Trends and Causality between Economic Growth and Foreign Debt: A Comparative Analysis of the ARDL Approach in Ethiopia, Rwanda, and Sudan

Foreign debt represents a country's obligations to foreign creditors and can stimulate economic growth through facilitating investments. However, excessive debt poses risks like debt crises, debt overhang, and nation’s vulnerability to external shocks. The study aims to explore trends and causality between economic growth and foreign debt in Ethiopia, Rwanda, and Sudan from 1990 to 2022. It is hypothesizes that examining trends and causal relationships between foreign debt and economic growth is crucial for addressing those risks associated with debt crises and nation’s vulnerability to external shocks. The study applied the ARDL approach to estimate long-term coefficients alongside a descriptive technique for trend analysis. Ethiopia had an average real GDP growth rate of 6.74%, Rwanda 5.70%, and Sudan 2.61%, indicating varying GDP growth levels among the countries. Increased foreign debt adversely impacts long-term economic growth in Ethiopia, Rwanda, and Sudan. Moreover, there is a notable negative long-term connection between inflation and real GDP growth in Sudan and Rwanda, but this effect is positive in Ethiopia. Debt servicing negatively impacts Ethiopia's long-term economy, with similar but statistically insignificant effects on Rwanda and Sudan. Furthermore, Rwanda and Sudan experienced significant adverse long-term effects due to their current account deficits, with the effect on Ethiopia being negative but statistically insignificant. Government spending promotes long-term economic growth in Ethiopia and Sudan, while its effect is negative but statistically insignificant in Rwanda. The study underscores the necessity for effective debt management, moderate inflation, enhanced public spending, improved governance, and a balanced current account in Ethiopia, Rwanda, and Sudan.