PUBLIC FOREIGN DEBT, SAVINGS AND INVESTMENT IN ETHIOPIA: EMPIRICAL ANALYSIS

Abstract

This study evaluates the effects of public foreign debt on savings and investment in Ethiopia. the study used an Auto Regressive Distributed Lag (ARDL) model to analyze Ethiopian data from 1979/80 to 2018/19 with national saving as a function of interest rate for bank deposit, real GDP, public foreign debt, public foreign debt servicing and investment as a function of lending interest rate, growth rate of real GDP, public foreign debt and public foreign debt servicing. First examine the stationarity of the variables using Augmented Dickey Fuller test. The result of stationarity tests reported a mixed integration at both I (0) and I (1) hence warranting the use of ARDL model. The empirical result reveals that public foreign debt has a significant positive effect in the long- run for savings. In addition, public foreign debt has positive and significant effect on investment both long run and short run in Ethiopia. Therefore, there is no “debt overhang” effect in Ethiopia. Also real GDP has positive and significant effect on savings and growth rate of real GDP has positive and significant effect on investments in the country. The Granger causality test showed that there is a unidirectional causal relationship from public foreign debt to national savings and there is no causal relationship between public foreign debt and investment. Finally, the study recommends that governance mechanism for the use and monitoring of funds generated through external borrowing needs much ardent improvement because of its strong and significant effect on savings and investment.