Analytical comparison between sukuk and public debt financing on the relationship of Twin Deficit

Document Type : Original Article

Authors

1 Professor, Department of Economics, University of Mazandaran

2 PhD of Islamic economics, Department of Economics, University of Mazandaran

3 Professor in Economics, Department of Economics, University of Mazandaran

10.22075/jem.2024.33719.1924

Abstract

Twin deficit is the simultaneous occurrence of budget deficit and current account deficit, which has adverse effects on the performance of various sectors of the economy. On the other hand, filling the twin deficit gap by relying on public debt is harmful to the economy if it exceeds the limits. In this study, the relationship between the twin deficits hypothesis and the role of sukuk as a new financing solution in compared with public debt financing have been investigated in 14 sukuk issuance selected countries. The data was analyzed using the General Method of Moment (GMM). The studied sample includes countries with a high volume of sukuk issuance in the period of 2012-2021. The findings show that with the presence of public debt, the effect of the budget balance on the current account balance increased from 0/46% to 0/68%, and the size of the net coefficient estimated at 0/22% indicates the strengthening of the twin deficit relationship. On the other hand, with the existence of sukuk, the positive relationship between the budget balance and the current account balance decreases from 0/75% to 0/66%, which weakening the twin deficits by almost 0/10%. In fact, the results indicate that sukuk can improve the current account balance in the direct method and in the indirect method, through Ricardian considerations, by compensating changes in savings, it can lead to the reduction of the twin deficit relationship. In fact, efficient financial instruments may implement Ricardian properties in economies and reduce the effect of fiscal policies on the current account.

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