Abstract
The main strategy of Rwanda for having a steady growth in coffee export value and revenues was increased sales of speciality coffee. However, global coffee prices are often volatile and Rwanda has little control over the fluctuating global prices. This paper analysed the effect of exchange rate volatility on the price and exports of Rwanda coffee. In order to respond to this question, the monthly time series data on bilateral Rwanda coffee exports and real effective exchange rates from January 2001 to December 2016 were analysed. The cointegration methods and error correction model using the autoregressive distributed lag procedure andGlosten, Jagannathan, and Runkle-Generalized Autoregressive Conditional Heteroskedasticity (GJR-GARCH) model were used to analyse the data. The findings showed that the exchange rate volatility resulted in an increase in Rwandan coffee export price in the long run by 1.5% and a decrease in the short run by 0.2%. The findings also showed that the exchange rate volatility affected coffee export volumes in the long run and the short run by 44.4% and 3.8%, respectively. The real income in importing countries increased coffee prices in the long run by 3.0% and coffee export volumes in the long run and the short run by 26.9% and 38.5%, respectively. A review of monetary policy to address the issue of volatility and hedging system adoption in the Rwanda coffee sector should be done in order to stabilize the exchange rate and to consequently avoid its bad effects on coffee price and export volumes.
Highlights
The agriculture sector remains the engine of the Rwandan economy
The computed values for Augmented Dickey-Fuller Test (ADF) for industrial production, coffee export prices, and real effective exchange rate were less than the absolute critical values
The results showed that coffee prices increased in long and short run due to the volatility of exchange rate
Summary
The agriculture sector remains the engine of the Rwandan economy. According to the Ministry of Agriculture and Animal Resources of Rwanda, this sector employs 64% of the country’s labour force and provides around a third of the National Gross Domestic Product (GDP) (MINAGRI, 2020). Coffee and tea stand as major agricultural export crops and origin of foreign currencies since 1930 (NAEB, 2011). Both coffee and tea account for 81% of agricultural export earnings (Broka et al, 2016). Both coffee and tea play a major role in the monetization of the rural economy (RDB, 2021). Rwandan coffee has been distinguished as the best brewed in the world (MINAGRI, 2021) It has scooped some international awards such as “Best of the Best” and “Coffee Lover’s Choice” in a competition that attracted brands from nine countries around the world (RDB, 2021). In 2018, Rwandan coffee started trading on Alibaba, one of the world’s largest e-commerce platforms.So far, sales volumes of Rwandan coffee have grown by
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