Trends and Drivers of Current Account Balance in Ethiopia
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Date
2022-07-05
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A.A.U.
Abstract
A country's current account balance is an important leading indicator of its economic health. It comprised of „goods and services‟, „income‟, and „current transfers‟ sub components. The main aim of this paper was to investigate the trends and drivers of current account balance of the Ethiopian economy. The study examined the trends and drivers of Ethiopia's current account balance using annual data from 1990 to 2019. This study used both descriptive statistics and econometric methods to estimate and analyze the drivers of current account balance on Ethiopia‟s economy. The ARDL bounds testing approach to co-integration analysis was used in the study to establish the long run relationship between the relevant time series variables under investigation. The empirical findings of study revealed that the coefficients of parallel market premium, average oil price and degree of openness, and real GDP per capita income growth were statistically significant. Conversely, the coefficients of the variables like real effective exchange rate, fiscal budget balance and financial deepening were found insignificant in the long run. The Current account balances as a major policy variable has positive and significant effects at first difference on Ethiopia‟s current account performance in the short run. In the Ethiopian economy, the current account balance is deteriorating, indicating a significant financial need that could increase the country's international indebtedness and reduce its international reserves. Likewise, the ECM term was statistically significant in determining current account balance disequilibrium adjustment in the short run. Therefore, the study's policy implication is that large amounts of government spending are required to expand infrastructures, which are supposed to increase private investment, particularly in the manufacturing and export sectors.