Government domestic debt, private sector credit, and economic growth in oil-dependent countries: a dynamic panel data analysis

Abstract

Banks are more liquid, better capitalized, and more profitable in oil-dependent countries. However, bank credit to the private sector is relatively low as a percentage of GDP. The low level has been blamed, amongst other reasons, on governments’ reliance on the banking sector to finance fiscal deficits. This study examines the crowding out effect of government domestic borrowing using a panel data model for 28 oil-dependent countries over the period 1990-2012. We estimate the model, using both fixed-effects and generalized method of moments estimators and find that a one percent increase in government borrowing from domestic banks significantly decreases private sector credit by 0.22 percent and has no significant impact on the lending rate banks charge to the private sector. This finding suggests that government domestic borrowing has resulted in the shrinking of private credit and works through the credit channel and not the interest rate channel.

The economic dynamics of oil-rich countries are mainly determined by the world prices of oil and gas and thus possess certain characteristics not shared by other economies. Over the last decade, oil-dependent countries have made some attempts to diversify towards the non-oil sector; in particular, significant priority has been given to the financial sector. This study explores the impact of bank credit in the growth of oil-rich economies and tests if it differs in the emerging non-oil sectors. We utilize both the panel cointegration and pooled mean group techniques for 28 oil-dependent countries spanning 1990-2012. The findings suggest that bank credit has a positive significant effect on GDP per capita growth (i.e. by 0.06 percent) but no significant impact on non-oil GDP per capita growth. Hence, banks do not yet provide adequate credit to stimulate non-oil economic growth. The growth of non-hydrocarbon activity depends mainly on government spending through hydrocarbon revenues.