Development Finance and Debt Sustainability in Ethiopia

Lesson to Sub-Saharan African Countries

By Teshome A.(PhD), Assistant Professor
Tigrai Online, May 8, 2015

Introduction

Development is multi dimensional processes that required large amount of financial resources. Economic theories have shown that financial resources are more important than natural resources in the process of economic development (Teklu Kassu, D.K Mishra and Melesse Asefaw, 2014).The amount and the sources of development finance play major roles in realizing sustainable economic development in developing countries. . There are two broad categories of sources of development finance which know as internal and external sources of development finance. The former sources of finance mainly relied on the domestic resource such as tax, nontax, domestic loan. The latter sources of finance is related to financial resources that came from external sources which include loans and aid from bilateral, multilateral institutions and international capital market. There are various argument in support or against of both types of sources of finances to realize sustainable economic development. But since 2002, the Monteria consensus most of the governments and scholars focus on the importance of the internal/domestic sources of development financing method because it is more effective and efficient to attain stable economic growth and structural transformation.

In the last ten years, the Government of Ethiopia (GoE) has been realizing an average of 10percent economic growth with fast social and economic development. The double digits economic growth accompanied with higher government spending and borrowing. Few consider the higher government borrowing may lead to high indebtedness therefore the beast option is to cut economic growth. For instances Robert Looney(2015) said that by IMF calculations, to stay within safe limits of domestic credit and external debt, Ethiopia will have to scale down its growth targets to more achievable levels. In the same way Seid Hassan, Minga Negash, Tesfaye T. Lemma and Abu Girma Moges (2014) in their recent article entitled “Is Ethiopia’s Sovereign Debt Sustainable?” conclude that Ethiopia debt is unsustainable. In his February 8, 2015 article Prof. Al Miriam claim that Ethiopia is facing high debt odious2. According to Hibamo Tagesse (2015) also, increased growth digits might mean much to our image, but when exposed to net indebtedness calculations, they are unable to draw us from the least developed economies backlist. In contrast to the above argument G. Ramakrishna (2015) said that higher government borrowing/debt not significantly affects economic growth of Ethiopia therefore Ethiopia should continue with high public borrowing.

Most of these studies have failed to observe and compare in detail the sources and trend of development finance with the public debt sustainability in the country. The absence of logical and scientific study in this area misled our big professors/scholars to make wrong generalization about Ethiopia development finance, economic growth and debt sustainability. This brief article will try to address this knowledge gap describing the trends and structure of development finance and debt sustainability in Ethiopia.

The study is consisting of six sections including introduction. The second section explains the relationship between sources of development finance and debt sustainability. The third section discusses the trends and structure development finances in Ethiopia. The fourth section focuses on debt sustainability in the Ethiopia. This section explains total and external public debt sustainability during 2000 to 2014. The fifth section identifies lessons to be learned for Sub Saharan African countries.

The above few paragraphs are an introduction to the main body of the article Please read the whole document here.

Development Finance and Debt Sustainability in Ethiopia Lesson to Sub-Saharan African Countries