Domestic Credit and the Balance of Payment Deficit: Evidence from a Heterogeneous Panel of Five Selected Mena Countries

Azeddine Ghilous,Adel Ziat

doi:10.2478/eb-2021-0009

Abstract

AbstractThis study investigated the relationship between domestic credit and net foreign assets in the long run through the monetary approach to the balance of payments (MABP) for a panel of five selected MENA countries (Jordan, Egypt, Algeria, Morocco, Tunisia) during the period extending from 1980 to 2019. It employed the second-generation methods in panel data analysis to deal with cross-sectional dependence (CSD) and slope heterogeneity. According to the panel results for Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG) estimators, domestic credit has a significant negative impact on net foreign assets in the long run. The country-specific results for the AMG estimator strongly supported the MABP propositions in Jordan, Morocco, and to a lesser extent, in Egypt and Algeria. As for Tunisia, the results do not conform with what MABP predicted. The implicit conclusion is that an increase in domestic credit causes a continuous loss of net foreign assets in Egypt, Jordan, Morocco, and Algeria. Thus, monetary authorities should formulate an appropriate monetary policy to control the domestic credit creation as a mechanism toward improving the balance of payment (BOP) position. Furthermore, the policymakers should concentrate on other policy instruments to correct the BOP deficit rather than focusing on monetary tools, especially in Tunisia, where the findings showed that BOP was not a monetary phenomenon.

Highlights

balance of payment (BOP) is a macroeconomic instrument that registers all transactions between a country and the rest of the world (Paun et al, 2013)
This study investigated the relationship between domestic credit and net foreign assets in the long run through the monetary approach to the balance of payments (MABP) for a panel of five selected MENA countries (Jordan, Egypt, Algeria, Morocco, Tunisia) during the period extending from 1980 to 2019
This study investigated the long-run relationship between domestic credit and net foreign assets through the MABP in five selected MENA countries (Jordan, Egypt, Algeria, Morocco, Tunisia) for the period extending from 1980 to 2019

Summary

Introduction

BOP is a macroeconomic instrument that registers all transactions between a country and the rest of the world (Paun et al, 2013). Major accounts that form the balance of payments are the capital account, the current account and the financial account. The BOP deficit is a common taxing problem, which raises questions about the causes of this problem and makes the search for possible solutions a priority. Many countries in the MENA region are faced with this problem. According to World Bank data, in 2019, the current account balance of Egypt, Jordan, Morocco, Algeria, and Tunisia recorded a deficit of 3.4, 2.3, and 4.1, 10,0 and 8.5 per cent of GDP, respectively. The International Monetary Fund gave thorough attention to the BOP equilibrium

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