Aid, the Real Exchange Rate and Why Policy Matters: The Cases of Morocco and Tunisia

Every form of foreign-exchange inflow, including aid, can potentially cause real-exchange rate appreciation, with adverse consequences for the production of tradables (Dutch Disease'). Whether it does so depends on the policy response to the inflow. This paper investigates the issue for Morocco and Tunisia, over 1980-2009. We find that aid led to a real appreciation in Morocco, but had no effect on Tunisia's real exchange rate. This confirms the importance of the macroeconomic framework in which aid is provided, and the key role for infrastructure and other supply-side improvements in determining the final real-economy impact of aid and other inflows.