The Effect of Sukuk on Twin deficits in Selected Countries

Public debt is a prime source of government revenue to finance budget deficit. It is perceived as the accumulation of annual budget deficits, generally face twin deficit viz. With the emergence of Islamic banking and finance across the globe, Islamic economists sought to find transactions that fit and conform to the principles of Islamic religion.therefore, The present study aims to discuss the possibilities of introducing Sukuk as an alternative way of financing public expenditure by replacing other conventional modes of financing in the future and effect Sukuk on twin deficit hypothesis for selected countries using the dynamic panel a generalized methods of moments (GMM) approach during the annual period 2013-2021. In the absence of sukuk we find a significant positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis and the results show that the size of the estimated coefficient on the budget balance is between 0.86 and 0.95. However, the existence of sukuk reduces the effect of budget balance on the current account balance (the coefficient is reduced to 0.1). In fact, the twin deficits relationship is reduced with the presence of sukuk. This innovation will increase a lot of strategic advantage and economic development of countries by utilizing sukuk as an alternative source of funding.