Impact of Macroeconomic Factors on Manufacturing Productivity in Ethiopia

Abstract

This study examines the main impacts of macroeconomic factors on manufacturing productivity in Ethiopia using a time series analysis from 1980 to 2020. The study reveals short-term and long-term determinants of manufacturing industry development. The Ethiopian manufacturing sector was able to achieve a vast change in value-added, especially between 1999 and 2020. However, from 1980 to 1999, the growth rate was erratic and slow, and around 1995 it recorded its worst performance. In the short term, the vector error correction model (VECM) results show that the first lag of manufacturing value added and real interest rates greatly impact manufacturing productivity, but other variables have no short-term impact. In the long run, variables such as the balance of payments, external debt, and real interest rates contribute to the positive development of the manufacturing sector, while other variables such as the exchange rate, monetary sector credit, and broad money balance affect manufacturing sector productivity negatively. Therefore, the Ethiopian government should pay due attention to improving the sector. Although the government is making great efforts to establish various industrial parks in the country, it lacks policies and subsidies for specific manufacturing sectors that can produce necessities. As the level of inflation and cost of living in the country intensify, targeting and prioritizing the manufacturing sector's production and productivity will be the best and most recommended solution so far.