Tourism-Related Loans as a Driver of a Small Island Economy: A Case of Northern Cyprus

Abstract

Although the literature on the contribution of tourism to economic expansion vis-à-vis the tourism-led growth hypothesis has been widely explored, so far, limited attention has been paid to the specificity of the role of tourism-related loans or financial inducement in economic growth. This paper examines the short-run and long-run relationships between bank loan disbursements to the tourism sector and economic growth in Northern Cyprus. We structurally derive empirical equations for co-integration and error-correction models by extending the original Solow growth model, applying a cointegration approach that is strengthened by the autoregressive distributed lag and Granger causality approaches to reveal important findings. The empirical findings suggest unidirectional causality from loans disbursed to the tourism sector to economic growth in Northern Cyprus for the period under study. Additionally, we show that tourism-related loans and human and technological advancement all spur economic growth in the short- and long-run. These findings’ main policy implication is that long-term complementary policies in the domestic banking system can increase the access to financial sources for tourism enterprises and, consequently, promote tourism-led economic growth, especially in small tourism-dependent economies where capital sources are scarce.