The Effect of Exchange Rate Fluctuation on International Trade in Rwanda

This paper is empirically examine the effect of exchange rate fluctuation on international trade in Rwanda employing annually time series data from 1990-2014. The Vector Error Correction (VECM) model has been used to capture both short and long-run relationships and the findings show the insignificant relationship between exchange rate and export as well as between exchange rate and import. The Granger causality test have been used to study the causal effect of one variable on other variables, basing on the test results we found that GDP to export and exchange rate to export hold bi-directional cause to each other. Whereas, on the other side we found that only GDP to import hold bi-directional causation between them. This paper finds evidence that exchange rate fluctuation is the main factor that affects the level of international trade measure in terms of export and import flows in Rwanda. It appears that if policy makers wish to promote export and to decrease import in order to improve the balance of trade in Rwanda, they have to keep an open eye on steady appreciation of the exchange rate and to reduce volatility.