Response of agricultural exports to fluctuation in exchange rate in Rwanda. Case of coffee and tea between years 2001-2016

Abstract

The agriculture sector is the backbone of Rwandan economy with tea and coffee as the major source of export earnings. However, between years 2001 and 2016, the share of agriculture exports to the GDP has been fluctuating considerably, and yet it has not been established if this is due to exchange rate volatility. The overall effects of these fluctuations are not obvious and empirical literature is not conclusive on the overall impact of real exchange rate fluctuations on agriculture exports, hence the need to carry out the current study. The general objective of this study was to contribute towards the improved performance of share export to GDP through better exchange rate policy, with reference to coffee and tea exports in Rwanda from 2001 to 2016. Monthly time series data for 16 years from 2001 to 2016 were used and analyzed by STATA and E-views. Descriptive statistics along with trend analysis were used. GARCH model was used to determine exchange rate volatility and ARDL was used to estimate the main model. Results indicated that there was a reduction in quantities of coffee exported by 0.5% per month while tea had a steady growth rate of 0.3% per month on average. A positive relationship between exchange rate volatility and coffee prices was observed in the long-run where the coefficient was 1.5. There was a negative relationship between exchange rate volatility and prices of tea in the short-run with -0.3 as the coefficient. In the long-run, a negative effect between the shock and volumes of coffee exported was exhibited, and the coefficient was -44.5 statistically significant at 1%. The study recommends that policymakers need to consider the existence, degree and likely effects of exchange rate volatility for each product while designing, developing and implementing trade policies. To boost competitiveness of tea and coffee, firms need to diversify the range of products and aggressively search for niche markets. This will lead to international trade development, job creation, poverty reduction and to a higher rate of economic growth in Rwanda.