Effect of International Remittance on Economic Growth: Empirical Evidence from Ethiopia

Despite the increasing importance of remittances in total international capital flows in Ethiopia, however, the short- and long-run relationships between remittances and economic growth has not been adequately studied. Existing few studies also did not resolve the nature of causality between remittances and economic growth. This study attempted to resolve these problems by employing the ARDL model and Granger causality test to investigate the short- and long-run effects and nature of causality of remittances on real GDP respectively for the period 1980 to 2015. The main results are as follows. First, remittance flow significantly improves real GDP in long run. Second, the effect of remittances in the short-run is negative. Third, there is unidirectional causality from remittances to economic growth. Fourth, short-run negative effect is higher than the long-run positive effect. A 1% increase in remittances increases real GDP by 1.13% in long run but reduces real GDP by 1.87% in the short run. This might be due to the fact that in the short run, remittances are mainly used for consumption smoothing and a high proportion of informal transfer of remittances. The policy implication of the results is that the government can extract the economic benefit of international remittance if it works on easing the remittance sending process and cost. This can be achived through devising a competitive financial system and setting coordination among government, banks, and migration offices. This can divert the remittance flows from the informal to the formal sectors.