COLLEGE OF AGRICULTURE AND ENVIRONMENTAL SCIENCE

DEPARTMENT OF AGRICULTURAL ECONOMICS

SENIOR SEMINAR ON THE EFFECT OF EXTERNAL DEBT ON

ECONOMIC

GROWTH OF ETHIOPIAN ECONOMY

BY

FATIYA NURU

ADVISOR:-BETELEM GEMECHU (MSC)

FEBRUARY, 2019

ASELLA, ETHIOPIA
TABLE OF CONTENTS

TABLE OF CONTENTS.................................................................................................................................................i
LIST OF ABBREVIATIONS AND ACRONOMY.....................................................................................................ii
ABSTRACT.................................................................................................................................................................iv
1. INTRODUCTION.....................................................................................................................................................1
2. BODY OF DISCUSSION...........................................................................................................................................3
2.1. Macroeconomic Performance and External Debt in Ethiopia..................................................................................3
2.1.1. GDP and sectorial Growth Trends........................................................................................................................3
2.2 External Debt In Ethiopia...................................................................................................................................11
2.2.1. Determinants of External Debt.......................................................................................................................11
3. SUMMARY AND CONCLUSIONS.......................................................................................................................14
4 .RECOMMENDATION............................................................................................................................................14
5. REFERENCES..........................................................................................................................................................16
LIST OF ABBREVIATIONS AND ACRONOMY
ECM - Error Correction Models
FDI - Foreign Direct Investment
GDP - Gross Domestic Product
GNP - Goss National Product
HIPC - Heavily Indebted Poor Countries
IMF - International Monetary Fund
LDC - Less Developed Countries
SSA - Sub- Saharan Africa
US – united state
 ACKNOWLEDGEMENT
First and foremost thanks to ALLAH for giving me wisdom and strength in my entire life
journey. My special thanks and gratitude extended to Bethlehem Gemechu (Msc), my seminar
advisor for her invaluable guidance and constructive comments in undertaking this seminar.
 ABSTRACT
External debt is considered as a significant source of income for developing countries.
However, a group of sub-Saharan countries classified as HIPCs including
Ethiopia, have continued to experience difficulties in managing and serving their
huge stock of external debt. This the impact of external debt on economic growth in
Ethiopia to determine the existence of a ‘debt overhang’ and/or ‘crowding out’
effects using time series data for the period 1983/84 to 2012/13.the real GDP is
influenced negatively by the past stock of external debt and debt servicing and,
positively by the current external debt inflows. This indicating the existences of
debt overhang and crowding out effect in Ethiopian economy. The
findings of the review indicate that exchange rate and inflation deter economic
growth while, private investment and terms of trade have positive impact.
Several policy implications emerge from the study. It is difficult simultaneously to
achieve sustainable levels of economic growth and external debt at a moment and a
country should give due attention to manage its external debt.
 1. INTRODUCTION
In this period of articulate growth and development in every field of life, it is very
difficult for a country to finance all of its development spending with its own
resources. Hence, External debt is considered as a significant source of income for
developing countries. To realize sustainable economic growth through capital accretion,
domestic saving rate must be. However, developing countries have low per capita
income, inadequate saving, low tax base and inefficient tax collection system. On the
other hand, developing countries exports raw material and primary goods with least mark
prices as compared to expensive imports that lead to current account deficit. Even
domestic saving rates are high enough; necessity of foreign exchange is still
inevitable because of the requirement of importing investment goods.
As a result, to cover up the gap between its expenditures and revenues, it has to borrow
one way or another from internal and external resources. In this framework for the lack
of savings and foreign exchange, the needs for external sources come into being so this
incident makes the external debts inevitable. External available resource in the form of
loans from donor to recipient nations are commonly rationalized in terms of their being
valuable to a recipient, if the loans help to improve the productive capacity.
According to Cline (1985), one of the conditions essential for external loans to have a
positive growth impact on the economy is to ensure that the marginal productivity of
each foreign loan is at least, greater than the cost of the principal and interest payment.
As Mjema and Musonda (1994) pointed out, this condition would further
necessitate that foreign loan, once obtained, and should be used in productive
sectors and in basic infrastructures that can facilitate the productivity of other
sectors of the economy of the borrowing country; so that external debt servicing does
not constrain the debtor’s economic performance. However, the outcome of not
servicing maturing foreign debt obligations is an accumulation of arrears, which
damages the credit worthiness stance of a recipient country.
This action harms the economic performance of the debtor nations as its economic growth
independent, among other factors, on the availability of foreign loans.

During the four decades beginning from the 1950s, deficit in the current account were
considered normal. Countries were encouraged to borrow abroad and create an environment
conducive to foreign investment to boost their economic growth. In the process, little
attention was paid to the liabilities side of the current account deficit which increased the
external indebtedness of these countries (Were, 2001). As a result, the external indebtedness of
African countries is an impediment to the re-establishment of the conditions desired for
growth. The massive debt burden acts as a peril to the economic performance given the wide
spread poverty and structural rigidities in these countries (World Bank, 1988).
As Alemayehu and Daniel (1998) revealed that, many developing countries have been greatly
exposed to external capital inflows in the past four and half decades. Such external flows are
now becoming the source of external debt problems in Africa in general and Ethiopia in
particular. External debt magnitudes of larger proportion have been very familiar in sub-
Saharan Africa. Many countries in this region have been stressed with debt burdens that
outweigh their export earnings, the growth rate and even level of their gross national product. It
is estimated that by the year 2004, sub-Saharan Africa have to spend an amazing 70
percent of its export earnings on external debt servicing. Africa’s debt rose sharply in the past
decade and is now equivalent to over 100 percent of its gross national product (about USD
200 billion) (World Bank, 2011).
Similarly, Ethiopia’s external debt has changed significantly in magnitude, structure and
composition over the last four and half decades. In 1975, it stood at about USD 343.7 million
(14% of the GDP) and in 1991 raised to USD 8.86 billion (138.93% of GDP). Moreover,
in2001 this figure had decreased to an equivalent of USD 5.6 billion (57.11% 0f GDP).
Recently, in 2011 following the debt relief granted in accordance with development initiative
designed to benefit the heavily indebted poor countries (HIPCs), it had raised to USD 7.9
billion (36.7% of GDP) (world Bank, 2011). Ethiopia being a developing country has not
been out of danger either the country is incapable of servicing its debt and attaining a
reasonable level of economic growth. So, the objective of this seminar is to review t h e impact
of external debt on economic growth in Ethiopia economy
2. BODY OF DISCUSSION
2.1. Macroeconomic Performance and External Debt in Ethiopia
2.1.1. GDP and Sectorial Growth Trends
Economic performance in Ethiopia is extremely interrelated with the political process.
Ethiopia’s history is full of conflicts, drastic policy changes and reversals. Before 1974, the
macroeconomic policy was mainly informed by a market oriented economic system. The
period 1974-1991 witnessed a centralized economic system (socialism), where the state
played a significant role in all aspects of economic activity. The post Derg period
(since1991) is again taking the economy back to the market oriented system of the imperial
regime. Such cyclical political process and regime shifts are not only unpredictable but also
violent. Economic insecurity pervades the system as a rule of law, enforcement of
contracts and property right insecurity are configured on unstable political base. The
detrimental impact of such political process on macro performance has to be obvious
(Alemayehu, 2011).
Figure 1.1: GDP and Agricultural Growth Rates (%)
Ethiopia‟s economy is mainly based on agriculture, which accounts for 44.53 percent of GDP
and 85 percent of total employment. The agricultural sector among other things suffers from
poor cultivation practices and frequent drought. There is a strong correlation between weather
Conditions and Ethiopia’s growth performance in general and agricultural productivity in

particular. A change of one percent in annual rain fall is coupled with a change of 0.3
percent in real GDP in the following year (Alemayehu, 2011).It is interesting to note
that growth episodes are extremely irregular. This is strictly linked toagriculture
growth, which in turn is related to the vagaries of nature. The figure shows not
only the rhythmic co-movement of GDP and agricultural growth but also the erratic
nature of both. This is the direct result of the extreme dependence of Ethiopian
economy on rain feed agriculture. The GDP registers the highest figure when there
is good rain and the lowest (sometimes negative) when it is not.Such dependence on
rain feed agriculture has a negative multiplier effect on level of production in
subsequent years. That is the shock in one period is carried over in to the next
since the early years of the drought deprives peasants not only of current income but
also of wealth. During the imperial era, the economy had been growing at a linear
growing rate of 4.1 percent per annum while population and per capita income was
growing by 2.3 percent and 1.8 percent per annum, respectively. Even though
agriculture had a great share to GDP (60.8 percent), it accounted only 31.2 percent of
the growth of GDP. In the same period, the value added in the agricultural sector was
growing by 2.1 percent while the other sectors were growing by more than 6.8 percent
per annum.

As Alemayehu (2002) pointed out, the performance of the Ethiopia economy during the Derg
period has been unsatisfactory on account of civil war, recurrent drought, high population
growth, and inappropriate economic policy and management. The average GDP growth for
the Derg period was 2.1 percent per year compared with an average population growth of 2.8
percent per annum that leads to a decline in per capita income. During that period (1974/75-
1990/91), the growth performance of the economy was miserable. In this period, the GDP
growth rate of 2.1 percent per annum was not even enough to keep the level of per capita
income constant with a population growth rate of 2.8 per annum, per capita income declined
by about 0.7 percent
During 1980/81-1990/91 agricultural production grew by a mere 2 percent per annum
while industry and distributive service grew by 0.75 percent per annum on average.
During thisperiod, aggregate expenditure exceeded GDP by 6 percent that is higher
than under per 1974 period average by 5 percent. This is mainly due to the
expansion of public sectors as the result of socialist ideology that encouraged
expenditure on public enterprises, state farms expansion and civil war. Post 1991,
the new regime economic development strategy is supported by an economic reform
program and a series of structural adjustment programs in order to alleviate the
previous regime stumbling blocks and to improve the overall performance of
the economy. The existing Growth and Transformation Plan (GTP) laid out the
directions to realize the Millennium Development Goals by 2015 and the basis
for Ethiopia to reach middle income position by 2020-25.
According to African Development Bank (2010), Ethiopia has practiced strong
economic growth in recent years, with real GDP growth at or near double digit levels
since 2003/04. Ethiopia has consistently outperformed predominantly other countries in
Africa and expanded much faster than the continent-wide average. Consequently, the
country faces some structural weakness that presents significant challenges in the
medium term. The following table summarizes the growth rates of real GDP in
different years and policy programs.
Table 1.1: Trends of Growth of Real GDP, GDP Growth Rate by Sector and Sectoral
shares

The above table indicates that Real GDP growth averaged 10.92 percent per annum during
the period 2003/04-2012/13 and placing Ethiopia in the middle of the pinnacle performing
Economies in sub Saharan Africa. This growth performance is well in excess of the
population growth and the seven percent rate required for attaining the Millennium
Development Goal of eradicating poverty by 2015. When we examine the sectoral sources of
growth and structural shift while initially led by agriculture, the growth base is broadening,
with increasing contributions to GDP from services and industry.

Moreover, the pace of agriculture sector growth during the period 2003/04–2012/13 declined,
while the industrial and service sectors grew more rapidly. The agricultural sectors share of
GDP declined by 4.1 percent points between 2003/04 and 2012/13 and currently has been
exceeded by services. This remarkable growth in services was determined by the rapid
spreading out in financial intermediation, public administration and retail business activities.
These services sub-sectors grown by more than 13.5 percent point in GDP share during the
past seven years. However, the contribution of industry in GDP has remained relatively
stagnant, amounting to between 11.5 and 14 percent. In an attempt to fight against inflation, the
government implemented a tight monetary policy
carriage. This measure, aided by retard in global food and fuel price inflation, observed that
consumer price inflation decelerate to 10.3 percent in January 2013 from 39.2 percent in
November 2011. The government‟s purpose to hold down prices was further reflected in its
cautious fiscal policy focusing on intensification of domestic resources and dropping
domestic borrowing. The tough fiscal stance, mainly measures to progress tax administration
and enforcement, resulted in a fiscal surplus of 0.2 percent of GDP in 2011/12
from -1.6 percent the previous year.
2.1.2. Trends in Saving and Investment
The low level of domestic saving is a classic feature of low income countries in general and
Ethiopia in particular. It represents a key hindrance to development as it limits investment
and thereby economic growth. National investment can be financed from both Domestic and
foreign savings. Little or stagnant domestic savings typically aggravate external borrowing

which through the debt service burden constrains future investment. But, since the
international debt crisis of the early 1980s, access to external borrowing has been harshly
reduced for a majority of developing countries. Without the option of domestic saving, this
condition force developing countries like Ethiopia to rely on donor‟s aid to finance a huge
part of domestic investment, a process held back with enormous constraints.

A number of factors are generally cited to explain the low domestic saving level of countries
like Ethiopia. A first factor is the low per capita income and the variation of propensity to
save and income. A second factor, to the low level of domestic saving is political and macro-
financial instability. Third, in addition to their inefficient performance, financial institutions
are concentrated in the urban areas and their networks extended slight in to the rural areas.
Many researchers point out that many rural households in developing countries, particularly
in sub Saharan Africa, are too poor to save (Robinson, 2001). Likewise, low saving has been
a dominant feature of the Ethiopian economy.
Figure 2.2: Gross National Saving and Investment (% of GDP) for Ethiopia
As represented by Economy watch Database (2012), the average share of gross domestic
savings and investments from GDP was 12.7 and 18.7 percent which is very low even to the
average of developing countries, respectively. The data for the period, 1980-2012 indicates a
broad gap between gross domestic savings and gross domestic investment in Ethiopia. This
Gap is huge in size and has also widened during this period (World Bank, 2010). Moreover,
the growth rate of domestic savings is lower than that of investment, and has been diminished
over time when we look at the share of gross domestic saving in the GDP (1980-2012),
Ethiopia registered the minimum saving rate it is about 5 percent and 6.6 percent, in 1980
and 1992 respectively. However, during 2004, Ethiopia has registered an extremely high
saving rate (24.6 percent). The share of gross domestic investment in the GDP for the same
period is found to be 26.5 percent, whereas the minimum being 10.6 percent (1992) and
maximum was 28.1 percent (2012). The resource gap (measured as the difference between
investment and saving) is about 7 percent during this period and reached a maximum of 12.7
percent during 1988. The above figure indicates that for the entire period, saving rate has
been lower than Investment, and both have declined during 1988-1992. These are the one
prior to the last Years of Derg regime, during which the civil war in the country has been
intensified.

On the other hand, in the later period, the gross domestic investment has considerably risen.
During the period, 1980-1991 (the last twelve years of the Derg regime) the average saving
Rate was about 7.0 percent, the minimum being 5 percent (1980) and the maximum was about
10.3 percent (1988). The average rate of investment was about15.9 percent; the minimum and
the maximum were 11.6 percent, and 23 percent respectively. The average resource gap for
this sub period was about 8.9 percent.

However, the liberalized regime (1992-2012) presented an amazing recovery of the rate of
domestic saving which increased from 6.6 percent during 1992 and 24.6 percent during 2004.
The average saving rate, investment rate and resource gap for this sub period was 16.1, 20.4
and 4.3 percent respectively. The share of investment in the GDP has reached more than 28.1
Percent after 1996. The relative progress in the rate of investment in this regime was mainly
due to the end of civil war and the policy reforms that have been initiated. However, the share
of saving in the GDP in the first 12 years of this regime was not satisfactory when it is
compared to the last 11 years of the military regime.

This may be due to an increase in the public expenditure and inflationary situation existing in
the economy. The deterioration of saving rate in this period (1980-2012) has lead to a huge
resource gap, which is about 12.7 percent (1988). The trend of saving and capital formation
resulted in an extended resource gap. The gap (measured as percentage of GDP) was low in
the imperial regime with an average of 1.67 percent. Nevertheless, it widened drastically to
6.18 percent in the Derg era which further increased to 8.9 percent during 1997. This shows
how important foreign borrowing is in bridging the resource gap.

2.1. 3 Trends of Imports and Exports

An examination of the external trade policy before 1974 was free trade and various measures
Aimed at improving the quality and quantity of imports and exports as well as facilitating
trade both by the public and private sector were made. In terms of imports, imports of capital
goods and raw materials were free of duty while others were taxed. The period 1974-1991
Was on the other hand characterized by a centralized economic system, where the state is
dominant in the external sector. The period was characterized basically by: (a) an attempt to
control the participation of private capital in trade and strengthening the state‟s role both in
export and import trade; (b) an attempt to closely monitor the price, quantity and distribution
of goods.
The post-Dreg governments’ foreign trade policy has mainly focused on ensuring private
Sector participation, managing the sector by issuing foreign exchange and import-export
regulation; designing and providing incentive to the export sector and replacing quantitative
restriction with tariff. In view of high demand for foreign exchange, one sustainable source of
financing is growth of export sector (Alemayehu, 2011). As can be read from fig. 2.3
however, exports as percentage of GDP were in the vicinity of 15 percent which is a good
performance compared to nearly 8 percent in the immediate past before the reform (1991).
However imports jumped from around an average of 16 percent in the five years immediately
before the reform to about 30 percent by 2000/01. Thus exports do cover only half of the
imports. This has an obvious implication on financing requirement and hence indebtedness.

2.2 External debt in Ethiopia

2.2.1. Determinants of External Debt
The Ethiopian government, due to its significant size in the economy as well as narrow
source of revenue base, has faced the shortage of resources to finance its spending. Due to
this and other factors, it desired to fill its budget deficit through internal and external
borrowing. As Befekadu (2001) pointed out, the poor performance of Ethiopian economy
hasmade the country highly dependent on external resource inflow in the form of credit and
grants aid. Since 1974, at which Ethiopia applied for loan from the IMF, shown highly
dependent on external assistance and has reached a stage where it cannot function without
it. The determinants of Ethiopia’s external debts can be credited to both internal and external
factors. The major external factors include: first, the 1973/74 oil price increases leads to
deterioration in terms of trade leading to BOP deficits. The oil shock also contributed to a
marvelous increase in the availability of international credit at very low interest rates and
encouraged oil importing developing countries (including Ethiopia) to borrow (Sachs and
Larrian, 1995). Second, in the early 1980s the world interest rates increased sharply as a
consequence of anti-inflationary programs in the industrialized countries. Third, at the same
time, the terms of trade deteriorated for the debtor world as raw material prices fell which
leads to Ethiopia’s growth of export earnings declined enormously. Fourth, increased
protectionism policies by developed countries have tended to discriminate against less
developed countries (including Ethiopia), thus lowering their earnings. Besides external factors,
Ethiopia indebtedness can be partly attributed to internal factors. These mainly refer to civil
war, continuous policy and program reforms, continuous droughts, highly distorted trade
policies and the expansionary fiscal policies and budget deficit.
2.2.2 The Impact of External Debt on Growth Incase Ethiopia
Economic theory suggests that „reasonable‟ levels of borrowing by a developing country are
likely to enhance its economic growth, both through capital accumulation and productivity
growth. Countries at early stages of development have small stocks of capital and are likely
to have investment opportunities with rates of return higher than in highly developed
economies. As long as they use the borrowed funds for productive investment and they do not
suffer from macroeconomic instability, policies that distort economic incentives or sizable
adverse shocks, growth should increase and allow for timely debt repayment. (C. Pattillo,
2004). Hence, at early stage of development (when capital is scarce), external borrowing is
expected to have a positive impact on economic growth. This is the case when an expansion
of public debt leads to an increase in public expenditure and an increase in economic growth
through the government expenditure multiplier. However, an increase in the external debt
might indirectly depress the level of GNP by creating debt overhang effect, crowding out
effect, discouraging capital formation and encouraging capital flight due to tax increase
expectation. Therefore, the impact of external debt depends on the magnitude of the two
effects. There is an incentive for capital scarce countries to borrow and invest since the
marginal product of capital is above the world interest rate (Paltilo et al, 2002). However,
beyond a certain level debt has an adverse impact on growth (Elbadawi‟s, 1996). Therefore, the
effect of external debt on economic growth has been identified through four broad channels.
Significant studies have been undertaken to investigate the origin of Ethiopia‟s external debt
crisis as well as the link between debt stock and growth. Regarding to debt crisis, most of the
general causes are the same as the rest of the African countries. It is a combination of
multiple domestic policy orientation and external shocks. Concerning to the link between
external debt and growth, recent studies examined a non-linear type of relationship.
Regarding debt sustainability, there is a contradictory finding, when some of the studies
indicated that Ethiopian external debt is sustainable; and other investigations conclude that
Ethiopia‟s external debt is unsustainable.
In recent studies, Hailemariam (2010) investigated the existence of long run relationship
between external debt and growth in Ethiopia. He explores that the current level of external
debt flow has a positive while the past debt accumulation has a negative impact on growth
and private investment. This confirms the existence of debt overhang hypothesis in the
Ethiopian economy. Furthermore, in the long run, both external debt stock as well as total
debt servicing has a negative and significant impact on economic growth and private sector
capital accumulation activity.

On the other hand, debt cancellation appears to have a positive contribution to economic
growth of Ethiopia. In the same way, Abinet (2005) examined the relationship between real
GDP growth rate and debt burden indicators during the period 1962/63 to 2003/04. He found
that the real GDP growth rate has negatively correlated with debt burden indicators.
Correspondingly, Melese (2002), by using a structural macroeconomic model, also found that
all debt burden indicators have a negative relationship with economic growth during the
period 1970 to 2002.

According to Befekadu (1992) explored that there was positive correlation between external
resource inflow and economic growth between 1960 and 1974, but negative relationship
between 1975 and 1988. The different outcome was explained by the different policy regimes
pursued by two governments, that is, external capital contributed growth positively during the
Imperial era and negatively during the Derg regime. He emphasized that the negative
correlation of external debt during the Military regime was a result of the policies pursued.
The policies in that era were diverted resources away from agriculture to other sectors. As a
result the share of export earnings of coffee, which is the most important export commodity,
has declined by 60 percent.

Regarding to Ethiopia’s external debt sustainability, Alemayehu and Daniel (1998),

Clearly confirmed that, the level of Ethiopia debt is beyond the capacity of the country to its
servicing requirements (existence of debt overhang problem). Although, the new debt
Initiative may have a say to lessen the debt problem, it by no means alleviated the crisis.
However, Haile (2005), using conventional tests, argued that the Ethiopian debt is
sustainable.

Moreover, on the basis of the unit root and counteraction tests, he concludes that given the
Attendant flow of revenue and expenditures, the current outstanding debt is sustainable.
Similarly, AFRoDAD (2006) examined that due to the momentous debt relief that has been
Extended to Ethiopia following the HIPC and MDRI initiatives, the Ethiopian debt has
Significantly declined relative to what it was until 2004. Even under the scenarios of an
Increase in unfavorable loans, a decline in growth of GDP, in exports or revenue; debt levels
Would still be considered sustainable with reasonable changes in the above parameters.
 3. SUMMARY AND CONCLUSIONS
In this period of expressive growth and development in every field of life, it is very difficult
For a country like Ethiopia to finance all of its development spending with its own resources.
Developing countries in general and Ethiopia in particular exports primary goods with least
Mark prices as compared to expensive imports that lead to current account deficit. In this
Framework, as a result of low savings and the lack of foreign exchange for importing
Investment goods, the needs for external finance become critical and this incident makes the
External debts inevitable. Unfortunately this approach of promoting economic growth has
Caused the federal fiscal budget deficit to widen and accumulation of massive external debt.
Moreover, those countries classified as HIPCs including Ethiopia, have continued to
Experience difficulties in managing and serving their huge stock of external debt.

Thus, high growth of debt and indebtedness, indicated by accumulation of interest and

Principal arrears, has changed the ability of the country to meet its development plan in the

Main sectors. The central focus of this study was to estimate the impact of Ethiopia’s external

In debtedness on economic growth. Some p a p e r uses time series data covering the
period 1983/84 to 2012/13 and econometric tools to investigate the relationship among the
variables.

The bench mark of these econometric analysis is an Elbadawi growth-equation model in which
Growth depends on external debt stock, debt servicing, private investment, terms of trade,
Exchange rate and inflation rate. Some evidence r e s u l t s support the existence of a long
run

growth equation in Ethiopia.

\
 4. RECOMMENDATION
The long-run and short-run regression results have important policy implications for Ethiopia.
It rationalizes the approval of the HIPC debt relief initiative because in the long-run Ethiopia
Is bound to have debt servicing problems that can be offset by substantial debt relief or total
Debt cancellation. In addition, the presence of „debt overhang effect‟ and „crowding out
Effect‟ in the long-run means that the efficiency of total investment will suffer as government
Cuts its budgets, tax returns on private investments, or uses capital inflows to service its
External debt obligations. Since, many of the imports of Ethiopia are vital intermediate capital
Goods, cutting the import of these investments goods have a larger loss on present and future
Output of a country.

Moreover, external borrowing decisions must be linked to a general policy framework that
Will guarantee profitability of invested funds and generation of sufficient foreign exchange
earnings for external debt servicing. External debt problem is a real constraint and should not
Be ignored. The country should introduce effective debt management as a major policy
concern to achieve the benefits of external finance without creating difficult problems of
Macroeconomic and balance of payment stability. Proper macroeconomic management of the
economy as a whole is important since it also determines the value and servicing external
debt as well as the credit rating.

Availability of external finance should be consistent with a policy framework that is credibly
maintained (exchange rate policy, interest rate policy, pricing policy etc). It is important to
create credibility including political will in order to spur investor‟s confidence for both local
and foreign investments. Another implication of our analysis is that policies that encourage
domestic investments, foreign direct investment and increased trade earnings can be effective
in rising GDP growth and reducing dependence on external debt for sustained economic
development.
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