Does Rwanda need a new growth model?

The International Monetary Fund (IMF) Managing Director Christine Lagarde’s highly billed visit to Rwanda ended on Wednesday with a three point message imbedded in a speech delivered at Parliament Tuesday afternoon. She urged Rwanda on the need to chart a ‘future’ growth model to attain national aspirations of becoming a middle-income country. “I can see a three-pronged approach focusing on mobilizing domestic resources to reduce dependency on aid; encouraging private sector development to reduce reliance on the public sector; and harnessing the potential of regional integration to support export diversification.” But analysts say that there’s nothing ‘futuristic’ about the model that Lagarde proposed noting that all three elements mentioned are already on the government’s priority list. “That future model is already with us if you look closely, that’s the government’s current assignment,” said one government official. Finance and planning Minister Claver Gatete said in a telephone interview that there’s no need to change anything at the moment noting that the country’s Economic Development and Poverty Reduction Strategy (EDPRS) addresses all the vital elements needed for growth. Gatete noted that Lagarde’s observations such as private sector development already form the core of the EDPRS II whose main goal is to promote private investment for faster economic growth and to reduce extreme poverty from 45 to below 30 percent. Sunday Times asked John Kayemba, an economist at the IMF Rwanda office to shade more light on Lagarde’s message and he said his boss was simply pointing out the areas where Rwanda needs to put more emphasis to achieve EDPRS II targets. “It’s not about what Rwanda is doing right or wrong, it’s about areas where efforts must be concentrated to attain set goals,” said Kayemba. Those areas, according to Lagarde include fostering self-reliance to reduce aid dependency, promoting the private sector through an efficient business climate and increasing export diversification by opening up to reach out to its neighbours. Today, domestic tax revenues account for 16 percent of GDP—still below the 25 percent target that the East African Community aims to achieve. Experts believe that in order to double domestic revenues, it calls for more efficiency in the tax administration as well as attracting more investments to widen the tax base. Rwanda Revenue Authority’s on-going innovation such as introduction of electronic billing machines to boost efficiency in VAT collection is a step towards that direction. Other efforts include the use of ICT to ease tax declaration and filling through electronic services and interconnectivity with banks all that government believes will help RRA reduce on its operational costs while increasing on the amount it remits to the national treasury. The government has recently amended the VAT law to seal any loopholes in the implementation of the electronic billing machines. “The Fund has been heavily engaged with Rwanda in providing technical assistance and capacity building in revenue administration and collection. We will continue this support to broaden the tax base and strengthen administration so that Rwanda can bridge this gap,” Lagarde pledged. More investments More efforts will also be directed at attracting more investments not only to boost production, but also broaden taxable base. However, while Lagarde agreed that Rwanda’s business environment is one of the best in Africa, she cautioned that there are still infrastructure gaps that hold back faster private sector growth. “In particular, key infrastructure projects in transportation, water and energy need to come on stream to unlock its full potential,” she said. According to Rwanda Development Board boss Francis Gatare, the business environment will continue to improve in order to attract more foreign direct investment. A major challenge to addressing these infrastructural gaps, Lagarde noted they need to be done within a reasonable resource envelope so as not to jeopardize debt sustainability. “The Fund has been engaged with the government in exploring optimal combinations of financing sources—increases in revenue and judicious resort to external borrowing—to finance critical infrastructure projects,” she said. Access to markets Other major elements in Lagarde’s proposed growth model include the need for Rwanda to invest in skilling of the labor force to reap the dividends from the demographic transition. Lagarde sent the message wrapped in a borrowed quote from President Paul Kagame that “Twenty years ago, Rwanda had no future, only a past. Today, half of all Rwandans are under age of 20”. This is the future that is before you—a future for all Rwandans.” In all this, expanding Rwanda’s opportunities through deeper involvement in regional integration is important for Rwanda. Lagarde noted that for a land-locked economy such as Rwanda, regional integration is a potent instrument to tap into bigger markets and new products. “Deeper engagement in the East African Community would allow you to benefit from regional infrastructure projects in key areas, including power generation and transportation. These steps are surely critical in unlocking Rwanda’s growth potential,” she added. These are the things Lagarde wants in Rwanda’s future model. But they’re also elements that it seems to be already working on making it difficult to draw a distinction from the country’s present and proposed future growth models. At some point she calls her proposals, ‘reforms’ that are ‘necessary’ to sustain Rwanda’s success into the future.”

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Does Rwanda need a new growth model?