MACROECONOMIC DETERMINANTS OF ECONOMIC GROWTH IN RWANDA (1980-2021)

Abstract

Rwanda’s public-sector led development model has shown weaknesses whereby public debt increased significantly in recent years. Rwanda’s heavy reliance on large public investments (at 13% of gross domestic product or GDP in 2019) has led to substantial fiscal deficits financed through external borrowing. The purpose of this study was to assess the literature and investigate both theoretical and empirical, macroeconomic determinants of economic growth in Rwanda. In the study Johansen cointegration approach and vector error correction model were used to test support hypothesis and model long-run and short-run relationships, we developed a model that relates gross domestic product Growth in Rwanda to Foreign direct investment, Manufacturing, Consumer Price Index and exchange rate. While my works were conducted on the existing effects of macroeconomic determinants (CPI, MANIF, EXR and FDI) on economic growth. The specific objectives were to examine whether the level of foreign direct investments flows influences gross domestic product (GDP) in Rwanda; to assess whether Manufacturing influences economic growth (GDP), to assess whether consumer price index (CPI) influences economic growth (GDP) in Rwanda and to find out if exchange rates determine economic growth in Rwanda. A 1% increase in foreign direct investment (FDI) would increase 0.068% in GDP is statistically significant in explaining changes in GDP, suggesting that attracting FDI is important as far as increasing GDP in Rwanda is concerned; 1 percent increase to inflation leads to 0.06% decrease in GDP of Rwanda. The results agree with a priori expectations that macroeconomic instability discourages GDP and is consistent with Çevis et al. (2007); a unit in exchange rate would increase GDP at 0.25% and the exchange rate is statistically significant to influence GDP; The manufacturing has a positive relationship with GDP in Rwanda. This result is consistent with prior expectations. The results suggest that 1% increase in manufacturing leads to 0.6% increase in GDP of Rwanda.