Determinants of Private Investment in Ethiopia: Time Series Analysis

Abstract

Ethiopia has recently embarked on policies that aim at rebalancing the role of public and private sector in the economy. To do so, the country has been giving a due emphasis on the development of private sector. This paradigm shift is basically to encourage private investment and ultimately make private sector the engine of growth. Taking this policy shift in to account, these study conduct as time series analysis of private investment in Ethiopia covering annual dataset from 1980-2014. It systematically examines the major determinants of private investment by undertaking various techniques of tests such as multicollinearity, autocorrelation, normality and model specification test. As the finding indicates that real GDP growth rate, real lending interest rate, inflation and gross fixed capital formation have a significant effect on private investment; whereas real effective exchange rate has insignificant effect on private investment. Regarding the results, the study provides evidence that real GDP growth rate, inflation, real lending interest rate, real effective exchange, and gross fixed capital formation both in a short-run and long-run significantly affect the level of private investment. Hence, to promote the performance of private sector to a higher level, it is essential to take measures that can improve real GDP in general and real income of people in particular, and make public investment in basic infrastructures (gross fixed capital formation) and institutions that are crucial to attract private investment. Besides, ensuring stable Investment environment (such as consistent investment policy and requirements/regulatory frameworks/, and macroeconomic and political stability), and addressing bureaucratic inefficient and poor governance problems are necessary to build lasting confidence of private investors.