Determinants of Rwanda's trade pattern

Abstract

Trade plays an important role in Rwanda’s economy, influencing the level of its economic growth, balance of payments and employment. Rwanda has initiated several trade policy reforms aimed at promoting trade. Given the role of trade in the economy, it is important to conduct a study for better understanding the determinants of Rwanda’s trade pattern with the rest of the world. This study was conducted using the gravity model which is designated to study the force of attraction between two objects with the assumption that this force is positively related to their mass and inversely related to the distance between them. This study focused on five specific objectives, which are to assess the impact of the economic size or mass (GDP) on Rwanda’s trade pattern; to assess how geographical distance between Rwanda and its trading partners affects Rwanda’s trade pattern; to measure the effect of exchange rate on Rwanda’s trade pattern; to examine how partner trade population size affect Rwanda’s trade pattern, and to assess if trade agreements or common border are significantly influencing Rwanda’s trade pattern. The analysis was done using STATA, while data were collected from World Bank Development Indicators dataset, National Institute of Statistics of Rwanda (NISR), National Bank of Rwanda (NBR) and data of distance collected from distancefromto.net. Findings of this study show that Rwanda’s trade pattern is positively correlated with the size of the economy of Rwanda as well as that of its trading partners, Rwanda’s exchange rate and integration in trade agreements while trade is negatively correlated with the distance between Rwanda and its trading partners and the population size in trading partners. Based on these results the study gives several recommendations for improving Rwanda’s trade.