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\begin{document}

\title{THE EFFECT OF COVID-19 PANDEMIC ON MACROECONOMIC STABILITY IN ETHIOPIA}



\author[1]{Habtamu Demiessie}%
\affil[1]{Jigjiga University}%


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  \date{June 14, 2024}


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\begin{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 VAR estimate indicates that COVID-19 uncertainty shock results a
massive rise in import in the six months following the outbreak of the
pandemic. The finding in this regard is expected, as the pandemic
triggers massive demand in food and pharmaceuticals, for which Ethiopia
is import dependent on both items. In the next two years, however, the
import bill of Ethiopia shows a decline. Reduction in aggregate demand
(both consumption \& investment expenditures) is one explanation for
decline in import size in 2013 and 2014 E.C.

The price dynamics as forecasted in the upcoming three years in Ethiopia
tells the direction of impacts of COVID-19 uncertainty shock to shake
the macroeconomic order. The findings in this regard revealed the
structural breakups of Ethiopian economy, characterized by its inability
to withstand shocks. As signaled in forecasted price dynamics on both
food and non food price indices, COVID-19 was a supply shock in its
first time impact, but quickly transpasses to demand shock. And in the
next few years the demand shock outweighs the supply shock.

The results of estimations indicate that food prices to sky rocketed at
least until the end of 2014 E.C (2021/22 E.F.Y). On the other hand,
except communication \& hotel \& restaurant prices, other components of
non food price indices show a slump. The decline in non food price level
is a clear showcase of under consumption characterizes the economic
order in Ethiopia in the coming three years.

COVID-19 uncertainty shock puts huge loss in the investment sector in
Ethiopia at least in the coming two years 2013 and 2014 E.C
(2020/21-2021/22). In this regard, the pandemic effect transmitted to
shake investment expenditure via the length of the pandemic period
itself and export performances, both of which are exogenous shocks.

The study identified that general under consumption features the
Ethiopian economy in the next couple of years. Therefore, the government
is expected to enact incentives/policy directions which can boost
business confidence. A managed expansionary fiscal policy is found to be
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. 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.%
\end{abstract}%



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