"The Effect of Remittances on Economic Growth in Ethiopia an ARDL Approach with Structural Break Analysis"
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Date
2026-05-03
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Addis Ababa University
Abstract
This study examined the effect of remittances on economic growth in Ethiopia using annual time-series data covering the period 2000–2024. The study employed the Autoregressive Distributed Lag (ARDL) approach to investigate both the short-run and long-run relationships between remittances and economic growth while accounting for structural breaks associated with the COVID-19 pandemic. Real Gross Domestic Product (RGDP) was used as a proxy for economic growth, whereas remittances, gross capital formation, foreign direct investment, financial development, trade openness, inflation, and a COVID-19 dummy variable were included as explanatory variables.Secondary data were obtained from the World Bank, the International Monetary Fund (IMF), and the National Bank of Ethiopia (NBE). The stationarity properties of the variables were examined using Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and Zivot-Andrews structural break tests. The ARDL bounds test confirmed the existence of a long-run cointegrating relationship among the variables. The long-run estimation results indicate that foreign direct investment and financial development have a positive and statistically significant effect on economic growth in Ethiopia. In contrast, the COVID-19 structural break variable exerts a significant negative effect on economic growth. Although remittances exhibit a positive coefficient, their effect is statistically insignificant in both the long run and short run. Similarly, gross capital formation, trade openness, and inflation were found to have insignificant effects on economic growth. The error correction model confirms a stable long-run equilibrium relationship, with a significant speed of adjustment toward equilibrium following short-run shocks.The study concludes that remittances contribute positively to the Ethiopian economy; however, their growth-enhancing impact remains limited because a substantial proportion of remittance inflows is directed toward household consumption rather than productive investment. The study recommends strengthening financial sector development, promoting formal remittance channels, encouraging productive investment of remittance inflows, and creating an enabling environment for foreign direct investment to enhance sustainable economic growth in Ethiopia.
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Remittances, Economic Growth, ARDL, Financial Development, Foreign Direct Investment, Structural Break, Ethiopia