The Role of Foreign Aid for Economic Development of Ethiopia

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Addis Ababa University


The research has tried to investigate imperially, the contribution of official development assistance in filling the resource gaps of Ethiopia. For this purpose, quantitative data has been gathered, organized and analyzed from the year 1990 to 2019 G.C. Co-integration test and Error Correction Model was applied in order to investigate the long run and short-run relationship between dependent and the independent variables. Accordingly, the research investigate the reality of Ethiopia having: the saving investment gap for the year 2005 – 2020 at average was 14.56 % percentage of GDP, the trade gap for the year 2005 – 2020 in average was 17.06 % percentage of GDP and average fiscal gap (budget deficit) from year 1993 to 2018 including the grant received was 12.10 Billion Birr. The empirical results from econometrics model reveal that foreign aid has positive impact on economic growth in both long run and short run and statistically significant at 1 percent significant level. The positive and significant error correction term shows that the extent to which ODA deviate from the long run steady state path after a certain shock, which, is 0.329 percent each year. The important policy implication of the study proposes that more effort has to be made to improve the negative impact of interest payment on external debt, mainly because of existence of poor institutional arrangement, which accumulate unpaid sums that shall create burden to the future repayment schedule and doubt on potential donors. the fund to unproductive sectors. The government has to ensure, a close monitoring and consistent management strategies, which is used to avoid mismanagement problems specially, for timely repayment strategy. Finally, the research paper tried to realize that the absorption capacity using assessment on rate of increase in saving and investment through the last thirty years, and the mere existence of the resource gap in every years and time-to-time increase of the management capacity of institutions.



Economic Growth, Foreign Aid, interest payment on external debt, absorption capacity, Ethiopia