BY GODFREY NTAGUNGIRA
One of the steps taken by Rwanda government after liberation in 1994 was to institute micro and macro-economic recovery programme through a prudent fiscal policy.
These policies are beginning to bear fruit as evidenced by the progress in the implementation of EDPRS programs.
After the 1994 Genocide confidence in the economy was gradually being restored due to the positive impact of Government’s fiscal policies which brought forth macroeconomic stability.
According to Ministry of Finance and Economic Planning, in 2008 Rwanda’s growth performance was higher than the projected rate of 8.5% at 11.2 %. Growth was driven by a rebound in agriculture and continued buoyancy in the industry and service sectors which registered robust growth rates.
The economic cluster covers the macro and financial sector alongside the economic sectors of agriculture, infrastructure which includes (ICT, energy, transport and ST) private sector development as well as environment and natural resources.
For Rwanda to achieve poverty reduction and increase economic objectives in the EDPRS period 2008-2012, the following has to be realised
i. Achieve an average annual GDP growth rate of 8.1% from 6.5%
ii. Increase exports at 15% of GDP to 23% by 2012
iii. Reduce the population living in poverty from 57% to 46% and those living in extreme poverty from 37% to 24%.
iv. Increase public expenditure by 9.0% per annum between 2008 and 2012
In response the government implemented some policies to rein in inflationary pressures including
1. Control of fuel pump prices.
2. Tightening of monetary policy to reduce broad money supply from 30% to close at 11%.
3. Tightening of fiscal policy to reduce broad money supply by reducing planned expenditure.
Despite these measures the average annual inflation climbed to 15.4% in December 2008, having remained in the single digit bracket up to July 2008.
Other measures included the following
1. The government also allowed a 5% depreciation of the Rwandan franc against the US dollar from mid-2008 partly mitigating the real appreciation pressures.
2. Net domestic financing exceeded its target at -3.3% compared to a target of less than 0.5%.
3. Insurance coverage as a percentage of GDP (excluding mutuelle de santé has been maintained at less than 1%.
4. Credit to the private sector as a percentage of GDP has been increased from 10% in 2006 to 14% in 2008 exceeding the target of 11.4% that was set.
5. The national insurance strategy was developed and an ensuring capacity building plan developed.
6. The microfinance law and strategy have been passed and a credit fund and capacity building fund established.
7. A memorandum of understanding was signed between national bank of Rwanda and the ministry of agriculture for the final phase of the rural investment facility.
8. The first version of the debt management strategy was produced and forwarded to cabinet for approval.
9. Cooperative law and SACCOs instructions have been instituted. The procurement to design a savings mobilisation strategy was completed and the rural insurance study was accomplished.
10. Other key policy achievements within the fiscal policy framework were the preparation of the 2009 mini budget in line with EDPRS priorities and the medium term macro framework.
11. The widening of the tax base was evident in the surpassing of projections of revenue collections.
12. In order to streamline the proper management of tax payers and improving tax payer compliance level, a study on the implementation of the block management system was commenced purposely to bring more traders into the tax net. The block management system was designed to manage the tax of small, medium and large enterprises by demarcating the areas in which they conduct business into sizable and manageable blocks.
Spending remained expansionary with revenue outperforming the projections. Expansion in spending over the year was driven by domestic capital expenditure which grew by 44% in line with priorities of the EDPRS to fund priority agriculture and infrastructure development projects.
The government of Rwanda increased expenditure and net lending in 2008 to estimated levels of 26.7 % of GDP, financed by increased revenues from both domestic and international grants.
Last year projections outperformed the projections by Rwf 2 Billion reflecting increased collection, higher inflation and GDP growth as well as large one off non tax revenue earnings.
Taxation from consumption and international trade also increased substantially reflecting increased monetisation of the economy and recent reforms in customs processing.
The above factors resulted in an increase in the revenue to GDP ratio from 13.6% in 2007 to 15% in 2008.
Import growth exceeded the increase in exports leading to a widening of the trade balance in 2008. Exports increased by 25.4% compared to 2007.
This was partly driven by traditional products such as tea and coffee which has grown strongly due to good weather conditions, high prices and a rebound effect for coffee from last year. Minerals also saw important growth. All these led to growing imports of public capital spending.
All this led to a larger current account deficit including the transfers which went up from 4.9 % in 2007 to 6 % in 2008.
Capital market development
The Rwandan bourse was launched in 2009 and the capital market advisory council CMC produced and published a blue print that provides guidelines and rules for primary insurance and secondary market trading of both equities and bonds.
The blue print formed the basis of operationalisation of the capital market in Rwanda.
All commercial banks including BRD are currently complying with BNRs capital and governance requirements as well as international financial reporting standards IFRS.
Effects of Fiscal policy on banking
1. Over the period of 2008, credit increased by 3.9% from Rwf 279.9 billion to Rwf 321.1 billion.
2. Deposits within banks jumped by 3.9% meaning it accumulated from Rwf 363.2 billion to Rwf 377.3 billion.
3. Non performing loans rate decreased dramatically from 14.3% in December 2007 to 8.8% in 2008 against the target of 5%.
4. The solvency of the whole banking sector was strengthened from 15.1% to 16.6%
Recent reforms under EDPRS have focused on deepening the financial sector, improving the quality of infrastructure and related services, fostering increased trade and regional integration, and laying the foundation for a more skilled labor force.
Progress in the implementation of the Financial Sector Development Plan is evident from recent laws that have been passed to improve regulation of insurance companies and combat money laundering.
Reforms have also focused on consolidating the banking and insurance supervision, in line with international standards; and development of a payment systems bill to establish a clear framework for oversight for the central bank.