The Determinants Of Current Account In Ethiopia Empirical Investigation

This study analyzes the role of fundamental macroeconomic variables in explaining thernmovements of the current account balance in Ethiopia.rnThe descriptive analysis on the developments of current account balance using the threernrelationships: external trade, income-absorption and saving-investment in the period 1960/61rn- 2002/03 indicates that: (i) Poor export performance due to dependence on primaryrncommodities with unmatched rate of growth with imports is the main reason for thernpersistence current account deficit; (ii) The increase in budget deficit in addition to the lowrnlevel of saving is the reason indicated for persistence of current account deficit by saving -rninvestment balance; (iii) Huge military expenditure during the degree régime and 1998rn20000 and increase in government expenditure as a result of increase governmentrninvolvement in the derge regime are implicated for the persistence current account deficit inrnthe income - absorption balance.rnThe estimated model using Johannes’s likelihood ratio test for cointegration indicates thatrnyoung dependency ratio, openness, financial deepening, terms of trade and real exchangernrare affect current account both in the long run and short run; budget balance, parallelrnmarker premium and ODA affect current account only in the long run and domestic outputrngrowth rate affect current account in the short run.rnThe policy implication of the findings is that diversifying exports, reducing budget deficit andrncontrolling distortionary policies of exchange rate.

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