| Abstract: | This study examined how commercial banks credit affects sectoral output growth in Ethiopia employing annual time series data of 39 years (1981-2019). Each sectors output are modelled as a function of bank credit, government expenditure and labour force as major explanatory factors along with other controlling variables like inflation. The findings confirmed that there is a long run relationship among sectorial output growth, bank credit, government expenditure and other exogenous variables considered as potential determination of sectorial output growth. Bank credit had statistically significant positive effects on agriculture, industry and service output in Ethiopia. This could be attributed to the good performance of banking sector by chaneling funds from those with surplus funds to those with shortages through deposit mobilizing. Though, the effect of bank credit in all sectors is positive and significant, the magnitude effect of the bank loans granted to agriculture sector is lower than industry and service. Hence, the banking sector provides smaller amount of loans for agriculture sector. The finding in the error correction model revealed that the long run disequilibrium in the agriculture, industry and service models is adjusted per year on average by about 35 %, 35 % and 69 %, respectively. This suggests that there will be an adjustment to restore the long run equilibrium relationship between output level and the combined explanatory variables. Finally, the government as well as banking sector should struggle to ensure that there are available and sufficient credit allocated to agriculture, industry and service sector as there is huge market demand for their product outputs and to achieving the desired objective in sectorial output growth and the government should give special attention and implement mechanisms for agriculture sector in order to increase the availability of credit. |
