THE EFFECT OFILLEGAL FINACIAL FLOW ON ECONMIC GROWTH OF ETHIOPIA

Abstract

This study investigates the effect of illegal financial flow on economic growth of Ethiopia the period 1980/81-2017/18 using Johnson co-integration and granger causality test procedures. The study employs secondary data obtained from the Central Bank of Ethiopia, Central Statistical Agency (CSA) and International Monetary Fund (IMF). The long run estimation result revealed that illegal financial flow, population growth rate and terms of trade affect economic growth of Ethiopia negatively and significantly and consumption affects economic growth positively and significantly. Furthermore, the short run estimation results of VECM reveals that the deviation of the system in the short run from its steady state restored to its equilibrium by 14.5% in the long run per year or speed of adjustment from the shock exists toward the long run equilibrium is 14.5% annually or the dis equilibrium correct (adjust) itself by 14.5% in the short run. The Granger Causality test results show that illegal financial flow, consumption and terms of trade granger cause real GDP. However, gross capital formation and population growth rate do not cause real GDP in Ethiopia. Generally, we conclude that illegal financial flow has significant negative influence on economic growth and its trend has been increasing on average about 7.14 million USD annually, which lose to the Ethiopian economy. Based on the research findings, we recommend the following to be made such controlling and auditing mechanisms for trans-boundary trade activities, creating effective institution and building collaborative.