Determinants of Manufacturing Sector Growth in Ethiopia

Abstract

Manufacturing sector growth is an essential to building national technological and industrial capacity, creating broad-based job opportunities, and improving income. The general objective of this study is to study the determinants of manufacturing sector growth in Ethiopia through time series analysis by using the quarterly time Series data in the year 2011-2022. The Johannes co-integration test suggests that there was one co-integration vector, which confirm VEC model. Based on the result of granger causality test, there were bidirectional causality as well as a unidirectional causality between the determinants of manufacturing variables in the study area. From the Vector Error Correction model, Employment in Agriculture, Employment in Industry, Employment in Service, Labor force, Foreign direct investment net flow, manufacturing value added, manufacturing export has a positive significant effect on manufacturing sector growth at 0.05 level of significant while exchange rate, inflation and manufacturing import has a negatively effect. According to the result of Variance decomposition, more of the variation of all variables explained by their own effect in short-run and becomes decrease in long run. Moreover, the contribution of one variables for the variation of the other variables were minimum in short-run and it increase to almost medium effect in long run. After check model adequacy within appropriate methods and performance of forecast determined, the Quarterly data of 2023-2027 used to forecasting and the result indicates that, there was an increment of inflation rate, manufacture export, exchange rate, Employment in industry and decreasing Employment in Agriculture, Employment in service, Manufacture import, manufacturing sector growth, Foreign direct investment net flow, manufacture value added and labor force. These results may be causes due to political instability, Weak domestic market supply due to agricultural production constraints and steady devaluation of the local currency and the increment of unemployment in the country.