Effect of Fiscal Policy on Investment Growth in Rwanda

Investment has been recognized as one of the pillars for achieving sustainable economic growth. From different studies done in Rwanda on investment, none of them assessed the effect of fiscal policy on investment in Rwanda intensively disaggregate fiscal policy variables. The effects of fiscal policy on investment have therefore not received much attention despite the fact that the Rwandan government has intensively used fiscal policy for its promotion. The general objective of the study is to analyze the effect of fiscal policy on investment growth in Rwanda. This study was used both descriptive and analytical research design. Ordinary Least Square (OLS) method was employed in analyzing time series data captured over the period under study. Granger casualty test used to test causality relationship between fiscal policy and investment growth. The study used annual time series data spanning from 2000 to 2017. The residual is stationary, t-statistic (-4.927723) is less than critical value (-1.961409) and the probability (0.0001) is less than 5 % and this table shows that the Durbin- Watson Stat is greater than R2 which is (1.131954) greater than (0.953128). Basing on those results, the researcher found that R-squared is significant at 95 %. This means that three fiscal policy contributed to the investment growth of Rwanda. The results shows that all independent variables have positive impact on investment growth, all coefficients of variables have positive sign, (5.265210) Tax, (4.012108) Gd and (2.516107) FCI. This shows that fiscal policy has been contributed positively on investment growth in Rwanda from 2000-2017. The development of fiscal policy is important in sustaining investment growth. The co-integration test illustrates that the variables were co-integrated and implying that a long run relationships exists on the investment growth in Rwanda. Therefore researcher accepts H1#0 and fails to reject H0. The findings of this study call for government of Rwanda intervention in three areas: reexamination of government spending to eventually make it complementary to investment growth; channeling more credit to the private sector and designing appropriate policies that deal with the current high domestic public debt.