Private Sector Investment in Sierra Leone: An analysis of the Macroeconomic Determinants

Many developing countries experienced a downturn in economic growth in the early 1980s. In Africa, the growth rate of income per capita fell significantly following persistent decline in domestic investment. For Sierra Leone, private investment as a share of GDP declined steadily from 6.9% in 1986 to around 3.1% in 1988. This trend further deteriorated to a record low of about 2.4% in 1993. This study principally aims at evaluating the macroeconomic determinants of private investment in Sierra Leone using times series data for the period 1966 to 2008. In order to account for factors that best capture the behaviour of private investment decisions in Sierra Leone, a more flexible version of the accelerator principle was adopted in specifying an investment equation for the study. To empirically determine the relationships between private sector investment and some key macroeconomic variables, the study employs Ordinary Least Square estimation following an examination of the time series properties of the data set using unit root tests. The results from the unit root tests for stationarity show that all the variables are stationary with breaks, justifying the use of an Ordinary Least Square estimation approach. The empirical findings from this study show that, while private sector investment is positively driven by real GDP, public sector investment, and credit availability to the private sector, it is, however, negatively driven by the real interest rate, inflation, and political instability, characterized by a decade-long civil conflict.