Effects of Fiscal Policy on Financial Bank Intermediation Quality in WAEMU Countries

ABSTRACT The study assesses the effects of fiscal policy on the financial bank quality intermediation in the WAEMU. To do so, the effects of the government securities ratio and the tax pressure rate on the NPL ratio are examined separately. The study uses panel data from WAEMU countries over the period 1990–2021 and ARDL modelling by the PMG estimator for basics estimates and the GM‐FMOLS estimator for robustness. The public securities ratio improves the financial bank quality intermediation up to the maximum threshold of 47.5% of GDP. The tax pressure rate contributes to increasing the NPL ratio up to the maximum threshold of 17.06%. These results imply that a reform of banking regulation should encourage banks to hold a significant proportion of public securities, without crowding out the private sector. They also call on governments to implement measures to stimulate economic activity to absorb fiscal pressure. The study contributes to the literature and empirical effects of fiscal policy on the financial bank quality intermediation in the WAEMU while serving as a decision‐making tool for governments and banking authorities in the management of NPLs in their lending activities and development.