Effects of Monetary and Fiscal Policies on Foreign Direct Investment in Mozambique during the period 2005-2015

Resumo

The study aims to analyse the effects of monetary and fiscal policies on foreign direct investment in Mozambique. This is accomplished emphasizing the effect of money supply, lending rate, treasury bills rate, inflation rate, taxes, and government expenditure on foreign direct investment. Implicitly the critical question raised in this study is: what are effects of monetary and fiscal policies on foreign direct investment inflows in Mozambique? The study utilises quarterly macroeconomic data from 2005 to 2015.The methodology draws upon unit roots and Johansen testing for co integration using a vector error correction model to explore the dynamic relationship of short and long run effects of the independent variables on the dependent variable. All variables are non stationary at level but when converted into first differences they become stationary. The findings of this study suggest that all the independent variables except money supply have effects on foreign direct investment inflow in Mozambique.

Whereas the lending rate, Treasury bill rate, and government expenditure have a negative and significant effect on foreign direct investment, while the inflation rate and tax revenue have a positive and significant relationship with the foreign direct investment. This means that the decisions of monetary and fiscal policies can affect the foreign direct investment either negative or positively. Thus, if the target is to attract foreign direct investment the Bank of Mozambique should be overly concerned with the interest rate(lending rate, Treasury bill rate),and on other sight governmental authorities should take into consideration how available funds are spent on development issues such as education, health, water, electricity, infrastructures, transport and telecommunications