An econometric analysis of determinants of debt sustainability in Ethiopia

Sound and efficient external debt sustainability is an essential instrument to shred the notoriety of indebtedness and to ameliorate economic growth. This study was conducted with an objective to examine the determinants of foreign debt sustainability in Ethiopia using a yearly time series data that lasts from 1980 to 2016. A log-linear regression model was used, and the results demonstrate that debt service to GDP ratio and real effective exchange rate were statistically significant and positively associated with debt sustainability in Ethiopia. Whereas terms of trade and foreign real interest rate were found statistically significant and have a negative relationship with debt sustainability in Ethiopia. The growth rate of foreign GDP and fiscal position of government were statistically insignificant and have opposite signs to impact debt sustainability in Ethiopia. Hence, cautious domestic macroeconomic policies that will avoid overvaluing real effective exchange and deteriorating terms of trade should be designed and implemented.