Investigation of the Economic Factors Explaining Inflation in Burundi

This study analyzes the explanatory factors of inflation in Burundi by applying the ARDL model over the period 1990-2022. The main objective is to examine the short- and long-term relationships between inflation and some key macroeconomic variables, including money supply, trade openness, gross fixed capital formation, and GDP per capita growth. The results indicate that the model has a high explanatory power (R2 = 0.9864), suggesting that the selected independent variables explain 98.64% of the variation or evolution of inflation. The study reveals a rapid adjustment mechanism for long-term inflationary imbalances, with a correction coefficient of -0.7310 (p = 0.008), meaning that 73.10% of the imbalances are corrected each year. In the long run, a 1% increase in GDP per capita reduces inflation by 3.35%, while a 1% increase in the money supply leads to an increase in inflation of 0.67%. Trade openness has an inflationary effect (+0.90%), although not statistically significant, while gross fixed capital formation has a disinflationary effect (-1.39%), also not significant. In the short run, the effects are more dynamic. A 1% increase in productive investments initially increases inflation by 2.02%, before generating a disinflationary effect after two periods. Similarly, an increase in the money supply temporarily reduces inflation by 1.84%, which can be explained by a strategic use of liquidity. These results highlight the importance for Burundian policymakers to control the money supply, stimulate economic growth and manage investments effectively to minimize inflationary pressures. Prudent management of budget deficits and trade policies is essential to stabilize inflation and propel a process of economic development.