The Impact Of Asymmetric Financial Shocks On The Economic Growth Rate In Egypt

This research aims to study how economic growth in Egypt responds asymmetrically to government spending shocks (both positive and negative) during the period from 1980 to 2024 using the NARDL (Nonlinear Distributed Auto regression) model. The research problem is that traditional linear models assume that a certain percentage increase in government spending has the same (but opposite) effect as a certain percentage decrease. This is unrealistic for Egypt, which has experienced multiple shocks (the 2011 revolution, the 2016 reforms, COVID-19, and the 2022 exchange rate crisis). The study employed a data collection methodology using annual data from 1980 to 2024 from the World Bank, the Egyptian Ministry of Finance, and the Central Bank of Egypt. The variables included the dependent variable: real GDP per capita growth rate, and the independent variable: real final government spending (divided into positive and negative shocks). The researcher used the following analytical tools: Unit Root Test (ADF) to verify the stationarity of the time series; Linear ARDL model (as a reference model); Nonlinear NARDL model (the baseline model); Hatemi-J test for asymmetric causality; Diagnostic tests (autocorrelation, heteroscedasticity, stationarity). The results showed that government spending had no significant impact on economic growth and exhibited a strong autocorrelation problem in the residuals (p-value = 0.000032), with the overall effect of spending being approximately zero. The nonlinear NARDL model showed that in the short run, positive shocks (increased spending) were not statistically significant, and negative shocks (decreased spending) were not significant in the first period, but were highly significant and negative in the second period (coefficient = -1.880, p = 0.008). In the long-run, the study showed that the multiplier for positive shocks was 0.305 (small effect), while the multiplier for negative shocks was -1.531 (large and negative effect – five times greater). Regarding the asymmetric causality test: Positive shocks cause economic growth (during all periods of slowdown). Negative shocks because sharp declines in growth (a much stronger effect). Economic growth does not cause spending shocks (neither positive nor negative). Therefore, the asymmetric response confirms that the Egyptian economy is more strongly and deeply affected by reductions in government spending than by increases. The causal direction indicates that fiscal policy drives changes in growth, not the other way around. Negative shocks are more dangerous because reducing government spending has devastating long-term effects on growth. Consequently, policy recommendations include avoiding sudden cuts; any fiscal austerity should be gradual, not abrupt, to avoid strong contractionary effects. Investment spending should be protected, as capital spending (infrastructure, education, and health) must be safeguarded even during periods of economic downturn. Austerity. Managing the debt burden by reducing debt-servicing costs to free up fiscal space for productive spending. Coordinating fiscal and monetary policy, especially during periods of inflation and economic turmoil. Establishing automatic stabilization mechanisms, such as unemployment insurance and social assistance, to mitigate the impact of negative shocks.