Analysis Of Macroeconomic Determinants Of Private Investment In Ethiopia

Abstract

This study analyzes the macroeconomic determinants of private investment in Ethiopia over the period 1991 to 2023. This research employs advanced econometric techniques, including the autoregressive distributed lag (ARDL) model and error correction methods, to analyze both short-run and long-run relationships between private investment and key macroeconomic variables. The findings indicate that in the short run, exchange rate fluctuations, interest rates and inflation negatively affect private investment by increasing borrowing costs and economic uncertainty. Labor force has a positive short-run impact, as it enhances productivity and reduces labor costs. In the long run, real GDP growth and public investment significantly and positively influence private investment by expanding market opportunities and improving infrastructure. Exchange rate stability fosters long-term investment confidence, while persistent inflation and high interest rates continue to constrain private investment by reducing profitability and increasing financial risks. The study underscores the need for macroeconomic stability, financial sector reforms, and supportive government policies to enhance private investment in Ethiopia