DOES PUBLIC DEBT IMPEDE FINANCIAL DEVELOPMENT IN JORDAN? SOME MACRO AND MICRO ANALYSES

Yıl 2023, Cilt: 10 Sayı: 3, 150 - 157, 30.09.2023

Ghassan Omet

https://doi.org/10.17261/Pressacademia.2023.1813

Öz

Purpose- It is acknowledged that banks offer their respective economies a number of services, including the encouragement of savings and allocation of capital to the private and public sectors. Within this context, and given that public debt in Jordan has been increasing at an alarming rate, this paper sets out to answer two questions: First, what is the impact of local public debt on aggregate credit to the private sector? Second, what is the impact of local public debt on bank-level credit to the private sector?
Methodology- To provide an answer to the first question, the paper uses annual data (1982 – 2021) on aggregate bank credit to the private sector, aggregate bank credit to the government, and the discount rate. The applied techniques include stationarity test, optimal lag structure, co-integration, and vector error-correction (VECM) estimation. To answer the second question, the paper uses annual bank level data (2010 – 2021) for all 13 listed Jordanian banks. The fact that this data includes both time series and cross-section elements, panel data analysis is used to measure the impact of bank-level credit to the government on bank-level credit to the private sector.
Findings- At the macro level, the results show that bank credit to the government (bank holdings of government securities) has a significant and negative impact of bank credit to the private sector. At the micro level, the results also show that bank-level lending to the government does affect (negatively) their credit to the private sector.
Conclusion- The results of this paper are not encouraging. Indeed, they indicate that public debt impedes credit to the private sector. The government should look at the status of its public finance and work on reducing its borrowing. In addition, the government should look at the viability of establishing a secondary market for its issued securities.

Anahtar Kelimeler

Jordan, public debt, bank credit, diversification, time-series analysis, co-integration

Kaynakça

• Afonso, A., & Sousa, R. (2012). The macroeconomic effects of fiscal policy. Applied Economics, 44(34), 4439-4454.
• Aghughu, A. A., Alenoghena, R. O., & Amase, J. (2022). Government domestic borrowing and private credit in Nigeria: Testing the lazy bank hypothesis. Journal of Economics and Sustainable Development, 13(7), 52–62.
• Akpansung, A. (2018). Analysis of the impacts of domestic debts on private sector credit, lending rate, and real output: Evidence from Nigeria. Journal of Finance and Economics, 6, 111-123.
• Anyanwu, A., Gan, C., & Hu, B. (2017). Government domestic debt, private sector credit, and crowding out effect in oil-dependent countries. Journal of Economic Research, 22(2), 127-151.
• Balcerzak, A. P., & Rogalska, E. (2014). Crowding out and crowding in within Keynesian framework. Do we need any new empirical research concerning them. Economics & Sociology, 7(2), 80-93
• Başar, S., & Temurlenk, M. S. (2007). Investigating crowding-out effect of government spending for Turkey: A structural var approach. Atatürk Üniversitesi İktisadi ve İdari Bilimler Dergisi, 21(2), 95-104.
• Buiter, W. H. (1977). ‘Crowding out’ and the effectiveness of fiscal policy. Journal of Public Economics, 7(3), 309-328.
• Cavallo, E., & Daude, C. (2011). Public investment in developing countries: A blessing or a curse? Journal of Comparative Economics, 39(1), 65-81.
• Furceri, D., & Sousa, R. M. (2011). The impact of government spending on the private sector: Crowding‐out versus crowding‐in effects. Kyklos, 64(4), 516-533.
• Gjini, A., & Kukeli, A. (2012). Crowding-out effect of public investment on private investment: An empirical investigation. Journal of Business & Economics Research, 10(5), 269-276.
• IMF. 2015. Arab Republic of Egypt, Staff Report for the 2014 Article IV Consultation, Country Report 15/33, January.
• IMF. 2017. Nigeria. Staff Report for the 2017 Article IV Consultation, Country Report 17/80, International Monetary Fund, Washington DC.
• Kabir, R., & Flath, D. (2020). Crowding out of private credit caused by government borrowing from the domestic banking sector: New cross-country estimates. Social Systems Research, 41(2), 183–202.
• Lee, M., & Goh, K. (2019). Bond market development in Malaysia: Possible crowding-out from persistent fiscal deficits? Economics Bulletin, 39, 1798-1807.
• Lidiema, C. (2018). Effects of government borrowing on private investments in Kenya. Journal of Finance and Economics, 6, 49-59.
• Liu, Q., Bai, Y. and Song, H. (2023), The crowding out effect of government debt on corporate financing: Firm-level evidence from China. Structural Change and Economic Dynamics, 65(4), 264-272.
• Miyajima, K. (2020). What influences bank lending in Saudi Arabia? Islamic Economic Studies, 27, 125-155. Mwakalila, E. (2020). Crowding out of private sector in Tanzania: Government expenditure, domestic borrowing, and lending rates. Emerging Economy Studies, 6, 123–135.
• Manda, S. (2019). Does government borrowing crowd out private sector investment in Zimbabwe. Asian Journal of Economics, Business and Accounting, 12(1), 1–9.
• Nguyen and Dang (2020). Bank-Specific Determinants of Loan Growth in Vietnam: Evidence from the CAMELS Approach. Journal of Asian Finance, Economics and Business, 7, 179–189.
• Ozili, P. (2023). Correlated lending to government and the private sector: what do we learn from the Great Recession? MPRA Paper 116407, University Library of Munich, Germany.
• Palley, T. I. (2013). Keynesian, classical and new Keynesian approaches to fiscal policy: comparison and critique. Review of Political Economy, 25(2), 179-204.
• Zhang, M., Brookins, O. T., & Huang, X. (2022). The crowding out effect of central versus local government debt: Evidence from China. Pacific-Basin Finance Journal, 72(2), 101707.
• Snowdon, B., & Vane, H. R. (2005). Modern macroeconomics: its origins, development and current state. Northampton: Edward Elgar Publishing.
• Tarawneh, A., Obeidat, M., Khataibeh, M., & Omet, G. (2021). The crowding out effect in a small developing country: A lesson from Covid-19. Journal of Economics, Finance and Accounting, 8(2), 83-89.
• Xu, X., & Yan, Y. (2014). Does government investment crowd out private investment in China? Journal of Economic Policy Reform, 17(1), 1-12