The Effect of External Finance on Economic Growth in Ethiopia: An Autoregressive Distributed Lag Modelling Approach
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Date
2022-06
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Addis Ababa University
Abstract
External financial sources are considered as one of the very important accelerators of economic growth. Development requires economic growth to alleviate poverty, and external financial sources are perceived as a necessary condition for more rapid growth. A descriptive and quantitative research approaches were conducted with the aim to examine the overall effects of external sources of finance on economic growth of Ethiopia. An Autoregressive Distributed Lag (ARDL) model was used to estimate the short and long run relationship of variables using time series data sets from 1990-2021 G.C. The results shown that external debt and grant have a positive and statistically significant while remittance and foreign direct investment have a positive but not statistically significant effect on real gross domestic product in the long-run. In the short-run, remittance and grant have positive but statistically not significant effect on rGDP at their current values. External debt has a negative and statistically not significant effect on rGDP at its current value. FDI has a negative and significant effect on rGDP both at its current and lagged value. From the empirical results it can be concluded that external finances support the process of economic growth hence there by support the process of poverty reduction in Ethiopia in the long-run. Absorptive capacity, institutional and bureaucratic quality should be improved to alleviate the inefficiencies of external finances in economic growth in the short-run and maximize the benefits earned from external financial resources.
Key words: external finance, rGDP, remittance, grant, external debt, FDI, ARDL