Deteriminents Of Balance Of Payment In Ethiopian Economy
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Date
2021-07
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A.A.U
Abstract
This study assessed the determinants of balance of payment performance in Ethiopia using time-series data for the period 1996 – 2019 using the Johansen Cointegration test, Vector error correction model and the Granger causality test. The study adopted restricted VAR model which had lag two as the maximum lag to estimate the relationship between balance of payments in Ethiopia and previous balances in balance of payments account, external debt, inflation rate, Foreign Direct Investment and political instability. The VECM model showed that all variables and their lags were highly significant in determining the balance of payment in Ethiopia. On the other hand , a positive relationship was found between current balance of payment and previous balance of payment at first leg, differenced FDI, differenced External debt, differenced inflation rate and foreign direct investment at first differenced lag. The study analysis to get a significant long run relationship between BOP, FDI, Inflation rate, external debt and political instability. Political Instability and inflation rate are short run relation between BOP. Political instability translated to unfavorable situation in the current balance of payment in Ethiopia. On the other hand, Balance of payments is negatively influenced by External debt and political instability and positive influenced by FDI and Inflation rate. The study recommended that the Government of Ethiopia, National bank of Ethiopia, all financial institutions and other stakeholders whose activities influence External debt and political stability ought to apply relevant policy measures for better management of Ethiopia’s balance of payment. Policies that encourage domestic investments, foreign direct investment and increased trade earnings can be effective in rising GDP growth and reducing dependence on external debt for sustained economic development
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Keywords
Balance of Payments, Macroeconomic variables, Inflation, political stability, External debt, Ethiopia