Abstract:
The main purpose of this study is to empirically investigate the impact of external debt on economic
growth in Ethiopia using time series data over the period 1981-2016 by applying Auto
Regressive Distributed Lag (ARDL) model. In addition to this the paper clearly indicates trends
of Ethiopia’s external debt stock. Variables included in this study are real GDP, Investment as
percent of GDP, debt service payment, debt service payment as percent of export, debt stock as
percent of GDP and inflation. Presence of long run relationship between variables under consideration
has tested using bound test which is proposed by Pesaran. Based on the bound test it is
found out that there is a long run relationship between variables under consideration. The long
run regression result indicates negative long-run relationship between external debt stock, its
service payment and economic growth which is -0.12, -0.30 respectively. On the other hand it is
found that there is positive long run relationship between GDP and investment & inflation which
is 0.13 and 0.0024 respectively even though the coefficient of inflation is not significant. The
error correction model shows that in the cases of short-run disequilibrium the RGDP model adjust
itself
toward
its
long-run
path
by
correcting
roughly
39%
of
the
imbalance
in
each
year.
Finally the most important policy implication that comes out of this study is that the policy makers
should focus on how the country prioritizes in allocation of its GDP and resources obtained
from multilateral and bilateral creditors. Finally it is recommended that Ethiopia has to implement
debt monitoring strategy and it has to limit non-concessional borrowings so as to avoid
debt distress.
