Ethiopia, one of the highly indebted poor countries, has continued to experience difficulties inrnmanaging and servicing its huge stocks of external debt. Consequently, there have beenrnsignificant net outflow of resources to meet the debt obligations. Hence, the main focus of thernstudy is to examine the impact of external debt on economic growth and private investment ofrnEthiopia using a co integrated VAR model over the period 1960/61 to 2008/09. The result ofrnco integration test, using Johansen Maximum likelihood approach, indicates the existence ofrnlong run relation ship among the variables entered in both growth and private investmentrnmodels.rnThe estimated short run models points out the current level of external debt flow has arnpositive while the past debt accumulation has a negative impact on economic growth andrnprivate investment of Ethiopia. This confirms the existence of debt overhang hypothesis in thernEthiopian economy. However, in the long run both external debt stock as well as total debtrnservicing have a negative and significant impact on economic growth and private sectorrncapital accumulation activity. On the other hand, debt cancellation appears to have a positiverncontribution to economic growth and private in vestment of Ethiopia. Hence, mitigate thernproblems of external finance, external borrowing decisions must be linked to a general policyrnframe work that will guarantee profitability of invested funds and generation of sufficientrnforeign exchange earnings for external debt servicing. Besides, creating credibility includingrnpolitical will to reforms is required to spur investors' confidence for both local and foreignrninvestments.