Professional Documents
Culture Documents
Kotebe Metropolitain University College of Business and Economics
Kotebe Metropolitain University College of Business and Economics
PREPARED BY:
NAME ID NO
BELYIHUN GETACHEW weco-011/11
ADVISOR; ABENEZER W.
Acknowledgement
First of all I would like to thanks Jesus Christ with his Mother ST-Merry because they are the
base a base for whom I am today for doing all these and make my dream start a journey of
success.
Also I would like to express my deepest appreciation and gratitude to my Advisor Mr. Haile-
Michael who gave me good advice, suggestion, and constructive comment.
Let me say in my words Mom all these are by and for you. Thank you very much for everything
you did in my life. I also owe to my Dad and all my relatives for their potential help during my
life in university.
Finally, thanks to all whom wish my success
Table Content
Declaration..................................................................................................................................................1
Acknowledgement.......................................................................................................................................2
ACRONYMS..................................................................................................................................................7
Abstract.......................................................................................................................................................8
CHAPTER ONE............................................................................................................................................10
1.INTRODUCTION......................................................................................................................................10
1.1 BACKGROUND OF THE STUDY..........................................................................................................10
1.2 STATEMENT OF THE PROBLEM........................................................................................................12
1.3 RESEARCH QUESTION......................................................................................................................13
1.4 Objective of the study......................................................................................................................14
1.4.1 General objective......................................................................................................................14
1.4.2 Specific objective......................................................................................................................14
1.5 Hypothesis.......................................................................................................................................14
1.6 Scope of the study...........................................................................................................................15
1.7 Significance of the study..................................................................................................................15
1.8 Limitation of the study.....................................................................................................................15
1.9 Organization of the study................................................................................................................15
CHAPTER TWO...........................................................................................................................................16
2. LETRATURE REVIEW...............................................................................................................................16
2.1. Theoretical literature reviews.........................................................................................................16
2.1.1 Concept of budget deficit.........................................................................................................17
2.1.2 Current account........................................................................................................................17
2.1.3 Causes of budget deficit...........................................................................................................17
2.1.4 Method of deficit financing......................................................................................................18
2.1.4.1 Drawing from reserves..........................................................................................18
2.1.4.2 Domestic borrowing.............................................................................................19
2.1.4.3 External borrowing................................................................................................19
2.1.4.4 Money printing......................................................................................................19
2.1.5 Determinant of budget deficit..................................................................................................19
2.2 EMPIRICAL LETRATURE....................................................................................................................20
CHAPTER THREE........................................................................................................................................23
3. METHODOLOGY OF THE STUDY.............................................................................................................23
3.1 Introduction.....................................................................................................................................23
3.2 Data Description and Source...........................................................................................................23
3.3 Methods of data analysis.................................................................................................................23
3.3.1 The Unit Root test of stationary................................................................................................23
3.4 Model specification.........................................................................................................................24
3.5 Description of the variable..............................................................................................................24
3.5.1 Dependent variable..................................................................................................................24
3.5.2 Explanatory variables................................................................................................................25
3.6 Model diagnosis...............................................................................................................................26
3.6.1 Testing stationary.....................................................................................................................26
3.6.2 Heteroscedasticity test.............................................................................................................27
3.6.3 Auto correlation test.................................................................................................................27
3.6.4 Multicollinearty test.................................................................................................................27
CHAPTER FOUR..........................................................................................................................................28
4. DESCRIPTIVE AND ECONOMETRIC ANALYSIS.........................................................................................28
4.1. DESCRIPTIVE ANALYSIS...................................................................................................................28
4.1.1. Government Budget deficits....................................................................................................28
4.1.2. Total government revenue.....................................................................................................29
4.1.2.1. Foreign trade tax...................................................................................................30
4.1.2.2. Indirect tax...........................................................................................................30
4.1.2.3. DIRECT TAX......................................................................................................31
4.1.2.4. Non tax revenue...................................................................................................31
4.1.3. Government Expenditure.......................................................................................................31
4.1.3.1. Current expenditure...........................................................................................32
4.1.3.2. Capital expenditure..............................................................................................32
4.1.4. Real GDP Annual Growth rate..................................................................................................33
4.1.5. Real GDP per capital................................................................................................................34
4.1.6. Inflation rate............................................................................................................................35
4.1.7. External Debt...........................................................................................................................37
Source: own compilation from WB (2019)................................................................................................37
4.2. Econometric Analysis.....................................................................................................................38
4.2.1. Results of ordinary least square (OLS) estimation...................................................................38
4.2.1.1 Stationary test........................................................................................................38
4.2.1.2 Testing the significance of the model.................................................................40
4.2.1.3 Heteroscedasticity test...........................................................................................40
4.2.1.4 Auto-correlation test..............................................................................................41
4.2.1.5 Multicollinearity test..............................................................................................42
CHAPTER FIVE............................................................................................................................................43
5. Conclusion and Recommendation.........................................................................................................43
5.1. Conclusion......................................................................................................................................43
5.2. Recommendation...........................................................................................................................44
REFERENCE................................................................................................................................................45
Appendix One............................................................................................................................................46
Appendix Two............................................................................................................................................47
ACRONYMS
OLS ___________________________________ Ordinary least square
LDC s __________________________________ Least developed countries
GDP ___________________________________ Growth domestic product
NBE ___________________________________ National bank of Ethiopia
MoFED ________________________________Minister of Finance and Economic development
ECA ___________________________________ Economic commission for Africa
SAP ___________________________________ Structural adjustment policies
MLFIs _________________________________ Multilateral financial institution
Abstract
The purpose of this study was to investigate determinants of budget deficit in Ethiopia by using
time series data from 1985 to 2018. The study used quantitative research approach and
secondary data are analyzed by using multiple linear regression models. The OLS method was
applied to investigate the impact of real GDP annual growth rate, real GDP per capital,
external debt and inflation rate on budget deficit. The explanatory variables that of real GDP
annual rate and inflation rate within this study have positive effect on the budget deficit and the
others have negative effect. The empirical results show that three explanatory variables (real
GDP annual rate, real GDP per capital, external debt) were statistically significant whereas
inflation rate were statistically insignificant. Finally, the researcher have made conclusion and
recommendation based on the analyzed results.
Keywords; Budget Deficit; Real GDP annual rate; Real GDP per capital;
External debt; Inflation rate; Ethiopia.
CHAPTER ONE
1. INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Fiscal Imbalance is among one of the prime macroeconomic problems for all the policy advisors
of the world. If a country experiences fiscal deficit in its budget then to finance it, a country has
to rely on the both domestic and foreign borrowings which ultimately declines the self-respect of
the country as whole and citizens of the country as well. Therefore, a country has to keep balance
between its expenditure as compared to public revenue entails many implications on the
functioning of the economy. There has been persistent rise in fiscal deficits in most of the
developed and developing countries.
This issues surrounding budget deficit are not certainly new, but the economic development of
the past decades has led to renewed interest in the fiscal themes. Government budget deficit is a
perennial topic of debate among policy makers. Traditional view of government deficit taken by
most economist said that when government runs a budget deficit and issues deficit. It reduces
national saving which in turn lead to lower investment and a larger foreign debt. This view
concludes that government debt places burden on future generation. While Ricardian view of
government deficits stress that budget deficits merely represent a substitution of future taxes for
current taxes. Budget deficit of government may affect a nation’s role in the world economy
(Mankiw 7th Edition 2007).
In recent years’ government spending LDC s has increased significantly. This is mainly
attributed to the fact that the governments of LDC s are involved in social, political and
economic affairs. Meanwhile revenues do not grow rapidly in the same proportion as expenditure
due to narrow taxes basis and inefficient tax collection of systems resulting in a budget deficit. In
industrial countries, too, the failure of market mechanism in 1930s (during great depression)
calls for government intervention in the economy paving the way for increased government
expenditure in those countries.
Despite the consensus on the need to reduce budget deficit, LDCs offer a wide range of
expenditure with budget deficit. From country to country budget led to high and variable
inflation with crowding out of investment and growth. While in some countries moderately high
budget deficit seem not to generate macroeconomic imbalance at all. The explanation for this
different outcome is that different governments adopt different techniques of financing their
deficits.
In an effort to escape sever poverty in developing countries like Ethiopia the role of government
in the economy is indispensable because government engages on building roads, different power,
generating plant, communication facilities, schools and health facilities. However; government is
constrained by under developed financial sector, high informal sectors, erratic nature of the tax
collection (Adunya, 1997) and (Yemane, 2008). This in turn enlarge the gap between
government expenditure and revenue receipt then leads to large and persistent budget deficit
which is possibly linked to monetary expansion, inflation, reduced competitiveness of domestic
producers (appreciation of real exchange rate) and eventually runs to trade and current account
deficit.
Ethiopia faces big budget deficit. The combined effect of a very rapid increase in expenditure
and a relatively slower increase in revenue is obviously increase governments budget deficit. The
budget deficit including grants increased from a little less than one billion birr in 1996/97 to over
6 billion in 1999/00. The fast increase in the budget deficit has started in 1997/98 when it more
than doubled from its previous year level to 2.1 billion birr again doubling to 4.5 billion birr in
1999/00. Budget deficit excluding grants increased from about 2.5 billion birr in 1996/97 to over
7.7 billion birr in 1999/00. The deficit excluding grants rose to as high as 15% of GDP in
1999/00 from its level of 6% in 1996/97 increasing to 7.5% and 13% in the following two years.
This is a significant and certainly unsustainable increase in the country’s budget deficit and
compares unfavorably with the average level of deficit of both the early years of a new
government (4% including grants) and the last years of the Dergue (8% including grants. In
general budget deficit is increase from time to time (Befekadu Degefe, Berhanu Nega,
Getahun Tafesse, 200/01).
The annual increase in the federal budget is a key manifesto of this approach. As a result, the
deficit is increasing, debt is a heavy burden, and inflationary money printing has become the
norm. This adds up to a considerable economic risk. The deficit for fiscal year that began in July
2016 doubled to 60 billion birr as revenue and grants growth was outpaced by expenditure.
While income increased by 10% to 269 billion birr, expenditures expanded by 21% to 329 billion
birr. The spending budget for the financial year that just ended was 321 billion birr. With an
ambitious tax-collection target, the budget deficit was 54 billion birr. Additional spending of 14
billion birr was requested during the fiscal year without identifying plausible revenue sources.
The government apparently has not learned any lessons from the preceding years under
performance in collection and the consequent gaping deficits. For this budget year, which began
on July 8, the spending budget increased by 3.6 percent to 347 billion birr. Although that
represent a slower rate of spending growth, despite last year huge underachievement in tax
collection, revenue from local sources is budgeted to increase by 6.6 % to 236 billion birr-this is
not credible. Regardless, the budget was approved by parliament without serious debate.
1.2 STATEMENT OF THE PROBLEM
Government budget deficits happen when government spending is higher than tax revenue. It
represents negative value in national saving, which would reduce the whole value of national
saving. Total savings of the economy will shrink, shifting the supply curve in the loanable funds
market left. This will raise the real interest rate and encourage foreigners to invest in the
domestic economy, leading to exchange rate appreciation. This makes domestic goods and
services more expensive relative to foreign goods. Therefore, the countries import more and
export less, increasing the trade deficit.
Attaining a sound macroeconomic balance has become a priority of industrial and developing
country economies in the measurement of government success. Ethiopia has a long economic
history characterized by macroeconomic imbalance, one of which the gap between government
spending and revenue. It is perceived that a larger deficit always signifies a more expansionary
fiscal policy. But that is not always true, because during recession as GDP falls, the
government’s most important source of tax revenue; income taxes, corporate taxes, and payroll
taxes all shrink because firms and people pay lower taxes when they earn less (Carlos. R 2003).
According to Sill (2012) the expenditure of an entity, which exceeds the earning or income it has
termed as budget deficit. In the absence of financing from external source the deficit carry
forward to next financial year. The deficit can be a result of delays in collection of the revenues
i.e. Sales, taxes other macroeconomic variables represents one of the most widely debated topics
among economists. Ethiopians budget deficit has been increasing over time. For instance, the
overall fiscal balance in Ethiopia has moved from surplus in the early 1950 to a balance budget
up to the mid- 1960 and rather small deficit in 1964 to 1974. Following the 1974 revolution the
government of Ethiopia increased its participation in economic activities through nationalization
of private enterprises this leads to the country to large budget deficit (National Bank of Ethiopia
annual reports).
Hence, the study attempts to observe the determinants of budget deficit in Ethiopia. Our
research contributes to fill the research gap on the determinant of budget deficit in Ethiopia. This
type of paper has been ever conducted in the case of our country used some variable like; real
GDP annual growth rate, inflation rate, real exchange rate, real GDP per capital and real interest
rate. Even if the various factors (determinants) of budget deficit of Ethiopia is addressed in
different period, our paper is different by the time period that it covered from 1985-2018 and the
other is variable gap by including External debt. The Study also analyzes the significance of each
determinant of budget deficit and their implication on the Ethiopia economy by using both
econometric method and descriptive methods of analysis using the data from the period 1985 to
2018. Finally, the study attempts to find out the significant determinants of budget deficit in
Ethiopia and arrived at the concluding remarks. .
The main research question is to establish how the External debt and other factors relate
to the budget deficit in Ethiopia?
Sub-question
1.5 Hypothesis
The following relationships are hypothesized based on the earlier studies and tested with
reference to the time series data as follow;
There is positive relationship between real GDP annual growth rate and budget deficit.
There is positive relationship between real per capital GDP and budget deficit
There is negative relationship between external debt and budget deficit.
There is negative relationship between the inflation rate and budget deficit.
Finally, this study may also give a clue for further study about determinants of budget deficit
in the future.
CHAPTER TWO
2. LETRATURE REVIEW
This chapter covers theoretical and empirical literature review related to the study. In order to
provide suitable theories and empirical evidence on the topic investigation, the researcher has
reviewed a number of existing literature; these are helps to explain some key terms, which will
be relevant to the study and the researcher has also reviewed other researchers discussion related
to the study area.
In the past the Thailand government usually ran a budget deficit. But in recent years the deficit
has become a surplus because tax capacity relative to GDP has increased significantly and
expenditure over revenues were also reduced. The evidence from the country show that the
government adopted non-inflationary, means of deficit financing more relaying on domestic
borrowing through bonds. Evidence also shows that there is no clear relationship between
inflation and seignorage in the country (Virabongase, Ramangkura: 1991).
Genius murwera pachena (2013); He examine the impact of selected macroeconomic variables
on budget deficits in South Africa. According to him, vector auto-regression model was used to
estimate the respective impact of unemployment, economic growth, foreign reserves, foreign
debt, and government investment consumption on the budget deficit. The analyses covered the
period 1980 to 2010 using time series annual data.
Teshome Ketema (2006) the impact of government spending on economic growth: in the case of
Ethiopia. He used both descriptive and econometrics analysis and also used various components
of government spending (investment, consumption and human capital expenditure) on the
growth of real GDP for the period (1960/61-2003/04) by using Johansen Maximum likelihood
Estimation procedure.
Tewolde Girma H.M (2013), has been examined the effect of budget deficit on monetary
aggregates and the foreign sector of Ethiopia using the Vector Error Correction Model over the
period 1970/71 to 2010/11. Estimation result shows the existence of fairly significant
relationship between fiscal deficit, monetary aggregates and the foreign sector in Ethiopia.
Budget deficit is at the root of monetary expansion. Monetary expansion intern contributes
positively to rising inflation and overvalued exchange rate. The Inflation and overvalued
exchange rate intern contributes to the low performances of the foreign sector through adversely
affecting export incentive. Fiscal deficit for small open economy like Ethiopia is also sign of
stimulated domestic import demand, because government not only spends on goods and services
produced in domestic economy. Thus, the result is in favor of the twin deficit hypothesis
therefore fiscal restraint bucked by export diversification will improve the performance of the
foreign sector and status of inflation.
CHAPTER THREE
3. METHODOLOGY OF THE STUDY
3.1 Introduction
This chapter has been specified the model and the methodology used to examine the relationship
between explanatory variable and dependent variable. It is followed by an explanation of
variables used, source of data and the diagnostic tests employed in the study.
3.2 Data Description and Source
This study aims at establishing the determinant of budget deficit in Ethiopia. Our study intends to
use secondary time series data collected from different sources for the period from 1985-2018.
Hence, the data for determinant of budget deficit variables; real gross domestic p
? . ..roduct per capital, Real Growth Domestic Product Annual Growth rate, Inflation rate and
External Debt has been obtained from Ministry of Finance and Development (MOFED), Central
Statistics Authority (CSA), National Bank of Ethiopia (NBE) and other sources.
3.3 Methods of data analysis
The data obtained from secondary sources are analyzed by using description and econometrics
model for a better clarification and discussion. Our paper used time series data estimation by
following; test of stationary in order to eliminate the possibility of spurious regression results,
test for co-integration. The essence of co-integration is to ascertain whether the residual of the
regression estimated using the non- stationary variables is stationary.
3.3.1 The Unit Root test of stationary
The first step in time series Regression analysis was to test stationary of each variable. The need
to test stationary of the variables arises because estimating regression using non-stationary based
on OLS leads to spurious and inconsistent result (Gujarat1995). In addition, if variables are
non–stationary it is difficult to conduct hypothesis testing as the classical assumption on the
property of the error term namely that it has zero mean, constant variance, and is non-auto
correlated is violated (Rao1994). So, stationary test is important. There are different ways of
testing stationary. In this paper, the two widely applicable (most available in statistical software)
test of unit root, namely The Dickey-fuller (DF) and Augmented Dickey-Fuller (ADF) are used.
It is known that most time series variables are non-stationary at level. Differencing the respective
variables and running regression on the same can handle the non-stationary problem.
3.4 Model specification
Model specification refers to mathematical demonstration of the relationship between the
dependent and independent variables. The budget deficit model of this study can be specified by
using four most important determinant variables that determine budget deficit. Such variables
are inflation rate, the real GDP annual growth rate, External Debt and real per capital GDP as
explanatory variables and budget deficit as dependent variable. The linear functional relationship
between explanatory variable and dependent variables as follows;
Bdt= f (rgdpt, grgdpt, exdt, irt)
Where t=denotes time
Bdt= denotes the government budget deficit at time t
rgdpt= the real GDP per capital at time t
Grgdpt= the real GDP annual growth rate at time t
Exdt= external debt at time t
Irt=inflation rate at time t
GRGDP; (Real GDP annual growth rate) is included in the model as a proxy for
economic activity because government budget balance is sensitive to economic
fluctuation. Indeed , when the level of economic activities low or moderate the amount of
tax revenues collected by the government decreases while social expenditure increase,
that lead to a deterioration of budget balance. Conversely, a higher economic growth
generates an improvement of budget balance (automatic stabilizers). However, some
authors (Talvi and Vegh, 2000) have suggested that fiscal policy can be pro-cyclical in
developing countries with weak governments, because political pressures to increase
public spending go hand in hand with the growing tax revenue due to higher economic
growth. The strong increase in the fiscal demands during economic boom is called
“voracity effect” (lane and tornell, 1999).
EXD :( External Debt) External debt is quit important financial resource for many
national economies around the world. In this context, external debt have been taken
recently in order to reduce saving and external exchange gaps, close the budget deficits,
and maintain the economic growth and development. When external debt taken due to in
adequate domestic resources are used effectively, they will increase savings, investments
and employment opportunities. However, the ineffective and unproductive use of external
debt results to several problems in the economy. As result external borrowing will
become a current issue again in order to repay these debts.
IR :( Inflation rate) Keynesian believes that the great depression could have been
averted if the government had engaged in more government spending and income tax
cuts (fiscal policy). Inflation reduces real tax revenue and thus causes high fiscal deficit.
This is called the inflationary approach to fiscal deficit. Sometimes the situation may be
described as “olvera –Tanzi effect” of fiscal deficit, i.e. Deficit caused by a decline in real
tax revenues during period of high inflation as a result levels reduce real tax revenues of
the government significantly as the government collects and accounts its tax receipts in +
+latter and expenditures causing high budget deficit in the country (Carlos Rodriguez:
1994).
IF prob>chi2 is greater than 5%, accept null hypothesis. This means no heteroscedasticity
problem in the regression. Whereas if prob>chi2 is less than 5%, accept alternative hypothesis,
there is heteroscedasticity problem.
3.6.3 Auto correlation test
It is a correlation between members of a series observation ordering in time (as a time series
data). The classical linear regression model assumes that the disturbance (error) term relating to
any observation is not influenced by disturbance term relating to any other observation. In
running OLS estimation by disregarding to auto correlation was result in inefficiency on the
estimated result and its standard errors are estimated in the wrong way (Gujarat, 2009).
CHAPTER FOUR
4. DESCRIPTIVE AND ECONOMETRIC ANALYSIS
From the table above largest budget deficit was occurred in 1990, which is about 2147.9 million.
The average budget deficit as a percentage of GDP was 10.0 during five year of Dergue regime.
0
-2.5e+09 -2.0e+09 -1.5e+09 -1.0e+09 -5.0e+08
BD
The budget deficit as ratio of GDP reflects increasing from time to time. AS we seen from above
table, the budget deficit as a percentage of GDP was 82.5% in 1998. The largest budget deficit
was incurred in 2018, which is about 118975.5 million excluding grant. On average budget
deficit as a % of GDP were 17.5 during the present government regime.
4.1.2. Total government revenue
Total government revenue in Ethiopia comes from the following sources: Ordinary revenue, external
assistance and capital receipts. Ordinary revenues are further classified into Direct taxes, Indirect
taxes, and foreign trade tax and non-tax revenue.
300000
200000
total revenue
100000 0
As we have seen the above tables various reform were introduced by the post 1990/91
government of Ethiopia that increased government revenue. As a result of this reform the trends
for government revenue show sharp rise and increased constantly after reform period. But
increase in revenue is less than the increase of expenditure which leads to budget deficit still.
4.1.2.1. Foreign trade tax
Taxes on international trade include import duties, export duties, profits of export or import
monopolies, exchange profits, and exchange taxes.
4.1.2.2. Indirect tax
Indirect taxes are basically taxes that can be passed on to another entity or individual. It is
usually imposed on manufacturer or supplier who then passes on taxes to the consumer. The
most common example of indirect tax are excise tax (cigarettes and alcohol), value added tax and
etc.
As we seen the above table, current expenditure is greater than capital expenditure
during five year dergue regime.
4.1.3.1. Current expenditure
Current expenditure is expenditure on goods and services consumed within the current year,
which needs to be made recurrently to sustain the production of educational services.
Minor expenditure on items of equipment, below a certain cost threshold, is also reported
as current spending
4.1.3.2. Capital expenditure
Source
: own compilation from Knoema.Com (2019)
As we observe from figure 4.5 there is a very high fluctuation in real GDP growth rate owing to
different factors. In 1980 the growth rate of GDP was 4% and in 1983 7.8%. However in 1984
and 1985 the growth rate was -2.3% and -11.4% respectively due to severe drought during that
period .In 1986 and 1987 the growth rate reach 9.7% and 13.9% due to favorable rainfall. In
1990 and 1991 the trend also decline due internal conflict between the military and EPRDF.
Starting from 1993 Ethiopia began to experiencing accelerated economic growth and it shifted to
an even higher in 2004. Real GDP growth averaged 11.7% in 2005 and 12.6% in 2006 per
annum. This is because of the EPRDF has been adopted typical structural adjustment policies of
market liberalization which issued a new economic policy in November 1991 by openly a market
oriented economic policy and other development initiative program (Befikadu, 2005). However
the current government experience up and down trend of real GDP because the majority of
Ethiopian economy depends on agriculture which is highly affected by natural hazards. For
example decline in real GDP growth rate in 2016 was due to El-Nino and severe drought.
15
10 5
GRGDP
0 -5
-10
Hence, the variables like real GDP annual growth rates, and inflation rate were stationary
without differencing the values or (0) lags. But budget deficit, real per capital GDP and external
debt becomes stationary after differencing the values of the variables.
4.2.1.2 Testing the significance of the model
The statistical values that measure the goodness of fit and significance of the model fit
reasonably well. To be specific the R2 value shows that about 76.72% of the variations in budget
deficit are explained by the explanatory variables. The overall significance of the model is also
significant. (Refer more information from appendix)
F-test
Test the significance of the whole explanatory variables simultaneously using F-test.
H0-all slope coefficients are zero
H1-all slope coefficients are different from zero
F = ESS/Df = ESS/K-1
RSS/Df = RSS/n-K+1
The probability that critical F-value at 5% level of significance greater than F calculated is at
1%, then we will reject the null hypothesis means that all parameters are different from zero
(refer the appendix part)
One of the most important considerations in multiple linear regression analysis is that the
explanatory variables should not significantly linearly related with each other because if any two
explanatory variables are highly or perfectly linearly correlated, the real magnitude of the
relationship they have with the dependent variable is either deemed best or it can be depressed
The descriptive analysis has revealed that expenditure has been persistently growing due to the
growth of the public sector economy. In turn, this has created budget deficit since it was not
followed by equally proportionate growth revenue. Since 1974, large and rapid expansion of
state activity in the economy has led to the growth of both government revenue and spending
with the dominance of the latter. As a result, budget deficit have been growing over time.
Looking further in to the structure of current expenditure and capital expenditure the relative
share of the current expenditure was high.
For much reliable conclusion econometric analysis was employed to examine the empirical
relationship between budget deficit and it’s financing. To this effect, the model specified in
chapter four is estimated using the available data and the ordinary least square method. In the
econometric analysis, the attempt has been made to test the hypothesis that financing budget
deficit through money creation leads to high inflation, domestic borrowing to finance budget
deficit leads to crowding out effect and excessive resort to foreign borrowing for financing
budget deficit leads to high external debt a service burdening. To reduce budget deficit the
government should restructure its budgeting system and mode of financing.
5.2. Recommendation
To increase tax revenue and decreases the deficit problems, fundamental
reform of tax structures should be made and the reform should focus on
broadening the tax bases (as opposed to mounting high tax rates),
minimize tax exemption and improve the tax administration system which
would affect the tax collecting systems.
The government should also exercise control over its expenditures and its
financing techniques especially through limiting its domestic borrowings
from banks.
Finally the fact that GDP growth in the country follows agricultural growth
trend implies that agriculture is the key to economic growth in the country.
Since the sector is subjected to several of the nature which are beyond
policy measures and control, due emphasis should be given to other
sector of the economy. Apart from policies directed towards improving
productivity in agriculture. In addition, the government should, not only
formulate, but also implement appropriate policies to further encouraging
private sector investment and saving which should gear the country to the
pace of rapid economic growth.
REFERENCE
Befekadu Degefe, Berhanu Nega, Getahun Tafesse, 200/01 second annual
report on the Ethiopia economy volume two.
Carlos Rodriguez, westerly, k. Schmidt Hebbel, 1994 fiscal performance with
fixed exchange rates, in carols Rodriguez, World Bank, Washington DC.
Clayton, 1995 economics principles and practices video disc edition.
Easterly W and Fishers (1990) the economics of the government budget deficit
constraint” the World Bank research observer, VOL-5.
Gujarati, N, Damodar (1995), basic econometrics, 4 th edition, MC Graw Hill,
network
Mankiw, G. (2007) macroeconomics, 7th edit. Worthy publisher.
National bank of Ethiopia (NBE), various annual bulletins.
Rodger Durnbusch, Stanley Fischer and Richard Startz, 2001 macroeconomics
8th edition.
APPENDIX
------------------------------------------------------------------------------
bd | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
grgdp | 1.88e+07 8260618 2.27 0.031 1878957 3.57e+07
lrgdp | -141192 16218.53 -8.71 0.000 -174362.6 -108021.4
ir | 2073164 4757188 0.44 0.666 -7656377 1.18e+07
exd | -.0375519 .0150137 -2.50 0.018 -.0682583 -.0068455
_cons | 5.64e+08 1.55e+08 3.64 0.001 2.47e+08 8.81e+08
------------------------------------------------------------------------------
Stationary Test
1 . dfuller bd, lags(0)
Multicollinearity Test
. vif
Heteroscedasticity Test
. estat hettest
chi2(1) = 3.86
Prob > chi2 = 0.0495
chi2(14) = 15.96
Prob > chi2 = 0.3155
---------------------------------------------------
Source | chi2 df p
---------------------+-----------------------------
Heteroskedasticity | 15.96 14 0.3155
Skewness | . 4 .
Kurtosis | . 1 .
---------------------+-----------------------------
Total | . 19 .
---------------------------------------------------
------------------------------------------------------------------------------
| Robust
bd | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
lrgdp | -141192 18488.23 -7.64 0.000 -179004.7 -103379.3
grgdp | 1.88e+07 6346925 2.96 0.006 5792898 3.18e+07
exd | -.0375519 .0137034 -2.74 0.010 -.0655786 -.0095252
ir | 2073164 4173550 0.50 0.623 -6462705 1.06e+07
_cons | 5.64e+08 1.64e+08 3.44 0.002 2.29e+08 9.00e+08
------------------------------------------------------------------------------
. clear
. tsset year
time variable: year, 1985 to 2018
delta: 1 unit
Auto-correlation Test
. estat bgodfrey
. dwstat
------------------------------------------------------------------------------
bd | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
grgdp | 801008 6957569 0.12 0.909 -1.35e+07 1.51e+07
lrgdp | -140597.8 30852.92 -4.56 0.000 -203797.1 -77398.47
ir | -2614829 3541338 -0.74 0.466 -9868932 4639273
exd | -.0631142 .0253293 -2.49 0.019 -.1149988 -.0112295
_cons | 9.18e+08 3.34e+08 2.75 0.010 2.33e+08 1.60e+09
-------------+----------------------------------------------------------------
rho | .6867334
------------------------------------------------------------------------------
Durbin-Watson statistic (original) 0.976096
Durbin-Watson statistic (transformed) 2.004527