Can Ethiopia Reach a Lower-Middle-Income Status by 2025? A Framework of DSGE and VAR Models

Abstract

Ethiopia has set the goal to be one of the Lower-Middle-Income (LMI) economies in the world by 2025. With that the target is to reach a GDP range of 147.5 to 578.4 bl. US$ and a GDP per capita range of 1,137 to 4,458 US$ by 2025. The present study asks whether Ethiopia is likely to reach these targets or not if the trends, dynamics, and volatility that have been experienced during the last decades persist. The out-of-sample forecast was analyzed using DSGE and VAR models, and the data set used in this study underwent a structural break test. Based on 1990-2018 data, the Nominal GDP of the Ethiopian economy is predicted to be 130.86 bl. US$ by the VAR model and 131.52 bl. US$ by the DSGE model in 2025. The 2004-2018 data gives a higher and above LMI margin predicted value of 164.84 bl. US$ and 169.69 bl. US$ for the VAR and DSGE models, respectively. Using the 2004-2018 data, the 2025 Nominal GDP in US$ is forecasted to be more than 164 bl, and the GDP per capita between 923 to 1,123 US$. Even though Ethiopia may surpass the target set in terms of Nominal GDP and come close to the GDP per capita target, still a lot necessity be done to make the goal of reaching the LMI status credible. Therefore, structural, financial and economic reforms, infrastructural investments and nurturing macro-economic balance, are among the policy measures that need to be taken to achieve a resilient LMI status by 2025.