Credit to Economic Sectors and the Economic Growth: Evidence from Jordan

The banking sector efficiently reallocates financial resources in the economy. Based on this firm belief, it is clear that the economic sectors need capital to grow the economy, and Jordan needs to get rid of its accumulated economic problems. Therefore, relying on the banking sector to reallocate resources is important. This paper studies the relationship between the share of banking facilities in Jordan's economic sectors and the rate of growth in real gross domestic product (RGDP). Data from the 2008 first quarter until the 2022 fourth quarter and the VEC model were used to analyze the model. We studies the impact of percent of direct credit facilities granted to the agricultural sector as a percent of the overall direct credit facilities granted by licensed banks (DCFA), percent of direct credit facilities granted to the industrial sector as a percent of the overall direct credit facilities granted by licensed banks (DCFI), percent of direct credit facilities granted for transportation services as a percent of the overall direct credit facilities granted by licensed banks (DCFTR), percent of direct credit facilities granted to the construction sector as a percent of the total direct credit facilities granted by licensed banks (DCFC), percent of direct credit facilities granted to the tourism, hotels and restaurants sector as a percent of the total direct credit facilities granted by licensed banks (DCFTO) and percent direct credit facilities granted to public services and facilities as a percent of the total direct credit facilities granted by licensed banks (DCFPS) on RGDP growth rate. We found that the model successfully explained the relationships between the variables DCFTO, DCFI, DCFC, DCFPS, and RGDP. The result showed a positive effect of DCFI on RGDP, a negative effect of DCFC, and an inverse relationship between DCFPS and RGDP. It was also found that DCFTR and DCFTO negatively affect RGDP. The results also showed that the increase in the sectors’ financing shares in the total appears to impact the model within nine months; that is, the RGDP responds after nine months to the changes occurring in the independent variables.