VAR Analysis of Economic Growth, Domestic Investment, Foreign Direct Investment, Domestic Savings and Trade in Rwanda

Abstract

This paper analyses real Gross Domestic Product (GDP), Domestic Investment (DI), Foreign Direct Investment (FDI), Domestic Savings (DS) and Trade (TR) in Rwanda for the period 1970 to 2011. GDP and DI have an upward trend and annual growth of real GDP was around 8% in average for all period. FDI and DS have remained below 2% of GDP each and trade balance of Rwanda is always negative. Augmented Dickey-Fuller (ADF) tests show that GDP, DI and FDI are not stationary at the level but the first differences are stationary. VAR (1) was identified as the appropriate model according to Akaike information criterion, Schwarz information criterion and Hannan-Quinn information criterion. Granger causality tests show that there is bi-directional causality between GDP and TR and TR and DI and unidirectional causality from GDP to DI, from DS to GDP, from DS to DI and from DS to TR. These findings show that GDP can be used to promote Domestic Investment and Trade. Domestic savings have significant effects on GDP, DI and TR. VAR was estimated and the forecasted values of GDP, DI and FDI in 2011 are respectively, 3,843.6233 million, 22.67% and 0.95% while their actual values in 2011 are 3891.9million, 22.7% and 1.66%. There is under-prediction for GDP, DI and FDI. The differences can be explained by the efforts of the Government of Rwanda to promote GDP, Domestic Investment and Foreign Direct Investment.