ANALYZING THE NEXUS BETWEEN TWIN DEFICITS IN ETHIOPIA.

Abstract

This study examines the relationship between twin deficits budget and current account deficits in Ethiopia from 1992 to 2022 using the Co-integrated VAR model. The methodology begins with Augmented Dickey-Fuller unit root tests to assess stationarity. The Johansen co-integration test confirms that key economic variables including the current account deficit, budget deficit, real GDP, real effective exchange rate, interest rate, and tax revenue are co-integrated with two long-run equilibrium relationships. The Granger causality analysis reveals a one-way causality running from the budget deficit to the current account deficit, without reciprocal feedback. Long- and short-run analyses confirm a significant and positive association between the two variables. Diagnostic tests validate the statistical robustness of the model. Based on these findings, policy measures should focus on reducing non-developmental expenditures and strengthening domestic revenue collection.