Does Bank Agricultural Credit Reduce Poverty Level and Income Inequality in Ethiopia: Panel Corrected Standard Errors (PCSE) Approach

Abstract

Harshly, the problem of poverty and income inequality overwhelmed a significant portion of the world’s population and remained one of the economic curses posing catastrophic consequences on society’s economic as well as social well-being. Hence, this study investigated the effects of extending bank agricultural credit on Ethiopia’s poverty level and income inequality. The study used unbalanced panel data from 2000 to 2021 collected from all 11 regional states in Ethiopia. The study also included other macroeconomic variables that affect poverty and income inequality to avoid the variable omission problem. When analyzing the relationship between agricultural credit granted by banks and poverty level and income inequality, the study adopted the Panel Corrected Standard Error (PCSE) method basing its robust feature on effectively controlling spatial correlation, heteroscedasticity, and cross-sectional dependence in panel data sets. Additionally, pre-estimation tests like cross-sectional dependence, co-integration, and unit root tests were conducted to identify the presence of associated problems. The study reveals that bank agricultural credit has a significant and negative effect on the poverty level in Ethiopia. Moreover, bank agricultural credit has a significant inverse relationship with income inequality. Therefore, renovating the credit distribution aimed at directing the magnitude towards the agricultural sector is vital to flourishing the society’s economic well-being.