The Impact of External Debt on Economic Growth and Private Investment in Ethiopia
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Date
2010-06
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A.A.U
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 co integrated VAR model over the period 1960/61 to 2008/09. The result of
co integration test, using Johansen Maximum likelihood approach, indicates the existence of
long run relation ship 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 total debt
servicing 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 in vestment 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 will to reforms is required to spur investors' confidence for both local and foreign
investments.
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Keywords
Economic Growth, Impact of External Debt, Private Investment in Ethiopia.