Analysis on the Determinants of Private Investment in Ethiopia A Time Series Analysis (1992-2016)

Abstract

This study investigates the determinants of private investment in Ethiopia for the period 1992-2016. The ARDL (Autoregressive Distributed Lag) approach to co integration is employed to test the existence of a long runrelationship, as well as to study the short run dynamics of private investment in Ethiopia. To that end, demand forprivate investment is estimated as a function of public investment, lending interest rate, saving interest rate, foreign aid, external debt, trade openness, business tax, and inflation rate. The original problem focuses on the assessment of factors that have either stimulated or dampened private sector investment in Ethiopia during the study period. The results of this study confirm some results found elsewhere in the empirical literature. Further, the study employed the variance decomposition and impulse response functions to investigate the dynamic simulations of the variables included in the estimated model Econometric evidence indicates that private investment is positively related to real saving interest rate and trade openness but negatively related to public investment, foreign aid, external debt, and business tax. Further the variance decomposition results show that innovations in business tax highly contributed to the forecast error of Ethiopia’s trade balance as compared to other explanatory variables. The study finally recommends that countries should seriously work in creating enabling environment for private investment.

Keywords: Private Investment, ARDL, Ethiopia