Impact of Public Debt on Economic Growth in Ethiopia

Abstract

a period of 28 years from (1991-2018). Data were tested for unit root using Augmented Dickey Fuller (ADF); Johansson trace and max statistics for co integration; Vector error Correction Model (VECM)wasalso applied to test long run relationship, and to determine short run dynamics. . VEC/model diagnostic tests were also conducted and found that there was no autocorrelations, the residuals were normally distributed and the model is stable. The finding of the study revealed that there is a long run relationship between economic growth and External, domestic debt, debt servicing, nominal lending rate and exports. It is concluded that external debt has statistically insignificant effect on economic growth; domestic debt has positive and statistically significant impact on economic growth. The results also indicated that debt service payment has negative but insignificant relation with Per Capita GDP, to Furthermore, export has positive impact but nominal lending rate has insignificant impact on economic growth. It is recommended that effective utilization of external debt should be considered since huge amount of foreign debt have been taken and from the research finding, there is insignificant relationship to economic growth .However, domestic debt should be made to induce economic growth.