# Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia

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## Abstract

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## 1. Introduction

## 2. Review of the Literature

## 3. Data and the Model

#### 3.1. Block 1: The Real flow Equations

_{t}=The export transformation efficiency or scale parameter.

_{s}=The quantity of the domestic output supplied to domestic markets for domestic consumption.

_{t}=Share parameter in export transformation equation denoting the share of export volume in the total volume of domestic supply.

_{t}=Export transformation parameter (the parameter for the transformation function).

#### 3.1.1. Export Supply

#### 3.1.2. Composite Commodity Supply

_{q}=The substitution efficiency in the Armington function.

_{q}=The Armington parameter in the composite product supply function.

#### 3.2. The Import Demand

#### 3.3. The Aggregate Domestic Demand

#### 3.4. Household Consumption

_{y}= the average tax rate,

_{y}= the average saving rate by households.

#### 3.5. Block 2: The Nominal Flow—Household Income

#### 3.5.1. Aggregate Saving

_{y}= is the household saving (proportion of income saved by households),

#### 3.5.2. Government Saving

_{g}), on the other, is the difference between its total revenue and its current expenditure, which is given by Equation (9) below.

#### 3.5.3. Government Tax Revenue

_{m}= average import tariff

_{e}= average export tariff rate

#### 3.6. Primary Balance

#### 3.6.1. Net Foreign Saving

#### 3.6.2. Block 3: The Price-Exchange Rate Equation

#### 3.6.3. Domestic Import Price Equation

_{m}=World unit price of the imported commodity in Foreign Currency Unit (FCU),

_{m}=Average import tariff rate on imports,

#### 3.6.4. The Export Supply Price

_{e}= World unit price of the exported commodity in Foreign Currency Unit (FCU),

_{e}= Average export tariff rate on imports,

#### 3.6.5. The Unit Price of Domestic Aggregate Output

_{x}= Average aggregate output price (production price)

_{d}= Domestic market supply price of domestically produced output

#### 3.6.6. The Unit Composite Commodity Supply Price Equation

_{m}=The domestic market price of imports

_{d}= The domestic market price of the domestically produced commodity

_{d}=Quantity demanded composite commodity in the domestic market

_{s}= Quantity supplied of the composite commodity

#### 3.6.7. The Final Sales Price (Consumer Price)

#### 3.6.8. Block 4: The Equilibrium

#### 3.6.9. Block 5: The Dynamic Equations

_{g})

_{t}is government capital investment share in GDP at time t, Ig

_{0}is government investment GDP share at base year, and g

_{ig}is the average annual growth rate of the share of government investment in GDP.

#### 3.6.10. The Government Consumption Expenditure (G)

_{It}is government consumption expenditure t years after the base year, G

_{0}is government expenditure at the base year, g

_{g}is the average declining rate of government’s consumption expenditure as share of GDP.

#### 3.6.11. Domestic Output at Factor Cost (X)

_{t}is the quantity of domestic output GDP share at time t after the base period, X

_{0}is the volume of the output-GDP share at the base period, g

_{x}is the average rate of annual growth.

## 4. Data Analysis and Findings

#### Macroeconomic Impact Analysis

## 5. Calibration of Model Variables and Parameters

## 6. Discussion

#### 6.1. Model Accuracy

#### 6.2. Robustness of the Model

#### 6.3. Model Simulation

#### 6.4. Impact on Price

#### 6.5. Fiscal Sustainability

#### 6.6. Average Consumption Tax

#### 6.7. Impact on Macroeconomic Variables

## 7. Conclusions and Policy Implications

#### 7.1. Policy Implications

#### 7.2. Suggestions for Further Research

## Author Contributions

## Funding

## Institutional Review Board Statement

## Informed Consent Statement

## Data Availability Statement

## Acknowledgments

## Conflicts of Interest

## References

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Variable | Calibration Formula | Base Year Value |
---|---|---|

World import price (wm0) | =Pm0/Er0*(1 + tm0) | 0.953 |

World export price (we0) | =Pe0*Er0/(1 + te0) | 1.000 |

Average import tariff rate (tm0) | =SAM(R6,E2)/SAM(R10,E2) | 0.050 |

Average export tariff rate (te0) | =SAM(R7,E2)/SAM(R1,E11) | 0.000 |

Average sales tax rate (ts0) | =(SAM(R5,E2) + SAM(R8,E2))/Qs0 | 0.061 |

Average direct tax rate (ty0) | =SAM(R9,E3)/Y0 | 0.046 |

Average household saving rate (sy0) | =(Y0-Pt0*Cn0-ty0*Y0)/Y0 | 0.238 |

Government consumption (G0) | =SAM(R4,E2)/Pt0 | 0.067 |

Government transfer (tr0) | =SAM(R3,E4)/Pq0 | -0.009 |

Net foreign transfer (ft0) | =SAM(R4,E11)*Er0 | 0.021 |

Net private remittance (re0) | =SAM(R3,E11)*Er0 | 0.071 |

Government capital expenditure (Ig0) | 0.087 | |

Domestic output (X0) | =SAM(R3,E1) | 0.103 |

Variable | Calibration Formula | Base Year Value |
---|---|---|

Export (E) | = SAM(R1,E11) | 0.118 |

Import (M0) | =SAM(R11,E2) + SAM(R6,E2) | 0.312 |

Domestic good supply (Ds0) | =SAM(R3,E1)-SAM(R1,E11) | 0.799 |

Demand for domestic supply (Dd0) | =Ds0 | 0.799 |

Composite commodity supply (Qs0) | =M0 + Dd0 | 1.111 |

Composite commodity demand (Qd0) | =Qs0 | 1.111 |

Tax revenue (Tax0) | =tm0*wm0*Er0*SAM(R11,E2)+te0*Pe0*E0+ts0*Pq0*Qd0+ty0*Y0 | 0.128 |

Household Consumption (Cn0) | =SAM(R3,E2)/Pt0 | 0.661 |

Total household income (Y0) | =Px0*X0+Pq0*tr0+Er0*re | 0.980 |

Aggregate saving (S0) | =SAM(R10,E3) + SAM(R10,E4)+SAM(R10,E11) | 0.406 |

Domestic import price (Pm0) | =1 | 1.000 |

Export supply price (Pe0) | =1 | 1.000 |

Composite commodity sales price (Pt0) | =Pq0*(1 + ts0) | 1.061 |

Output price (Px0) | =1 | 1.000 |

Price of domestic good (Pd0) | =1 | 1.000 |

Exchange rate (Er0) | =1 | 1.000 |

Aggregate investment (Z0) | =SAM(R2,E10)/Pt0 | 1.000 |

Government saving (Sg0) | =Tax0-G0*Pt0-Pq0*tr0+Er0*ft | 0.383 |

Budget gap (pbt0) | =Sg0-Ig0 | 0.086 |

Parameters | Calibration Formulas | Value |
---|---|---|

Elasticity of export transformation (σ_{t}) | =previous studies and Guesstimation | 80.0 |

Elasticity of import substitution (σ_{q}) | =previous studies and Guesstimation | 0.5 |

Rho for export transformation (ρ_{t}) | =(1/σ_{t}) + 1 | 1.01 |

Scale parameter for Export transformation (α_{t}) | =X0/(δ_{t}*E0^(ρ_{t})+(1-δ_{t})*Ds0^(ρ_{t}))^(1/ρ_{t}) | 2.01 |

Share parameter for export transformation (δ_{t}) | =1/(1+(Pd0/Pe0)*(E0/Ds0)^(ρ_{t} - 1)) | 0.51 |

Armington parameter (ρ_{q}) | =(1/σ_{q})-1 | 1.00 |

Scale parameter for Armington (α_{q}) | =Qs0/(δ_{q}*M0^(-ρ_{q}) + (1-δ_{q})*Dd0^(-ρ_{q}))^(−1/ρ_{q}) | 1.68 |

Share parameter for Armington (δ_{q}) | =1/(1+(Pd0/Pe0)*(E0/Ds0)^( ρ_{q} - 1)) | 0.13 |

Variable Name | Original Value | Final Value | Final Value | Comparison | ||
---|---|---|---|---|---|---|

50% Reduction (1st Scenario) | 50% Increase (2nd Scenario) | |||||

A | B | C | D = B/A | E = C/A | F = C/B | |

E | 0.118 | 0.119 | 0.118 | 1.00 | 1.00 | 1.00 |

M | 0.313 | 0.313 | 0.312 | 1.00 | 1.00 | 1.00 |

Ds | 0.799 | 0.800 | 0.800 | 1.00 | 1.00 | 1.00 |

Dd | 0.799 | 0.800 | 0.800 | 1.00 | 1.00 | 1.00 |

Qs | 1.111 | 1.113 | 1.112 | 1.00 | 1.00 | 1.00 |

Qd | 1.111 | 1.113 | 1.112 | 1.00 | 1.00 | 1.00 |

TAX | 0.128 | 0.128 | 0.128 | 1.01 | 1.01 | 1.00 |

Cn | 0.661 | 0.662 | 0.661 | 1.00 | 1.00 | 1.00 |

Y | 0.980 | 0.981 | 0.980 | 1.00 | 1.00 | 1.00 |

S | 0.406 | 0.407 | 0.406 | 1.00 | 1.00 | 1.00 |

Pm | 1.000 | 1.000 | 1.000 | 1.00 | 1.00 | 1.00 |

Pe | 1.000 | 1.000 | 1.000 | 1.00 | 1.00 | 1.00 |

Pt | 1.061 | 1.061 | 1.061 | 1.00 | 1.00 | 1.00 |

Pq | 1.000 | 1.000 | 1.000 | 1.00 | 1.00 | 1.00 |

Px | 1.000 | 1.002 | 1.001 | 1.00 | 1.00 | 1.00 |

Pd | 1.000 | 1.000 | 1.000 | 1.00 | 1.00 | 1.00 |

Er | 1.000 | 1.000 | 1.000 | 1.00 | 1.00 | 1.00 |

Z | 0.383 | 0.383 | 0.383 | 1.00 | 1.00 | 1.00 |

Sg | 0.086 | 0.087 | 0.087 | 1.01 | 1.01 | 1.00 |

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## Share and Cite

**MDPI and ACS Style**

Ramakrishna, G.; Asefa Gizaw, B.; Paramaiah, C.; Joseph, R.; Khan, S.
Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia. *Sustainability* **2023**, *15*, 3074.
https://doi.org/10.3390/su15043074

**AMA Style**

Ramakrishna G, Asefa Gizaw B, Paramaiah C, Joseph R, Khan S.
Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia. *Sustainability*. 2023; 15(4):3074.
https://doi.org/10.3390/su15043074

**Chicago/Turabian Style**

Ramakrishna, Gollagari, Berhanu Asefa Gizaw, Ch. Paramaiah, Robinson Joseph, and Sania Khan.
2023. "Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia" *Sustainability* 15, no. 4: 3074.
https://doi.org/10.3390/su15043074