Economy to grow by 5.7%

Rwanda's economy is steadily recovering from the 2013 slowdown with the World Bank projecting a 5.7 per cent growth rate for 2014, slightly lower than the government and the International Monetary Fund's projection of 6 per cent.

Rwanda’s economy is steadily recovering from the 2013 slowdown with the World Bank projecting a 5.7 per cent growth rate for 2014, slightly lower than the government and the International Monetary Fund’s projection of 6 per cent.

The World Bank said in its Rwanda economic update report, released yesterday, that the lagged effect of the aid shortfall to the economy was extended to the second half of 2013 decelerating both public and private sector activities. 

Toru Nishiuchi, a World Bank economist and co-author of the report on Rwanda’s economic outlook, said in addition to Gross Domestic Product growth rates, turnovers of services and industries have been picking up, further raising hopes that the growth in 2014 will be higher than that registered in the previous years.

In 2013, the economy grew by 4.7 per cent, the lowest since 2003, but quickened to 7.4 per cent in the first quarter of this year, raising hopes for better days to come. 

However, the foundation of the recovery may not be strong enough to support the 6 per cent growth projections by government.

“We have a lower prediction of the growth recovery, but the difference isn’t that big compared with the government’s own forecast,” says Carolyn Turk, World Bank’s Rwanda country manager.

The World Bank’s argument is based on the fact that the country’s growth has, in the past, heavily relied on a large public sector but with limited private sector investment, calling for urgent policy interventions that would ultimately lead to ‘significant structural transformation of the economy’.

“This kind of transformation would minimise current vulnerabilities in the economy and enable Rwanda to sustain its high growth rates into the next decade,” Turk added.

Amina Rwakunda, a senior economist at the Ministry of Finance’s microeconomic policy unit, acknowledges the concerns outlined in the report, but points out that the government is “confident it will achieve the target or even better.”

“I strongly believe we can still meet our projections because the indicators in the first quarter of the year show that the economy will make stronger gains,” Rwakunda said.

However, Rwakunda concedes that high lending rates among commercial banks, coupled with an unpredictable agriculture sector, could taper those prospects.

Hindrances

World Bank’s Nishiuchi said while the central bank notes that new loans to the private sector grew by 47 per cent in the first half of 2014, the growth was boosted by a few big deals, including one in the energy sector.

“So you will find that without these few big deals, the growth in new loans could be below 30 per cent, meaning there are still issues with credit access and affordability,” Nishiuchi said.

High interest rates are among the hindering issues raised; however, the banks attribute the interest rates to the high operational costs.

Nishiuchi said banks should not use this as an excuse, noting that financial institutions in Kenya experience a similar challenge, but have comparatively lower rates.

As of July 2014, Kenyan lending rates were at 16.91 per cent compared to Rwanda’s average of 17.6 per cent.

“There’s low competition in the banking sector and this could explain why lending rates are not responding to the reductions in policy rates of the central bank,” Nishiuchi added.

Moving forward, the economic outlook report recommends that Rwanda should advance policies geared toward economic structural transformation.

This, the Bank said, will help the country steer away from aid dependency, public sector-led and domestic demand-driven economy.

The goal is to create a self-reliant, private sector-led economy. This can be achieved by growing net exports supported by addressing constraints that hinder private sector investment such as energy and transport bottlenecks.

 

Have Your SayLeave a comment