Foreign Aid and Economic Growth in Ethiopia (Application of Vecm)

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.