International Journal of Economics and Finance; Vol. 11, No.4; 2019 ISSN 1916-971XE-ISSN 1916-9728 Published by Canadian Center of Science and Education 114 Impact of External Debt on Economic Growth in Jordan for the Period (2010-2017) Khaled Abdalla Moh’d AL-Tamimi 1 & Mohammad Sulieman Jaradat 2 1 Associate Professor in Economics, Department of Administrative and Financial Sciences, Irbid University College, Al-Balqa’ Applied University, Jordan 2 Associate Professor in Economics, Department of Banking and Financial Sciences, Ajloun National Uniuversity, Jordan Correspondence: Khaled Abdalla Moh’d AL-Tamimi, Associate Professor in Economics, Department of Administrative and Financial Sciences, Irbid University College, Al-Balqa’ Applied University, Jordan. E-mail: khaled_tamimi@yahoo.com Received: March 22, 2019 Accepted: March 30, 2019 Online Published: March 31, 2019 doi:10.5539/ijef.v11n4p114 URL: https://doi.org/10.5539/ijef.v11n4p114 Abstract The study investigates the effect of external debt on economic growth in Jordan by using annual data for the period (2010-2017) by using external debt as a percentage of gross domestic product (GDP) as an independent variable, and GDP growth rate (A proxy for economic growth) as a dependent variable. The study starts with theoretical literature for the impact of external debt on economic growth, then empirical literature for previous studies that analyze the same relationship, after that analyzing the impact of external debt on economic growth in Jordan during the period (2010-2017). The study finds the same conclusion as previous studies that there is a negative and significant impact of external debt on economic growth during the study period, and recommends relying on other financing methods like foreign direct investment. Keywords: external debt, economic growth, foreign direct investment, budget 1. Introduction External debt is one of financing instruments in any economy. Developing countries depend on external debt to finance its projects because of its low savings and low income. It results in increasing debt service requirements, so external debt accumulates and external debt becomes a constraint and a burden on the economy of a developing country (S. Ayadi & O. Ayadi, 2008, pp. 234-235). External debt has an ambiguous impact on economic growth; it may be either optimistic or pessimistic. It is useful when it is used for investment purposes in infrastructure such as railway stations. It is detrimental when it is used in consumption purposes that don ’t benefit the government and increase debts of the country. External debt should be between 35-40% as a percentage of GDP, and between 160-170% as a percentage of exports (Shahzad, Zia, Ahmed, Fareed, & Zulfiqar, 2014, pp. 2133-2134). This study analyzes the impact of external debt on economic growth in Jordan during the period (2010-2017), by starting with theoretical literature of external debt impact on economic growth, then empirical literature of other studies that analyze this relationship, and analyzing the purpose of this study of the impact of external debt on economic growth in Jordan during the period (2010-2017) as follows: 2. Theoretical Discussion The impact of external debt on economic growth can be explained through the debt overhang effect which means that the debt creates debt service obligations that lowers the benefits from external debt in investment projects. This debt overhang effect means increasing debt service in a country that the government couldn ’t pay and uses its output to pay external debt service so it hinders investment and economic growth (Ejigayehu, 2013, p. 14). There are 3 theories that explain the effect of external debt on economic growth as follows: 1) Neoclassical Theory This theory explains the negative impact of external debt on economic growth. Because of increasing budget deficit, the government may use external debt to finance its deficit and those crowds out private investment because of raising interest rates, so it hinders economic growth.