Foreign Resource Inflows and Domestic Revenue Mobilization in Ethiopia: A Co-integration & Granger Causality Analysis

Abstract

This study examines the effect of foreign resource inflows and domestic revenue mobilization in Ethiopia over the period 1980 to 2014 using co-integration and vector error correction analysis. All the necessary time series tests such as stationary test, model sufficiency, co-integration test are conducted. The variables in the model are co-integrated and show long run relations. The empirical result from the model shows that aid and grant have positive effect on domestic revenue mobilization in the long run. Also, the granger causality analysis reveals that there is a bi-directional causal relationship between real GDP growth and domestic revenue mobilization in Ethiopia. This implies that the country has to give strong emphasis on domestic revenue mobilization for the sustainable economic development of the country. Therefore, aid recipient country like Ethiopia has to work hard on how to enhance  domestic revenue raising capacity of the country which is at the heart of meeting the capital required for the sustainable economic growth and development in times of short falls and precariousness of external sources of finance.

Keywords: Domestic Revenue; Foreign Aid; Foreign Grant; External Borrowing; Ethiopia