1.2 The research Problem
Thanks to the direct control of credit and prices, inflation
was kept at a low level during the 1980s, an average rate of 4.7%. In the
context of the 1990-1994 war, inflation was bound to increase and it indeed
reached 64% in 1994. During the 1996-2000 period, the progressive restoration
of institutions and security in the entire country, the control of public
expenditure and monetary policy allowed the country to contain inflation at an
average level of 5.4%. During the 2001-2005 periods, inflation was kept at an
average rate of 6.7%. (Musoni 2009:5)
Rwanda's economy in 2008 developed in an unfavorable
international economic environment characterized by a worst inflationary shock
and the current global financial crisis. The world economy experienced
important inflationary shocks during the first half of 2008 due essentially to
the increase in world oil and food prices. On annual average, inflation in
advanced economies was 3.4% in 2008 against 2.2% in 2007.
Despite the unfavorable international environment, Rwandan
economy continued to perform well with the real GDP growth rate of 11.2% in
2008 following 7.9% recorded in 2007. This growth was mainly due to a strong
recovery in the agriculture sector which registered a growth rate of 15%
compared to 0.7% in 2007 and a noticeable improvement both in industry and
service sectors which increased by 10.7% and 7.9% respectively. The secondary
sector growth was driven mainly by good performance in the construction and
public works sub-sector (26%) and production of electricity (16.9%) despite a
decline in manufacturing of 4.1%. (NBR 2008:3)
According to the NBR (2009:4), the overall inflation
accelerated from 6.6% in December 2007 to 22.3% in December 2008, despite the
improvement in agriculture production and the low growth of broad money. In
terms of annual average, the inflation in 2008 reached 15.4%, against 9.1% in
2007 due to decline in import prices, good performance of agricultural
production, annual average inflation dropped to 10.3% from 15.4% in 2009.
The inflationary pressures resulted particularly from the
international fuel and food prices. Compared to the year 2007, terms of trade
deteriorated by 16.5% in 2008, their index falling from 150.5 in 2007 to 125.7
in 2008. Contrary to the year 2007 when the export average value had increased
more than the import average value (18.2% compared to 2.2%), trends were
reversed in 2008.
The questions that come to mind after considering these issues
concerns factors that explain inflation in Rwanda. Relatedly, is there an
economically interpretable relationship among Consumer prices Index, output,
interest rate, money supply and the exchange rate? And lastly, how can we use
these variables to forecast future inflation rate in Rwanda?
1.3 Research objectives
In view of the above research problem, the broad objective of
this study analyzes statistically factors affecting inflation rate in Rwanda.
This involved specifying and estimating an inflation regression model with the
consumer prices index as the dependent and, gross domestic product, interest
rate, money supply and exchange rate as the explanatory variables.
The specific objectives of the study therefore were:
i. To determine the effect of Money supply on the inflation
rate in Rwanda;
ii. To determine the effect of the gross domestic product
(output) on the inflation rate in Rwanda;
iii. To determine the effect of exchange rate on the inflation
rate in Rwanda;
iv. To determine the effect the interest rate on the inflation
rate in Rwanda.
| 
