Well-known economist Irving Fischer once
said that it is good for a bank to be prudent, but it is bad for the economy if
all banks become prudent.
اضافة اعلان
One indicator of
prudence is the spread (difference) between the lending and deposit rates that
banks pay and receive. Another is the ratio of domestic credit to private
sector as a percentage of the GDP. There are other measures, of course, but I
will stick to these two simple ones, and ask the following questions: Is the
spread between the interest rate on loans and deposits high, and if it is high,
then by how much? Has lending expanded to spur growth or moved in tandem with
it? And how, based on these two indicators, did the private banks react to
economic growth rates in the past two decades?
Let us look at the
past quarter century, 1997-2021. Official data shows that during a period of
low economic growth (1997-2003), domestic credit to private sector as a
percentage of the GDP was 72 percent, and the spread was 4.8 percent. During
2003, a year of uncertainty and regional turmoil, the spread was extremely
high: 6.2 percent. There is no evidence that banks may have caused the slow
growth rates; however, clearly banks reacted with great trepidation by raising
the spread and reducing lending.
On the other hand,
during 2004-2009, the domestic credit to the private sector as a percentage of
GDP rose to 83 percent and the spread decreased to 4.2 percent. Interestingly,
the average growth rate of the real GDP during this period was close to 8
percent. Hence, the growth that was spurred by the invasion of Iraq and
resulted in an influx of wealthy Iraqi immigrants caused greater lending and a
lower spread rate.
With the growth
rate slowing down slightly in 2008, amidst an unjustified fear of a bubble
(which later resulted in a self-fulfilled prophecy), and the resultant prudent
policy adopted by the private banks, the domestic credit to the private sector
as a percentage of the GDP dropped from 92 percent in 2007 to 78 percent in
2008, and then to 73 percent in 2009, the year Jordan entered, by own design,
into the Global Credit Crisis — note that the world by then had announced in
Istanbul that it exited the crisis.
… consistent with unregulated capitalism doctrines, only big businesses have the capacity to borrow, micro and small enterprises will not be able to obtain credit. Consequently, a combination of tight fiscal and monetary policies will reduce potential growth to a trickle.
One cannot but be
surprised that no one was later held accountable for causing Jordan to unnecessarily
jump into the crisis.
Enter the last
period for which data is available (2010-2021). During this period, the
domestic credit to the private sector as a percentage of the GDP became 73
percent, and the spread increased to 4.6 percent. The highest spread was in
2010, a year that witnessed a collapse of the growth rate for 5.3 percent in
2009 to 2.2 percent in 2010.
Another peak
emerged in 2016 when the spread became 5.1 percent. Note that the Arab Spring
had little to no effect on the spread. In 2020, the COVID year, the spread fell
to 3.4 percent and the domestic credit to the private sector as a percentage of
the GDP increased from 77 percent in 2019 to 83 percent.
The austerity
programs of the IMF led to increased taxes and reduced public expenditures,
at the same time that private expenditures were being squeezed as a result of a
tight monetary policy.
Given that,
consistent with unregulated capitalism doctrines, only big businesses have the
capacity to borrow, micro and small enterprises will not be able to obtain
credit. Consequently, a combination of tight fiscal and monetary policies will
reduce potential growth to a trickle.
Solution: there needs to be a complete shift in economic governance if
the economy is to turn around.
Yusuf Mansur is CEO of
the Envision Consulting Group and former minister of state for economic
affairs.
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