Effect of Currency Depreciation on Sovereign Bond Prices in Rwanda
Vicka Gladys Izere
Kigali University
Email: vickagladysizere@gmail.com
Abstract: Thisstudy examinesthe effect of currency depreciation on sovereign bond dirty pricesin Rwanda over 2011Q1–2024Q4 using quarterly time-series data from the National Bank of Rwanda, the RwandaStock Exchange, the IMF, and the World Bank. Despite the persistent depreciation of the Rwandan franc (RWF) against the US dollar (USD) and the growing importance of domestic sovereign bondsin financingnational development, no prior multivariate study had simultaneously quantified the transmission channelslinking currency depreciation to bond prices in Rwanda. The study employs the USD/RWF exchange rateas the principal independent variable, with the Central Bank Rate (CBR) and money market liquidity (reverse repo operations) as transmission mechanisms, and inflation, inflation expectations, and bond maturity as control variables. The dependent variable is the sovereign bond dirty price. Theoreticalanchors include the International Fisher Effect, Purchasing Power Parity, the Liquidity Preference Theory, the Monetary Transmission Mechanism, the Sovereign Debt Theory, and the Portfolio BalanceTheory. Given a mixed order of integration revealed by Augmented Dickey-Fuller and Phillips-Perron unit root tests, the study applies the Autoregressive Distributed Lag (ARDL) bounds testing approach (Pesaran, Shin & Smith, 2001), estimating an ARDL(2,0,4,2,2) model selected by the Akaike Information Criterion. The bounds test confirms cointegration (F = 4.479 > upper bound 3.872). Findings show that the exchange rate exerts no significant direct effect on bond prices, the CBR has a significant negative effect in both the long and short run, and money market liquidity significantly affects bond prices only inthe short run. The error correction term (−0.115, p < 0.01) confirms convergence. The study concludes that currency depreciation influences Rwandan sovereign bond prices indirectly through the monetarypolicy channel, offering actionable insights for policymakers, debt managers, and investors.
