Does External Debt Cause Economic Growth? The Case of Ethiopia

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Addis Ababa University


The study examines the long run and short run relationship between external debt and economic growth in Ethiopia over the period of 1970/71-2010/2011 using Autoregressive Distributed Lag Model (ARDLM) or bound testing approach. The empirical results indicated that the relationship between external debt and economic growth both in the short run and long run is significant with a negative sign. This indicates the existence of a debt overhang problem in the country. But, the debt servicing variable has a negative but insignificant effect on economic growth. As a result there is no evidence of crowding out effect since it is not significant. Moreover, there exists unidirectional causality from external debt to economic growth. Therefore, external debt is found to have a negative effect rather than causing economic growth in Ethiopia for the period under study. Hence, in order to tackle the problems of external debt, there should be close monitoring and consistent debt management strategies so as to avoid the misallocation and mismanagement of external debt.



Does External Debt Cause Economic Growth