Terrorism Impact on Public Debt and Government Borrowing Cost: New Evidence from Long Run Relationship in MENA Countries

Abstract :

The high frequency of terrorist attacks in the Middle East and North Africa region is seriously damaging many countries’ economies. Focusing on this specific geographic area, several studies have shown that terrorism has a negative impact on economic growth, drops tourism and reduces trade and Foreign Direct Investment. In this research, we are interested in terrorism effect on public finances. In particular, we are trying to study its impact on the cost and the ratio of public debt for the MENA countries.?Using both time series and dynamic panel data techniques for the period 2002-2018, this paper aims to investigate the relationship between terrorism, public debt and government borrowing cost using a panel of 11 MENA countries while taking into account macroenomic and institutional indicators. In doing so, we apply the second-generation econometrics tests to examine whether cross-sectional dependence is present which leads us to control heterogeneity. Thanks to the results obtained from CIPS unit root test, we investigated long-run relationship between dependant, independent and control variables with Westerlund (2007) bootstrap cointegration. Finally, Fully Modified Ordinary Least Square (FMOLS) estimation and heterogeneous panel causality technique have been applied.?We deduce that there is a positive long-term relationship between the global terrorism index and the debt ratio. In addition, we found that terrorism increases the risk of default by its negative effect on the sovereign rating. Furthermore, we notice that the violent attacks affect the credit rating more than the debt ratio. The sensitivity of the financial market to this phenomenon is much more marked than its effect on the real economy.