Effects of external debt on private investment in Rwanda

Abstract

In the early 1970s, low-income countries received huge loans from abroad. But their external debt became unsustainable over time. In Rwanda, current external debt stock and debt service are unsustainable, and private investment is very low in the country. At the end of 2000, the debt-service to export ratio was 40.9% against the threshold of 15%. The external debt net present value to export ratio accounted for 523%, which is far beyond the threshold of 150%. The objective of the study is to investigate whether the Rwandan external debt burden has contributed to weak private investment in the country. For this purpose, two hypotheses need to be tested. First, the debt-service ratio is expected to have a negative effect on private investment. Second, public investment is hypothesized to have positive effect on private investment. The study is carried out using the OLS, and the time series data analysed cover the period 1970 - 2000. Gross private investment (PRI) is specified as a function of the debt-service ratio (DSR), gross public investment (PUI), terms of trade (TOT), total external debt stock (EDT), interest rate (IR), GDP lagged by one period (Y-I), credit to private sector (CPS) and gross private investment lagged by one period (PRI(-1 )). A dummy variable was introduced to accommodate political stability (POST) in the model.