Impact of Foreign Capital Inflow on Economic Growth in Sudan 1989-2004

Abstract

Since the early 1990’s, the world economy has been witnessing a marked surge in capital flows among countries following liberalization policies adopted by many developing countries, removal of barriers to encourage foreign capital and decline of interest rates in USA during 1989-1992 combined with recession in Japan and many parts of Europe .This period also witnessed a wide spread of financial and banking crises. This thesis examines the impact of foreign capital inflow on economic growth in Sudan during 1989-2004. Foreign capital can take different types such as long-term concessional loans and grants, medium and short-term loans, private foreign capital and foreign direct investment. To magnify the impact of foreign capital on economic growth in Sudan, and factors determining the inflow and effectiveness of foreign capital, the research uses the Ordinary Least Square Method (OLS) in estimating the model parameters. Data were collected from the annual reports of the Central Bank of Sudan, economic review of the Ministry of Finance and National Economy, External Debt Unit, IMF and World Bank publications Most of foreign loans were utilized in long term projects like Marawe dam, construction of high ways and rehabilitation of existing projects, rural development and expected to increase productive capacity of the economy. But these projects do not produce goods for exports. The repayment of these loans might put some pressure on the balance of payments in the future. FDI received by Sudan was mostly utilized in the field of oil exploration and export reflects immediate positive impact on the economy. The terms of trade improved, foreign reserves accumulated, the contribution of industry and mining sector to the GDP has increased and exchange rate remained stable, portfolio investment was negligible, other investment was utilized in importing consumption goods. The research recommends that Sudan would seek to substitute different types of capital for FDI, not only in mining sector, but also in other sectors of the economy, namely agriculture. Government must pay attention to the problems associated with depending on investing only in petroleum industries. This might destroy the other sectors of the economy which creates “ Dutch Disease “ , and the economy is now subject to the changing in international Oil prices .