Browsing by Author "Estiphanos Girma"

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    An Analysis of African Regional Trade Integratlon Using A Gravity Approach: The Case of Common Market for Eastern and Southern Africa (COMESA)
    (A.A.U, 2009-06) Hail Belete; Estiphanos Girma
    Although Regional integration in Africa has a long history which dates back to the and of 19th century, it has failed to achieve its objectives, Several studies have pointed out different factors which contribute for its poor performance. These factors include loss of revenue due to trade liberalization non-complementarily of tradable goods, poor private sector participation, overlapping of memberships and so on. his study assessed and analyzed the problems and determinants Africa regional trade integration in general and COMESA in particular. however, it gives a due attention to determine the impact of trade openness ( trade liberalization) and overlapping of memberships on top of other determinants ( GDP, precipitate GDp, common boundaries, common language of member countries, distance between member countries etc.) on COMESA total trade flow using gravity model approach. The study comes up with the finding that trade openness (trade liberalization) within COMESA member countries boosts the intra-trade flow of the region. in contrast to this, overlapping of membership results in decline for the intra- trade flow of COMESA. Thus, the study recommends that COMESA member countries should liberalize their trade ,diversify the tradable commodities ,increase private sector participations and they should not to be a member of more than one regional group.
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    An Analysis of Foreign Direct Investment Pattern and its Implications in Ethiopia
    (A.A.U, 2001-07) Sugebo Tagese; Estiphanos Girma
    This study investigates the sect oral and geographical distribution of the approved foreign direct investment (FDI) in Ethiopia between 1992 - 2000. It is observed that, sect orally, FDI is mainly concentrated in consumer goods manufacturing and processing. Agriculture, real estates, construction, and hotels and tourism have also claimed substantial proportions of the approved FDI, in that order. Fishing, and mining and quarrying attracted the least amount of FDI. The relative shares of health and education were also low. The present Investment Code is argued to have a strong influence in causing this sect oral pattern as the Code maintains such entry restrictions as high minimum capital requirements and a list of several areas reserved for domestic investors. Regional considerations show that FDI is predominantly situated in Addis Ababa. The Oromia, Asmara and Afar regional states have also taken sizable proportions of the approved FDI. No foreign private company expressed its interests to invest in Benishangul-Gumuz and Somali regional states during the period under reference. The study argues that the regional distributions of FDI are largely determined by the level of economic development of the regions (in relative terms) such that the better the availability of infrastructural facilities the larger the flow of FDI, other things being constant.
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    An Analysis of Foreign Direct Investment: The Case of Ethiopia: Co-Integrated VAR Approach
    (2015-06) Berhane Asmelash; Estiphanos Girma
    paper gives analysis on Foreign Direct Investment (FDI) in Ethiopia based on study using Co-integrated VAR approach over the period 1974/75 to 2013/14. It in particular examines the trend of FDI inflow on regional, sectoral and by country of origin bases. The study also discusses why Ethiopia is conducive for Foreign Direct Investment, the area of opportunity, the problems faced by foreign investors and the institutional and regulatory framework. In order to point out the main factors that can highly affect the inflow of FDI in Ethiopia and to know how much these factors affect FDI leading to an oscillating trend, the study took the determinant of FDI in Ethiopia such as infrastructure development, the domestic market size and growth potential, macroeconomic stability, human capital development, openness, and external debt and evaluate as to how they affect the inflow of FDI. In the analysis there are findings. Firstly, I found that in the long run explanatory variable such as infrastructure development, the domestic market size, Human Capital, openness, and external debt are found positively related and statistically significant while inflation rate is negatively related and statistically significant. Secondly, in the short run Gross Fixed Capital Formation and inflation become negatively related and they are statistically significant while Gross Domestic Product is positively related and statistically significant that supports the hypothesis that the growing economy attracts more FDI. While the remaining variables of debt servicing, openness, and human capital has a positive coefficient but is insignificant in the short run. Thirdly, there is bi directional causality between Gross Fixed Capital Formation and FDI and the variables of inflation, Gross Domestic Product, Debt Servicing, Openness and Human Capital does Granger- causes foreign direct investment but not the other way around. Overall, the major policy implication of this study is that, foreign direct investment is more determined by infrastructural activities, market size, macroeconomic stability, and openness in long run case. Hence, in order to increase the inflow of FDI first it is very crucial to concentrate on the above economic activities. On the other hand, I found that economic growth has positive and significant effect on FDI. These suggest the decisive role of growth in stimulating investment by foreign as well as domestic investors. Hence, the current fast economic growth of the country signals a country’s economic prospects and encourages foreign investors
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    An Analysis of the Relationship between Ethiopia' Foreign Trade and Gross Domestic Product
    (A.A.U, 1982-06) Estiphanos Girma; Suryani S.
    The purpose of the study was to establish and analyze the relationship between Ethiopia's foreign trade (exports and imports) and Gross Domestic Product (GDP). A broader review of published sources was made on all aspects of the problem to be investigated. Based on a priori theoretical knowledge and the nature of the scatter diagram, linear regressions of GDP on exports and imports on GDP were formulated .Regression and correlation coefficients were computed and interpreted with allowances given to non-economic variables. The results showed that there is a strong association between GDP and exports, on the one hand, and imports and GDP , on the other. The relationships were then viewed with due considerations given to policy issues such as structural diversification and economic cooperation and integration.
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    Assessing the Impact of Non-Reciprocal Trade Preferences: the Case of African Growth and Opportunity Act (Agoa) and Subsaharan Africa's Agricultural Exports to the United States of America
    (A.A.U, 2008-06) Gebregiorgis Kokeb; Estiphanos Girma
    The purpose of the paper is to discuss and analyze the impact of Non Reciprocal Trade Preferences the case of African Growth and Opportunity (AGOA) on the agricltltural exports of Sub Saharan .4frica. That is its aim is to show whether the AGOA has increased agricultural exports from SSA to the United States of America. The researcher employs both descriptive and empirical analysis approaches. Pre and Post AGOA agricultural export performance of Sub Saharan are among descriptively analyzed issues. For empirical analysis part, we employ the fixed effect gravity model of international trade. We take three samples the first is a sample of 46 SSA countries, Secondly a sample of 30 countries whose average yearly agricultural exports is >= 500,000 US dollars and finally a sample of 9 major agricultural exporters in SSA countries. The period of time covered under the study is from 1996.2007 which is 5 years before the enactment of AGOA and the rest 7 years post AGOA period.Our descriptive evidence shows that the AGOA has had insignificant impact on the agricultural exports of Sub• Saharan Africa.Similarly the empirical estimates shows for the first sample with 46 SSA countries AGOA has led to a decline in average exports of SSA by 19%, for the second sample with 30 SSA countries whose yearly average agricultural exports is >= $ 500,000 AGOA has led to an increase in agricultural exports approximately by 35% on average, while for the third sample, major agricultural exporters, averagely AGOA has led to increase in agricultural exports approximately by 18%, but in all the three samples considered the AGOA dummy was not statistically different from. zero. Therefore, one may conclude that AGOA has induced neither an increase nor a decline in SSA agricultural exports to the US.
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    Competitiveness of Ethiopian Shoe Industry: Response to Export Market
    (Addis Ababa University, 2012-06) Gonfa Birkinesh; Estiphanos Girma
    Ethiopian Leather development strategy has put the shoe industry on the forefront position to accelerate the development of the sector. The study focuses on Ethiopian shoe industry competitiveness and its export market performance. The main purpose is to find the factors that are impediments for competitiveness of shoe industry at firm level and to find out the peculiar problems of shoe manufacturing in the export activities. Concepts of competitiveness and measures have been discussed. The Porter diamond model has been chosen to analyze firm level competitiveness. The result depicts the very low status of competitiveness of the Ethiopian shoe industry. At the firm level, all the determinants of competitiveness (Factor conditions, related and support industries, firm structure, strategy and rivalry, Demand conditions) are found to be insignificant. Among the factors, related and supporting industries and factor conditions mainly limit the firms from utilizing their cost advantage to sustained market share on the domestic as well as on the international market. The study foreword some recommendation or policy implication based on the analysis. Some of the major recommendations are: on the importance of import substitution strategy in complement with the export-oriented strategy is highly magnified in the study for the sector long run development. Promoting Investment on supporting Industries are crucial in solving problems in the whole value chain of the industry. Government involvement to create access to reliable and low cost of inputs and access to finance is crucial for shoe industry competitiveness. The other important area that needs an improvement is the quality of shoe products and utilization of PMA, here the importance of firms, government and other institutions collaborate with each other to tackle the problems is very crucial to improve the competitiveness of Ethiopian shoe industry.
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    The Contribution of International Air Transport to Ethiopia’s Tourism Sector
    (Addis Ababa University, 2015-07) Shitemaw Kalkidan; Estiphanos Girma
    This paper examines whether there exists a relationship between tourism and air transport sectors in Ethiopia. It employs Vector Error Correction approach to assess how air transport sector contributes to tourism. It further shows the progress of the two sectors by utilizing a time series data of Ethiopia for the period 1974-2014. Impulse response and variance decomposition tests are also applied to see the interaction of tourism, air transport and economic growth in the country. The findings support the existence of relationship between the two sectors. The empirical tests further show the presence of positive and significant long run and short run relationship between tourism and air transport. Moreover the results of impulse response and variance decomposition indicate the permanent effect of air transport on tourism. The findings also point out the importance of infrastructure, economic growth, transport cost, domestic price and income of the originating country on the performance of the tourism in Ethiopia. There is also evidence that both tourism and air transport contribute to the overall growth of the economy. Thus, since the advancement in air transport leads to development of tourism both in the long run and short run, measures such as upgrading the already existing air fields, expansion of domestic airports, spreading out to new destinations and equipping the airlines with modern technology have to be considered by the authorities.
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    Determinants of Current Account Balance in Ethiopia: An Autoregressive Distributed Lag Approach
    (Addis Ababa University, 2017-06) Fitwi Tesfalem; Estiphanos Girma
    The purpose of this paper is to investigate the empirical linkage between current account balance of Ethiopia and macroeconomic variables based on the inter-temporal approach using recent econometric techniques from 1980 to 2015. Auto Regressive Distributed Lagged Model adopted to investigate the existence of short run and long run relationship between current account balance and set of macroeconomic variables. The model based on inter-temporal approach to current account considers current account as an inter-temporal phenomenon given that; it is the difference between domestic saving and investment. The result of the econometric analysis indicated that there is a long run relationship between current account balance and fiscal balance, real effective exchange rate, terms of trade, and Real GDP growth and statistically significant. Variable such as foreign direct investment, age dependency, financial deepening, trade openness and relative income found statistically insignificant in the long run. Among policy implication that comes out of this study is that large amount of government spending is needed in order to expand infrastructures which are supposed to increase private investment particularly for those participate in manufacturing and export sectors. In addition, devaluation of domestic currency that improves current account balance is appropriate but government should be careful in taking such measurement since it increases the cost of imported inputs and inflationary pressure on domestic price. Key words: Current account Balance, Inter-temporal approach, ARDL
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    The Determinants of Export of Primary Commodities in Sub Saharan Africa: A Panel Co - Integration Approach
    (A.A.U, 2010-05) Melcaw Beshir; Estiphanos Girma
    SSA is generally characterized by a heavy dependence on export of primary commodities. Export income is the largest resource inflows in the region. However, the performance of the exports of primary commodities is evastating. And this is a source of shock to the economy due to the volatility & continuous decline of the prices of their exports. Both internal and external factors are responsible for the poor performance of the sector. The study employed panel data to empirically analyze these determinants in SSA for the period 1990-2008 using a panel co- integration approach. A sample of 25, 15, 19 and 15 countries from the region were taken to analyze the determinants of exports of food, agricultural raw material s, minerals and energy (as defined under the SITC) respectively. For the first three commodity groups the real value of exports is specified in a semi-log linear form as a function of the relative export price (unit export price of a commodity per its world price), the international value of a commodity relative to its domestic value, the weighted average income of importers, real effective exchange rates, world interest rate, gross domestic investment and foreign direct investment. On the other hand, the real value of export of energy is specified in a log linear form as a function of world export price of energy relative to world prices and gross world income (with the assumption of constant supplies). The long run relationships were estimated using OOLS which accounts for serial correlations and problem of endogeneity. The results demonstrated the inastic nature of the elastic ties of exports of the three commodity groups while elastic price (relative) and income elastic ties were found for energy exports. Moreover, the supply side factors and the macroeconomic policies pursued by importers are found to be among the important determinants of exports of primary commodities in SSA.
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    The Determinants of Export Performance in East African Countries: A Panel Data Approach
    (2016-05) Aman Denekew; Estiphanos Girma
    The paper examines the effect of demand and supply side factors on East Africa countries total, agricultural raw materials, service and manufacture export performance. Thus, both internal and external aspects are responsible for poor export performance in the region. The study employed a penal data to empirically analysis these determinants in East Africa for the periods 2005 to 2014. A Sample of 7 countries from the region was selected for analyze the determinants of the exports of total, agricultural raw materials, service and manufacture based on the standard international trade classification. Based on the Hausmanestimate the total and agricultural export fixed effect model is appropriate whereas for service and manufacture export random effect model is fitted. Using the first model (fixed effect) we found that the police related to FDI and trade openness have impact on the total export performance in the region. And for model two (fixed effect) the agricultural raw materials export performance in this region is not influenced as the expected theoretical. Using random effect in the model of service sector human capital and foreign direct investment net inflow are the major factors to improve the service and manufacture sector export performance in the region. Moreover, except the agriculture raw material export the supply and demand sides’factors are found the major determinants of the total, service and manufacture export performance in the region.
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    Does Real Exchange Rate Matter for Ethiopia‟s Exports? A Gravity Model Analysis
    (Addis Ababa University, 2011-06) Bekele Kebede; Estiphanos Girma
    Real exchange rate is usually used as a measure of export competitiveness of a country. Despite mixed results in empirical works, its depreciation (appreciation) is supposed to stimulate (depress) exports from a particular country. This study mainly focuses on examining whether Ethiopia’s exports are determined by movements in real exchange rate. To examine this issue, the aggregate export and the exports of two main subsectors; namely, Coffee and Oilseeds are taken into consideration using bilateral exports to seventeen major trading partners over the period 2000-2009. Accordingly, a dynamic panel data gravity model that takes into account the persistent nature of trade is estimated using the system GMM estimator. Following recent approach in empirical studies, both the current and one year lagged real exchanges rates are included, where the latter is intended to account for the sluggish adjustment of trade to changes in relative prices. The results of the study show that both lagged and current real exchange rates are not in a position to exert significant effect on the bilateral exports of the country, in all the three export categories under consideration. The implication is that complementary measures are required to gain competitiveness in international market. Diversifying exports from traditional primary commodities to nontraditional price elastic export items, expanding exports destinations and giving due attention to the quality of exports are reasonable options
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    Economic Effects of Progressive Air Transport Liberalization in Africa.
    (A.A.U, 2007-07) Abera Megersa; Estiphanos Girma
    Empirical analysis on economic effects of liberalization in the context of African air Transport sector is not much discussed in the literature and the continent's policy makers and The industry operators need such analysis to implement liberalization initiatives. As such, The Purpose of this study is to empirically measure economic effects of progressive air transport liberalization in Africa by taking the case20city-pair routes to/from Addis Ababa for the Period 2000-2005. by employing a Two-stage least square estimation procedure for a Panel data set, passenger demand. fare and departure frequency models are estimated to see the impact of bilateral air service agreement (BASA) liberalization. Liberal policies are assumed to affect the two supply side variables i.e. fare and departure frequency. accordingly, The frequency model indicates that a significant increase in departure frequency is observed in routes that experienced both ' full' and 'restricted ' type of liberalization compared to those governed by restrictive bilateral arrangements. in Addition. Higher increase in the number of departure frequency in routes which experienced restricted liberalization relative to those operated under fully liberalized arrangement is observed. regarding the fare model, a statistically significant negative impact of liberali zation policy on standard economy fare is not found . Finally, It is ecommended that liberali zing BASAs, Especially Provisions Pertaining to departure frequency will enhance service quality.
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    The Economic Effects of Progressive Air Transport Liberalization in Africa: The Case of City-pair Routes to/from Addis Ababa
    (Addis Ababa University, 2007-07) Abera Megersa; Estiphanos Girma
    Empirical analysis on economic effects of liberalization in the context of African air transport sector is not much discussed in the literature and the continent’s policy makers and the industry operators need such analysis to implement liberalization initiatives. As such, the purpose of this study is to empirically measure economic effects of progressive air transport liberalization in Africa by taking the case of 20 city-pair routes to/from Addis Ababa for the period 2000-2005. By employing a Two-Stage Least Square estimation procedure for a panel data set, passenger demand, fare and departure frequency models are estimated to see the impact of Bilateral Air Service Agreement (BASA) liberalization. Liberal policies are assumed to affect the two supply side variables, i.e. fare and departure frequency. Accordingly, the frequency model indicates that a significant increase in departure frequency is observed in routes that experienced both ‘full’ and ‘restricted’ type of liberalization compared to those governed by restrictive bilateral arrangements. In addition, higher increase in the number of departure frequency in routes which experienced restricted liberalization relative to those operated under fully liberalized arrangement is observed. Regarding the fare model, a statistically significant negative impact of liberalization policy on standard economy fare is not found. Finally, it is recommended that liberalizing BASAs, especially provisions pertaining to departure frequency, will enhance service quality. Key Words: Air Transport, Liberalization, Yamoussoukro Decision, Bilateral Air Service Agreements, Africa JEL Classification: L93, L51, L9
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    Economic Growth, Capital Accumulation and Macro Stability in Ethiopia
    (Addis Ababa University, 2018-07) Ghebremedhin Zelealem; Estiphanos Girma
    This study tries to investigate the impact of capital accumulation and macro stability on economic growth of Ethiopia taking a series of data range from 1971 to 2006. Result of co-integration test using Johanson likelihood approach indicates that all explanatory variables which are entered in the model form long-run equilibrium. The study is also conducted test for weak exogeneity and test for zero restrictions on co-integrating vectors to determine causality relationship and level of significance among equilibrium established variables. The result indicated that real GDP positively and strongly associated with physical capital, but negatively and significantly with budget deficit and political instabilities. The study could not find strong evidence which supports the existence of macro instability in the long-run other than short-run impact. The existence of war as indicator of political instability, adversely affects real GDP both in the long-run and short-run. In Ethiopia context, physical capital is found to be more important than human capital probably due to lesser human capital are accumulated in the stock.
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    Economic Growth, Capital Accumulation and Stability in Ethiopia.
    (A.A.U, 2008-07) Gebremedhin Zelalem; Estiphanos Girma
    This study tries to investigate the impact of capital accumulation and macro stability on economic growth of Ethiopia taking a series of data range from 1971 to 2006. result of co-integration test using Johanson likelihood approach indicates that all explanatory variables which are entered in the model form long-run equilibrium. the study is also conducted test for weak exogeneity and test for zero restrictions on co-integrating vectors to determine causality relationship and level of significance among equilibrium established variables. the result indicated that real GDP positively and strongly associated with physical capital, but negatively and significantly with budget deficit and political instabilities. The- '"" study could not find strong evidence which supports the existence of macro instability in the long-run other than short-run impact. The existence of war as indicator of political instability, adversely affects real GDP both in the long-run and short-run. In Ethiopia context, physical capital is found to be more important than human capital probably due to lesser human capital are accumulated in the stock.
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    The Economy -wide Impact of Continental Free Trade Area (CFTA) on Ethiopia: A Recursive Dynamic Computable General Equilibrium Approach
    (2016-06) Hailemeskel Begidu; Estiphanos Girma
    This study examines the economy wide impact of CFTA on Ethiopia. The analysis is made based on Ethiopian social accounting matrix (SAM) of 2009/10 constructed by EDRI. The study has utilized a recursive dynamic CGE model. The model is simulated for an import tariff reduction on different sectors using three different scenarios. The scenarios involve joining CFTA at one time, in 2016, or through phases, a 25% tariff removal each year from 2016-2019. Another scenario involves excluding strategic sectors from the CFTA. The impact of CFTA result shows, Government revenue also decreases as tariff revenue is an important source of revenue for the Ethiopian government. GDP and trade balance are, however, positively affected. The increase in GDP might be associated to the increase in disaggregated production. The larger increase in exports as compared to the increase in imports leads to an improvement in trade balance. Household consumption expenditure also increases. This might be due to the availability of cheap consumption commodities from abroad due to the removal of tariff. On the other hand, our results show a decrease in investment which might be attributed to the inability of domestic producers to compete with foreign suppliers at a lower price.Our findings also show that protection of strategic sectors benefits only producers in these sectors. Exclusion of strategic sectors from CFTA helps producers face less competition as the price of imported commodities will include tariffs. Protection of strategic sectors will also increase government revenue. The impact of protecting strategic sectors on the overall economy, however, is negative, which is it results in a decrease in GDP.
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    The Effect of Exchange Rate Changes on Trade Balance of Ethiopia: 1970/71 - 2005/06."
    (A.A.U, 2007-03) Amsalu Eshete; Estiphanos Girma
    The purpose of this paper is to analyze the effects of change in exchange rate of Birr on the trade balance of Ethiopia. The study employs the standard Augmented Dickey-Fuller test in order to test the stationarity of all variables at levels and first differences and the Johansen and juselius' approach to estimation of multivariate co integration systems on the quarterly data in the period 1970/ 71QI - 2005/06QI. In order to establish the existence or absence of a j-curve phenomenon in Ethiopia, we employ impulse response function to trace the effect of real effective exchange rate on the trade balance of Ethiopia.The main findings of the study show that: first, there is a negative relationship between the trade balance and the real effective exchange rate appreciation indicating that a real depreciation will improve the trade balance in the long run; second, the results indicate that there seem to be no clear evidence of the J-curve phenomenon. The policy implication of the finding is that to improve its international competitiveness and its trade balance deficit, Ethiopia can use depreciation/devaluation based adjustment policy. Competitiveness, however, goes beyond currency depreciation. I.e. currency depreciation alone is unlikely to be able to increase competitiveness. Therefore, Ethiopia has to use also export diversification strategy i.e. the government has to pursue to diversify export commodities from agriculture to other products both vertically and horizontally in order to be competitive and reduce its trade deficit since most of export items relied on few primary commodities. The negative sign of domestic real income indicated that a rise in domestic income of Ethiopia encourages its consumers to demand more foreign goods, leading to a deterioration of trade balance in favor of its major trading partners. In this regard, the government has to promote import substitution strategy In order to shift the demand of domestic consumers towards domestic goods.
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    The Effect of Export Earning Fluctuation on Physical Capital Formation in Ethiopia
    (A.A.U, 2009-06) Raga Merera; Estiphanos Girma
    Physical capital plays a key role in determining economic development in a country. Based on this fact, the main objective of this study was to investigate the effect of export earning fluctuation on physical capital formation in Ethiopia by employing data ranging from 1970171 to 2007/08 using time series technique. The study used unit root and co integration tests to see the characteri stics of the data seri es. In addition, Vector Error Correction Model (VECM) was developed to investi gate the effect of variation of the explanatory variables in the short run on physical capital formation. The finding of the study shows that expected level of output and aid affects the level of physical capital formation in the country for the period of study positively and significantly. Export income fluctuation and real effective exchange rate, on the other hand, affects physical capital formation negatively and signifi cantly. The rate of gross domestic saving has positive short run implication on the rate of phys ical capital formation as iJld icated in the ShOl1 run dynamics during the entire period of study.
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    Effectiveness of Foreign Aid in Sub-Saharan Africa: A Less Aggregated Analysis
    (Addis Ababa University, 2008-06) Abda Hassen; Estiphanos Girma
    Inspired by the contradicting findings of studies on aid effectiveness and the recently emerging dissatisfaction of scholars with the methodologies of earlier works, this study has taken up the examination of the effectiveness of bilateral and multilateral aids on economic growth. To this end, the estimation technique of Difference-GMM – along with other techniques for comparison – has been applied to a panel data from 42 Sub-Saharan African countries for the years 1980 through 2007. For the data at hand, no evidence is found for the – conditional or unconditional – effectiveness of both kinds of aid. This result is robust to the alternatives of using the augmented Solow type growth models and the ‘modern’ models which emphasize the roles of institutional, policy and geographical factors at explaining growth differences. Bilateral aid on its own or in an interaction with policy is ineffective at enhancing economic growth, regardless of whether it is measured relative to the recipients GDP or in per capita terms. The same holds for multilateral aid. The concluding point of this study which says that both bilateral and multilateral aids are ineffective at influencing economic growth is confined to the data at hand and thus gives no evidence about the effectiveness of the recently emerging aid modalities. Research on aid effectiveness remains to be extended along high level of disaggregating aid and testing for the effectiveness of the new approaches of delivering aid which are argued to possess elements of better government accountability, better transparency and better recipient-ownership.
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    An Empirical Analysis of the Determinants of the Current Account In Ethiopia (1961/62 - 1999/00)
    (Addis Ababa University, 2007-06) Tesfamariam Gebreegziabher; Estiphanos Girma
    This study analyzes the role of fundamental macroeconomic variables in explaining the movements of the current account balance in Ethiopia and describes the trends and profiles of the current account balance and its major components in three different regimes using data covering the period 1961/62-1999/00. Current account in Ethiopia had been in a persistent deficit due to the poor performance of exports to finance the growing import bills. In estimating the model, the ADF tests for unit root show that all the variables are integrated of order one. The Johansen’s likelihood ratio test for co-integration indicates that there is one co-integration vector. The test for weak exogeneity also suggests that all the explanatory variables except capital flow are weakly exogenous, while the exogeneity test for current account balance is strongly rejected. The empirical results reveal that budget balance, broad money, relative income and terms of trade affect the current account balance significantly both in the long run and in the short run, while the effects of dependency ratio and openness are significant only in the short run. The policy implication of the findings is that reducing budget deficit, controlling monetary expansion, controlling birth rate (through family planning), achieving overall economic development, improving the diversity and quality of exports and liberalizing external trade will eliminate the persistent deficits of the Ethiopian current account balance. Key words: determination of current account, inter-temporal substitution effect, consumption smoothing effect, co-integration analysis, and error correction method.