Public External Debt, Capital formation and Economic growth in Ethiopia

Abstract

This study examined the nexus between public external debt, Capital formation and economic growth in economy of Ethiopia during the last recent four decades. The purpose is to identify the existence of cause and effect relationship between external public debt, Capital formation and Economic growth. To this end, secondary time serious macroeconomic data for the period under review were collected from ministry of Finance and Economic Development and African Development Indicators of World Bank data base and analyzed by qualitative description and quantitative econometric techniques. The result from qualitative and quantitative analysis has shown that Ethiopia were under serious external debt problem until 1990’s. Its good name was affected and access to external concessional borrowing window was denied. There were debt overhang, crowding out and liquidity problems birthed out of unfavorable policy followed by Dergue regime which include large borrowing from multilateral, bilateral and commercial creditors to finance war, in appropriate macroeconomic policy and channeling of resources for inefficient public undertakings which led to very low rate of return. The present government which inherited a mounting debt, fragile macro economy and very unstable country highly vulnerable to distress and conflict, with the help of  IDA and IMF established a stable macroeconomic environment, adopted comprehensive debt management strategy, utilized available debt relief optimally, improved debt indicator ratios and brought  the country’s external debt from un sustainability to sustainability. According to the quantitative analysis public external debt as percentage of GDP has a negative and significant relationship with real GDP in the long run and no significant effect in the short run. On the other hand external debt as percentage of GDP has positive and significant effect on capital formation in the long run and negative in the short run.

Keywords: Public External Debt, Economic growth, Capital formation, and Debt distress