Assessing Monetary and Fiscal Policy Measures to Promote the Sustainability of Domestic and Foreign Direct Investment in Sub‐Saharan Africa

ABSTRACT Many sub‐Saharan African (SSA) countries are dominated by high loan interest rates and value‐added taxes (VAT). This study examines whether monetary and fiscal policies support domestic and foreign direct investment (FDI) in 48 sub‐Saharan African countries from 2000 to 2020, while controlling for economic growth. For data analysis, we used the Kernel Regularized Least Squares (KRLS) machine learning estimator. The results indicate that monetary policy (i.e., real interest rates, money supply, and real exchange rates) does not support domestic and FDI in SSA. Specifically, a 1% increase on average money supply and real exchange rates is linked to a 0.32% and 1.26% decrease in FDI, respectively. Similarly, a 1% increase on average monetary policy, including broad money supply, real interest rates, and exchange rates, is associated with a 0.06%, 0.11%, and 0.64% decrease in domestic investment, respectively. This suggests that tightening monetary policy, including broad money, real interest rate, and exchange rates, discourages domestic and FDI in SSA. Conversely, a 1% increase on average fiscal policy (i.e., government spending) leads to an increase in FDI and domestic investment of 0.32% and 0.29%, respectively. Contrary to this, the results show that a 1% increase on average tax revenue leads to a 0.51% decrease in FDI and a 0.19% decrease in domestic investment. Consequently, an increase in fiscal policy (i.e., tax revenues) discourages both domestic investment and FDI in SSA. Central banks and governments in African countries should implement policies that reduce real interest rates and Value‐Added Tax (VAT) to one digit (i.e., < 10%) to boost investors confidence and encourage more investment in the region.