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An Empirical Analysis of External Debt and Economic Growth in Ethiopia: a Vector Auto Regressive Approach


This paper analyzes the relationship between external debt and Economic Growth in Ethiopia for the period 1981/82 – 2014/15 using annual data obtained from the National Bank of Ethiopia and Ministry of Finance and Economic Cooperation and employing a Vector Auto Regressive econometric technique for analysis. The result shows that there is no evidence of the theoretically hypothesized debt overhang effect of external debt on growth for the case of Ethiopia during the period, however, there is an indication of ‘crowding out’ effect of debt service on investment. This is because the returns from investment take a long time and debt service takes resources from other sectors limited foreign resources. The absence of debt overhang effect does not mean that the government should continue depending on foreign resources for development purposes, as it is both risky and unreliable. So, policies that encourage increased domestic saving, raise export earnings and create conducive environment for inflow of FDI should be given priority to finance the development activities of the country by reducing the reliance of the economy on external debt. Moreover, to mitigate the crowding out effect of debt service on investment wise and proper utilization of external resources should also be undertaken.

Corporate Author: 
Ethiopian Economics Association (EEA)
Ethiopian Economics Association (EEA)
Primary Descriptors: 

 Debt Service,  Crowding-out effect

Secondary Descriptor: 

Economic Growth, Debt Overhang

Geographic Descriptors: 
Cataloge Date: 
Broad Subject heading: 
External Debt
Call Number: 
330.0963 PRO 2017
Serial Key Title: 
Proceedings of the Fourteenth International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Publication date: 
2017-06-01 00:00:00
Conference Place: 
Addis Ababa, EEA Multi-purpose Building Conference Hall
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Current frequency: 
Thematic area: 
Macroeconomics, Trade and Industry Related Topics
Conference date: 
July 21 – 23, 2016