EFFECT OF BALANCE OF PAYMENTS ON ECONOMIC GROWTH IN ETHIOPIA

Abstract

The effect of Balance of payments on economic growth in Ethiopia. Balance of Payments (BOP) is a statement or record of all monetary and economic transactions made between a country and the rest of the world within a defined period normally on yearly basis from 1987/88 to 2019/20. The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments (“BOP”) while when funds leave a country, a deduction is made. Thus, a Balance of payments (BOP) deficit, on the other hand, indicates that a country’s imports are more than exports. Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. A country’s balance of payments tells you whether it saves enough to pay for its imports and it reveals whether the country produces enough economic output to pay for its growth and a balance of payments deficit means the country imports more goods, services and capital than it exports. Therefore, if growth is based on consumer spending and falling saving rates, this will tend to cause imports to rise faster than exports. To achieve the underlying objectives, the study employed autoregressive distributed lag model as well as co-integration analysis using the Johansen multivariate procedure. Pairwise Granger causality was also used. The Augmented Dickey unit root test indicated that all series are integrated of order one, i(1). That is, all series are stationary after 1st and 2nd differences. The causality result showed economic growth granger causes BOP. From the long run model export and FDI positive significant effect on the economic growth rate of Ethiopia both in the short-run and long-run. Based on the results obtained it is recommended that the government to sum it up Balance of Payments is a very important record of financial transactions and status of any nation and its economy because it highlights the direction of economic growth or otherwise of any country and is a ground on which many important policy decisions of countries are based.