Linkages between Inflation, Exchange Rates, Finance and Non-Performing Loans: Evidence from Low-and Middle-Income Countries

Abstract

This study explored the linkages between inflation, exchange rates, finance and non-performing loans in low- and middle-income countries from 2000 to 2022. Indicators such as non-performing loans (% GDP) was used to measure non-performing loan, while other variables are inflation rate, interest rate, digital financial measures such as automated teller machines, point of sale, mobile banking, mobile money, and electronic banking were used to measure finance, while we control for financial deepening and interest rate. These variables were estimated using the panel autoregressive distributed lag (ARDL) model as the baseline, and panel fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) as the robustness checks. Findings from the ARDL results that inflation rate has significant impacts on the non-performing loans in low- and middle-income countries, while the exchange rate and finance have significant positive impacts on non-performing loans in low- and middle-income countries and these findings are similar to the results findings from the robustness checks models FMOLS and DOLS models. Thus, we recommend that to albeit non-performing loans (NPL) in low- and middle-income countries can be effectively reduced if the authorities improve the macroeconomic conditions of the countries monetary policy tools such as inflation rate, interest rate and exchange rate. This would aid in achieving economic stabilization, aid in reviving the overall well-being of households and other economic agents, improve per capita income since the economies would be very productive and lead to reduction in the non-performing loans (NPL).

KEYWORDS: Non-performing loans, Inflation, Exchange Rate, Finance