ODA and Financial Inclusion: How is the Impact Transmitted in MENA Countries?

Abstract This study explores the effects of foreign direct investment (FDI) and official development assistance (ODA) on financial inclusion across MENA countries from 1960 to 2023. Using a VAR model, we compute impulse response functions and variance decompositions. The findings show that, for most countries, FDI and ODA have minimal and short-lived effects on financial inclusion. However, Lebanon stands as an exception: financial inclusion (specifically FI_2) responds significantly and positively to an FDI shock, and the effect is more persistent compared to other countries. Variance decomposition further indicates that FDI shocks contribute the most to the forecast error variance of financial inclusion in Lebanon, highlighting the relatively stronger role of FDI in shaping its financial inclusion dynamics. Overall, the limited influence of external financial flows elsewhere in the region suggests that they are insufficient for sustained improvements in financial inclusion. Instead, domestic factors remain critical, as evidenced by the strong and stabilizing response of financial inclusion to its own shocks. These results underscore the need for internal resilience and tailored national policies to effectively enhance financial inclusion across MENA countries.