Are banks effective in the economic recovery from the Arab Spring?

Abstract

We analyze the role of banks in Bahrain, Egypt, Libya, Tunisia, and Yemen, pre- and post-revolution, and find that the volume of credit they offered to the private sector was neutral to real economic growth. Supported by a recent IMF study which ranks banking regulation and supervision ‘poor’ or ‘below-average’ in four out of the five countries under study, we attribute the limited effectiveness of their banks to government intervention in credit allocation and pricing. Our results cast doubt on the banks’ ability to facilitate an economic recovery, and suggest that a monetary policy focused on bank credit alone may not be successful.

Keywords:

• Arab Spring
• Middle East and North Africa
• banks
• credit

JEL Classification:

• E5
• F3
• F5
• G01
• G21
• G28
• O11
• O42

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. One distinction between these studies and our paper is that the crisis they examined were the result of a foreign shock or financial imbalance that eventually hurt growth in an otherwise normal domestic economy. In the Arab Spring however, the economic slump is the result of political instability with an otherwise normal domestic and international financial sectors.

2. For a review of these issues in the context of countries in the MENA region, see Soltani and Maktouf (2013) and Manizheh and Hook (2013). For the case of Egypt, see Kamal (2013).

3. Given the limited number of observations, we have an insufficient number of degrees of freedom to estimate a random effect model.

4. Abiad and Mody (2003) created a financial liberalization index for 35 countries between 1973 and 1996. Egypt is the only country from the Arab Spring covered by their analysis.

5. In 2003, the Libyan disarmament issue was peacefully resolved when Mr. Gaddafi, the leader at the time, agreed to eliminate his country's weapons of mass destruction program and US and International sanctions were lifted. As a result, the growth rate in Libya’s real GDP registered an astounding 13% that year.

6. The World Bank statistics show that Libya’s real GDP shrunk by 62% in 2011 and rebounded by 105% in 2012. We consider these changes as outliers and eliminate these extremes from our analysis.

7. One concern about the statistical significance of the coefficient for the investment ratio is that this variable may be correlated with bank credit. If so, the variance of the coefficient estimates increases, and may cause the coefficients to switch signs as multicollinearity saps the statistical power of the analysis. We ran a correlation analysis between the two variables in question and found it to be 35.7%, a level insufficiently high to cause concern. We wish to thank an anonymous referee for bringing this point to our attention.

8. This is part of large study by the IMF detailed in Creane et al. (2004). The Index has not been updated since 2004.