Abstract

Private investment is critical for post-conflict economic recovery, yet evidence on how specific fiscal policy instruments, such as taxation, borrowing composition, and expenditure types, affect domestic and foreign investment in a post-conflict set-up remains limited. This study examines whether disaggregated fiscal policies are associated with crowding in or out private investment in Rwanda, a post-conflict economy characterized by constrained fiscal space, shallow credit markets, and evolving institutions. Using a Vector Error Correction Model (VECM), on quarterly data spanning 1996 Q1–2024 Q4, the analysis captures long- and short-run dynamics between disaggregated fiscal variables, institutional quality, and private investment. The results indicate that direct taxes and domestically financed debt are negatively associated with both domestic and foreign private investment. Externally financed capital spending, on the other hand, is associated with a crowding-in effect, stimulating both local and foreign investment. Lagged measures of institutional quality also enhance investment outcomes, highlighting the conditional role of government in shaping fiscal transmission. These findings demonstrate that fiscal effects are instrument-specific, depending on funding sources and composition, and mediated by institutional and macroeconomic conditions. By integrating disaggregated fiscal analysis with institutional context, this study provides empirically grounded insights for designing fiscal strategies that support private sector-led recovery and sustainable growth in post-conflict and resource-constrained economies.

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