The Effect of Foreign Capital Inflows on Economic Growth in Egypt

Abstract

1 This research is designed to investigate the effects that sources of foreign capital inflows (FCI) have on economic growth in Egypt. Concentration is given to the two significant sources of FCIs in Egypt, migrant remittances (REM) and Net Official Development Aids and Assistance received (ODA) inflows. The study applies the Auto Regressive Distributed Lag (ARDL) Bounds testing method to examine cointegration based on annual time series data for Egypt from 1990 to 2020. Data for analysis are mainly collected from the World Bank development indicators data set (WBI). Results of the study indicate that REM and ODA, as the two significant sources of FCIs, have a positive and significant impact on economic growth in the long term. Indications imply that a 1% increase in REM causes GDP to grow by 0.134 %, while a 1% increase in ODA fosters economic growth by 0.109 %. Furthermore, short-term estimation indicates that the error correction form (ECM) coefficient is (-0.47), implying that GDP adjusts by 47% yearly to return to its equilibrium status. The study also confirms that remittances are the essential source of FCIs that stably grows and swells, especially since 2016 after the economic reforms in Egypt, including exchange rate devaluation and the period of (COVID-19) pandemics. This fact reflects the importance of remittances in smoothing consumption and fostering growth in origin countries, especially during economic crises.