Effect of Public External Debt on Economic Growth in Ethiopia

Abstract

This study is an effort to determine the effect of public external debt on economic growth in Ethiopia. In doing this, the study used an Autoregressive Distributive Lag model (ARDL modeling) to analyze Ethiopian data from 1981 to 2014 with GDP per capita as a function of stock of public external debt, public external debt servicing, human capital, physical capital, labor force, trade openness and policy change dummy. The empirical result reveals that in the long-run high level of stock of public external debt has a significant negative effect on economic growth.  Therefore, there is an evidence for the “Debt overhang” and “Conventional view” of public debt in Ethiopia. On the other hand, public external debt servicing has a negative coefficient but insignificant in affecting economic growth. That is, there is no evidence for the “Crowding out” effect of public external debt in the country. Besides, human capital is found to have negative impact on GDP per capita. Moreover, Labor force has a significant positive impact but private capital formation and trade openness are insignificant in explaining the Ethiopian economy. Hence, the study’s implication is that the government and policy makers should improve the existing policies on public external debt management through investing in productive activities and sectors. Moreover, the government should implement structural change, public sector and tax reform, and diversifying the economy so as to generate more revenue in domestic.

Keywords: ARDL Approach, Economic Growth, Public external debt, Public external debt Servicing

JEL Code: G29

DOI: 10.7176/JESD/10-13-04

Publication date:July 31^st 2020