RELATIONSHIP BETWEEN DEFICIT FINANCING AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

The study looked at how deficit financing affected the expansion of the Ethiopian economy. The study used time series secondary data for this purpose, which was taken from the Federal Reserve Bank of St. Louis, the Ministry of Finance and Economic Development, the National Planning and Development Commission of Ethiopia, the World Bank development indicators database, the International Monetary Fund database, Trading Economics statistic Bulletin, and the International Monitory Fund database. The information spanned 31 years from 1991 to 2021.The budget deficit and economic growth were analyzed in both the long and short runs using the Autoregressive Distributed Lag (ARDL) co-integration method. Modeling and analysis of the study's data revealed a negative association between Ethiopia's budget deficit and economic growth in the long run, and these findings are consistent with the with Neo Classical School of thought. The study's conclusions showed that external debt borrowing used to finance deficits has a major detrimental impact on Ethiopia's economic expansion. Additionally, while debt service has no discernible impact on Ethiopia's economic growth, external debt has a positive considerable impact on it. Additionally, the rate of inflation has a negative and substantial impact on economic growth, but government spending and trade openness have a positive and statistically significant long-term impact on the economy. However, the short-term analysis showed that the budget deficit has positively contributed to long-term economic growth of the country. This demonstrates that adjustments to the budget deficit in the long run have a direct impact on economic development. For Ethiopia's government to avoid specific levels of budget deficit and achieve the required level of growth, the report recommended some actions. To reduce corruption, linkages, and wastages, the study also advises that the government set up monitoring teams. These teams will ensure that the budget is carefully and effectively implemented, as well as that loans are borrowed, and they will do this by holding everyone accountable for every dollar of public funds spent.