Effect of External Debt on Economic Growth in Rwanda

Abstract

External debt plays a crucial role in financing economic development, particularly in developing countries like Rwanda. However, its effect on economic growth remains a subject of debate in Rwanda as excessive debt may lead to debt distress and hinder long-term growth. The fresearch fstudy examined the fEffect fof external fdebt fon feconomic fgrowth fin fRwanda utilizing time series data from f1990-2023. This fresearch was fdone fin forder fto fobtain frelevant finformation ftowards fthe fobjective fof fthis research study which is to fexamine fthe fpossible frelationship fbetween fexternal fdebt fand feconomic fgrowth fin fRwanda,to analyze fthe flong-term fand fshort-term f fdynamic frelationships fbetween fexternal fdebt fand feconomic growth, fto fexplore fhow fmacroeconomic fvariables, fsuch fas finflation fand fexchange frates, fmediate fthe effect fof fexternal fdebt fon fRwanda’s feconomic fgrowth. fThe fstudyfused dataf fcollected from fCentral bank, fNational finstitute fof fstatistics fof fRwanda ,,Ministry of Finance and Economics and world Data Bank for a fperiod fof f33 fyears fstarting ffrom f f1990-2023.The study employed an econometrice model especially SVAR model to invesutgate the relationship between external debt and economic growth in Rwanda . The unit root test indicated some variables are stationary at level while others are stataionery at first differencing .Variance decomposition results highlight that key macroeconomic variables are interdependent over time, emphasizing the interconnected nature of economic growth and debt dynamics. The Cointegration test indicated that there is a long term relation ship between the macro economic variables . The results of the study found a positive relationship between external debt and Economic growth in Rwanda. Policymakers should ensure that external borrowing remains within sustainable limits to avoid excessive debt burdens as this retards economic growth. Further studies should investigate the effect of external debt on sectoral growth to provide more targeted policy interventions in Rwanda