THE IMPACT OF EXPORT FINANCING INCENTIVES BY COMMERCIAL BANKS ON THE EXPORT EARNING OF ETHIOPIA: THE CASE FOR EXPORT CREDIT

Abstract

There are several motivations for countries to export their production. Exports growth is seen by governments as being a driver to economic growth, and it also helps domestic industries to develop, improve productivity and create new job. Ethiopia’s export earnings are one of the most important sources of foreign currency to import its vital imports. Despite years of growth in the export earnings it faces a severe balance of trade deficit, because the return from exports is far less than the expense needed to pay for the imports. This export and import unbalance leads Ethiopia to the instable and weak macroeconomic management due the depletion of foreign currency, eventually the nation is forced to look for additional finance to cost of its imports. Lack of own financial source has led the country to the development of a significantly sized external debt. This paper tried to answer export credit incentives effect in boosting the export earnings of Ethiopia in the past decade, how is the link between private sector and government regarding financial credit as well as what can be done to improve the nation’s export performance. In this paper Inferential Fixed Effect Model of the Pane Data is used to illustrate the case for the effect of export credit on export earnings, while real GDP and Inflation Rate were used as control variables. The analysis results show that, during the period of 2007/08 to 2017/18, there was a strong and positive effect of export credit on export earnings. Thus, this paper put forward for Ethiopia banks to promote export through increment of credit volume to the export sector as well as by diversifying the credits instruments that are provided to the sector.