Fiscal Deficit, Debt Dynamics and Economic Growth In Ethiopia

Abstract

The paper used annual factual information collected over time from 1984-2019 to examine the nexus between fiscal deficit, debt dynamics and the growth rate of RGDP in the Ethiopian economy. In the model examination, the augmented dickey-fuller (ADF) and Phillips-perron (PP) unit root test, co-integration test, vector error correction model (VECM) and granger causality test were performed. The separate analysis reflects that all the variables captured in the model were stationary at first differencing individually. The co-integration test performed shows that there is long – run association ship among the response variable and regressor variables. The practical evidence displays a meaningful and positive connection among the total public debt (TPD), current account balance (CAB), External reserve (EXRV), Exchange rate (EXR) and Investment on GDP growth . However, this result should be interpreted with restraint given the detrimental effects of debt accumulation in an economy. The assessed co-efficient of the error correction term is statistically significant and appropriately signed indicating that about 64.86 percent of imbalance in the economy that has been caused by past years‟ distress meet hindmost to the long-run balance in the current year. The granger causality test discloses that there were bi-directional causality association ships among response and regressors variables in both short run and long run. The results of the analyses revealed that Fiscal deficit, total public debit and economic growth had long run and short run relationship, and Additionally, Fiscal deficit has negatively hurt the RGDP and Total public debit has positive relationship and significant influence on RGDP in Ethiopia. The study recommends that, Government must come up with policies and structural reforms to increase the revenue and lower its current expenditure. Commitment to budget should be encouraged for fiscal discipline on the part of the government and its agencies.