DETERMINANTS OF CURRENT ACCOUNTS IN RWANDA (1980-2022). AN ECONOMETRIC ANALYSIS.

Abstract

This study is intended to assess the determinants of current accounts in Rwanda. The research question is to evaluate the effects of real exchange and inflation, level of foreign direct investment and net income from abroad affect economic growth of Rwanda, extent does broad money and government expenditure affect economic growth of Rwanda? Using annual data for Rwanda 1980 to 2022. To achieve the objective of study Auto Regressive Distributed Lagged model has been used to show the short run and long run effect of current account determinants on Gross Domestic Product (GDP). In this study, diagnostic tests and the results confirmed that the model was good where the independent variables jointly explain the dependent variable. The results test suggests that the variables were not seriously affected by heteroskedasticity and serial correlation problems. The findings indicated that the determinants of current account such as foreign direct investment, broad money, net primary income, government expenditure and inflation affect positively the gross domestic product while exchange rate and net secondary income negatively affect Gross Domestic Product. It also showed that there is the long run relationship of variables based on the results from the unit root test of residuals. The results also showed that the coefficient of Auto Regressive Distributed Lagged model on CointEq(-1) is negative and it was statistically significant, leading the model to be co-integrated and errors were corrected in the long run. In summary, our study suggests that various factors, including foreign direct investment, broad money supply, net primary income, and government expenditure, have a positive impact on Rwanda's economic growth. On the other hand, exchange rates and net secondary income have a negative effect. These findings can be valuable for policymakers and economists working to understand and improve Rwanda's economic performance.