Effects of Exports and Imports on the Balance of Foreign Trade in Rwanda Using Principal Component Analysis (2010-2017)

Rwandas BOT deficit has continued to widen overtime despite the measures taken by the government to reduce importation and encourage exportation. The purpose of this research project is to apply principal component analysis technique to determine the effects of major export and import commodities on Rwandas balance of trade. Specifically the study aimed at determining the principal components of the various groups of exports and imports using PCA, testing for the stationarity of BOT and investigating the effects of key export and import components on the BOT in Rwanda. Time series secondary data from NISR and BNR for the period 2010 to 2017 was processed and analyzed using SPSS and Eviews. The results indicated that there were 2 principal components 1st and 2nd per group. Food and drinks e. g. tea, coffee, wheat and vegetables and minerals were the major exports while electrical and motor vehicle appliances e. g. transformers, motors for goods, passengers and special purpose motors and medical instruments were the major imports. BOT was stationary at first difference. Major exports had significant positive effects whereas major imports had significant negative effects on BOT. The study recommends the use of PCA as data reduction technique by NISR and BNR. The study further recommends various export promotion strategies and imports reduction strategies to be adopted by the government in order to reduce the BOT deficit.