Government Domestic Debt, Private Sector Credit, and Crowding Out Effect in Oil-Dependent Countries
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Banks are more liquid, better capitalised, 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 generalised 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.
Abstract
Banks are more liquid, better capitalised, 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 generalised 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.
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