The Impact Of Cash Out-Flow From The Banking Sector on Sudanese Economy(1972-2001)

Abstract

Sudan —as an example of l.,DCs the banking sector has been suffering from the problem of cash outflow over the last three decades, generating the following impacts: Loss of banking sector of its role of financial intermediation, cash scarcity in the banking sector, large government borrowings from unreal source of finance, thus, more inflation. The research attempts to specify the main determinants of cash outflow from the banking sector in Sudan (during the period 1972-2001). Hence, those revealing the major impacts of the cash outflow on the economic activity and rates of inflation. The research hypotheses were (l) the Banks economic behavior of attainment reserves and expanding loans is main cause of cash outflow. While (2) the government financial activity to cover its budget deficits, and the effective demand for money liquidity by the public are the main factors transmitting the impacts of cash outflow to the major macroeconomic variables (Money stock, aggregate demand and supply, cost of resource adjustment, and the rate of inflation). (3) Monetization of bank loans via allowing the growth in the effective demand for liquidity by the public directly leads to aggravation of inflation given the downward trend of money velocity. (4) Monetization of bank loans via financing the current delicits of the government, causes an inflationary pressures due to aggregate demand expansion, the real side of the economy will not be affected. Using twelve equations-mathematical model systems with endogenous variables: the demand for effective money liquidity, the nominal and real growth of money stock, the demand for real balances, cost of resources adjustment, the aggregate demand, Gross Domestic Product GDP, the capital stock, the private investment, rate of inflation, bank loans, velocity of wide money, and the current budget deficit. Moreover, the general price level index, the real output trend and its actual deviations from that trend, quasi money, real depreciation of the local currency, the labor force size, the private savings and excess reserves held by banks as exogenous variables were used. Based on annual data of Sudan economy for the study period, iterative Weighted Two-Stage Least Squares (IWTLS) were applied through running an econometric computer program of E-views. The Results revealed that monetization in Sudan is mainly determined by the availability of Bank loans which in tum are affected largely by banks’ ability to form excess reserves, by dominated the government borrowing, and less by liquidity preference of the public. Moreover, Money stock has great endogeneity. The bank loans expansion in Sudan economy may induce liquidity preference or may cause inflation through inducement of monetary growth by the BOS. lnllation growth may exceed the monetary growth. So, real money growth falls and thus de-accelerates velocity and causes economic recession. On the other hand, the bank loans expansions encourage the government to incur large deficits thus pulling the aggregate demand and aggravate inflation with no effect on the real side of the economy. The research recommended controlling the process of monetization, through controlling banks’ ability to expand loans, good perception to the growth in liquidity preference, and sizing of the government borrowing. To control liquidity preference the government borrowing must be rationed and the policy must be of minimum impact on inflation. To avoid high liquidity preference associated with less velocity, the policy must be designed to facilitate bank loans to the prior productive sectors and the government borrowing must be rationed. And real sources for financing deficits must be developed.