Abstract:
The study analyzed relationship between foreign aid and economic growth in Ethiopia
specifically to find out whether foreign aid complements economic growth. Secondary
sources of data was collected from Central Statistical Services, National Economic
planning commission, Ministry of finance and economic cooperation (MFEC), Ministry
of Agriculture and natural resource, Ministry of investment and trade, National bank of
Ethiopia, World Bank and International monetary fund (IMF) through internet access of
1990 to 2020/21 period. Identified Variables were Aids, Expenditure level, total debt,
Money supply, Lending interest rate, Inflation rate, FDI and Exchange rate. Data
analyzed through descriptive statistics and regression for time series analysis which is
Vector error correction model (VECM) to know how much the independent variables
explain or influence the dependent variable by using STATA in order to reduce the
possibility of getting wrong answers. The result of VECM shows that variables like Aid,
Expenditure and FDI are statistically significant at 1% and have positive impact on
economic growth. Other variables like Money supply, lending interest rate and Debt are
negatively affecting economic growth. Generally, the result shows there is both short-run
and long-run relation. Accordingly, concerned body like government, NGOs and policy
makers should improve variables with positive effects but should control variables with
negative effect on economic growth.
