Domestic Saving and Economic Growth Nexus in Ethiopia: Contemporary Evidence from Autoregressive Distributive Lag Approach

Abstract

Accumulated savings serve as a foundation for capital stock, which subsequently foster an
increase in investment and output, and ultimately promotes economic growth. Accordingly, this
paper aims to analyze the effect of domestic saving on economic growth in Ethiopia, utilizing
annual data from 1981 to 2023 and employing the Autoregressive Distributive Lag (ARDL)
approach. Prior to conducting the regression analysis, the unit root and bounds cointegration
tests indicate that the study variables exhibit mixed orders of integration, thereby validating
the suitability of the ARDL approach and confirming the existence of long-term cointegration
among them, respectively. Furthermore, the regression results reveal that human capital,
exports of goods and services, and the average lending interest rate are significant contributors
to economic growth in both the long and short run. Conversely, while the money supply robustly
enhances growth only in the long term, domestic savings and economic reforms contribute
positively, whereas the inflation rate significantly hinders economic growth in the short term.
Therefore, it can be inferred that economic growth reacts differently to variations in domestic
savings over the long and short term. Lastly, the coefficient of the Error Correction Term is
negative and significant as expected, affirming the presence of a long-run relationship among
the study variables. Furthermore, various post-estimation diagnostics and parameter stability
tests have confirmed that the results are reliable for meaningful interpretation and validate the
robustness of the empirical model. Consequently, this study underscores that the Ethiopian
government should formulate and implement policies aimed at enhancing human capital,
increasing both public and private savings, diversifying exports, and curbing inflation to
expedite economic growth in Ethiopia.