Determinants of the Current Account Deficit of Ethiopia: is it Structural or Cyclical?

Abstract

This study examines whether and the extent to which structural and cyclical factors explain the Ethiopian current account imbalance over the period 1985-2017. The results of four filtering methods generally suggest that the structural factors explain most of the variations in the current account deficit in the long-run though the cyclical factors are found to have some contributions to further deterioration of the current account balance in the post-crisis period. The structural determinants of the current account are examined using cointegration techniques, and the results using Fully Modified OLS and Canonical Cointegration Regression (CCR) have revealed that the current account balance worsens the increase in the initial net foreign asset position, the relative income, the financial deepening, and the effective exchange rate depreciation. The vector error correction (VEC) based Granger causality tests have also revealed that trade openness and real effective exchange rate Granger causes current account balance, but current account balance Granger causes only trade openness and neither of the variables Granger causes initial net foreign asset, fiscal balance, and relative income in the system.