The Determinants of Current Account in Ethiopia: Empirical Investigation
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Date
2006-07
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A.A.U
Abstract
This study analyzes the role of fundamental macroeconomic variables in explaining the
movements of the current account balance in Ethiopia.
The descriptive analysis on the developments of current account balance using the three
relationships: external trade, income-absorption and saving-investment in the period 1960/61
- 2002/03 indicates that: (i) Poor export performance due to dependence on primary
commodities with unmatched rate of growth with imports is the main reason for the
persistence current account deficit; (ii) The increase in budget deficit in addition to the low
level of saving is the reason indicated for persistence of current account deficit by saving -
investment balance; (iii) Huge military expenditure during the degree régime and 1998
20000 and increase in government expenditure as a result of increase government
involvement in the derge regime are implicated for the persistence current account deficit in
the income - absorption balance.
The estimated model using Johannes’s likelihood ratio test for cointegration indicates that
young dependency ratio, openness, financial deepening, terms of trade and real exchange
rare affect current account both in the long run and short run; budget balance, parallel
marker premium and ODA affect current account only in the long run and domestic output
growth rate affect current account in the short run.
The policy implication of the findings is that diversifying exports, reducing budget deficit and
controlling distortionary policies of exchange rate.
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Keywords
Current account, Determinants, Empirical Investigation