Should aid in Uganda be repurposed to super-size social cash transfers? An application of a Dynamic Computable General Equilibrium Model

The major international humanitarian donors and aid organisations have raised concerns about the efficiency and effectiveness of targeting Official Development Assistance. Although the 2016 Grand Bargain committed to shifting a quarter of the aid funds to the local actors, performance has remained low. By 2021 less than one percent of the humanitarian aid was being allocated to local actors. Though recent scholars have postulated that redirecting aid funds to local actors might be beneficial, there is limited quantitative literature to support this proposal, especially for the case of Uganda. Based on this background, this paper uses a Dynamic Computable General Equilibrium model to assess the macroeconomic impacts of shifting aid funds from traditional spending architecture to direct cash transfers for households in Uganda. The findings reveal that shifting aid funds to local actors (households) provides macroeconomic benefits to the economy and generates spillover effects to non-recipient households and other economic agents. Financing the cash transfers by reducing allocations to government and so-called 'Non-Profit Institutions Service Households' increases tax revenues, household incomes and savings. However, employment and economic growth decline as the actual appreciation of the exchange rate reduces international competitiveness. The decline in economic growth is driven by a decline in industry and service sector GDP as agricultural GDP increases. The alternative scenario of financing social cash transfers by reducing the overheads of offshore aid is the most effective in improving economic growth, household incomes, government tax returns, employment and household savings and investment. International humanitarian donors and aid organisations are urged to consider re-directing aid funds from the overseas overhead costs to local actors through direct SCT to vulnerable households. This will improve household welfare, investment and employment and accelerate economic growth.