Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)

Habib Ur Rahman, Adam Arian and John Sands ()
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Habib Ur Rahman: Faculty of Higher Education (Accounting and Finance), Holmes Institute, Gold Coast, QLD 4217, Australia
Adam Arian: School of Business, Faculty of Business, Education, Law and Arts, University of Southern Queensland, Darling Heights, QLD 4350, Australia
John Sands: School of Business, Faculty of Business, Education, Law and Arts, University of Southern Queensland, Darling Heights, QLD 4350, Australia

JRFM, 2023, vol. 16, issue 9, 1-15

Abstract: This study explores fiscal consolidations’ impact on non-performing loans (NPLs) in highly indebted countries (HICs) following the global financial crisis (GFC) and subsequent sovereign debt crisis. A dynamic panel data estimator was applied to obtain the unbiased estimator due to NPLs’ time persistence. The findings reveal that fiscal consolidation measures increase NPLs since they limit the household and business loan-serving capacity. Extended analysis categorises fiscal consolidation episodes into (1) the fiscal consolidation weak form (FCWE) and (2) the fiscal consolidation strong form (FCSE). The extended analysis results reveal that the FCWE and FCSE improve NPLs by 1.55% and 31.10%, respectively. The weak-to-strong form transition of the fiscal consolidation analysis resulted in improving NPLs by 28.55 percentage points. NPL definition challenges, the potential influence of loan restructuring and regulatory restrictions, and implications for policymakers and financial institutions in managing NPLs in highly indebted economies were explored. Investigating the potentially different effects of both forms of fiscal consolidation (FCWE and FCSE) on NPLs in countries with different definitions of NPLs, including a comparison study between different definitions, was identified as an implication for future research. Finally, future studies should examine how restrictions on IFRS 9 may affect the FCWE and NPL as well as FCSE and NPL associations.

Keywords: non-performing loans; fiscal consolidation; highly indebted countries; global financial crisis; sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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