Foreign Direct Investment and Rwanda’s Trade Balance

Abstract

The Rwandan economy has a long-run trade deficit challenges. This issue, being a significant source of the economy's external vulnerability, has been the subject of numerous efforts and a variety of strategies over the years. Given that it has a significant impact on the country's employment, balance of payments, and rate of economic growth, an addition to the existing literature could provide an impetus to a medium-term solution. This research answers the question on whether the FDI has a statistically significant impact on the trade balance of Rwanda and explores other factors that are likely to influence the trade balance of Rwanda. The study aims to complement previous studies and shed light on the trade balance dynamics in Rwanda using data and applying the Ordinary Least Square (OLS), and error correction model (ECM), for the period 2000–2019. Estimation results indicate that FDI does not significantly affect the trade balance of Rwanda neither in the short-run, nor in the long-run. On contrast, the results indicate that in the long run, increases in inflation, Consumer Price Index and degree of openness improve the trade balance, while increases in Rwandan capital formation and total debt service deteriorate the trade balance. In the short-run, findings show that, increases in Gross Capital Formation and Total Debt Service negatively affect the trade balance of Rwanda.