The Economy -wide Impact of Continental Free Trade Area (CFTA) on Ethiopia: A Recursive Dynamic Computable General Equilibrium Approach
No Thumbnail Available
Date
2016-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
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.
Description
Keywords
Recursive dynamic CGE model, CFTA, Import tariff reduction, Ethiopia