Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia

Gollagari Ramakrishna, Berhanu Asefa Gizaw, Ch. Paramaiah (), Robinson Joseph and Sania Khan
Additional contact information
Gollagari Ramakrishna: Department of Economics, IBS Hyderabad, IFHE, Hyderabad 501203, India
Berhanu Asefa Gizaw: Department of Public Financial Management, ECSU, Addis Ababa P.O. Box. 5648, Ethiopia
Ch. Paramaiah: School of Business, Skyline University College, University City of Sharjah, Sharjah P.O. Box 1797, United Arab Emirates
Robinson Joseph: School of Business, Skyline University College, University City of Sharjah, Sharjah P.O. Box 1797, United Arab Emirates
Sania Khan: Human Resource Management Department, College of Business Administration, Prince Sattam Bin Abdulaziz University, Al Kharj 11942, Saudi Arabia

Sustainability, 2023, vol. 15, issue 4, 1-18

Abstract: The main objective of this study is to examine the dynamic impact of import tariff reduction on major macroeconomic variables and its long-run implications for the fiscal sustainability of Ethiopia. In addition, it estimates the increase in the average consumption tax required to compensate for the possible tax revenue loss and fiscal sustainability. A Recursive Dynamic Computable General Equilibrium Model (RDCGEM) is used to assess the dynamic impact on macroeconomic variables of import tariff reduction and examine the increased consumption tax required. The study is novel as there are no studies in general, and for Ethiopia in particular in this regard. We use the available 2013/2014 base year macroeconomic data from national income accounts, fiscal accounts, and balance of payments accounts of Ethiopia. The RDCGEM is calibrated to the base year data, checked for correctness, and tested for robustness using sensitivity analysis. The model then is simulated for the import tariff reduction under the base case and under various tariff reduction scenarios based on which the macroeconomic impacts of tariff reduction are analyzed. Based on the RDCGM outputs, the fiscal sustainability impact of import tariff reduction is verified, and using a cointegration method, we examine the sustainability of fiscal policy. The results suggest a 95 percent import tariff reduction that negatively impacts the major macroeconomic variables. It also leads to long-term fiscal unsustainability. The joint reform of the country has relatively better impacts on major macroeconomic variables but slightly negative effects on household income and consumption.

Keywords: tariff reduction; macroeconomic variables; fiscal sustainability; RDCGE; cointegration (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:15:y:2023:i:4:p:3074-:d:1061647

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