Determinant of current account balance in Ethiopia Research
proposal submitted Partial fulfillment of the requirement For the
award of BA degree in EconomicsPrepared by: Bizunesh ChicheId No
1845/04
Advisor name: Wondwesn W.
Debre Markos University Collage of Business and Economics
Department of Economics
June 2014 Chapter one Introduction1.1 BACKGROUND OF THE
STUDY
Current account balance is the sum of the value of imports of
goods and service plus the net transfer payment (net returns on
investment abroad minus the value of export of goods and services
where all these are measured in domestic currency. (D.salvatora
,2004 as cited by Abebayehu.Y, 2014),Developing country are
characterized by low level of macroeconomics performance of high
total population, low per capital income growth, under employment,
budget balance deficit, high rate of inflation in continuous
manner, unfavorable, unfavorable terms of trade and market
instability.(Ethiopian economic association annual report,2006)
.Ethiopia is a country with population of 80 million in 2007/8. It
is one of the developing countries which face the problem of low
per capital, inflation and current account deficit and food
insecure (scarcity food).The high growth rate of the population did
not match with the production of the output in the country .(NBE
annual report,2009/10).In open economy policy markets are concerned
with two macroeconomics goal. Internal balance and external balance
are fully utilized and stability of price level is attained where
as external balance is achieved when an optimal level of current
account balance attained optimal balance meant that a countrys
current account balance is neither so deeply deficit that the
country may be unable to repay its foreign debt in the future nor
strongly in surplus that foreigners are put in that position. The
impact of trade liberalization is hypothesized to render the
current account more sustainable relative to the represented pre
liberalization era. The trend volume of exports rose sharply during
the post return period relative to the pre reform period. I.e. the
volume of these exported items twice less than in the perform
period. The reasons behind the decline of the output of the
exported items were the major determinants of the output of the
export products. During the post 1992 period the value of imports a
share of GDP increase continuously.(Ethiopia Economic association
annual report 2004).But, the objective is for identifying what
factors that determine the current account balance of Ethiopia. 1.1
statement of the problemA current account deficit is reflection of
the strength of developing countries economy particularly Ethiopia
and it measures the available resource coming in to the country to
finance investment demand in excess national saving, on the other
hand it can also shows dangers imbalance between national saving
and domestic investment so as to the accumulation of debt.(Abush
Grime;2011).In the case of Ethiopia there is a problem of unstable
export markets consequently, it worsening term of trade and it
leads to Ethiopia exports are concentrate on a small number of
products. In terms of values the share of major export items have
been fluctuating over time due to volatile behavior of price and
unpredictable demand in the international market. On the supply
side agriculture item are influence by policy problems, war
structural constraint, natural factor(drought, disease)etc, there
are an over increasing knowing the determinant of current account
balance is one of the main target that is expected from policy
makers and every individual for discarding problems regarding with
it (Abebe Gizaw,2012).The current account balance is affected by or
determine by so many things from time to time, however there is no
sustainable increase on surplus of the curt account balance of
Ethiopia. Because Ethiopia is one of the developing countries has
low level of capital stock and manufacturing industries with
regarding to this the country really on foreign trade. The country
export mainly agricultural products ,while imports constitute
different items regarding from food to different types of
manufacturing goods that are required to transform its backward
economy but the absence of stable and expanding exports product and
market because independent for the increase in foreign exchange
earnings. Therefore its necessary to knowing and assessing the
determinants of current account balance of Ethiopia.(Gebregzabher
T.2003, As cited by abebayehu.y).
RESEARCH QUESTION 1. What are the factors that determine the
current account balance in Ethiopia?2. How to investigate the
trends of current account balance in Ethiopia? 1.3 Objective of the
study 1.3.1 General objective of the studyThe main objective of
this study is to look for what are factors that determine the
current account balance of Ethiopia. 1.3.2 Specific objectives of
the study1. To examine the determinant of current account balance
of Ethiopia.2. To investigate the trends of current account in
Ethiopia. 1.4siginificance of the study The study would be
important to induce information which helps to design appropriate
and effective polices about the countrys economy and it helps to
identifying what kinds of policy be adopt in order to reduces the
negative impacts of variable on CAB in Ethiopia. 1.5 scope of the
study The research would be focus on typical determinant factors
that affect current account balance of Ethiopia for the last three
decades through time series Quantitative data and its revise and
assess the regime up to the present current account balance of
Ethiopia 1.6 Limitation of the studyTime and finance constraints
data collection requires more times but the time is but the time is
highly limited to get information from different source about the
current status of the situation. On the other hand to get reliable
data, requires more fund but the capacity of finance does not allow
to data, requires more fund but the capacity of finance does not
allow to carrying out the study deeply and efficiently, since it
requires more expense. 1.7 research methodology The data analyzes
through using two methods of data analyzes which are the
descriptive and econometrics analyses in order to make the study
productive. When under econometrics analyses the estimation model
would be made using ordinary least square (OLS) methods with
different tests. Under descriptive analyses .it uses tables,
graphs, etc for analyzing data. 1.8 Hypothesis of the study 1. REAL
GDP is negatively correlated to current account balance in
Ethiopia.2. Real effective exchange rate is negatively correlated
to current account balance.3. Consumption is negatively related to
current account balance.4. Oppenness is also relatively correlated
to current account balance. 1.9 Organization of the studyThis paper
has five partsThe first part is introduction part, deals with
briefly about the background of the study, statements of the
problem, objective of the study, significance of the study,
methodology of the study, objective of the study including both
general and specific objective of the study, the scope of the
study, the limitation of the study, the hypothesis of the study,
and organization of the study.The second part is about related
literature reviews relisted to the topics and under this part which
included both theoretical and empirical literature.The third part
is about methodology of the study which includes methods of data
analysis are, model specification, definition of variables and
descriptive data analysis. The fourth part talks about data
analysis method and presentation and interpretation of results in
both econometrics and descriptive analysis is made.The fifth and
the last part of this paper is present conclusion and give
recommendation about the ultimate result and trend of the study in
short and precise way.
CHAPTER TWO2. LITERATURE REVIEW2.1Theoretical literature
reviewThe current account records and imports of goods and services
are by convention entered as positive items in the current account
balance and imports are entered as a negative ,unilateral transfers
are receipts, which the residents of a country receive for free
receive from abroad as negative items.(soderston and reed,1994
cited by abebayehu y).Since current account is concerned with goods
and services, it is generally considered to be the most important
component of balance of payments. What makes a current account
surplus or deficit important is that a surplus means that the
country as a whole is earning more than it is spending and
increasing its stock of claims on the rest of the world. On the
other hand, deficit means the country is reducing its net claims on
the rest of the world. The current account is likely to be a cause
of changes in other economic variables. Such as change in the real
exchange rate, domestic and foreign domestic and relative price
inflation(Pitbean,1998).It is important mention that current
account deficit is not necessarily phenomena for country economic
development. The country opportunity for investing the borrowed
recourses is more important than paying back loans to foreigners
because profitable investments wills generate are turn loans. In
this case, A deficit in current account is likely to be followed by
future surpluses. Similarly a surplus in current account is not
undisputedly appositive phenomenon economic development. For
example if the surplus is a result of low investment due to un
certainty in the country it is likely to be followed by future
deficits, the important goods predominantly consumer goods like
cars and electronics, then it might be argued that deficit is more
worrying then if the imports are plant and machinery that could be
important be generating future export (Gebregzabher
Tessfmariam2003, cited by abebayehu, 2013).A current account
deficits means that the concerned country is increasing its
indebtedness or reducing its claims on the rest of the world. If
the country is a net creditor it can usually afforded to do this.
Whereas, if its debtors the deficit may be regarded as a serious
problems another point to bear in mind that if country has a large
deficit due to a large government budget deficit. Then the remedial
measures may lie in reducing government expenditure and or raising
taxes. If however, the deficit due to high investment then there is
a good chance that future export growth will reduce the deficit.
Finally to the country has a current account deficit, high
inflation and low economic growth then the problem is more worrying
then it the deficit is a combined by high economic growth and low
inflation.(Abebe Gizaw; 2003). 2.2 Approach to current account
determination 2.2.1 Elasticity Approach The elasticity approach
treats the current account balance as the sum of trade balance and
net international investment income. Exchange rate domestic output
and foreign output. In particular, it is uses to examine whether
currency depreciation can help to improve the current account
balance or no. Therefore the elasticity approach highly emphasizes
the role of exchange rate and trade flows in current account
adjustment. Consequently, relative international prices and their
determinants were viewed as central to the dynamics of the current
account (siewed, 1994 as cited in Abush Girma 2004).Alfred marshal
(1968) and Lerner (1971) set the marshal Lerner condition that
indicates whether devaluation improve or worsen the current account
balance and condition postulates a stable foreign exchange market
and important in balance of payment if the sum of elasticity of
demand for export unity in absolute value however the sum of these
to elasticity will have to be substantially greater than one to
make devaluation a method of correcting the nations balance of
payment. Devaluation will improve the trade balance if the
devaluating countries elasticity for imports country export exceed
on the other hand if the demand are less than one then devaluation
will worsen the trade balance would weather helps not hurt, of the
sum demand elasticity equal one.(salavator,as cited by abebayehu
y,2013) . 2.2.2 Absorption approachThe absorption approach
considers the current account balance as the difference between
income and absorption or equivalently the difference between saving
and investment. This approach is a macro economics approach it
investigates the effect of exchange rate change on trade balance
through the absorption channel ewer income and relative prices
change by adjusting this approach states that if an economy spends
more than what it produce i.e. Absorption exceed consumptions and
spending. This approach argues that the exchange rate is an
important for current account adjustment. (Krugman, 1987 cited by
Abush grime 2004).Mathematically the absorption approach can be
expressed as follows(Carbaugh,2009).
Let Y=C+I+G+(X-M)Y=A+BB=Y-ABy this expression suggest that the
balance of trade (B) Equally the difference between total domestic
output(y) and the level of absorption (A). Its national output
exceeds the level of absorption; the economys trade balance would
be positively. Conversely a negative trade balance suggests that an
economy is spending beyond its ability to produce. 2.2.3 Inter
temporal approach The inter temporal approach to the current
account views the current accounts(CA) as the difference between
domestic saving(s) and domestic investment (i): recall the previous
national income identify on expenditures side:Y =C+I+G+X-M and we
add the national income identify on the disposal side (how people
earn income and allocate it to different uses).Y=C+S+T,(S-Saving,
T-tax). This side at income is divided consumption savings and
taxes, (sequentially, it may be more first. CA=S-I and focused on
macro economics factors that determine the two variables, S and I.
The intertemporal approach recognizes that savings and investment
decision result from forward looking calculation based on the
expected values of various macroeconomics factors. It tries to
explain the current account development through closer examination
of inter temporal consumption, savings and investment decision.
This approach has achieved a synthesis between the trade and
financial flow perceptively by recognizing how relative prices and
how relative prices affects saving and investment decisions
(Regoff, 1995).The inter temporal approach suggests that one could
approach currents account determination by focusing more explicitly
on the development of on in its counter part of the capital
account. In an open economy, the capital account can be affects by
country characteristics that reflect macroeconomic policies.
According to literature, countries that are more open to
international trade to attract more foreign capital to finance
expenditures relative to income, contributing current account
deficits. The degree of openness to international trade may have
important for long run implications for over all current account
positions (krugman,1987 as cited in Abush Girma,2004). 2.2.4
Monetary ApproachAccording to monetary approach currency
devaluation exerts impacts on purchasing power levels and balance
of payment. (Carbugh 2009, as cited by yamrot,2005).According to
this approach, currency devaluation may induce a temporary
improvements in nations balance of payment position. The surplus
does not last forever, the currency devaluation leads to an
increase in spending 9absorption) which reduces surplus. The
effects of devaluation on real economic variables are thus
temporary. Overt long run currency deprecation merely raises the
price level. 2.3, Empirical Literature Review 2.3.1 Cross-country
studies on current account (Khan and Knight 1983), Investigated the
evaluation of the current account balance for 32 non-oil developing
countries over the period 1973-1980 by using pooled times cross
section data and adopting an ordinary least square estimation
approach, their result indicate that both internal factors(the
increase is fiscal deficits and the apperception in real effective
exchange rate)and external factors, (the deterioration in terms of
trade, the decline of economic growth and the increase in foreign
real interact rates are important in explaining the deterioration
of the current account of the countries under review).The effect of
the exchange rate on exports depends on the price elasticity of
export supply because the real exchange rate should incorporate the
price effect on exports thus the higher the price elasticity. The
move competition face exports of particularly commodities on the
world market in general individual products have higher price
elasticity then primary products, which causes industrial export to
respond perfectly to change in real exchange rates. I.e. the effect
of exchange rate on developing countries exports is ambiguous
(Yishak, 2009).Many developing countries adopted import substation
strategies to promote domestic economic development. Ethiopia was
one of these during derge regime as such Ethiopias trade history
has long been characterized by control system of region exchange,
trade policy, imports, quotas, high tariffs, state controlled
marketing of exports, export prohibits and export taxes. Thus trade
policy become increasingly inconsistent with some of the
macroeconomic policies followed by derge regime.
(Derese,2001)Current account and real exchange rate; the effect of
devaluation on the current account has been extensively addressed
in traditional open macro economics. In mundele Fleming model
devaluation will improve the tread balance if the marshal learner
conditions are fulfilled (Devarla, 1998)Current account and
openness on the issue of openness investigate the impact of trade
restriction on current account. The studies suggest that when non
tradable are intensive in import intermediary tariff act as a
supply sock in this sector as a result resource will be reduce from
non tradable to exportable and current account improves. When the
input tariff leads to a contraction of the exportable sectors the
net effect on current account is ambiguous. (Lopez and rodic,
1989)Real gross domestic product and current account as
theoretically domestic economic growth accelerate demand for
foreign goods and services and consequently deteriorates current
account balance (Gebregzabher T, 2003 as cited by abebayehu
y2012)Consumption and current account balance: When increase in
consumption it leads to decreasing of net saving of individual
(Abebe Gizaw, 2004). CHAPTER THREE
3.1 RESEARCH METHODOLOGYThe study used time series data from the
period 1981to20010/11 on currents account balance, real effective
exchange rate, real GDP, consumption and openness of country.The
data for my study is obtained and collected from the national bank
of Ethiopia (NBE), The statistical agency of Ethiopia (CSA),
ministry of finance and economic development (MOFED), World bank
(WB), research paper, books magazines and other related idea to the
issue. These collected data are used to develop the model or
inferential (econometrics) analysis and descriptive analysis. 3.2
Model specification Current account balance is usually measured the
sum of the value of imports of goods and services plus the net
transfer payment (net returns) on investment abroad minus the value
of exports of goods and services where all these elements are
measured in domestic currency (D.Salvatoer as cited by Abebayehu
Y,2013).The specification of model shows the regression of
Ethiopians current account balance on system of macroeconomic
variables, so the research specifies the current account balance as
auction of real effective exchange rate, real GDP, consumption and
openness as follows.CAB=B0+B1REER+B2RGDP+B3OPP+B4CONS+EiWhere
CAB=current account balance REER=Real effective exchange rate
RGDP=Real growth domestic product Opp=openness Cons= consumption
Ei=error termREER is expect to have positive correlation with
current account balance, where there is devaluation of domestic
currency is expect to improve CAB by encouraging and by
discouraging import. Conversely REER is also expecting to have
negative relationship with CAB, when there is appreciation of
domestic currency. Because it is expect to encourage import and
discourage export and it lead to current account deficits.RGDP is
expecting to have a negative relationship with CAB through by
encouraging import and bringing above deteriorate CAB.Consumption
is expected to have negative association with CAB.Openness is
expected to have negative correlative with CAB. 3.3 variables
Description A. Dependant variable Current account balance
(CAB)CURRENT ACCOUNT BALANCE IS PART of the balance of payment that
contains international transactions on currency product good and
services and other net income from abroad (D.salvatora ,1990 as
cited by Abebayehu Y.2013) B Independent variables1.Real gross
domestic product(RGDP),domestic economic growth accelerates demand
for foreign goods and services and consequently deteriorates the
current account balance an increase in domestic output growth rate
has effects of expanding the current account deficits. The
increasing of real GDP of Ethiopia which leads to increase import
and export level of the country because of domestic income
increases, the government support domestic industries to compute in
the international market and the resident of the country prefer to
import from abroad. The decrease real gdp discouraging both import
and export but import of goods from abroad are huge in amount in
addition to highly price. In contrast export goods of our county
are primary products and low in volume I n addition to lowness of
price.2.real effective exchange rate (REER):can affects the current
account balance ,at the value of birr increase the price of goods
and services in home country increases and become expensive price
of goods and services. Therefore, is promoting import since the
residents are unable to buy domestic products? With regard this
exports are discouraged since, supplies are beneficial to sell
goods and services domestically as higher price relative to foreign
prices.Conversely, the decrease in value of birr result in price of
goods and services are relatively low and the residents are willing
to buy these domestic products while produces are not beneficial
because their produces are cheap domestically they prefer to export
goods and services to abroad since the relative price of goods are
relatively high. Thus exports are encouraged one imports are
discouraged.3. Consumption (cons): can affect the current account
balance hince,when increasing consumption net saving of individual
decrease .so I expect consumption is negative correlation with
current account balance .4. Openness (opp): as the trade is more
liberalized, the restrictions are less and it encourages import of
the country. Regarding export high openness means reduce
export.
3.4 TEST OF THE MODEL1. STATIONARYTheoretically time series is a
collection of random variable (xt) such collection of random
variables ordered in time is called stochastic process. Stochastic
is said to be stationary if it means (x) and variance very(x) are
constant over time and values depend on the distance or lag between
two time periods and not on the actual time at which the covariance
cov(x) is compute. (Guajarati, 1995).Augmented dickey
Fuller(ADF)test is the most popular unit root test to differentiate
weather the variables stationery or not and it indicates the order
to integration of variables to make them stationery. If the test is
non stationery using time difference lag(0), and so on tries to get
stationery.(Maddala,1992)2. Test of multicollineartyVariance
inflation factor measures of multicollnearty that shows the
relationship between independent variables.3. Test of
hetrosdasityBrush pagon-Godefary test is the common measures of
hetrosdasity that shows non constant variance of non homogeneity
enough the variables by compute the compute value of chi square are
critical value of accept or reject the hypothesis.4. R2-Test Shows
the performance of the explanatory variables jointly explainer the
variation in the dependant variables and there is also the adjusted
R2 that is the modification form of R2. 5. Autocorrelation If the
assumption of the classical linear regression model that the errors
or disturbances of entering into the population regression function
are random or un correlated is violated, the problem is
autocorrelation arises (Guajarati, 1995).The presence of
autocorrelation the OLS estimators remain unbiased, consistent and
they are no longer efficient. The remedy depends on the nature of
interdependence among the disturbance. (Gujerti, 1995). 6. Co
integrationEngle and Granger (1987) pointed out that linear
combination of two or more non-stationery series may be stationery.
If such stationery linear combination does exist the non stationery
time series are said to be co integrated and the stationery linear
combinations can be interpreted as a long run equilibrium
relationships among the variables.When the Engle test only allows
as a single co integrating relationships. And the granger tests
multiple co integrating relationships.
CHAPTER FOUR 4. DATA ANALAYISIS AND PRESNTATION OF RESULT 4.1
PERFORMANCE OF CURRENT ACCOUNT BALANCE IN ETHIOPIACurrent account
balance is the sum of trade balance and invisible balance (meaning
that is the sum of net services (export- import) services plus
unilateral transfer of payment9aid, donation, and remittance) plus
interest dividend and profit. In spite of this fact, according to
World Bank report the current account balance of Ethiopia shows
deficit for the two consecutive years (in 2010, and 2011). Current
account balance of Ethiopia is a deficit sight still. Ethiopia has
been one of the fast growing non oil dependent countries in Africa
and its economy is based on agriculture which accounts for more
than 45% of the countrys GDP, 80% of export and 80% of employment.
The highest source of the countries foreign trade are coffee,
flowers, oilseed,, pulses and live animal as well as vegetable
respectively. In spite of high growth rate of the country the
current account balance is vicious circle due to periodic drought,
soil degradation, and high population density, high level taxation,
poor infrastructure and high income distribution inequality. As a
result of the above mentioned and other additional factors the
Ethiopian current account balance inclined to deficit balance
account. 4.2.2 Net income in Ethiopia Net income refers to receipts
and payment of employee composition paid to non residents workers
and investment income (receipts and payments on direct investment,
portfolio investment, other investment and receipt or reserve
assets). As the net income of the country increases the people went
to save or to consume luxury goods imported from foreign nations.
With regarding to this the countrys current account balance can be
affected and worsened deficit account balance. 4.2.3 Structured of
imports It is often the case that a developing countries export
destination largely corresponding with origins of imports. In the
case of Ethiopia however, such corresponding which has been holding
for long has started to lose significance as of the past few
years.The import structure of Ethiopia can grouped into raw
materials, capital goods consumer goods and oils and fuels take the
lion share. In the year 2005/06to 2007/08 was rise and its share of
GDP riches 30.4% from 16.7% in 1994/95. In over all case, capital
goods are the major import items which have $1774.4million in
2007/08. Flowers, consumer goods, Sami finished and raw materials
take the other shares in decreasing orders with a value of 1621.4,
1515.7, and 257.8 respectively as the same year. According to the
journal report; the pre devaluation and post devaluation also the
import of capital goods where the highest accounting for 34.7% and
followed by consumer goods by accounting of 29% on average. The
smaller import items are raw materials. It s not only small but
also continued declining compare to the import items. This might
shows the society depend on imported goods rather than consumed and
used local manufacturing products by imported raw materials. So,
this sharp in the total value of imports and this is contributing
to worsen of current account balance of Ethiopia.Import of goods
and service comprise all transaction between residents of a country
and the rest of the world involving a charge off ownership from non
residents to residents of a general merchandise goods sent for
processing and repairs goods and service. The industrial products
successes machinery, fertilizers, chemical and luxury products.
Since, Ethiopia is one of the developing with hugest growth rate
(double digit growth rate), this situation leads to the country to
import large amount of products until the country can able to
produces those goods and service. Due to this fact the countrys
current accounts balance adversely affected and aggravated for the
level of deficit account. 4.2.4 Structures and performance of
Ethiopia export sectorsAs most of African counters Ethiopia is
highly depends of agriculter.Even though is sides that more than
80% of the people depend up on agriculture and its output is not as
expected because, agriculture sector characterized as traditional
in absence that the method of agriculture used is what our great
grandfather has been using, because of this and other rezones the
output agriculture is more subsistence.During 2007/08 the largest
market for Ethiopias export to Europe and it was accounting for
41.9% of the countrys export. Among the European countries, Germany
which mainly imported coffee and flower were the largest buyers of
Ethiopian goods. The Netherlands, the biggest destination for
Ethiopian flower during the review period was the second largest
market followed by Switzerland and Italy whose main imports from
Ethiopian include leather and leather products, coffee as well as
textiles and garments. The major export items to Saudi Arabic
include coffee, live animals as well as meat and meat products.
Coffee constituted the bulk of exports to Japan. Leaser and leather
products, as well as oil seed made up large portion of export to
china. Meat and meat products, pulses, live animals as well as
fruits and vegetable were the major items exported to United Arab
Emirates.On the Other hand, 14.2% of exports were detainable to
African countries of which about 88.3% went to three neighboring
like countries like, Somalia, Sudan and Djibouti. Chat was the
principle export items shipped to Somalia followed by live animals.
The major export to Djibouti include chat ,lie animals as well as
fruits and vegetables, on the other hand Sudan mainly imported
coffee, pulses and natural honey and bee wax. Mean while, about 1
5.3% of Ethiopias exports were to African nations in particularly
to Somalia (41.8%), Sudan (30%) and Djibouti (12%) and Egypt (9%).
Coffee pluses and live animals were exported to Sudan, chat and
live animals and pluses to Egypt. The Americans accounted for 5% of
Ethiopias exports of which 85%, mainly coffee and oilseed went to
the united state of American (NBE, Third quarter 2010/11).Over
time, Germanys and sauds shares remained almost stagnant, while
that of Japan and Switzerland have been falling on average by 5 to
7.6% yearly. But export to Netherlands china and the united state
increased substantially by 50.44 and 12 percent respectively.Since,
Ethiopia export is dominated by agricultural products among that
the most important merchandise export are coffee, leather and
leather products and oilseeds respectively and others share their
own accounts for the total export of the country. In spite of this
fact, the export sector for goods are most venerable for weather
condition and give less response for exchange rate devaluation as a
result the export sector of Ethiopia not much significance
contribution for current account balance of Ethiopia until now.
Meaning that, the counters export volumes faced serious fluctuation
from to time because of its export goods and mostly depend on
agriculture goods which highly depend on climatic condition of the
country.Table 4.1 Ethiopias export share to major trading partners
Ethiopia is export share to major trading partners.Major trading
partners2002200320042005200620072008Average
Germany10.712.212.614.113.010.110.711.7
Arabia8.37.56.96.57.07.37.87.3
Japan 8.39.210.27.78.76.53.97.1
Switzerland9.410.28.86.85.74.96.36.8
Italy 9.07.66.35.76.36.85.36.4
United state3.9 4.96.14.95.15.77.35.7
China1.71.52.48.87.25.75.25.3
Nether land0.91.23.13.94.56.67.64.9
Source: - Ethiopian costume Authority 4.2.5 Gross Domestic
productThe Economic growth (gdp at constant price) EFY is estimated
to be 11.4%. As per the estimates annual growth rates of the major
sectors, i.e. agriculture, industry and their services were 9.0%
15.0% and 12% respectively and their shares out of the total GDP
were about 41%, 13.4% and 45.6% respectively. Over the last eight
consecutive years: during 1996-2003 EFY the economy has registered
rapid growth. Accordingly, in this period the annual average growth
rate of GDP was 11.4%. The agriculture, industry and service
sectors annual average growth was 10.2%, 10.8%, and 12.9%
respectively. In this period a slight structural change observed in
the economy. The agricultural sectors share of GDP is decreasing
and that of service sector is increasing. The industry sectors
share more or less constant except in the last budget year where
high growth is registered. With regarding to this, the Ethiopian
economy as this time shows higher growth rate. But there is not
well expanding and integrated of industry and home production of
goods and services is not massive. Hence, there is a higher demand
of foreign goods including large machineries for sustainable growth
in the country until the infant phase of industry over come in the
country until the infant phase of industry over come in the country
and this situation brings adverse effect on the current account
balance of the country. 4.2.6 Expenditure on gross domestic
productAs per the estimate in 2003EFY:- consumption has registered
about the remaining balance (83.1%) is attributed the private final
consumption. Rate of investment has reached 25.5% of GDP and has
registered 30.3% annual average growth over the last eight years,
on the other hand, import has been 31.8% of GDP and has registered
32.1% annual average growth over the last eight years, on the other
hand, imports has been 31.8% of GDP and has registered 30.1% annual
average growth over the last eight years. As a result of higher
trade deficit and it worsen current account balance of the country
through trade deficit of the country. 4.2.7 Openness The trade
liberalization of Ethiopia has almost affects the trade balances of
the country and it also leads to affect the countrys current
account balance negatively. As openness increase the import and
export item of the country increase, however that increment is
unbalanced due to their nature. For example from 2009 to 2010 there
is relatively high increment in openness i.e. 14.6% and it results
brought current balance deficit through high trade deficit.
Standing from this fact the increasing of openness in developing
countries particularly in Ethiopia it worsen current account
balance deficit.
4.3 econometrics result and interpretation
The investigator used economics analysis or economic data in
order to lend empirical support to the economic model and obtain
numerical result and quantitative analysis. Since the important
part of economic model is empirical model. In addition to
descriptive analysis in order to capture the degree of influence of
some of the determinant of current account balance as a result
econometric analysis would be apply. The investigator (the
research) used time series data to run regression covers from the
year 1981 to2009/10 using time series data. In ordered to evaluate
the trend of the determinants in the long run by affecting the
dependant variables.The estimation of the model has been made using
ordinarily square method (OLS) with different tests. If the model
is not correctly specified the researcher encounter the problem of
model specification error or model specification bias. The model
may have omitted important variables or have used the wrong
functional form. To aid us in determining whether the model is
adequate on account or not we can use some of the following test.
Test is useful in econometric analysis since, the data may face
some error and which leads to wrong decision. 4.3 Result of OLS
regressionCABCOEFSTD errorT-VALUEP-VALUE
RGDP-223621.794847.89-2.360.026
REER282133181933540.340.733
CONS55096.2325464.922.160.040
OPP3.563.011.180.247
CONS-6.574.631.420.167
R-Squerd (R2) =0.2266Adj R-Squared =0.1076 4.3.1 Long run model
Long run model is a model which shows the long run relationship of
curre nt account balance and explanatory variables. It can be
represents from the above regression results as
follows.CAB=6.57-223621.7RGDP+2821131REER+55096.23CONS+3.56OPP+Ei
4.3.2 Interpretation of the model The explanatory variables 1.Real
GDPIt was a negative impact on the variable of current account
balance with highly significance because of P-value. A unit ($1)
increase in real GDP result to decrease $223621.7 amount of current
account balance by other things remain constant. This may be in
developing countries, when real income of the people increases they
are encourage to consuming luxurious imported goods and it affects
current account balance negatively.2. ConsumptionIn the same
fashion, Consumption and current account balance Ethiopia are
negatively correlated to with highly significant manner.
Economically one unit increase in total consumption will lead to
generate a current account balance by, $550926.23 by considering
other things remain constant. This can be due to the case that,
When consumption is increase it will lead bring decreasing net
saving of the individual and it affects the current account balance
adversely because saving is a primary condition for investment
activities and if there is no investments takes place in the
country it worsen the current account balance deficit by importing
very simple finished products to the country. Openness It is found
that, it has positive impact on the value of current account
balance of Ethiopia and it is also insignificant from point view of
p- value.Real effective exchange rateIt has also a positive effect
on current account balance of Ethiopia with highly insignificance,
because of p- value. I.e. p-value is less than 90%.
4.3.3 Test of the model4.3.3.1 Stationery test (unit root
cost)Table 4.3 VariablesTest statistics1% critical value5% critical
value10% critical value
Current account balance-5.056-3.716-2.986-2.624
Real GDP7.207-3.716-2.986-2.624
CONS4.793-3.716-2.986-2.624
REER24.022-3.716-2.986-2.624
OPP2.326-3.716-2.986-2.624
Based on the above stationery test most of the variables are
stationery. Because, absolute value of T-statistics greater than
the augmented critical value.Ramsey RESET test using powers of the
fitted 4.3.3.2 HetrosedasticityHetrosdacitey has serious
consequences for estimator. Based on our data the hetrosdacity is
as follows Brush-pagan/ cook-Weisberg test for hetrosdacitey HO:
Constant varianceVariables: fitted values of current account
balance Chi(1)=23.1Prob>chi2=0.0000Interpretation: This means
that our critical value chi is greater than the calculated value
this means our data has a hetrosdasities with having problem.
i.e.o.ooo