The Impact of Fiscal Policy on Foreign Capital Inflows in Selected Sub-Saharan African Countries

Abstract

Foreign capital inflows (FCI) are essential for economic growth in developing countries. This study analyzes the impact of fiscal policy on FCI in 31 Sub-Saharan African (SSA) countries using panel data from 1985 to 2019 and the System GMM dynamic modeling approach. The findings show that when foreign direct investment (FDI) is considered an endogenous variable, the real interest rate (RIR), government expenditure (GE), tax rate (TA), and GDP growth rate positively affect FDI, while the real exchange rate (RER) and inflation (INF) negatively correlate with it. There is also a positive relationship between lagged FDI and current FDI. For foreign portfolio investment (FPI), government expenditure and RER significantly influence FPI positively, while the tax rate has a negative effect. Although the RIR, inflation rate, GDP growth rate, and lagged FPI correlate positively with FPI, these relationships are statistically insignificant. The study emphasizes the need for coordinated fiscal policies in SSA to attract more FCI for growth. It recommends reassessing tax systems for greater competitiveness, establishing bilateral tax treaties to reduce international double taxation, and improving expenditure on capital projects to support foreign investment.