This study investigated the relationship between domestic credit and net foreign assets in the long run through the monetary approach to the balance of payments (MABP) for a panel of five selected MENA countries (Jordan, Egypt, Algeria, Morocco, Tunisia) during the period extending from 1980 to 2019. It employed the second-generation methods in panel data analysis to deal with cross-sectional dependence (CSD) and slope heterogeneity. According to the panel results for Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG) estimators, domestic credit has a significant negative impact on net foreign assets in the long run. The country-specific results for the AMG estimator strongly supported the MABP propositions in Jordan, Morocco, and to a lesser extent, in Egypt and Algeria. As for Tunisia, the results do not conform with what MABP predicted. The implicit conclusion is that an increase in domestic credit causes a continuous loss of net foreign assets in Egypt, Jordan, Morocco, and Algeria. Thus, monetary authorities should formulate an appropriate monetary policy to control the domestic credit creation as a mechanism toward improving the balance of payment (BOP) position. Furthermore, the policymakers should concentrate on other policy instruments to correct the BOP deficit rather than focusing on monetary tools, especially in Tunisia, where the findings showed that BOP was not a monetary phenomenon.

Research background Every country attempts to improve its balance of payments (BOP) position to enhance macroeconomic policy. Algeria, like many developing countries, is experiencing a BOP deficit. This raises concerns about the reasons for this deficit and prioritizes the quest for potential answers. Purpose In the context of the Monetary Approach to the balance of payments (MABP), this paper investigates the long-run relationship between domestic credit, inflation, interest rate, GDP, and net foreign assets to find whether BOP is a monetary phenomenon in Algeria from 1980 to 2019. Research methodology: The Autoregressive Distributed Lag (ARDL) bounds test, combined with the critical approximation p-values of Kripfganz and Schneider (2020), has been applied. Results The findings clearly showed a long-run relationship among the variables. The long-run estimates strongly supported MABP propositions, and domestic credit had a negative and statistically significant influence on net foreign assets. This suggests that Algeria’s BOP is a monetary phenomenon, and excess money supply played a crucial role in Algeria’s balance of payments disequilibrium. Novelty The contribution of this paper is the use of the ARDL bounds test in combination with the novel critical approximation p-values of Kripfganz and Schneider (2020), which provided more robust results. This study could help monetary authorities to elaborate the suitable policies in dealing with BOP problems in Algeria.