What the study found
The study finds that a fiscal contraction, meaning an improvement in the primary balance from deficit toward surplus, reduces non-performing loans (NPLs) in the long run. It also finds a short-run increase in NPLs after fiscal contraction.
Why the authors say this matters
The authors say the study matters because it addresses an interaction between fiscal policy and NPLs that is often overlooked in banking stability literature. The study suggests this adds to the literature by extending the industrial organization (IO) theory of banking to the fiscal policy–NPL relationship in a developing, resource-rich economy.
What the researchers tested
The researchers proposed a generalized theoretical framework that combines IO theory of banking with liquidity preference theory. They analyzed bank-level quarterly data from Guyana from 2009: Q4 to 2024: Q4 using a Panel Autoregressive Distributed Lag Pooled Mean Group (ARDL-PMG) model.
What worked and what didn't
A one-percentage-point improvement in the seasonally adjusted primary balance as a share of GDP was associated with a 0.473 percentage point decrease in NPLs in the long run. In the short run, fiscal contractions were associated with a temporary increase in NPLs, with a coefficient of 0.103. The abstract also states that higher oil prices and bank efficiency significantly lowered 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 provides results from bank-level quarterly data for Guyana only, so the scope is limited to that setting. It also does not describe additional limitations beyond the reported model, period, and variables.
Key points
- A fiscal contraction is associated with lower NPLs in the long run.
- The long-run estimate reported is a 0.473 percentage point decline in NPLs for a one-point improvement in the primary balance (% of GDP).
- The short-run effect runs in the opposite direction, with a temporary increase in NPLs.
- Higher oil prices and bank efficiency are reported to significantly lower NPLs.
- GDP growth, inflation, the real effective exchange rate, and COVID-19 are reported as statistically insignificant in this framework.
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
- OpenAlex record:
- View
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