Private Sector Development in Ethiopia

Abstract

The role of the private sector in driving sustainable and inclusive growth, poverty reduction, and creating jobs is indispensable. In order to effectively use the opportunities available for sustainable development and transformation of the Ethiopian economy and to further leverage the private sector, it is important to examine the structure and performance of private sector development, identify important bottlenecks and challenges, and further investigate its contribution to the economy. A time series Autoregressive Distributed Lag (ARDL) model was employed using secondary data collected from various official sources from 1991 to mid-2021. The result shows that in response to successive policies and strategies, an increment trend in private sector investment project was observed from 2003 onwards. However, the majority of the investment has been carried out by domestic investors. The implementation rate of projects in all development plan periods has been very low and showed a decline in agriculture sector investment from 2000 onward. Although promising signals indicate that the industry sector has begun to emerge over the last few years, with less participation of domestic private investors in the manufacturing sub-sector and no or little agriculture sector investment, this indicates a less nascent structural change to the productive sector of the economy. The result further shows domestic private sector investment has not yet been channelled into the productive sector and export market, which has a trickle-down effect towards industrialization and structural transformation of the economy and plays a less satisfactory role in employment generation, export, and economic growth of the country. The ARDL model revealed that the real effective exchange rate and credit have positive and significant effects both in the short and long runs. On the other hand, government expenditure and real interest rate were found to be positive and significant only in the long run. The results suggest that macroeconomic policies should be aligned with country’s the comparative advantage. To this end, encouraging a high-value export-led manufacturing sector and thereby strengthening Ethiopia's overseas purchasing power (improving the negative real effective exchange rate), undertaking government expenditure on capital investment (such as preferably on physical infrastructure and the development of industrial parks), and providing adequate financial services will leverage private sector investment in Ethiopia.