Analysis of External Debt and Economic Growth in Ethiopia Economy

Economic growth speculations suggest that reasonable levels of borrowing by countries are likely to enhance its economic growth. Hence, countries at early stages of development have small stocks of capital and are unlikely to have investment opportunities with rates of return higher than those in advanced economies. This paper intended to analyse external debt and economic growth nexus in Ethiopia by using annual time series data over the period of 1990-2022. To meet it objective the study employed Autoregressive Distributed Lag (ARDL). The empirical result revealed that there is the existence of long run relationship between external debt and Economic Growth in Ethiopia and reveals that external debts stock contribute negatively to the economic growth of Ethiopia. Thus, the evidence in this study also revealed that in the long run external debt and human capital have negative and significant effect on economic growth, wile, external debt service and gross fixed capital formations has significant positive and effects on growth (real GDP) in Ethiopia. In addition, the Granger (1969) procedure of causality test result reveled that there is unidirectional causality between external debt and growth, with the causality from economic growth to external debt. In addition, in the short run effect, there is 67 percentage adjustment taking place at each year towards the long run periods. The study recommends that government of Ethiopia should create conducive environment that helps to mobilize domestic resource for developmental projects rather than to rely on borrowing of external finance only for productive and value adding projects. One of the major concern, in order to improve Ethiopia’s economic growth, is to adopt policies which will permit favorable internal productive projects includes the lowering corruption, respect rule of law, government effectiveness, legal voice and accountability, regulatory quality and political stability should be encouraged.