External debt-growth nexus: Empirical evidence from Ethiopian economy

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 have 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 1970 up to 2017 with real GDP as a function of stock of public external debt, public external debt servicing, human capital, physical capital, trade openness, labor force 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. Hence, 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 real GDP. Moreover, physical capital has a significant positive impact but labor force and trade openness is 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.