Empirical evidence on aid volatility shows that it adversely impacts recipient countries. This study seeks to find if aid volatility matters in Tuvalu—a small aid recipient country in the Pacific. The study finds that, with a coefficient of variation of 0.49, aid volatility in Tuvalu is significant. It is also found that project aid is more volatile than aid that goes to budget support and routine programs such as scholarships. Aid volatility results in incomplete projects, high transaction costs, ‘Dutch disease’ and fiscal planning problems. To manage the adverse impacts of aid volatility, Tuvalu needs to strengthen its Consolidated Investment Fund to buffer for any disruptions in aid disbursements, provide a sound policy and institutional climate, target aid to budget support and programs instead of specific projects, and implement large infrastructure projects in phases.
