An Analysis of the Macroeconomic Determinants of Private Investment in Sierra Leone
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Date
2002-06
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Addis Ababa University
Abstract
This paper endeavors to identify the Macroeconomic determinants of private investment in
Sierra Leone using time series data spanning from 1966 to 1998. From a simple trend analysis,
it was observed that private investment (as a ratio of GDP) rose steadily from about 6.5% in
1966 to around 8.5% in 1978. After 1978, it fluctuated drastically reaching a minimum of
around 3.8% in 1980 and subsequently shooting up to around 11.5% in 1981. Thereafter,
private investment (as a ratio of GDP) decline continuously reaching a minimum of around
3.0% in 1998. Several reasons ranging from external shocks, inappropriate fiscal and monetary
management, and the ten years of hostilities among others, were responsible for this.
The methodology employed in carrying out the analysis of the study specified a version of the
flexible accelerator model of investment for Sierra Leone following the works of Solimano
(1990), Chhibber and Shafic (1990), Blejer and Khan (1984), Chhibber and Van Wijnbergen
(1988), Musalem (1988), and Scmidt-Hebel and Muller (1991). A dummy variable taking the
value of one from 1991 to1998 and zero otherwise, was used to take account of the war in
Sierra Leone and enters the regression. This is followed by estimation techniques on the basis of
Co-integration analysis using both the Johansen’s (1988) procedure and the ECM approach.
On the basis of the Johansen’s procedure, a single cointegrating vector was identified. Both the
long-run and a dynamic private investment models were subsequently estimated. From the
estimates of the long-run model, the results indicated that while real GDP and public sector
investment positively affect private investment, interest rate, real exchange rate and inflation
negatively affect private investment. On the basis of the Short-run estimates, while public sector
investment, real GDP and the interest rate have positive effect on private investment, inflation
and the real exchange rate negative effects on private investment. Though not significant, the
war dummy show a negative sign indicating the adverse effect of the war on private investment
in Sierra Leone.
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Macroeconomic Determinants