Public Debt, Oil Rent, and Financial Development in MENA Countries: A Fractional Response Model Approach (FRM)

Abstract

The rapid accumulation of public debt raises global concern over its implications for financial markets. This study examines the effect of domestic public debt on financial development in Middle East and North Africa (MENA) countries, a region marked by sharp heterogeneity in institutions, debt dynamics, and oil dependence, using annual panel data for 16 countries over the period (2000–2020). Our analysis employs a fractional response model (FRM), which accounts for the bounded nature of the dependent variable, corrects for heteroskedasticity, and incorporates country fixed effects. The findings reveal a significant negative effect of domestic public debt on financial development, consistent with the lazy banks and crowding-out hypotheses. This adverse relationship persists across different income groups and debt percentiles, with modest attenuation at higher debt levels. Oil rents are also found to exert a robust negative effect, highlighting the structural vulnerabilities associated with oil dependence. These results emphasize the importance of debt management, fiscal frameworks that account for commodity cycles, and policies to reduce the sovereign–bank nexus in fostering sustainable financial development in the region.