Does public debt impede financial development in Jordan Some macro and micro analysis

Abstract

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. Keywords: Jordan, public debt, bank credit, diversification, time-series analysis, co-integration. JEL Codes: E50, E51, E52