Why fungibility of development aid can be good news: Pakistan case study

This study investigates the link between fungibility and international aid effectiveness by combining quantitative and qualitative methods; using state-of-the-art statistical analysis with in-depth interviews with key stakeholders, it provides deeper insights into fungibility and its drivers. It uses a different starting point than most studies on fungibility, namely that fungibility might actually be quite positive to achieve Sustainable Development Goals (SDGs). It contributes empirically to the debate on aid effectiveness and fungibility with respect to Pakistan, one of the largest recipients of Official Development Aid (ODA) over the past decades. Findings suggest that there is an inverted U-shaped relationship between aid inflows and government development expenditures. While development expenditures of the government rise initially with aid inflows, expenditures actually decline with higher aid levels. Looking at the interviews for the case of Pakistan, we can conclude that this higher level of fungibility with higher aid inflows might actually be good news for recipient countries, as valid reasons to reallocate the original allocations also emerged. Our main policy implication is that donors and recipient governments should collaborate more on the allocation and redistribution of funds to ensure successful progress towards the SDGs with minimal loss of scarce resources.