Macroeconomic, Political And Institutional Determinants Of Private Investment In Ethiopia: Time Series Analysis

Abstract

The primary aim of this study is to examine the macroeconomic, political and institutional determinants of private investment in Ethiopia. The study concentrated on 31 years of secondary data (i.e., from 1992 to 2022). The macroeconomic data were gathered from National Bank of Ethiopia (NBE) and Ethiopian Investment Commission (EIC) while political and institutional variables were obtained from Worldwide Governance Indicators (WGI) that was drawn from World Bank research dataset. The ARDL model was chosen to analyze both short-term and long-term relationships between dependent and independent variables due to its ability to handle mixed orders of integration and capture immediate responses as well as long-term equilibrium relationships. The finding of the study shows that external debt service, annual inflation rate and real effective exchange rate had significant negative effect on Ethiopian private investment development in both short-run and long-run. Average lending interest rate has significant negative effect on private investment expansion in short-run. Public investment has a crowding-out effect in long-run but positive relation (crowding-in effect) in the short-run. Control of corruption has negative significant effect on private investment in short-run unlike its long-run effect. Government effectiveness, real GDP and trade openness were positive significant effect on private investment growth in Ethiopia in long-run. Furthermore, political stability and the absences of violence have a profoundly positive impact on the growth of private investment in Ethiopia over the long term. Consequently, this study suggests that to foster private investment, the government should focus on promoting political stability, reducing violence, enhancing legal frameworks, protecting property rights, adopting business-friendly policies, ensuring accountability, and providing fair dispute resolution. Given the finding that inflation negatively impacts private investment in both the short and long term, it is recommended that policies aimed at stabilizing inflation be prioritized to encourage private investment. Efforts should include monitoring price levels, adjusting monetary policy as necessary, and implementing fiscal measures that support economic stability