THE IMPACT OF PRIVATE SECTOR CREDIT ON ECONOMIC GROWTH IN ETHIOPIA

Abstract

This study investigated the impact of bank credit to the private sector on the economic growth in Ethiopia. The sources of data for this research are mainly from secondary sources, but for the purpose of supporting the finding of the research, primary data were used to some extent. The study has applied Johansen co-integration approach, Vector Error Correction Model and Pairwise Granger Causality test using the quarterly time series data for the period of 1989/90-2016/17. Real gross domestic product (GDP) is the dependent variable and proxy for economic growth while bank credit to the private sector (BCPV) is proxy for financial indicator. The stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) unit root test. All the variables were integrated of order one i.e., I (1). ). A major finding is that there is a significant positive relationship between bank credit to the private sector and economic growth. The pairwise granger causality test result indicates a unidirectional causal relationship running from gross domestic product to bank credit to the private sector. The result supports the growth-led finance hypothesis that financial development follows economic growth which is “demand following”. Hence, the Government needs to continue to promote the real sector and that would serve to propel economic expansion, and thereby translate into employment and engineer credit growth. From the primary data analysis we can conclude that Access to finance is the main obstacle for private business in Ethiopia particularly, for small and medium enterprises. We recommend that the government has to implement policy measures to improve access to finance.