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The Impact of External Debt on Economic Growth and Private Investment in Ethiopia: A Vector Auto Regressive Approach

Abstract: 

Ethiopia, One Of The Highly Indebted Poor Countries, Has Continued To Experience Difficulties In Managing And Servicing Its Huge Stocks Of External Debt. Consequently, There Have Been Significant Net Outflow Of Resources To Meet The Debt Obligations. Hence, The Main Focus Of The Study Is To Examine The Impact Of External Debt On Economic Growth And Private Investment Of Ethiopia Using A Cointegrated Var Model Over The Period 1960/61 To 2008/09. The Result Of Cointegration Test, Using Johansen Maximum Likelihood Approach, Indicates The Existence Of Long Run Relationship Among The Variables Entered In Both Growth And Private Investment Models.
The Estimated Short Run Models Points Out The Current Level Of External Debt Flow Has A Positive While The Past Debt Accumulation Has A Negative Impact On Economic Growth And Private Investment Of Ethiopia. This Confirms The Existence Of Debt Overhang Hypothesis In The Ethiopian Economy. However, In The Long Run Both External Debt Stock As Well As Debt Servicing Ratio Have A Negative And Significant Impact On Economic Growth And Private Sector Capital Accumulation Activity. On The Other Hand, Debt Cancellation Appears To Have A Positive Contribution To Economic Growth And Private Investment Of Ethiopia. Hence, Mitigate The Problems Of External Finance, External Borrowing Decisions Must Be Linked To A General Policy Frame Work That Will Guarantee Profitability Of Invested Funds And Generation Of Sufficient Foreign Exchange Earnings For External Debt Servicing. Besides, Creating Credibility Including Political Determination To Reforms Is Required To Spur Investors' Confidence For Both Local And Foreign Investments

Corporate Author: 
Getnet Alemu & Worku Gebeyehu (Editor) & Ethiopian Economic Association/Ethiopian Economic Policy Research Institute
Publisher: 
Ethiopian Economic Association (EEA)
ISBN/ISSN: 
978-99944-54-24-2
Primary Descriptors: 

Private Investment

Secondary Descriptor: 

External Debt

Geographic Descriptors: 
Ethiopia
Cataloge Date: 
02/27/2013
Broad Subject heading: 
Economic Growth
Call Number: 
330.963 PRO 2012
Serial Key Title: 
Proceedings of the Ninth International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Volume: 
II
Publication date: 
2013-06-27 23:12:00
Forum or Discussion date: 
2013-02-27 15:43:20
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Book
Current frequency: 
Annualy