Macroeconomic Policy Determinants of Service Sectors Output Growth in Ethiopia

The purpose of this study is to analyze the relationship between macroeconomic policy variables and the service sector’s output in Ethiopia from 1981 to 2021, utilizing SVAR and VECM methodologies. Data were obtained from World Development Indicators. Over this period, the service sector contributed 35.63% to GDP, with annual growth contributions of 6.83% in 2020, primarily driven by traditional activities such as agriculture commodity trading. The results indicate that human capital, gross capital formation, interest rates, official exchange rate and imports positively impact long-term service sector output. In the short term, gross capital formation negatively influences service sector output. Conversely, exports significantly boost service sector performance while human capital, interest rates, official exchange rate, imports and inflation have a minor impact. The analysis highlights the need for Ethiopia to implement both short-term and long-term macroeconomic policies to enhance the service sector. Long-term strategies should focus on improving human capital development, increasing gross capital formation and managing interest rates and the exchange rate. Short-term measures should aim to incentivize human capital and fiscal investments, stabilize financial indicators and regularly assess macroeconomic trade policies. These strategies are intended to strengthen the service sector and promote overall economic stability and growth in Ethiopia.