External debt servicing, foreign exchange constraint and import demand: evidence from Ethiopian economy

Abstract

This study shows empirical evidence about the effects of external debt servicing on the foreign exchange reserve of the country and tests whether foreign exchange availability of the country affects the import demand. A yearly basis data starting from 1982 up to 2021 is employed. The required data are retrieved mostly from the World Development Indicator (WDI) database of the World Bank. In analyzing the data, the auto regressive (ARDL) technique of econometric estimation is used. The long-run result shows that repayment of foreign borrowing is insignificant in affecting the foreign exchange reserve of the nation. However, foreign aid, foreign borrowing and export growth are significant in increasing the foreign exchange reserve of the country. A sufficient supply of foreign currency in an economy is important to deal against instability and uncertainty of foreign capital flows. So, the government of Ethiopia can enhance the foreign exchange reserve through capital inflows and export growth. The findings from the import demand function of Ethiopia show that the foreign currency reserve is significant in driving import demand of the country. It is known that import enables unfettered access to capital goods from abroad and for improving the domestic welfare. So, the government should have stable and sufficient foreign exchange reserves to finance import of goods and services from abroad.