Abstract:
This study generally analyses the significant endowments of external debt on exchange rate in Rwanda. The study obtained annually data analyzed from 2002-2021, using Augmented Dickey-Fuller (ADF) unit root test to measure stationary of variables. Co integration approach applied to distinguish the robust among the variables with specification of short-run and long run. Cusum test has been used to test if the economy is dynamically stable, and the result found, can ensure that the country’s economy is dynamically stable where we have find that the blue line lies between the red lines despite a minor deviation. Trend analysis have been used to estimate the trend, the findings shows that there is positive trend for all variables.It has been observed that the association between the two variables exists to prove the questions that have been formulated. The annual data from 2002 to 2021 has been used to steer the conclusion. By using this data, the stationary test is used to show if the time series data have unit root or if they don’t have unit root. By using ADF we test at which level they are stationary if it is at 1 difference or 2 differences, some variables are stationary others are non-stationary. The Ordinary Least Squares Method (OLS) is used to analyze data between 2002 and 2021 based on long run. The study proved that exchange rate and external debt have a positive relationship in the long run in the Rwandan economy; obviously various unknown factors also affect the exchange rate. Using Error Correction Model (ECM) by allowing for short-run adjustment dynamics, short-run error correction model estimates if there is a change on external debt input variables which will negatively affect the exchange rate. Both OLS and ECM show that variables are significant based on long run and short run model analysis.Moreover, if the country’s economy wants to keep the economy stable it is not only external debt that can be used but there are other factors that can be used, there are some suggestions that the government should improve its utilization of debt and encourage savings in the country so it will not have to seek for help from foreign countries, this will eventually lead the country towards economic stability and developed.
