DOES DOMESTIC CREDIT TO THE PRIVATE SECTOR BY BANK INFLUENCE ECONOMIC GROWTH IN SAUDI ARABIA

Abstract

This paper investigated the impact of Saudi Arabia's domestic bank credit on the private sector and different macroeconomic variables on economic growth in the long and short term to advise what kind of financial and monetary policies should be supervised to guide the kingdom toward a sustainable development path. The autoregressive distributed lag (ARDL) bounds testing approach was used to examine both the short- and long-term relationships among variables, and the speed of adjustment at which the economic growth returns to a long-run equilibrium relationship after a shock in a short-run is estimated by an error correction model (ECM), focusing on historical trends and financial dynamics of annual data from 1970 to 2023. According to the findings, the domestic bank credit to the domestic private sector has a strong positive effect on economic growth in both the short- and long-term; economic growth is negatively affected by money supply in both periods, and inflation has a positive impact on economic growth in the long run, while its effect is ambiguous and negative in the short run. These results demonstrate the need for bank credit to advance Saudi Arabia's economic development. To achieve the goals of Saudi Vision 2030, credit policy should be in place to buttress the nation’s economic stability and extend its long-standing growth. Proper regulation of money supply and inflation is crucial for ensuring long-run economic sustainability.