What the study found
The study found that fiscal contraction, meaning an improvement in the primary balance from deficit toward surplus, is associated with lower non-performing loans (NPLs) in the long run. It also found a short-run increase in NPLs after fiscal contraction.
Why the authors say this matters
The authors say this matters because the study addresses a fiscal policy–NPL connection that is often overlooked in banking stability literature. They conclude that the findings extend industrial organization theory of banking to this relationship in a developing, resource-rich economy.
What the researchers tested
The researchers proposed a generalized theoretical framework that augments industrial organization theory of banking with liquidity preference theory. They tested it using bank-level quarterly data from Guyana from 2009: Q4 to 2024: Q4 and a Panel Autoregressive Distributed Lag Pooled Mean Group (ARDL-PMG) model, which is a panel time-series method.
What worked and what didn't
A one-percentage-point improvement in the seasonally adjusted primary balance as a share of gross domestic product was associated with a 0.473 percentage point decrease in NPLs in the long run. In the short run, fiscal contraction had a coefficient of 0.103, indicating a temporary increase in NPLs, likely because of pressure on borrowers' debt-service capacity. Higher oil prices and bank efficiency were reported to significantly lower NPLs, while GDP growth, inflation, the real effective exchange rate, and the COVID-19 pandemic were statistically insignificant in this framework.
What to keep in mind
The abstract does not describe the study's limitations in detail. The findings are based on bank-level quarterly data from Guyana and may reflect that specific setting and period.
Key points
- Fiscal contraction was associated with lower NPLs in the long run.
- A one-percentage-point improvement in the primary balance was linked to a 0.473 percentage point long-run decrease in NPLs.
- Fiscal contraction was linked to a temporary short-run increase in NPLs, with a coefficient of 0.103.
- Higher oil prices and bank efficiency significantly lowered NPLs in the model.
- GDP growth, inflation, the real effective exchange rate, and COVID-19 were statistically insignificant.
Disclosure
- Research title:
- Fiscal contraction is linked to lower NPLs in the long run
- Authors:
- Tarron Khemraj, Sukrishnalall Pasha
- Institutions:
- Ministry of Finance, New College of Florida
- Publication date:
- 2026-04-02
- DOI:
- 10.3390/jrfm19040255
- OpenAlex record:
- View
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