The Relationship between Public External Debt and Economic Growth in Ethiopia: Evidence from ARDL Approach to Co-integration
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Date
2016-06
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Addis Ababa University
Abstract
This study is an effort to determine the effect of public external debt on economic growth in
Ethiopia. Specifically, the study tries to answer the questions whether stock of public external
debt and public external debt servicing has any significance effect on economic growth of the
country and it also determined the magnitude of the effect. In doing this, the study used an Auto
Regressive Distributive Lag model (ARDL modeling) to analyze Ethiopian data from 1981 to
2014 with GDP per capita as a function of stock of public external debt, public external debt
servicing, human capital, physical capital, labor force, trade openness and policy change
dummy. The empirical result reveals that in the long-run high level of stock of public external
debt has a significant negative effect on economic growth and it poses great challenges on the
economy. Therefore there is an evidence for the “Debt overhang” and “Conventional view” of
public debt in Ethiopia. On the other hand public external debt servicing has a negative
coefficient but insignificant in affecting economic growth and there is no evidence for the
“Crowding out” effect in the country. In the long-run result, human capital is also found to have
negative impact on GDP per capita. Moreover, Labor force has a significant positive impact but
private capital formation and trade openness are insignificant in explaining the Ethiopian
economy. Hence, this study recommended the government of Ethiopia and local policy makers
to improve the existing policies on public external debt management such as to invest in
productive activities and sectors, to implement structural change, public sector reform and tax
reform, should try to minimize the dependence on external borrowing through diversifying the
economy so as to generate more revenue in the domestic.
Key phrases: Public external debt, Public external debt servicing, ARDL and economic
growth.
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Public external debt, Public external debt servicing, ARDL and economic growth