The Impact of Fiscal Policy Shocks on Ethiopian Economy: Evidence from Import Tariff and Direct Tax Using Stage CGE Modeling Approach

Abstract

Fiscal policy is one of the macroeconomic policies, which play a decisive role on economic growth
especially in developing economies, which have many economic and social bottlenecks. This study
examines the impacts of fiscal policy shock on Ethiopian economy by applying static computable
general equilibrium (Stage CGE) model, which allows quantifying the impacts of fiscal instrument
shocks on the economy and welfare of households. Fiscal problems like small tax revenue and
consistent fiscal deficit put its own major influences on developing economies performance. The
study uses 2009/10 Ethiopian SAM as an input for the model and applies three simulation
scenarios. In the first simulation, tariff cut affects GDP and household welfare negatively. In the
second simulation, increasing direct tax has negative impact on total GDP. The other alternative
simulation scenario is reducing direct tax, which showed a positive change on the total GDP. The
study suggests that the government should reduce direct tax to improve economic performance. In
addition, liberalizing tariff is not advisable for Ethiopian economy.