The Relationship between External Debt and Economic Growth in Ethiopia: ARDL Approach

The paper tries to investigate the relationship between external debt and economic growth in Ethiopia for the period 1981-2019. More specifically, it tries to address the existence of inverted U-shape type relationship between external debt and economic growth. The study used Autoregressive Distributed Lag model to estimate the long run and short run estimation of the model. The long run estimation results show the existence of inverted U-shape type relationship between external debt and economic growth with a threshold level 24.76 percent (external debt as percentage of GDP) in Ethiopia for the period 1981-2019. The long run empirical results indicate that external debt has positive impact on economic growth up to the threshold level. However, if external debt goes beyond the threshold level it will retard economic growth. The long run results also indicate that government expenditure and foreign exchange reserve have insignificant effect on economic growth. Exchange rate and inflation have negative and positive impact on economic growth respectively. The granger causality test shows the presence of unidirectional causation from external debt to economic growth. The paper also suggests important policy implications that have to be taken to minimize the external debt burden problem in Ethiopia and to enhance economic growth.