THE CROWDING-OUT EFFECT IN A SMALL DEVELOPING ECONOMY: A LESSON FROM COVID-19

Abstract

Purpose- COVID-19 has dealt a severe blow to public finance, and caused public debt to Gross Domestic Product (GDP) to pass the 100 percent mark. Given this, the objective of this paper is to examine the impact of bank lending to the government on bank credit to the private sector (crowding-out effect) in Jordan. Methodology- This paper uses bank-level data during the period 2011-2020. Based on the collected data from the financial statements of all 13 conventional Jordanian banks, the Seemingly-Unrelated Regression (SUR) is applied to examine the determinants of their credit growth. The used independent variables are bank deposit growth, credit to the government, bank size, bank capital, bank income diversification, real economic growth, and inflation rate. Findings- The 2020 financial statements show that the profits of Jordanian banks (return on assets) have decreased from 1.43 percent in 2019 to 0.74 percent in 2020. This decrease was mainly due to the increase in loan loss provisions. As far as the econometric results are concerned, it is informative to note that the impact of banks’ lending to the government, in the form of government securities, is negative and significant, and in all estimated econometric versions. Conclusions- While much of the determinants of bank performance are applicable to the Jordanian scene, it is encouraging to note that Jordanian banks have managed to finish the 2020 financial year well. However, it is argued that the government should use COVID-19 as a “trigger” point for change in the status of its poor public finance.

Keywords

• Jordan
• banks
• profitability
• net interest margin
• bank size
• seemingly-unrelated regression

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