THE EFFECT OF GOVERNMENT SECTORAL EXPENDITURE ON ECONOMIC GROWTH IN ETHIOPIA: TIME SERIES ANALYSIS

ADVISOR: GEMECHU MULATU (PhD) The main objective of the study was to investigate the effect of government sectoral expenditure on economic growth over the periods of 1992 to 2022 in Ethiopia. The study uses secondary data collected from the Ministry of Finance (Mof) and National Bank of Ethiopia (NBE), World development indicator (WDI) and world economic outlook (WEO). The augmented Dickey-Fuller for unit root test was performed, and all variables are found to be stationary at the first difference level. Applying Johansen co-integration test also revealed that except industrial sector all variables are cointegrated which indicates that the presence of long-run in the study. By conducting a Vector Error Correction Model (VECM), evaluate the short-run and long-run correlations between government sectoral expenditure and economic growth in Ethiopia. The study's findings demonstrated that government expenditure on agriculture has a negative impact on economic growth and statistically significant over the long term but not in the short run. Government expenditure on infrastructure and health were found to be statistically significant and positively relationship with economic growth (RGDP) and in both the long-run and short run, but expenditure on industry effects economic growth positively insignificant in the long run and negatively effects in the short-run. The alternative method for estimating pairwise granger causality tests shows that, the movement of government expenditure on health and industrial sector to real gross domestic product (RGDP has a highly unidirectional causal relationship and at the 10% level government expenditure on health and industrial sector had a bidirectional causal relationship with real gross domestic product (RGDP). Based on the finding of this study the researcher recommended that government of Ethiopia should continue increasing sectoral expenditure in order to address the country’s increasing economic growth. Keywords: Economic growth, government sectoral expenditure, VECM, Ethiopia.