Effects of Fiscal Policy on Banking Profitability in West African Economic and Monetary Union Countries

Abstract

The article assesses the effects of fiscal policy on banking profitability, looking separately the effects of government securities and tax pressure on ROE and ROA. Applying the Pooled Mean Group in the WAEMU-panel countries from 1990 to 2021, this article provides two results: (i) government securities positively and significantly affect ROE/ROA up to a maximum threshold of 19.41% of GDP; and (ii) tax pressure negatively and significantly affects ROE/ROA up to a maximum threshold of 19.42%. Three implications emerge: (i) monetary authorities must prevent any contagion between public finances and banking crises by setting an indicative ceiling, adjusting the reserve requirement ratio upwards or resorting to restrictive open market operations; (ii) the cap reduces the crowding out of private credit through preferential refinancing lines for productive credit; (iii) government authorities must improve tax revenue mobilisation and adopt tax and regulatory incentives for private credit, such as targeted tax reductions or the creation of public guarantees.