Awoke Seyoum Tegegne* and Wosenie Gebireamanuel Hailu
Background: The Ethiopian government wants to decrease and control tobacco usage and reduce it in the near future, which is adopted from the WHO plan. Identifying the association or relationship between raw material costs, amount of tobacco production, total sales value and tax paid about tobacco product is important to achieve the government’s tobacco usage reduction plan. The study aimed to examines the relationship between tobacco product, raw material cost, sale value and tax paid in Ethiopia using annual time series data from the 1996 to 2018.
Method: The study used the best popular method of Augmented Dickey Fuller and Phillips Peron unit root test for stationarity test. Johansen cointegration test was used to determine the number of co-integrating equation. The co-integration test used to show the presence of long run relationship and Vector Error Correction Model (VECM) is appropriate than pure VAR. Granger causality, impulse response functions and forecast error variance decompositions were applied.
Result: The ADF and PP unit root test showed that all series are integrated of order one that is stationary after first differencing. Johansen cointegration test revealed there are two co-integrating equation. The VECM show product is affect by itself only but the other variables were affected by whole variables at first and second lagged values. VEC Granger causality showed that there is uni-directional causality between product and the others variables but not the reverse. Raw material cost, sale value and tax all have bi-directional causality between each other. The impulse response analysis show that shock of product and sale value leads to mix of negative and positive response of product but the shock of raw material cost and tax leads to positive product response. Similarly, the other variables shock has effect to each other. Forecast error variance decompositions shows that the portion of the variance in the forecast error for each variable due to innovations to all variables in the system. This proportion may decrease or increase according to shock effect on the endogenous variable.
Conclusion: From the model there exist a long run and short run relationship among the variables. Each variables shock has influence on the other variable in the system and there is Uni-directional a bi-directional causality among the variables. Seven years ahead forecasting was done and has increasing trend in certain manner. Tax has negative long run and short run relationship with sale value and it recommended using tax to tobacco control.
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