The Effect of Tourism on Current Account Balance in Ethiopia

Abstract

Ethiopia is one of the countries that experience a persistent current account deficit, despite it has recently realized a steady double-digit economic growth. International tourism can serve as an alternative means to minimize current account deficit through generating foreign currency to the economy. Therefore, this paper investigated the effect of tourism on current account balance in Ethiopia. Besides, causality between tourism and current account balance is tested. Further, this study has tried to identify the main challenges of tourism development sector in Ethiopia. ARDL methods of co-integration and Granger causality test was used to explore the relationship and causality between the variables, respectively. The result from the econometric analysis confirmed that tourism industry positively and significantly affects current account balance, implying it is an alternative means to minimize current account deficit through generating foreign currency to the economy. The pair-wise Granger-causality test also confirmed the existence of unidirectional causality that runs from tourism receipt to current account balance. However, the trend analysis and qualitative analysis clearly showed that the tourism sector has been challenged by many factors. Lack of infrastructures development, poor and inadequate tourist facility (quality and adequacy); lack of qualified manpower; lack of peace and security; lack of stakeholder’s collaboration; inadequate promotional or marketing works and lack of awareness and low participation of the community are among the major challenges mentioned by the respondents. Hence, coordinated and integrated public intervention aimed at further developing tourism sector and curbing the existing bottlenecks in the sector is necessary to fully utilize the constructive role of tourism industry in minimizing the persistent current account deficit in Ethiopia.