Foreign aid and economic growth: an econometric study of Rwanda

Abstract

This thesis aims to assess the effects of foreign aid in Rwanda’s economic growth using Quarterly data from 2006Q1–019Q4. To achieve the main objective,the specific objectives were: to demonstrate how foreign aid has caused change in exchange rate and how exchange rate has had an effect on exports. This study uses various time series techniques such as Johansen–Cointegration test, Granger causality test, Vector auto-regression(VAR) models and Variance decomposition to find out the short-run and long-run equilibrium dynamics among the variables under consideration.The empirical results confirmed that long-run relationship exists among economic growth, foreign aid inflows, domestic investment, Exports and Exchange rate in Rwanda. The results revealed that the the percentage change in foreign aid (LODA) is associated with an increase of 0.24 in real gross domestic Products (LGDP) on average ceteris paribus in long -run. It is also revealed that in long-run , the exports increased by 0.22 on average and exchange rate increase by 0.69 on average and this caused the increase of domestic investment by 0.29 on average. In the short-run ,The findings showed that LODA, LGCF, LEXPORT, and LEXR did not have an impact on economic growth in short-run. But the exchange rate was statistically significant, the results revealed that real exchange rate influenced exports in short-run, while foreign aid didn’t cause change in exports in short-run.