Intertemporal Government Budget Constraint: Debts and Economic Growth in Ethiopia, 1990–2018

This paper uses the intertemporal government budget constraint model, linear logarithmic functions (for better regression results), annual time series data and the generalized least squares technique to examine the effects of external debt and external debt servicing on economic growth in Ethiopia between 1990 and 2018. Alemayahu and Zerfu (1998) confirm that the level of debt in Ethiopia is beyond the capacity of the country to service it. This problem then begs the following major research questions: Does external debt or its servicing crowd out investment in Ethiopia? What have been the effects and estimates of (i) external debt and (ii) external debt servicing on economic growth in Ethiopia? The major hypotheses are: (a): External debt does not enhance economic growth. (b) External debt servicing depresses economic growth. Data were collected from the World Bank and United Nations. The major findings of the paper are: (1) That increases in external debt enhanced economic growth in Ethiopia within the sample period, ceteris paribus; and (2) That external debt servicing had negative effect on economic growth in Ethiopia. The paper also suggests maintaining reasonable levels of external debt by the government of Ethiopia to enhance economic growth, and avoiding excessive borrowing that might create difficulties in debt servicing (i.e. debt overhang). As a result of its findings, one future research topic this paper would proposes is: “Determination of the Sustainable Debt Levels for Enhancing Rapid Economic Growth in Ethiopia.”