COVID-19 Pandemic Uncertainty Shock Impact on Macroeconomic Stability in Ethiopia
Abstract
This study investigated the impact of COVID-19 pandemic uncertainty shock on the macroeconomic stability in Ethiopia in the short run period. The World Pandemic Uncertainty Index (WPUI) was used a proxy variable to measure COVID-19 Uncertainty shock effect. The pandemic effect on core macroeconomic variables like investment, employment, prices (both food & non-food prices), import, export and fiscal policy indicators was estimated and forecasted using Dynamic Stochastic General Equilibrium (DSGE) Model. The role of fiscal policy in mitigating the shock effect of coronavirus pandemic on macroeconomic stability is also investigated. The finding of the study reveals that the COVID-19 impact lasts at least three years to shake the economy of Ethiopia. Given that the Ethiopian economy heavily relies on import to supply the bulk of its consumption and investment goods, COVID-19 uncertainty effect starts as supply chain shock, whose effect transmitted into the domestic economy via international trade channel.
The pandemic uncertainty shock effect is also expected to quickly transcend to destabilize the economy via aggregate demand, food & non-food prices, investment, employment and export shocks. The overall impact of COVID-19 pandemic uncertainty shock is interpreted into the economy by resulting under consumption at least in the next three years since 2020. Therefore, the government is expected to enact incentives/policy directions which can boost business confidence. A managed expansionary fiscal policy is found key to promote investment, employment and to stabilize food & non-food prices. A particular role of fiscal policy was identified to stabilizing food, transport and communication prices. The potency of fiscal policies in stabilizing food, transport and communication prices go in line with the prevailing reality in Ethiopia where government has strong hands to control those markets directly and/or indirectly.
This suggests market failure featuring COVID-19 time, calling for managed interventions of governments to promote market stabilities. More importantly, price stabilization policies of the government can have spillover effects in boosting aggregate demand by spurring investments (and widening employment opportunities) in transport/logistics, hotel & restaurant, culture & tourism and export sectors in particular.
References
[2] Baldwin, R., and Weder di Mauro B. 2020. Economics in the Time of COVID-19, Centre for Economic Policy Research (CEPR), CEPR E-Book, ISBN: 978-1-912179-28-2, CEPR Press, London, UK.
[3] Bruton, B. 2020. What does the coronavirus mean for Africa? REUTERS.
[4] Denis, M., Vandeweerd, V., Van der Vliet, D. 2020. Overview of Information Available to Support the Development of Medical Countermeasures and Interventions against COVID-19, Transdisciplinary Insights - Living Paper, Paper version: dd. 23 March, 2020.
[5] Doan, T., Litterman, R., and Sims, C. 1984. Forecasting and conditional projection using realistic prior distributions, Econometric Reviews, 3(1): 1-100.
[6] Fetzer, T., Hensel, L., Hermle, J., Roth, C. 2020. Coronavirus Perceptions and Economic Anxiety, First version.
[7] Ferede, T., Diriba, G., and Beyene, L.M. 2020. The economy wide impact of the COVID-19 in Ethiopia: Policy and Recovery options. Ethiopian Economics Association (EEA), June.
[8] Geda, A. 2020. The Macroeconomic and Social Impact of COVID-19 in Ethiopia and Suggested Directions for Policy Response, Preprint.
[9] Jordà, Ò., Singh, S.R., Taylor, A.M. 2020. Longer-Run Economic Consequences of Pandemics, Federal Reserve Bank of San Francisco Working Paper 2020-09. https://doi.org/10.24148/wp2020-09
[10] Kuikeu, O. 2020. Economic impact of COVID-19 in Cameroon: An empirical assessment with the VAR Methodology. April.
[11] Litterman, R.B. 1979. Techniques of forecasting using vector auto-regressions, Working Papers 115, Federal Reserve Bank of Minneapolis.
[12] Liu, S. 2020. The Butterfly Effect: Coronavirus may Re-define the Global Currency Landscape. Harvard Kennedy School.
[13] Miranda-Agrippin, S., and Ricco, G. 2018. Bayesian Vector Auto-regressions, Bank of England and CFM and University of Warwick and OFCE – SciencesPo.
[14] Ozili, P. 2020. Covid-19 Pandemic and Economic Crisis: The Nigerian experience and structural causes. https://ssrn.com/abstract=3571085
[15] Pinshi, C.P. 2020. COVID-19 uncertainty and monetary policy, University of Kinshasa, May.
[16] Watanabe, T. 2020. The Responses of Consumption and Prices in Japan to the COVID‐19 Crisis and the Tohoku Earthquake. JSPS Grant‐in‐Aid for Scientific Research (S), Central Bank Communication Design, working paper series no.020, March.
[17] Yeshineh, and Mainar Causapé, A.J. 2020. Ethiopia: Input-Output Table and Social Accounting Matrix 2015/16, Policy Studies Institute (PSI), Addis Ababa, Ethiopia.
[18] Weldesilassie, A.B., and Woldehanna, T. 2020. The Economic Implications of COVID - 19 in Ethiopia and Policy Measures, Policy Studies Institute (PSI), Addis Ababa, Ethiopia.
*** African Union (AU). 2020. Impact of the Coronavirus (COVID-19) on the African Economy, March.
*** Africa News. 2020. Coronavirus 'corroding' sports betting in East Africa, March.
*** FDRE Ministry of Finance (MoF). 2020. COVID-19 Multi-Sectorial Preparedness & Response Plan, Addis Ababa. April.
*** International Labor Organization (ILO). 2020. COVID-19 and the world of work: Impact and policy responses, ILO Monitor 1st Edition, 18 March.
*** International Monitory Fund (IMF). 2018. Country Report No. 18/354, The Federal Democratic Republic of Ethiopia, 4. December.
*** POLITICO Magazine. 2020, Coronavirus Will Change the World Permanently. Here’s how: A crisis on this scale can reorder society in dramatic ways, for better or worse. Here are 34 big thinkers’ predictions for what’s to come, March.
*** The Economist Magazine. 2020. The 90% Economy that Lockdowns will leave Behind, April.
*** United Nations Conference on Trade and Development (UNCTD). 2020. The Covid-19 Shock to Developing Countries: Towards a “whatever it takes” program for the two-thirds of the world’s population being left behind, March.
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.