Fiscal Deficits and the Monetary Sector in Ethiopia: Implications for Reform

Abstract

Large macroeconomic disequilibria characterized by a deteriorating current account, inflation and rising debt burden have been major features of the Ethiopian Economy for many years. Fiscal policy can be used as tool of sustained growth and a means to avoid such imbalances. This paper looks into the relationship between fiscal deficits and money supply, price level and public debt. An examination of Ethiopian data for the period 1976-1991 shows that fiscal deficits have been at the root of monetary expansion, inflation and increasing debt burden. The implication is that in the short to medium period, such imbalances may be redressed through setting limits on government bank and external borrowing while simultaneously reforming the expenditure side of the budget.