Abstract:
This study examines the long run and the short run determinants of import demand for Ethiopia
using a time series data for the period 1970/71-2010/11. Both the simple descriptive analysis
and the Johansen’s cointegration approach are employed to see the impact of real GDP,
domestic price level, foreign exchange reserves and exchange rate on the import demand of the
nation. This study differs from other similar studies in Ethiopia for it employs Johansen
cointegration approach, stationary series, more variables and more recent observations. The
quantitative results from cointegration and error correction specifications show that imports of
the country are sensitive to changes in domestic output level and foreign exchange reserves both
in the long run and in the short run though their estimated elasticity coefficients are smaller in
the later case; and domestic price level and exchange rate are found to be statistically
insignificant. While only foreign exchange reserves Granger cause import in the short run, all
variables jointly Granger causes import in the long run. The estimated Vector Error Correction
Model of import is stable over the sample period that it can be used for a policy purpose. The
lower short run income elasticity of import shows the room available for import substitution
industrialization strategy in Ethiopia and the higher long run income elasticity provides an
evidence in favor of product diversification. Devaluation can also be made effective by
supplementing it with import restriction schemes.
