Effects of Sectorial Allocation of Commercial Bank Credit on Ethiopian Economic Growth: An Empirical Analysis

Abstract

Despite the growing literatures that examined the relationship between financial developments and growth of any economy, there is scarceness in the empirical studies that examine the influence of bank credit on economic performance or growth at sectorial level of any country. Therefore, this study came to examine the effect and relationship between bank credit allocation to Agriculture, Industry, Service, Export and to the whole economic sectors independently and Real GDP in Ethiopia at different using time series data for the period that span from 1980 to 2015. The paper examines whether a long-run relationship between bank credit allocation to these sectors and economic growth measured by Real GDP exist in Ethiopia. It employs Vector Error Correction Model (VECM) approach to assess how bank credit allocation to these sectors contributes to growth. It further used the granger causality test so as to find the direction of causality between bank credit allocation to these sectors and economic growth. The findings support the existence of feedback effect or bi-directional causality between Total bank credit to the economy and Real GDP. Moreover, the empirical results point out that the efficiency of the bank credit facilities in major economic sectors at level and lags has an important role in the Ethiopian economic growth both in short- and long-runs. This shows that there is a need to enhance the role of financial sector for different economic sectors by adopting more appropriate macroeconomic policies.