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%. It 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.
CHAPTER ONE
INTRODUCTION
Background information
Rwanda is a small, landlocked, agriculture-based country of 26,338 km2. With 12 million inhabitants, Rwanda is one of the ten most densely populated countries in the world (MINAGRI 2015). Regardless of efforts to expand the economy, Rwanda stays an economy deeply dependent on agriculture regarding employment opportunities (UNDAP, 2013). During the last decade, agriculture contributed more than 30% of the GDP and employed over 70% of the population (NISR, 2015). During the Economic Development and Poverty Reduction Strategy one (EDPRS I) from 2008 to 2012, the contribution of agriculture to poverty reduction, food security, and economic development was significant (Tom, 2015).
The government has envisaged agriculture sector to have an annual average growth of 8.5% over the course of EDPRS II (2012-2017) (NISR, 2015). Agriculture in Rwanda is dominated by small-scale, subsistence farming under traditional agricultural practices and rain-fed agriculture (Broka et al., 2016). Cassava, maize, Irish potatoes, sweet potatoes, plantain, beans, rice, milk, and beef are agricultural commodities that jointly make up the top 80 percent of the value of agricultural production including coffee and tea which are important export crops (Broka et al.,2016).
Coffee was introduced in Rwanda in 1904 by German missionaries (NAEB, 2011). Around 1930, it was a key driver of the economy, and the Belgian colonial government made it obligatory for farmers to grow coffee but at the same time controlled prices and charged high export taxes. The consequence of this was that the farmers gained very little from their coffee. (Nzeyimana et al., 2013).
The most important change was the crisis of the world coffee price drop in 1990’s, which was followed by the 1994 genocide in Rwanda. These two incidents took a huge toll on Rwandan coffee industry. The year 2000 was the time to rebuild the sector whose cleaning and processing infrastructure was completely devastated . It took about ten years for the industry to begin to recover, and now there is a National Coffee Strategy (NCS) to further recovery , improve and expand the industry. Farmers and their families now benefit from higher and more stable prices (MINAGRI, 2012).
Tea was introduced in Rwanda after coffee in 1952 six years before independence. Tea is grown in areas endowed with favorable natural conditions of high altitude, varying from 1500 to 3000 meters above sea level and well-distributed rainfall. Given these conditions; production of tea in Rwanda goes on all year round. With some of the best clones grown and using efficient and diligent plucking, Rwanda produces some of the brightest, briskiest, and most aromatic tea in the world (MINAGRI, 2013).
Rwandan tea is sold through auction and to private buyers. About 80 % of the tea is sold through Mombasa auction (the second biggest auction center in the world) thus giving Rwanda tea a broader scope of exposure. The remaining 20% is sold to private buyers based mainly in Mombasa (Kenya) but whose clients are all over the world (MINECOFIN, 2014). About 60-65% of Rwandan tea goes to Pakistan, of the 20 % sold to private buyers and the main grades from the top gardens are mainly sold in UK and USA (NAEB, 2015). The balance is sold to Egypt, Middle East, South Africa, Sudan, Somalia and former Soviet Union States (Gathani and Stoelinga, 2013). Fluctuations in tea and coffee production and prices affect Rwanda’s export earnings (MINICOM, 2014).
Exports contributed 15% of GDP in 2014 (World Bank, 2015) and are divided into formal and informal exports. Formal exports are again divided into traditional, non-traditional exports and re-exports. Traditional exports are composed of tea, pyrethrum, coffee, minerals (tin, coltan, and Wolfram), as well as hides and skins. Non-traditional exports are dominated by milling industries, especially food and beverages, edible vegetables, roots, tubers and live animals (MINICOM, 2011). Rwanda re-exports petroleum products, vehicles, machines as well as engines and minerals. The foremost commodities traded in informal cross-border exports are agricultural products and livestock, most of which are exported to neighboring countries such as Burundi, Democratic Republic of Congo, Tanzania and Uganda (BNR, 2010). Agriculture export sector is one of the vital sectors of the country vis-à-vis foreign exchange earnings. Coffee and Tea exports account for 81 percent of agricultural exports earnings and about 20 percent of total Rwanda’s goods exports (Broka et al., 2016). The export share percentage of GDP from 2000 up to 2015 shows a fluctuation where the highest share was 16% in 2007, the lowest was 6% in 2000, and the recent statistics show that the share was 15% in 2014 (BNR, 2015). Ideally, the national income is the indicator of economic growth, and the exports are one of the vital components in determining the national income. If the level of imports relative to exports is low, the national income level will be better (Were et al., 2002). An increase in a country’s total exports of goods and services can create jobs, increase foreign exchange earnings, improve the balance of payments and consequently reduce weighty external borrowing (Mabeta, 2015).
To boost exports, Rwanda has set exchange rate policy whose core objective is to preserve the external value of the national currency and also to ensure the effective operation of the foreign exchange market (Mukunzi, 2004). Rwanda introduced a flexible exchange rate regime in 1995, and its key characteristic is a controlled flexible policy (BNR, 2015). The policy’s goals are twofold: to stabilize the exchange rate and prices to enhance the economic growth as well as to link that national foreign exchange market to the world market (Mukunzi, 2004). The effect of exchange-rate variability on the volume of international trade has received considerable attention because the end results of exchange rate volatility on trade have long been at the center of the discussions on the optimality of different exchange- rate regimes (Buguk et al., 2003).
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