Author(s):

Abstract:
The positive role of finance for economic growth is well-known in the economics literature and in policies. A major issue is the impact of investment credit on a country’s external competitiveness. However, this relationship is malfunctioning in the Western Balkan countries, not only since 2009 when the economies of the countries were hit by various current external shocks. The structural malfunction of the relationship between financing and growth and competitiveness is reflected in persistent trade deficits, which could not be reversed even in the ongoing period of recession and decline in the region. The paper asks what can be done to revive credit for more and better investment. The paper applies a growth diagnostic approach to identify the long- and short-run binding constraints in financing. The long-run constraints include a low depth of financial intermediation, low specialization of banks, and a too low concentration in the banking sector in some countries, and a too high concentration in others. The actual binding constraints, however, is the high degree of and the alarming increase in non-performing loans (NPLs) throughout the region. This analysis is backed by a panel regression approach including credit supply (mainly NPLs) and demand variables. The increase in NPLs is the result of policy failures, mainly the forbearance of the supervisory authorities that supports expectations in the banking sector of a bail out of debtors by the government. The paper outlines a concept for resolution and recovery of non-performing loans – using international experiences. The concept should be flanked by measures overcoming structural impediments of finance to growth.

Thematic field:
Financial sector

Date of abstract submission:
04.02.2014.

Conference:
REDETE 2014 - Researching Economic Development and Entrepreneurship in Transition Economies