Description
Title: Geopolitics and the Twin Deficit Hypothesis in the Middle East and North Africa
Abstract: This study uses Granger Causality, Panel Vector Autoregression-Generalized Methods of Moments PVAR-GMM estimation, IRFs, and the twin deficits hypothesis (TDH) to examine the relationship between fiscal and external balances in MENA oil versus non-oil countries. The main goal of this analysis is to determine how vulnerable the region’s fiscal and external balances are to changes in the price of oil and regional geopolitics. The findings indicate that a twin-deficit problem only exists in oil-rich MENA countries, while the issue does not exist in non-oil producing nations. This supports the idea that dependence on oil increases a country’s fiscal vulnerability to geopolitical shocks, which automatically affects the country’s external balances. While a TDH has not been demonstrated to exist in non-oil producing nations, structural issues with long-standing fiscal and external balances cause these issues. These nations are more susceptible to domestic and international shocks due to their heavy reliance on tourism and remittances as their primary sources of foreign currency receipts, along with poor tax administration and increased current spending bills, which is reflected in both growing fiscal and current account deficits. The size of the import sector and the capacity for exports are additional factors that weaken external accounts. The main policy recommendations for the oil-rich MENA nations center on the significance of developing non-oil industries in order to diversify domestic revenue sources. It is advised to adopt flexible exchange rates to lessen the susceptibility of the oil price dynamics to external shocks. Fiscal consolidation, reforming current spending, and bolstering tax administrations are essential for MENA non-oil regions to improve fiscal performance. External accounts in the examined economies would also be improved by employing export-led growth strategies and inclusive growth policies.
Keywords: twin deficit hypothesis; budget balance; current account balance; MENA region; oil countries; non-oil countries; PVAR modeling
Paper Quality: SCOPUS / Web of Science Level Research Paper
Subject: Economics
Writer Experience: 20+ Years
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