus of aid on individual projects instead of programs, and administrative problems in Tuvalu. The major costs of aid volatility in the country link to uncompleted projects, high transaction costs, ‘Dutch disease', and fiscal planning problems. The study therefore argues that aid volatility is a problem in Tuvalu. Thus, to deal with the aid volatility problem, Tuvalu needs to strengthen ‘reserve funds' such as the Tuvalu Trust Fund (Account B) to buffer for any disruptions in aid disbursements, provide sound policy and institutional climate in the country, target aid to budget support and programs instead of specific projects, and implement large infrastructural projects in phases
