The Effect of Financial Sector Development on Economic Growth in Ethiopia: A Time Series Analysis
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Date
2024-10
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Addis Ababa University
Abstract
This study investigates the impact of financial sector development on economic growth in Ethiopia from 1994 to 2023. Utilizing descriptive statistics and econometric modeling, the research examines key variables such as GDP growth rate, domestic credit to the private sector, money supply, government expenditure, bank deposits, private investment, and inflation rate. The findings reveal considerable variability in these indicators, with GDP growth averaging 6.85%. Trend analysis indicates a general upward trajectory in economic growth, despite challenges like civil conflict and the COVID-19 pandemic. The econometric model results, including unit root tests and the ARDL long-run estimation, underscore the importance of financial factors in shaping economic outcomes. Notably, an increase in money supply positively influences GDP, whereas increases in domestic credit to the private sector and private investment have a negative long-term impact on economic growth. High inflation rates also negatively affect GDP. The study concludes that while financial development is crucial for economic growth, efficient credit allocation, controlled money supply expansion, effective inflation control, and strategic private investment are essential for sustainable economic development. Recommendations for policymakers include enhancing financial infrastructure, improving regulatory frameworks, expanding money supply judiciously, and fostering strategic private investments.
Key words: Financial Sector Development, Economic Growth.