Macroeconomic Factors Affecting Agricultural Transformation in Ethiopia

Agriculture is vital to Ethiopia's economy, but its GDP contribution is declining due to structural transformation. Its growth remains limited by economic instability, inadequate finance, low technology adoption, and weak sectoral linkages. The study examines macroeconomic factors influencing agricultural transformation in Ethiopia using annual data from 1983-2024, employing VECM, Granger causality, and SVAR models to assess short- and long-run relationships. The results confirm the existence of both short-run and long-run relationships among agricultural output and the selected macroeconomic variables. The error-correction coefficient indicates that approximately 40.2% of deviations from long-run equilibrium are corrected annually. In the short run, GDP has a significant negative effect on agricultural output, while domestic credit and inflation show positive effects in the VECM. However, the long-run SVAR results indicate that GDP, domestic credit, inflation, urbanization, and REER have significant negative effects on agricultural output. Labor has a positive but statistically insignificant effect, while exports have a negative and statistically insignificant effect. The impulse response analysis further indicates that agricultural output is sensitive to persistent macroeconomic shocks, while variance decomposition shows that agricultural-sector shocks remain the dominant source of fluctuations in agricultural output. The findings show that economic growth alone is insufficient for agricultural development. Sustainable transformation requires improved finance, technology, productivity, infrastructure, and resource allocation. The study recommends macroeconomic stability, targeted agricultural finance, mechanization, irrigation, affordable inputs, managed urbanization, and stronger linkages with manufacturing and agro-processing to promote productive and resilient agriculture in Ethiopia.