External debt-growth nexus: Empirical evidence from Ethiopian economy

Main Article Content

Wondatir Atinafu http://orcid.org/0000-0002-8536-1424


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.

Article Details

How to Cite
ATINAFU, Wondatir. External debt-growth nexus: Empirical evidence from Ethiopian economy. Economics, Management and Sustainability, [S.l.], v. 5, n. 2, p. 6-27, nov. 2020. ISSN 2520-6303. Available at: <https://jems.sciview.net/index.php/jems/article/view/97>. Date accessed: 01 dec. 2020. doi: https://doi.org/10.14254/jems.2020.5-2.1.


Baba, I. (2013). Foreign direct investment inflows and economic growth in Ghana. International Journal of Economic Practices and Theories, 3(2).
Decai, T., & K, B. (2012). China – Africa foreign trade policies: the impact of China's foreign direct investment (FDI) flow on employment of Ghana. 2012 International Conference on Future Energy, Environment, and Materials. 16, pp. 553-557. Energy Procedia.
Dr. John, A. (2005). What has been the impact of foreign direct investment in Ghana?. IEA Policy Analysis. The Institute of Economic Affairs, 1(9).
Francis, G., Mary, O., & Jonatha, K. E. (2013). Foreign direct investment and gross domestic product in Ghana. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(3), 256-265.
George, O.-A., James, A., & Peter, K. (2013). Foreign direct investment: A journey to economic growth in Ghana - Empirical Evidence. International Business & Economics Research Journal, 12 (5).
IMF. (1993). Balance of Payments Manual, 5th edition. Washington D.C: International Monetary Fund.
Joseph, Y. A. (2015). Chinese Investment in Ghana. Argumenta Oeconomica Cracoviensia, (13), 61-81.
Justice, G., & Gloria, C. (2012). Determinants and effects of foreign direct investment in Ghana – Review of literature. Developing Country Studies, 2(11).
Kusi, G. (2013). Regulatory Framework for Investing in Ghana. Ghana Investment Promotion Centre.
Kwasi, B.-G., & Yao, L. (2017). FDI trends in Ghana: The role of China, US, India and South Africa. Eurasian Journal of Economics and Finance, 5(2), 1-16.
OECD. (2008). OECD Benchmark definition of foreign direct investment. In OECD, OECD Benchmark Definition of Foreign Direct Investment (4th ed., pp. 62-64). Paris: OECD.
Prince, A., & Victor, O. (2014). Foreign Direct Investment (FDI) Inflows into Ghana: Should the Focus Be on Infrastructure or Natural Resources? Short- Run and Long -Run Analyses. International Journal of Financial Research, 5(1).
Romer, P. (1986). Increasing returns and long run growth. Journal of Political Economy, 94(5), 1002-1037.
Samuel, K. F. (2012). Research on Relationship between China and Ghana: Trade and Foreign Direct Investment. Journal of Economics and Sustainable Development, 3(7).
Tee, E., Larbi, F., & Johnson, R. (2017). The Effect of foreign direct investment (FDI) on the Ghanaian economic growth. Journal of Business and Economic Development, 2(5), 240-246.
Unctad. (2012). World investment report: Towards a new generation of investment policies. New York and Geneva: United Nations Conference on Trade and Development.
UNCTAD. (2008). World Investment Report: Transnational Corporations and the Infrastructure Challenge. New York: United Nations Conference on Trade and Development.