The economic opportunity of 2009

Minister James Musoni presented his budget for the 2009/10 and announced an overall increase in the budget of 24% in a bid to stimulate the economy and pump some liquid into the market.

Minister James Musoni presented his budget for the 2009/10 and announced an overall increase in the budget of 24% in a bid to stimulate the economy and pump some liquid into the market.

Globally, governments have followed two schools of thought on how to deal with this downturn; some have taken the supply side approach and increased spending such as America and UK, but others have simply cut spending.

We have opted for the spending route but each choice is a trade-off of negative and positive effects; increased spending brings about inflation and decreased spending affects the poorest worst.

Increasing spending will mean the government will have to hold a tight leash on public sector pay; workers will feel the pinch and will request pay rises and will point to the increased investment by the government as their right; however this will have negative effects if any public sector pay-rises are given.

24% is a massive jump in spending and will lead increased urban inflation in real terms as the overall quantity of money is increased.

Anyone in Kigali will know that prices of consumer goods particularly are prone to higher inflation but this mainly urban inflation is offset by us having a large rural population that doesn’t buy expensive goods.

A great milestone we reached was the fact that our internal resources were higher than the external remittances; such as aid, budgetary support and money sent by people in the Diaspora.

This is partly due to our extensive efforts and also because some Western governments have reneged on their promises; there is a silver lining to every cloud, an opportunity in every crisis.

Loans have been reduced as the burden of these loans tend to cripple a developing nation over time, in this harsh economic crisis interest rates for these loans will have gone up and we would do well to avoid them.

In the Keynesian model; public spending on infrastructure is increased to plug the shortfall of private sector revenues; however not much new money was promised for the cash-starved construction sector that needs huge capital but produces huge profits.

Overall growth will be an enviable 5.6% which is less than what we are used to but good in the present global climate; this comes mainly from growth in agriculture which has had a good year.

The government spending is still at 27% of GDP, even in America or UK it is nearer 40% so there is scope for ramping up spending if it is targeted in new areas and increases productivity therefore tax revenues.

A number of tough decisions await Rwanda; we have postponed them for a year but these issues have to be dealt with. We need to increase taxes; as much as taxes bite, our tax rates are some of the lowest in the region; we have tried the approach of widening the tax-payer base but tax hikes are a necessity.

In order to justify these higher taxes, we will have to widen the scope of services our government provides; people don’t mind paying higher taxes as long as they are getting value for money.

Another issue is our trade deficit; our insatiable love of foreign goods is driving up our trade deficit which is around 10% of GDP depending on which method you use to calculate but it is at around $300 million a year.

This compounded over years amounts to billions of dollars that end up weighing heavily on our shoulders. The third issue is poverty-reduction; I will first have to state clearly that I am against such EDPR strategies.

However I would support EDWCS (economic development and wealth creation strategy) no nation has ever become wealthy by EPRDS whose economic models are Marxist and outdated.

We Africans have become guinea pigs for economic experiments by western thinkers who have no record of success; we needed debt relief and as a result Africa as a whole opted for more dependency.

As a result we incorporated into our economic policies measures that were not in our favour such as pegging our currencies, focusing more on what NGO’s want and not on the business sector.

When we talk of countries that get addicted to aid, none was more addicted to aid than Kenya in 1990; it was an aid junkie if ever there was one. During the cold war it was a staunch ally of the USA, getting fat off aid and grants; then came the end of the cold war and they were dropped like a hot potato.

Suddenly KANU was told to democratise, to deregulate the economy, to privatise, to slash the government budget, to end corruption that the West had previously tolerated and all this at a time when the country was fragmenting along tribal lines.

The one thing I respect Moi for is standing firm in the face of pressure and Kenya went from being an aid junkie to financing its own budget almost entirely from taxes with 95% from their own efforts.

This only came about when tough decisions were made; firstly to live within their means and slash spending, secondly to support the business sector as strongly as they could and making them the focus of their economic policy; and lastly to ruthlessly collect taxes, in Kenya you can usually bribe your way out of anything, except paying tax.

Some say we are in a crisis, others would say it is an opportunity, we might look back on this in 2020 as the “Economic opportunity of 2009” but only if we take this opportunity.

We have to radically alter our thinking to focus on ourselves as the solution and not the problem. We are in the information age – the only way we will get out of this is by producing information; the first role of government in this age is to produce information, analyse this information and devise a way out.

When looking for solid data on any sector in Rwanda one faces massive struggles and I often have to revert to foreign sources like UNCTAD or IMF or World Bank; how can we solve our problems without knowing what they are?

There is no institution that I know of that produces real-time analytical data comparable to a western institution. We need to lay our facts on the table and devise a new course as a backup route to EDPRS so if there is traffic ahead we can change course.

I will also admit that EDPRS does a lot of good; although the odds are stacked in their favour, any new school, clinic, borehole is credited to EDPRS but in America they managed to dig boreholes without EDPRS.

The question of the chicken and the egg remains; which comes first? Should we dig boreholes in Rwamagana then develop the private sector or develop the private sector then dig boreholes in Rwamagana?

It is like several people trying to climb a wall; they can either trying to climb equally at the same time or help one person climb to the top to throw a rope down to help the others climb up.

ramaisibo@hotmail.com

 

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