Determinants of Balance of Payments in the Ethiopian Economy: ARDL Model

Abstract

The balance of payments is a crucial indicator of a country's economic performance in the global economy. As a result, this paper attempts to empirically analyze the macroeconomic variables that determine the movements in Ethiopia's overall Balance of Payments (BOP) accounts. The analysis utilizes the ARDL model estimation technique and incorporates the Error Correction Model (ECM) to account for short-run adjustments and long-run equilibrium dynamics. Time series data from the period 2000 to 2021 is employed for the analysis. This research study examines the factors influencing the Balance of Payments (BOP) in the short and long run. The analysis focuses on variables such as foreign direct investment (FDI), inflation rate, interest rate, exchange rate, money supply, fiscal balance, external debt, and GDP. Using a short-run dynamic equation model, the study finds that FDI, inflation rate, interest rate, exchange rate, and money supply have a statistically significant impact on the BOP in the short run. However, variables such as fiscal balance, external debt, and GDP are found to be statistically insignificant. In the long run, all variables except fiscal balance and external debt are statistically significant in their influence on the BOP. The findings highlight the importance of considering FDI, inflation rate, interest rate, exchange rate, and money supply when analyzing the BOP and suggest that policymakers and researchers should incorporate these variables in their strategies to maintain a sustainable and favorable BOP position.