Among the subjects keeping economic planners across the world up at night is the consequences of the ongoing trade war between two economic giants— US and China.
Already the International Monetary Fund (IMF) has revised the global economic growth rate down projections to 3.2 per cent in 2019 in anticipation of the effects of the continued trade war. How much will it affect Rwanda?
The New Times’ Collins Mwai spoke to the IMF’s Mission Chief, Laura Redifer, on a range of economic issues such as projected growth, effects of trade war, and debt levels among others.
Earlier in the year, IMF alongside the government projected a growth rate of 7.8 per cent for 2019. Half way through the year, are we maintaining the projections?
We have kept that projection. As you know, the IMF approved a new programme for Rwanda.
The growth of 7.8 per cent for 2019 is being maintained. The growth in the first quarter was higher than that. We will have to see what it was in the second quarter. That is where the rains were a bit erratic. All indicators show that the growth should be the same or even higher.
What do you make of the fluctuations of commodity prices on the international markets and its effect on exports and revenue receipts?
Given that the prices have turned out to be lower than expected, that is one of the downside risks. That is why we did not go higher in the projections. We identified some of the risks which include commodity prices, regional issues.
However, there are upside drivers such as the new investments that have been coming in such as the airport as well as new export areas.
Then there is the appreciation of the value of the dollar as it recovers globally. What does your analysis say of likely impacts?
One of the things to remember is that Rwanda does not have a lot of short term capital inflows & outflows. Changes in the dollar do not have immediate impact on how much money flows in and out of the country.
The dollar becoming strong does make external debt a bit more expensive for the government but it also means that when inflows come in, they are worth more. So I do not expect a huge impact due to the value of the dollar.
The IMF recently launched a new programme for Rwanda, what’s the model of intervention?
The new programme is a non-money programme. It is under the policy coordination. The intent of the programme is to support the National Strategy for Transformation (NST).
The first pillar is about having a fiscal policy stance over the medium term that supports the NST. The second pillar is about mobilizing domestic resources to support financing the NST while the third pillar is about increasing the transparency and identifying if there are risks that could derail things. The fourth pillar is supporting the new central bank monetary policy framework.
Speaking of resources, there has been a conversation globally about Africa’s debt. You have previously said that Rwanda’s is not at risk. Still maintain that?
As long as you stay within the 50 per cent threshold and keep the debt risk low, it makes sure that the spending is done effectively. You can only spend so much making sure it’s spent well. That makes sure that there is not much burden on paying back.
The indicators are doing very well in Rwanda, in some areas it could be better. The debt is being spent on areas that will have an impact (positive) on future generations. That balance is very important and has to be done in a way that is good for the future of the country.
The 50 per cent is pretty conservative considering that Europe has about 60 per cent.
Speaking of thresholds and limits in regards to debt on the African continent, it’s been argued that mentions of limits and thresholds only serve to cause alarm and ignore other important aspects such as debt management as well as impact of funds when invested….
That is why we look at it in net present value because it tells you something about management. If you do more concessional borrowing, you can get more and still stay within that limit.
Rwanda has a very good debt management approach and good practices of thinking about what the money is invested in. It may not be perfect, but it’s pretty good compared to others. The number itself is what EAC has decided. Given the strong capacities and institutions in Rwanda, we would not get worried until the debt reaches 70 per cent which is way above the EAC threshold.
Obviously you are right, you cannot just focus on the threshold, the important thing is what you are spending the money on.
Brexit and the trade war between the US and China; what are the likely impacts on Rwanda for the two issues?
On Brexit, I really cannot comment on it because we have not thought of that yet. It’s such a complicated topic at this stage.
On the issue of the trade war between the US and China, the IMF has revised its projections. I think Rwanda is lucky that it has niche markets and is unlikely to be affected by the revision in growth.
Generally, we have in our report a section on risks where we look at trade wars and we found that the risk of affecting global growth is high but the impact on Rwanda is low. That is our assessment. It’s not super scientific but your export markets are not going to be affected by the trend.
As Rwanda Revenue Authority invests in domestic revenue mobilization and efficiency, there are a number of tax incentives which probably, if revised, could increase Rwanda’s earnings. What do you think?
So, on that, for the decade leading up to 2016, there was a lot done by Rwanda in domestic revenue mobilisation. It increased by about 6 per cent a lot which was through tax administration issues.
That, however, stalled because of the tax incentives. One of the pillars of the programme that we have launched is to see how we can regain the momentum on some of those pillars because you will need some of those revenues to implement the National Strategy for Transformation.
We are now looking at those incentives very carefully to see if they are bringing in what is needed.
But you have to be very careful about that balance because Rwanda is a high tax country and we want to make sure that we are not just creating incentives for private investments and making it hard to do business here.
It cost a lot to operate here due to logistics so you have to keep that in balance. We are trying to examine the tax incentives.
One would say that digitisation in revenue collection is unlikely to increase earnings. Is this so?
On the digitalisation, they (RRA) have done a lot to allow one to pay taxes online among other things.
All that stuff is making tax administration efficient and making it harder to dodge paying taxes. It’s all good stuff, however to achieve the sustainable development goals, it’s important to remember that it’s going to cost a lot (the development) and you cannot get that much more from domestic resources.
You can get two or three percentage points of GDP but at this income level but it will not fill that gap. It’s a priority but will only get a fraction of what is required to for the projected developments in transformation.
That is why the government is looking for more innovative ways to work with the private sector, to get partners to guarantee loans as well as a big pool of private investments.