Impact Of Budget Deficit On Economic Growth In Ethiopia: Time Series Analysis

Abstract

In most developing countries, the basic challenging issue is achieving the objective of economic growth through appropriate policy and strategy. This economic growth enables the nation to overcome the problem of poverty. One of the most challenging factors for economic growth is Budget Deficit. This study is therefore aimed to analyze the impact of Budget Deficit on Economic growth of Ethiopia by using time series data for 1991-2023. Secondary data was gathered from NBE, World Bank and Ministry of Finance and Economic Development. After testing for Unit root test and related issues, Vector Error Correction Model (VECM) was employed. In addition to Budget Deficit, other variables such as Labor force participation, Inflation rate, Real exchange rate, Gross capital formation and interest rate were included in the model as factors determining economic growth. The result of the study revealed that Budget deficit is negatively and statistically affecting the economic growth of Ethiopia. All other variables included in the model were with positive effect on economic growth at 1% of level of significance. The result also revealed that there is both short-run and long-run relationship between Real Gross Domestic Product (RGDP) and its determinants. Accordingly, the researcher would recommend the government and National Bank of Ethiopia to control Budget Deficit in collaboration with other stakeholders