Time Series Analysis of Sustainable Debt and Economic Growth in Ethiopia

This study investigates the dynamic relationship between sustainable debt and economic growth in Ethiopia over the period 1992–2022. Utilizing the Augmented Dickey-Fuller (ADF) test, Johansen cointegration approach, and an Autoregressive Distributed Lag (ARDL) model, the research explores both short-run and long-run effects of key macroeconomic variables, including GDP, tax revenue, government expenditure, exchange rate, total debt, and foreign direct investment (FDI). The results reveal strong GDP persistence, indicating that past economic performance significantly influences current growth. A higher debt-to-GDP ratio is found to negatively affect growth, underscoring the importance of prudent debt management. The debt-to-revenue ratio and tax revenue exhibit short-term contractionary effects but contribute positively to growth in the long run, reflecting the delayed benefits of fiscal consolidation and revenue mobilization. Government policy changes and the COVID-19 pandemic had significant lagged negative impacts, highlighting the economic costs of structural adjustments and global shocks. These findings align with existing literature on fiscal sustainability and provide critical insights for policymakers aiming to balance debt management with growth objectives. The study concludes that sustainable debt practices, supported by effective fiscal policy, are essential for Ethiopia’s long-term economic development and resilience.