Determinants of External Debt in Ethiopia

Abstract

The study is attempted to examine the determinants of external debt in Ethiopia. Ethiopia is
one of HIPC suffering from historically increasing external debt. External debt is the amount
that a country is owing to the foreign country with or without interest payment on principal.
In developing country financing budget deficit via external debt is burden as there is low
economic growth and problem of debt overhang. In this study time series data from 1981 to
2016 is used, and ARDL model was used to analyze the data. As well the variables in the
sample are normally distributed and the result of bound test depicted the existence of long
run association among the variables. In short run ECM regression shows that inflation rate,
primary budget deficit and exchange rate are statistically significant which mainly
determining Ethiopian external debt whereas domestic saving and resource balance is
insignificant. Inflation rate is negatively related to Ethiopian External debt while primary
budget deficit and exchange rate are positively related to Ethiopian external debt. In long run
Inflation rate, primary budget deficit as ratio of GDP, domestic saving as ratio of GDP and
resource balance as ratio of GDP are statistically significant. Primary budget deficit as ratio
of GDP and domestic saving as ratio of GDP has positive impact on Ethiopian external debt
accumulation while inflation rate and resource balance as ratio of GDP have negative
impact. And exchange rate negatively related to external debt but statistically insignificant.
Thus as policy implication the government of should opt for equity finance (FDI and portfolio
investment), reduce budget deficit, concern the efficiency of investment and maintain stable
exchange rate.