The Effect of Foreign Aid on Economic Growth in Ethiopia: Evidence from an ARDL Model (1991-2023)

This study investigates the impact of foreign aid on Ethiopia’s economic growth over the period 1991-2023 using an Autoregressive Distributed Lag (ARDL) model. Despite being one of the largest recipients of official development assistance (ODA) in Sub-Saharan Africa, the effectiveness of aid in fostering sustainable growth in Ethiopia has remained a subject of debate. The study employs annual time-series data from the World Bank and the National Bank of Ethiopia, incorporating real GDP as the dependent variable and foreign aid as the key explanatory variable, alongside foreign direct investment (FDI), exchange rate, human capital, labor force participation, and political stability as additional regressors. The results reveal that foreign aid exerts a positive and significant effect on Ethiopia’s economic growth in the long run, complementing the role of FDI and human capital development. In the short run, however, the impact of foreign aid is relatively weaker and sometimes statistically insignificant. The findings suggest that foreign aid can be an important driver of economic growth in Ethiopia, provided that institutional quality and macroeconomic management are strengthened. Additionally, this research enriches the literature by integrating institutional quality and macroeconomic variables in a systematic ARDL framework, thus offering policy-relevant insights into Ethiopia’s growth trajectory.