AMBO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
THE EFFECT OF BALANCE OF PAYMENT ON ECONOMIC GROWTH:
THE CASE OF ETHIOPIA.

Thesis proposal

By
Meharu Wondimu

Advisor:
Tedele Melaku Chala, Phd

April, 2022
Ambo, Ethiopia
 APPROVAL SHEET
Submitted by:

Meharu Wondimw ________ _________ 18/5/2022

PG Candidate Signature Date

Approved by:

1. ____________________ _______________ ________________

Advisor Signature Date

2. _____________________ _________________ ________________

Head, Department Signature Date

3.____________________ _______________ ________________

Evaluator Signature Date

4._____________________ ________________ ________________

College/Institute Dean Signature Date

5_________________ ________________ _________________

Director School of Graduate Studies Signature Date

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 LISTS OF ACRONYMS
BOP Balance of payment
CA Current account
CAD Current account deficit
VAR Vector autoregressive
CFA Capital and Financial account
FDI foreign direct investment
GDP gross domestic product
NBE National Bank of Ethiopia
IMF International Monetary Fund
MoFED Ministry of Finance and Economic Development

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Contents
APPROVAL SHEET ..................................................................................................................................... i
Contents ................................................................................................................................................... iii
1. INTRODUCTION .................................................................................................................................... 1
1.1 Background of the Study .................................................................................................................... 1
1.2 Statement of the Problem .................................................................................................................... 2
1.3 Research Question .............................................................................................................................. 4
1.4 Objective of the study ......................................................................................................................... 4
1.4.1 General objective............................................................................................................ 4
1.4.2 Specific objectives ..................................................................................................... 4
1.5 Significance of the Study .............................................................................................................. 4
1.6 Scope of the Study ........................................................................................................................ 5
1.7 Description of the study area ........................................................................................................ 5
1.8 Limitation of the study .................................................................................................................. 7
1.9 Organization of the study .............................................................................................................. 7
2. REVIEW OF LITERATURE ................................................................................................................... 8
2.1 Concept of BOP .................................................................................................................................. 8
2.2 Theoretical Literature.................................................................................................................... 9
2.3 Empirical Literature Review ............................................................................................................. 11
2.4 Conceptual Framework ............................................................................................................... 14
2.5 Research Design and Approach .................................................................................................. 15
2.6 Research Design.......................................................................................................................... 15
2.7 Research Approach ..................................................................................................................... 15
2.8 Research Method ........................................................................................................................ 16
2.9 Data Analysis Method................................................................................................................. 16
3. Time schedules (work plan) .................................................................................................................... 17
4. Budget ..................................................................................................................................................... 18
5. References ........................................................................................................................................... 19
6. Appendices (I) ..................................................................................................................................... 21

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 1. INTRODUCTION
1.1 Background of the Study
The International Monetary Fund (IMF) defines the effect of the balance of payments (BOP) on
economic growth as a term used to refer to an accounting record of all monetary transactions
carried out by a country with other countries within a given period. Specific period of time, usually
one year. It comprises all types of transactions of a country, such as exports and imports of goods
and services, purchase and sale of foreign assets, foreign direct investment and portfolio
investment, as well as loans and loans to the rest of the world. It is preferably presented in the
national currency of the country (IMF, 1996).
Based on the Balance of payments and International Investment Position Manual, sixth edition
(BPM6), the BOP defines the balance of payments (BOP) effect on economic growth as a term
that is used to refer to an accounting record for all the monetary transactions conducted by a
country with other countries within a specified period of time, usually one year. Balance of
Payments consists of products and services account, primary income account, secondary income
account, capital account, and financial account). BOP accommodates all types of transactions of a
rustic like – exports and imports of products and services, buy and sale of overseas properties,
overseas direct funding and portfolio funding additionally to borrowing from and lending to the
relief of the world. During this sense, the balance of payments is one altogether the foremost
indicators of a country’s status in global (BPM6).

In the BOP transactions if a country has received money, this is known as a credit, and if a country
has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be
zero, meaning that assets (credits) and liabilities (debits) should balance, but in practice, this is not
happen and its effect on economic growth. The greatest importance‘s of balance of payments lie
nits serving as an indicator of effects international economic growth position of any country. It can
also be used to appraise a nation‘s short-term international economic growth prospects, to evaluate
the degree of its international solvency, and to determine the appropriateness of the exchange rate
of country’s currency (Mundell, 2016) .

Balance of payments can be favorable (positive), unfavorable (negative) or in difference (around

zero). (Kennedy,2018) argues that a country‘s favorable balance of payments cannot be taken as
an indicator of effect economic growth prosperity or the unfavorable balance of payments is not a

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reflection of economic failure. A poor country may have a favorable balance of payments due to
large inflow of foreign loans, foreign aids and equity capital.

A current account deficit may imply that countries are relying on consumer spending, and are
becoming uncompetitive. This leads to lower economic growth of the export sector (Umar, 2017).
This is particularly a problem for countries like Ethiopia, which lack competitiveness in the
international market that may be the reason for large current account deficits.

A Balance of payments deficit may cause a loss of confidence by foreign investors that the
investors may remove their investments causing a big fall in the value of domestic currency
(devaluation) and on the economic growth. This can lead to decline in living standards and lower
confidence for investment (IMOISI, 2012).Therefore, it is prudent to know the factors or the
variables that affect and understand the changes in the balance of payment to make an informed
economic growth decision. This study investigates the determinants of balance of payments in
Ethiopia for the period between1998-2021.

1.2 Statement of the Problem

Moreover, in 1970s and 1980s many developing countries balance of payment was highly
deteriorated with overvalued currency and highly rate of unemployment was observed (Stambuli,
2006). These lead nations to search financial and non-financial aid from international
organizations. However, Tamirayehu (2015) international organizations like the International
Money Fund (IMF) and The World Bank were not interested to give their money without
preconditions. That is, structural adjustment program (SAP) was asked to be implemented. SAP
was a program that encouraged finance seeking countries to privatize all state owned properties,
less government intervention, devaluation of the overvalued currency, applying “free market
economy” and many others were proposed.

This paper will presents new evidence on the relationship to balance of payment and economic
growth in developing nations, especially in Ethiopia. A literature that goes back to Gebreegziabhier
(2003) views as historically indicated starting from the emperor regime to the current government
the current account of Ethiopia is facing very weak performance. Even though, Ethiopia has
experienced large deficits in its current account since at least the late 1990s; (Naod 2010) showed
there is a little improvement of BOP due to the profitability of service sector and official foreign
assistance and remittances.

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In the 2009/10 and September 2010/2011 the Ethiopian Birr was depreciated to 23.7 percent and
16.5 percent respectively against the US dollar. The overall 3 balance of payments in 2009/10
recorded USD 1.37 billion in surplus compared to USD 316.6 million in the preceding year. In this
period GDP is grown by 10.4 percent. This growth was also continuous with 11.3 percent annual
average growth during 2003/04- 2015/16 (NBE, 2011). However, in 2015/16 the balance of
payment account faces higher deficit 830.9 million USD dollars and annual average growth was
10.5 percent. However, country’s exchange rate is still deprecating and reached to 21.1059
Birr/USD, on average. Even though, recently Ethiopia is in a process of producing manufacturing
products that are finished and semi-finished; which are exportable and substituting imported
goods; the current account of the country is still in deficit. Recently (October 2017) the National
Bank of Ethiopia devalues its currency by 15 percent to solve the problem of external imbalances.
That is, to increase the export performance of the country as well as its competitiveness and solve
the shortage of foreign currency

As Edward et al (2017) the National Bank also intervenes in the foreign exchange market to ensure
stability of the exchange rate through implementation of a gradual devaluation of the Ethiopian
Birr to ensure alignment of the exchange rate with market fundamentals. Ethiopia is one of the
developing countries that export earnings are low and fluctuating, the import of high priced goods
is increasing over time. These disproportional growth rates of export and import value contributed
to the deteriorating balance of payment of the country and it also affects the recent fast economic
growth of Ethiopia in the long run

The national bank annual reports also show that since 2004 Ethiopian economic growth rates
became constantly high and stable but produce the same deficit in the balance of payments.
Source: Ministry of Finance and Economic Development and Staff computation based on the
newly Revised Series (1999/00 Base).

Despite the relatively extensive theoretical, there is no consensus on the determinants of balance
of payment effect on economic growth especially in individual developing countries. It means
that the nature, performance and determinants of the balance of payment remain an empirical
problem of economic growth in developing countries, (Ajayi.J.O.2014).

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This study aimed at identifying why Ethiopian balance of payment and its effect on economic
growth is widening while Ethiopia has a stable and high economic growth.

1.3 Research Question

1. What is the consequence of BOP on the economic growth of the country?
2. What are the economic factors that influence the BOP?
3. What are the main economic factors determining Ethiopian BOP problem?
1.4 Objective of the study
1.4.1 General objective
The general objective of the study is to assess the Effect of Balance of Payment on Economic
growth in Ethiopia from 1998/99 up to 2020/21.

1.4.2 Specific objectives

2. To assess the effect of BOP on economic growth.
3. To assess economic factors that influences the balance of payment.
4. To identify main economic factors of Ethiopian BOP problems.
5. To examine the effect of FDI on balance of payment.
6. To analyze the effect of inflation on balance of Payment

1.5 Significance of the Study

The study of balance of payments effect on economic growth has become a matter of great
interest to all concerned. It has been said that effect of Balance of Payments on economic growth
is just like a financial statement of a bank or a business that reveals the financial condition of the
country (Umo, 2018).

The analyses of the balance of payments and its effect on economic growth are important
because:

1) It examines the transaction of all the exports and imports of goods and services for a given
period.

2) It helps the government to analyze the potential of a particular industry export growth and
formulate policy to support that growth.

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3) It gives the government a broad perspective on a different range of import and export tariffs.
The government then takes measures to increase and decrease the tax to discourage import and
encourage export, respectively, and be self-sufficient.

5) If the economy urges support in the mode of import, the government plans according to the
BOP, and divert the cash flow and technology to the unfavorable sector of the economy, and
seek future growth.

6) The balance of payment also indicates the government to detect the state of the economy, and
plan expansion. Monetary and fiscal policy are established on the basis of balance of payment
status of the country. It was provided information to banks, firms, financial institutions and
individuals which are directly or indirectly involved in international trade and finance. The
findings of this study will shed light on the factors that has significance on the balance of
payment and its effect on economic growth of Ethiopia.

1.6 Scope of the Study

The study will covers the period between 1998 up to 2020/21. This study discusses concerning
the Macroeconomic variables like FDI, import, export, inflation and GDP the effect of balance of
payment in economic growth on Ethiopia.

1.7 Description of the study area

Ethiopia, the second most populous country in Africa, could even be a one-party state with a
planned economy. For more than a decade before 2016, GDP grew at a rate of between 8% and
11% per year, one of the fastest growing states among the 188 member countries of the IMF. This
growth was fueled by government investment in infrastructure, as well as sustained progress within
the agricultural and repair sectors. Nearly 70% of Ethiopia's population continues to be employed
within the agricultural sector, but services have overtaken agriculture as the main source of GDP.
Ethiopia has the lowest level of income inequality in Africa and one in each of the lowest in the
world; with a Gini coefficient like that of the international Scandinavian countries. However,
despite progress towards eliminating extreme poverty, Ethiopia remains one of the poorest
countries in the world, due both to growth and to the coffee base. Changes in rainfall related to
global weather patterns resulted in the worst drought in 30 years in 2015-16, creating food
insecurity for untold numbers of Ethiopians. The state is heavily involved in the economy.
Ongoing infrastructure projects include energy production and distribution, highways, railways,
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airports, and industrial parks. Key sectors are state-owned, including telecommunications, banking
and insurance, and power distribution. Under the Ethiopian constitution, the state owns all land
and provides long-term leases to tenants. Title rights in urban areas, particularly in the city, are
poorly regulated and subject to corruption (Source: CIA World Fact book, (2020).
Ethiopia's trade gains are led by the service sector, primarily the state-owned carrier Ethiopian
Airlines, followed by exports of various commodities. While coffee remains the most important
foreign exchange earner, Ethiopia is diversifying exports, with commodities such as gold, sesame,
khat, livestock, and horticultural products becoming increasingly important. Manufacturing
represented only 8% of total exports in 2016, but manufacturing exports should increase in the
coming years due to a growing international presence. The banking, insurance,
telecommunications, and micro-credit industries are restricted to domestic investors, but Ethiopia
has attracted approximately US$8.5 billion in foreign direct investment (FDI), mainly from China,
Turkey, India, and thus India. From the EU; US FDI is $567 million. Investment has been made
primarily in infrastructure, construction, agriculture/horticulture, agricultural processing, textiles,
leather, and leather products.
To support industrialization in sectors where Ethiopia has a comparative advantage, such as
textiles and apparel, leather goods, and processed agricultural products, Ethiopia plans to expand
installed power generation capacity by 8,320 MW, up from a capacity of 2,000 MW, by building
three more. Large dams and expand into other renewable energy sources. In 2017, Govt. devalued
the birr by 15% to expand exports and ease the country's chronic shortage of foreign exchange.
(Source: 2020 CIA World Factbook)

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 1.8 Limitation of the study
Although the concept of balance of payments are so broad, this study limits itself only certain
functions namely Inflation, FDI, Export, Import, GDP. Some of those challenges the researcher
encounter in the study include lack of access to the right secondary data and lack of well-organized
document and lack of sufficient time and resources.

1.9 Organization of the study

The study will have five chapters. The first chapter contains the introductory part including
statement of the problem, objectives, significance of the study and scope and limitation of the
study. The second chapter presents both theoretical and empirical literature review. The third
chapter presents data sources, data collection method and methodology of data analysis. The
fourth chapter includes analysis of Ethiopian balance of payments based on inferential statistics.
Finally, chapter five gives conclusion and policy recommendations.

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 2. REVIEW OF LITERATURE
2.1 Concept of BOP
This chapter examines the literature on the effect of BOP on economic growth on Ethiopia. The
literature review discusses each theoretical and empirical review of the effect of BOP on economic
growth on Ethiopia.

Most of literatures were found in the few articles forms on same half-done aspects of BOP on
economic growth. Hossain and Alauddin (2016) examine the process of Bangladesh‘s BOP effect
on economic growth and structure of exports, imports, FDI, GDP and other macroeconomic
variables. By using econometric investigation based on the ARDL and the ARDL co-integration
techniques they empirically found BOP has had a positive effect on economic growth and have
significantly effect on economic growth in the long run.

In 1952, Hume and Alexander, in 1968 Mundell, in 1975 Johnson discussed the monetary approach
for balance of payments on economic growth. According to the theory, the balance of payments is
basically a monetary phenomenon. BOP should be analyzed regarding to the changes of money
supply (Gureech, 2014).

There is a comparative study in India and is focused more to investigate how the balance of
payments determines regarding to the exports and imports (Rana, Khurana, 2011). There is another
descriptive analysis about how the balance of payments works regarding to the export and imports
(Srivastava, Sinha, Geetu, 2016).

Another research in Kenya has examined the determinants of balance of payments using time
serious data covering 38 years. It has been based on the monetary approach for balance of
payments. It has concerned the money supply, openness of the economy, real interest rate, real
exchange rate, gross capital formation, political stability as the determinants of the balance of
payments (Gureech, 2014).

The research in Bangladesh reveals that barriers in imports should be removed slowly than
removing barriers in exports. Further it has explained that liberal polices causes to increase imports
expenditure than export income (Chowdhury, 2013).

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Research in Nigeria has examined the applicability of using monetary approach for balance of
payments with the intention of exploring the determinants of the balance of payments. It has
revealed the competent of the theory and further explained the positive relationship between
balance of payments and exchange rate (Tijani, 2014).

Economic growth is rise in the production of goods and services over a specific period of time
(year). It is primarily driven by improvements in productivity, also called economic efficiency.
Economic Growth can be measured as the percentage change in gross domestic product (GDP),
specifically the percentage change of the real GDP where increments are adjusted for the effects
of inflation. Real GDP provides a more realistic assessment of economic growth than nominal
GDP (unadjusted for inflation), because nominal GDP includes both price and economic growth.
The ratio of nominal GDP to GDP deflator is the value of real GDP (Snowdon and Vane, 2017).

2.2 Theoretical Literature

Theories of Balance of Payments are concerned with identifying possible bases of Bop, and
specifically analysis of policies for preserving BoP equilibrium. According to Johnson (1972) prior
to 1930s, no comprehensive theory of BoP was available for analysis instead there was a well
worked out theory of mechanism of international adjustment under the gold standard. This
approach is also known as the Classical Price-Specie-Flow mechanism. The mechanism assumes
that citizens in deficit (surplus) country would experience a negative (positive) real balance effect.
And, because of changed relative prices and real balances, residents of deficit country would
purchase less from abroad, and citizens of surplus country would increase their imports. This
process would continue until payments balance is restored. David Hume used this mechanism to
refute the mercantilist belief that country could achieve a persistent balance of trade surplus by the
mercantilist policies of import protection and export promotion.
2.2.1 Source of BOP Disequilibrium effect on Economic Growth
The factors leading to disequilibrium (surplus or deficit) in balance of payments could be
Economic factors (Mundell, 2017).He further illustrates the economic factor as follow:
 Structural changes in the economy,
 Changes in exchange rates (overvaluation /devaluation),
 Changes in the level of foreign exchange reserves,
 Cyclical fluctuations,

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  Inflation / deflation
 Developmental expenditure undertaken by developing countries- developing countries in
the early stage of their development imports massive capital from developed countries.
2.2.2 Theory of an Adjustment of Disequilibrium in BOP effect on Economic Growth
An adjustment of disequilibrium in BOP and its effect on economic growth can broadly divide
into two types: Automatic and Policy Induced or Deliberate (Johnson, 1977). According to
Johnson (1977) under automatic adjustment, the BOP adjustment comes automatically; it is not
brought deliberately by government policy or intervention. The burden of adjustment is on the
economic growth and market forces and not on the government. If market forces of demand and
supply are allowed to have a free play, in course of time, BOP equilibrium was automatically,
restored and economic growth. Assuming fixed or flexible exchange rates, the automatic
adjustment in BOP takes place through changes in prices, interest rates, income and capital flows.
Thus, under automatic adjustment there is no government intervention.
However, it is to be noted that automatic adjustment does not confirm to reality and has unwanted
side effects on economic growth.

Normally, in the real world the mercantilist and David Hume theory of balance of payment was
not working plus researchers engaged in studying the source balance of payment disequilibrium
and the mechanism that correct the disequilibrium (Serawit2017).

In neoclassical economic theory growth is cured mainly in the context of endogeno

us growth models like Solow (1956), Romer (1986), and others. The view of economic growth is
dependent on the growth factors to supply side of the economy i.e. supply of labor capital and over
all factor of production. These concept is logical and totally fulfils the scope of national economy
in the long run. Technological progress always has been accompanied by increment of output
really it is known as growth. However it cannot been applied to compare economic growth across
countries, because of neoclassical models do not explicitly point out the reason for the growth on
the supply side of the economy and do not justify why demand side should follow only adjust
supply side. But in Keynesian theory on the other hand demand drives the economy and supply
adjusts to it. The same critique relates to that mercantilist and David Hume theory and neoclassical
theory because cannot explain that when demand exists the supply side always follow.

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According to this approach, a country's growth rate is determined by the level of demand, and in
open economies the balance of payments is the main constraint on demand (Boyko, 2008). There
is a lore of theoretical approaches to explain the effect of balance of payment on economic growth
in Ethiopia.

Most of them are income approach, Monetary Approach, Absorption Approach, Elasticity
Approach and Ethiopia runs consistent trade deficits due to small production of exportable goods
and logistic difficulties. Main exports are gold, coffee, live animals and oilseeds. Ethiopia is a net
importer of fuel, foodstuffs and textile apparel. Main trading partners are China (18 percent of total
imports and 8 percent of exports) and Saudi Arabia (13 percent of imports and 7 percent of
exports).

A literature presented on a country faces the balance of payment problems for many reasons:
among other things constant, expansionary monetary policies, a deterioration in terms of trade,
price distortions, high debt servicing, shortage of foreign exchange reserve or a mix of these
factors. To solve these problems, many countries seek balance of payments support from outside
sources including the International Monetary Fund (IMF) and debt relief from creditors in the
framework of a planned adjustment process. Exchange rate adjustment (devaluation) is essentially
part of this adjustment process. (Yigermal, 2018).
2.3 Empirical Literature Review
Empirical studies in Ethiopia focused on the relationship between BOP and economic growth.
According to Selma and Kastrati (2013), FDI has benefits on the balance of payment in both
developing and developed nations. These benefits include technology spill over, human capital
formation support and improvement of enterprise development. Aside from host country making
the foremost of inflows of capital, FDI could even be substitute for imports of products and
services which end in improvement of BOP through this account. The paper examines the benefits
of FDI as a key component for successful and sustainable economic growth and also as a part of a
method to social improvement. The objective Kastrati paper is to highlight the most main channels
through which FDI makes a significant and exceptional impact on the economic development of
the host countries. At the same instance, it is important to recognize that, like all things, FDI is
neither good nor bad. A single discussion is devoted to the potential negative impacts of FDI flows
on host economies” (Kastrati, (2013).

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Osorio (2013) while investigating effect of balance of payments in Kenya found that the quantity
of balance of trade, foreign direct investment and charge per units were the foremost effect of
Balance of payment in Kenya. His study found that balance of payment in Kenya is both a
monetary and real phenomenon. Osorio’s (2013) study investigates the long-run effect of balance
of payment dynamics in Kenya between 1963 and 2012, using co integration and error correction
mechanism. The Osorio paper uses annual time series data for Kenya. The results of the variables
identified, confirmed that balance of payments co integrated. Osorio’s, study suggest that balance
of payments fluctuations could be caused by the level of trade balance, exchange rate movement
and foreign direct investment inflow.

In Namibia, Eita (2012) conducted a study on the balance of payment through co-integrated vector
auto regression method with variables being fiscal balance, GDP and rate. These variables were
found to be the foremost determinants of balance of payment. The paper investigates
macroeconomic determinants of the balance of payments in Namibia for the period 1999 to 2009.
The study was conducted through co-integrated vector auto regression methods. The Eita (2012)
study make known that fiscal balance, GDP and interest rate are the main determinants of balance
of payments in “[Namibia” [Eita (2012)]. Increase in GDP and interest rate causes a progress in
the balance of payments. According to Eita Study the positive effect of GDP on balance of
payments suggests that expansion of export has a positive impact on current account and the
overall balance of payments. In Namibia, a rise in GDP and rate of interest was found to cause an
improvement within the Balance of payments, while GDP policy is employed to extend exports
on improve accounting, charge per unit policy was accustomed ensure favorable capital account.

Sulaiman & Azeez (2012) studied the effect of external debt on the economic growth of Nigeria.
They were working the method of ordinary least square and error correction model to determine
the long run relationship of the endogenous and exogenous variables chosen. Suleiman & Azeez
(2012) study findings shown that the external debt has contributed positively to the Nigerian
economy.

From the literature conferred above, it will be concluded that the effect of balance of payment on
economic growth on Ethiopia may be a results of both monetary and real factors. However as
evident from the empirical literature, a little number of studies are disbursed regarding the BOP of
Ethiopia. There is a little evidence to validate the theories within the Ethiopia economy is given

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supported studies drained Ethiopia regarding balance of payment is thought about factors that may
be influencing Ethiopia external balance because of insufficiency of the Literature. The findings
on literature like Serawit (2017) indicated that some factors that positively influence balance of
payment in Ethiopia includes gross saving and gross investment are the foremost determinant of
Ethiopian balance of payments. So by considering these, we realize that these studies didn't
recognize and emphasize some variables on effects of balance of payment on economic growth of
Ethiopia.

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 2.4 Conceptual Framework
From both the theories and empirics I will infer that the BOP is the most important Macroeconomic
area where different scholars had paid attentions working on it. Based on these theoretical and
empirical facts mentioned in the above, for this study I will try to see the effect of balance of
payment in Ethiopia economy by using a 23 years’ time series data on five variables, such FDI,
Export, import, inflation and GDP to analyze. By using Mueller (2011) has laid down the balance
of payment accounting framework as follow:

BOP = FDI + (EX-IM) +GDP+ inflation …………………….. (1)

Model specification y = a +b1x1+b2x2 +b3x3 +b4x4+b5x5+ei …………… (2)

Where: y =Balance of payments

X1=Exports X3=Real GDP

X2=Imports X4=FDI (foreign direct investment)

X5= inflation a= Intercept b1, b2, b3, b4 & b5= Slopes

INDEPENDENT VARIABLE DEPENDENT VARIABLE

FDI

Export

Import
BOP

GDP

Inflation

Source: adopted by researcher 2022

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 2.5 Research Design and Approach
In this study research approach is quantitative approach. This type of research design approach is
usually highly detailed and structured and results can be easily collected and presented statistically.
Before conducting any study it is necessary to come up with a plan of the study‘s methodology
and how that plan fits with the study‘s purpose. These plans direct decisions on when, how, where
and how often to collect and analyses data.

This study will covers a long period of time, time series research designs are generally preferred
to the other types of research designs because it is easier to collect data on their variables since the
data are often readily available and they are also easy to analyses and interpret.

2.6 Research Design

The study will examines the impact of import, exports, inflation, FDI and GDP on the balance
of payments of Ethiopia from 1998-2021 using econometric analysis. The sample period for
this study will be from 1998-2021. As the success of any econometric analysis ultimately
depends on availability of appropriate data, it is, therefore, essential to discuss about the
source and nature of the data. The study will be conduct based on secondary data from
domestic and foreign sources. For the domestic sources from documents of Ministry of
Finance and Economic Development (MoFED) and the National Bank of Ethiopia (NBE)
while for external sources from World export, import Tables, World Development Indicator,
different World Bank Reports and IMF publications are utilized. This study will use the
VECM model, time series analysis to estimate the effect of export, import, GDP. inflation
rate and FDI on the balance of payment in Ethiopia through Vector Error Correction model
(VECM) between the time periods 1998-2021.This econometric analysis will be applied by
using the statistical program on the time series data that collected during the period of the
study.

2.7 Research Approach

The study will use secondary data. The secondary data for the study will obtain by past reports
& files kept by responsible organizations for further interpretation and analyses. These
important data will obtain from respected organization moreover as department of the

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centralized. This study will measure the determinants of the balance of payment in Ethiopia
using secondary time series data for the amount 1998– 2021. Using Descriptive statistics and
Econometrics technique the study will adopt a restricted VAR model. The VECM model show
that a variable FDI, Inflation, export, and import, Inflation, and GDP highly significant in
determining the balance of payment in Ethiopia.

2.8 Research Method

The study will use the secondary data that has already been collected by National bank of
Ethiopia, World Bank and IMF the study used a 23years‟ time series data” from 1998 to
2021.In this years the economy growth rates became constantly high and stable but the
balance of payments deficit is widening. Analyze this data will use statistical analysis methods
to test relationships between variables. Using VECM model statically analysis the
relationships between variables such as FDI, Inflation, export, and import, and GDP to BOP.

2.9 Data Analysis Method

The data collect are subject to method and thus the parameters are estimate using the Vector
error correlation model (VECM) model, which allows statistic aspects to be model
simultaneously. The VECM model has therefore has accustom explore the link between the
independent variables and also the Balance of Payment in Ethiopia using statistic data. The
variables first be subjected to stationary test considering that time series data are mostly non
stationary. Co-integration tests are undertaken to check for future relationships among the
variables. Diagnostic tests like autocorrelation, heteroscedasticity model specification and
normality tests undertake to check for the validity of the results.

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3. Time schedules (work plan)
Months April May June July Aguste September

Tasks weeks weeks weeks Weeks Weeks Weeks

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Proposal
development
& final draft
submissions
Further
literature
studies

Data
collection

Data
Analyses

Writing the
findings of
thesis

Submission
of final draft
thesis

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 4. Budget
No Activity measure Unit No. of Total cost in Sources of
ment days birr Fund
Cost/day

1. Transportation cost
No. of 100 180 2400 Ambo unv.
days

2 Research working materials 30,0

3 Internet
No. of 100 5 400,0
days
Ambo unv.

4 Work area Ambo unv.

Birr 50,000 12,000,

5 Periderm and transport to Ambo unv.

follow up the progress of each
data gathering 50,00

6 10% Contingency budget 2000

Total project budget in Birr

21,200

18
 5. References
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European Journal of Business and Management, pp. 213-214.

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105.

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Ethiopian National Bank. (2014/15).Annual Report. Addis Ababa: National Bank of Ethiopia.

Stock, J and Watson, M. (2001) Vector Autoregressions‘, Journal of Economic Perspectives,

15(4); 101-115.

Tijani, O. (2014) ‗Empirical Analysis of Balance of Payment Adjustment Mechanism:

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IMF. (2014). the Federal Republic of Ethiopia. Country Report No. 14/303. Washington D.C.:
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Johnson, H. G. (1972). The Monetary Theory of Balance of Payments Theory. Journal of
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Johnson, H. G. (1975). The monetary approach to balance of payments theory: a diagrammatic

analysis. Journal of International Economics. , 67-71.

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Obafemi, N. a. (1996). Impact of Exchange Rate Adjustment in Nigeria Balance of Payments

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20
 6. Appendices (I)
Table 1 data will collects in the following methods

Year Ethiopia Inflation Export Import GDP BOP Remark

FDI
Rate (%)

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

21
2020

2021

22
23
24