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Financial inclusion (FI) is widely recognized as a catalyst for sustainable development in the era of globalization, yet its effects may not be uniform. This paper examines the asymmetric impact of FI on Ethiopia’s economic growth over the period 1991–2023. A composite FI index was developed using a two-stage Principal Component Analysis (PCA) that integrates six traditional and four digital financial indicators. The Nonlinear Autoregressive Distributed Lag (NARDL) model is employed to capture short- and long-run asymmetries, while the Toda-Yamamoto causality test examines directional linkages. Empirical results reveal that positive FI shocks significantly enhance long-term economic growth, whereas negative shocks reduce it, though only positive shocks significantly spur economic growth in the short run. The findings underscore a domino-effect of FI, where FI expansion generates sustained growth momentum than the adverse impact of FI contraction. Moreover, trade openness, monetary expansion, and population growth are found to exert adverse effects on growth, while the real exchange rate contributes positively in the short run. Causality results confirm both supply-leading and demand-following hypotheses, suggesting a feedback loop between FI and growth. As FI emerges as a key driver of growth, policy implications stress the need to strengthen domestic financial regulation, promote digital financial services, invest in infrastructure and expand financial literacy. For Ethiopia and similar economies, embedding FI within broader development strategies while addressing the negative asymmetric effects of FI is essential to ensure inclusive and resilient growth.
Mohammed Jatoro Arebo (Thu,) studied this question.