Abstract:
ABSTRACT
This study objective set out to analyse the External debt effect on economic growth of Ethiopia Series Analysis.Data for the study are collected from secondary sources. The variables on which data are collected include;Real Domestic Product, Stock of external debt to GDP ratio,the debt service as a ratio of export earning,Terms of trade,Official exchange rate and Rate of inflation.This paper estimates empirically the impact of external debt on economic growth in Ethiopia to determine the existence of a ‘debt overhang’ and/or ‘crowding out’ effects; using a time series data estimated for 1992 -2021. Data are analyzed using E views 12 statistical software Augmented Dickey-Fuller (ADF) was used for Unit Root test, Johansen Co-Integration Test to obtain stationarity and Vector Error Correction Model has been used to estimate a long run relationship.The ADF unit root test shows that all the variables are not stationary unless term of trade at levels but at first difference stationary. Johansen cointegration test shows long-run relationship between the variables and RGDP.
The empirical findings illustrates that real GDP is influenced negatively by the past stock of external debt, debt servicing, real exchange rate and rate of inflation but term of trade has a positive and significant effect on economic growth. The negative relationship of past stock of external debt and debt servicing with GDP indicates the existence of debt overhang problem in Ethiopian economy that mean the presence of „debt overhang effect‟ and „crowding out effect‟ in the long-run means that the efficiency of total investment will suffer as government cuts its budgets, tax returns on private investments, or uses capital inflows to service its external debt obligations.
From the findings, the study recommended that the government should minimize the reliance on external debt by diversifying the sources of finance through mobilizing its own resource domestically and enhance the exports of country and reduce imports of luxuries goods and also they should conduct those measures which minimize fiscal deficit so as to tackling the problem of severe external debt burden.
The government should minimize the dependence on external borrowing by maximizing tax revenue collection through combating the illegal usage of taxes like tax avoidance and tax evasion in order to finance both recurrent and capital expenditure and ensure economic, political stability and stop civil unrest in order to benefit from domestic, diaspora and foreign capital from foreign investors
