Public debt management is now an integral part of overall macroeconomic management in many developing and emerging market economies. Preventing unsustainable debt accumulation and maintaining healthy fiscal profile begins with understanding its key drivers both in the short- and in the long run. This study applies structural vector auto-regressive (SVAR) model on annual time series data to study general government debt and current account dynamics in Ethiopia for the period 1980–2018. Both the impulse response and forecast error variance decomposition results confirm that fiscal balance exerts the strongest influence on both government debt and current account balance in the short run. In addition, own shock as well as shocks stemming from gross fixed capital formation and growth have significant effects on general government debt. The findings were robust to alternative data transformation, differing Choleski ordering of the model variables, and inclusion of exogenous deterministic terms that capture changes in the political landscape.
JEL classification: E60, E63, C32, H63