The Determinants of Ethiopia’s Balance of Payment: An Analysis of Disequilibria and Policy Implications
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Date
2025-07-30
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AAU
Abstract
Ethiopia has been suffering chronic balance of payments (BOP) disequilibrium for decades, yet
few studies have looked at the combined role of structural issues, policy shocks, and governance
concerns, above all, political corruption, to explain this imbalance comprehensively. The present
study fills the gap by analyzing the principal determinants of Ethiopia's BOP imbalance between
1974 and 2023 with a special focus on economic, structural, and policy-related variables across
three political regimes. Using an Autoregressive Distributed Lag (ARDL) specification, the
results from the analysis relied on data obtained from the National Bank of Ethiopia, World
Bank, Global Economy, and government and research outlets. The long-run findings show that
the exchange rate is statistically significant by itself, and hence currency depreciation is helpful
in increasing the BOP in the long run. They have powerful impacts in the short term. FDI,
external debt, inflation, and exchange rate as well as past BOP levels have powerful short-run
impacts. Policy actions and anti-corruption measures also have negative short-run impacts
accounting for transitional adjustment costs. The robustness of the model is verified by
diagnostic tests. The results stress the pivotal role of exchange rate management to bring about
long-run external balance and imply that exchange rate flexibility can be used to strengthen
export competitiveness. Added to this, careful management of FDI and external debt can remove
short-run external imbalances. Policy and governance reforms are mandated nonetheless, but
these need to be sequenced properly in order not to trigger short-run volatility yet achieve
long-run BOP sustainability