Financial Deepening and Economic Growth in Ethiopia
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Date
2026-04-03
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Addis Ababa University
Abstract
Ethiopia has undergone significant financial sector transformation since 1991, yet the extent to which financial deepening translates into sustained economic growth remains an open empirical question. Existing studies are largely confined to conventional banking indicators such as broad money and private sector credit, and most predate the rapid expansion of mobile money platforms and the substantial growth of diaspora remittances, leaving a critical gap in the empirical literature. This study is motivated by the need to provide updated, comprehensive evidence on the finance-growth nexus in Ethiopia by incorporating both traditional and emerging financial indicators within a single analytical framework. Annual time series data covering the period 1990 to 2025 are used sourced from the National Bank of Ethiopia, the World Bank World Development Indicators, the International Monetary Fund Article IV reports, and Ethio Telecom annual publications. The Autoregressive Distributed Lag bounds testing approach combined with an Error Correction Model is employed as the method of analysis, given its suitability for small samples and its capacity to handle variables of mixed integration orders. The key findings reveal that a stable long-run relationship exists among all variables. Financial account ownership and remittances are the most significant long-run drivers of economic growth, while broad money and private sector credit are statistically insignificant in the long run. In the short run, financial account ownership exerts the largest positive effect on growth, whereas public debt crowds out growth significantly. Inflation is consistently negative across both time horizons. These findings carry important policy implications. Policymakers should prioritize expanding digital financial inclusion, reducing remittance transfer costs, improving credit allocation toward the private sector, and maintaining price stability as a precondition for financial deepening to deliver meaningful and sustained economic growth in Ethiopia.
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Financial Deepening and Economic Growth in Ethiopia