Evidence-based exploration of macroeconomic dynamics in ensuring the sustainability of external debt: A case study of Djibouti

Abstract

The current research examines the impact of different macroeconomic indicators on Djibouti's external debt from 1990 to 2022 using the Autoregressive Distributed Lag (ARDL) model. The empirical model provides evidence that economic growth, trade, and government expenditure have a positive and significant impact on external debt. Moreover, the findings uncovered a positive relationship between Djibouti's national savings and external debt. Interestingly, FDI inflows and population growth showcased insignificant impacts on external debt during the long run. This can be explained by the lack of a business operating environment that attracts FDI and a limited number of consuming customers due to the modest percentage of the Djiboutian population. Consequently, these findings highlight the importance of sustained economic growth, trade efficiency, and fiscal prudence in managing and potentially reducing external debt. Additionally, the insight into the relationship between national savings and external debt provides a foundation for further exploration into Djibouti's borrowing and saving behaviors.