Trends and determinants of domestic private investment in Ethiopia: Time series analysis

Abstract

Abstract The Ethiopian Investment Commission was established to formulate suitable investment policy with good investment climate that enables investors to operate in a more macroeconomic friendly environment. Despite all efforts, domestic private investment in Ethiopia is still in its early stages. Therefore, this study aimed to investigate the trends and determinants of domestic private investment in Ethiopia using a time series data over the period 1992–2022. To meet its goal, the study employed an Autoregressive Distributed Lag (ARDL) bounds testing approach through E-views version 12. The findings show that domestic private investment was negatively and significantly affected by the inflation rate, public investment, and real effective exchange rate over a period of both the short- and long-run. While domestic credit to the private sector, foreign direct investment, real GDP and trade openness were found to have positive and significant effect on domestic private investment in long run. Unemployment rate was found to have positive and significant effect in short run but insignificant in long run. Annual interest rate was found negative significant effect in short run but insignificant in long run. While total government expenditure was insignificant in both short and long run. Inflation has a negative relation with domestic private investment in both short and long run, therefore the study suggested that policymakers should recognize the cause for fluctuations in inflation and keep in a stable manner.