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The relationship between loans and economic growth

Jan 28,2023 - Last updated at Jan 28,2023

Data indicates a 7.5 per cent growth in credit facilities provided to the private sector during the first eleven months of 2022 compared to a growth rate of 4.8 per cent for the same period the previous year, 4.9 per cent for the whole of 2021, 6 per cent for 2020 and 4.5 per cent for 2019. In contrast, the overall GDP growth was 2.6 per cent in Q3 of 2022, 2.2 per cent in 2021, -1.6 per cent in 2020, and 1.9 per cent in 2019. Reviewing data from the golden period of the Jordanian economy 2001-2008, it was found that the average economic growth rate reached 6.8 per cent compared to credit facilities growth rates of 12.5 per cent. Recent studies have also indicated a positive relationship between credit facilities provided to the private sector and the GDP growth rate in Jordan. This means that when credit facilities provided to the private sector increase, GDP growth rates tend to increase as well. Conversely, when credit facilities provided to the private sector decrease, GDP growth rates tend to decrease as well.

This relationship exists because loans provided to the private sector can help stimulate economic activity and accelerate growth. When companies and individuals have access to credit, they are able to invest and purchase goods and services, which can contribute to overall economic growth. In addition, credit can help companies expand and hire more workers, which can also contribute to economic growth. It is important to note that while there is a positive relationship between loans provided to the private sector and rates of GDP growth, this relationship is not necessarily causal or direct. There may be other factors that play a role in creating changes in GDP growth rates. For example, changes in government policy, technological innovation, or global economic conditions can affect GDP growth rates as happened after 2009, where the Jordanian economy was affected by a series of shocks and crises, the most prominent of which were; the 2008-2009 global financial crisis, the Arab Spring crisis 2011, the Syrian refugee crisis 2011, the Egyptian gas cutoff 2011/2012, the COVID-19 pandemics 2020 and the Russian-Ukrainian war of 2022.

In general, an increase in credit provided to the private sector can lead to economic growth, as access to credit allows companies to invest in new projects and expand their operations. This can lead to an increase in employment and also an increase in the production of goods and services, both of which contribute to the growth of the gross domestic product (GDP), as long as there are enough investment opportunities and the necessary conditions for economic growth. However, the question of causality arises, that is, does an increase in credit to the private sector cause economic growth or vice versa, that is, does economic growth lead to an increase in credit facilities for the private sector? Studies we have conducted indicate that there is a reciprocal relationship between credit provided to the private sector and GDP growth, meaning that both can affect each other. On one hand, an increase in credit provided to the private sector can lead to an increase in GDP growth, as access to credit allows companies to invest in new projects and expand their operations. This can lead to an increase in employment and also an increase in the production of goods and services, both of which contribute to the growth of GDP.

On the other hand, an increase in GDP growth could lead to an increase in credit extended to the private sector. With economic growth and increased corporate profits, it is likely that money will be borrowed to finance further expansion. It is worth noting that studies have shown a time lag of around 12-18 months between credit extended to the private sector and GDP growth rates in Jordan. This means that the effects of changes in credit extended to the private sector may take some time to fully reflect in GDP growth rates and vice versa. There are a number of factors that can contribute to the time lag in this relationship. For example, it may take companies and individuals a month to a few months to secure credit and use it for investment or purchasing goods and services. Additionally, it may take time for these investments and purchases to translate into increased economic activity and growth.

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