The Impact of Capital Expenditure on Ethiopian Economic Growth

Abstract

This study investigates the effect of disaggregated capital expenditure on economic growth in Ethiopia over the period from 1981 to 2021. An autoregressive distributed lag (ARDL) model, combined with a Granger causality test, is used for the econometric analysis. The empirical results reveal that capital expenditure on economic development (CAEE), recurrent expenditure (RCE), and the inflation rate (CPI) have significant positive impacts on economic growth in both the long run and short run. However, capital expenditure on administrative and general development (CEAG) has a significant negative effect on economic growth in the long run. The Granger causality test further indicates unidirectional causality from economic growth (GNI) to capital expenditure on economic development (CAEE). Based on these findings, the study recommends that the Ministry of Finance should increase its budget allocations for capital expenditures aimed at economic development in order to further stimulate economic growth. Additionally, the government should implement stricter follow-up and monitoring mechanisms to ensure the proper management of budget allocations, particularly regarding capital expenditures on social development and administrative and general development. These measures are crucial for sustaining long-term economic growth in Ethiopia.