Is There Any Impact of Public Spending on Bank Performance? Empirical Evidence From the Mena Region

This paper investigates the role of the level and composition of government spending as a determinant of three different aspects of bank performance in 179 banks from the MENA region between 2001 and 2019. To control for the impact of the oil sector on the banking system of some countries in the region, we divide our sample into two groups of banks, depending on whether they are from net oil importers or net oil exporters. The results reflect the inherent heterogeneity of MENA region economies. We find that the determinants of banking performance differ according to the type of spending and the nature of the economy’s reliance on oil. Overall, the results show that government spending affects bank performance and that, in most cases, this impact is significantly negative. We find that current spending has either an insignificant or a negative impact on the investment and leverage efficiency of banks in the MENA region. On the other hand, while capital spending negatively affects lending growth, it has a positive effect on the performance of banks in oil-importing countries. Our findings shed light on the role of the level and composition of government spending on bank performance. Fiscal policy in the MENA region is greatly affected by oil prices and can have unintended effects on the banking sector..