Rwanda’s economy is expected to perform better this year compared to 2013. According to government, IMF and World Bank projections, the local economy is going to grow by between 7.2% and 7.5%. However, are projections feasible considering that last year the economy grew lower than expected? We examine the factors that will make this a reality, and the threats that could lead to negative development during the course of the year.
Inside the compound of his newly acquired coffee processing plant in Ngoma, John paces up and down as he prepares to start running the business.
This coffee factory recently secured an SME loan from one of the leading banks to expand its operations. Projects such as John’s are tipped to be the drivers of economic growth, job-creation and also cushion the country from external shocks similar to the ones when donors suspended development aid to the country in 2012. Small enterprises like these are also geared at widening the export base and making Rwanda a self-reliant country.
Suspension of aid during the 2011/12 financial year and the eurozone/US financial crises had a toll on the economy as it grew at a lower-than-expected rate in 2013. The economy grew by 5.9 per cent and 5.7 per cent in the first and second quarters, respectively, before inching up to 6 per cent in the third quarter. This sluggish growth compares poorly with 7.7 per cent growth rate in 2012.
Though the growth figures for the last quarter of 2013 are yet to be released, it is highly unlikely that the government and International Monetary Fund (IMF) projected growth rate of 6.6 per cent in 2013 will be achieved. The government and IMF also projected the economy would grow by 7.5 per cent this year, while the World Bank, in its report that will be released mid-January, projects the economy to grow by 7.2 per cent in 2014.
Is the projected 7,5% growth rate attainable?
So, considering the lower-than-expected growth last year, should we expect better fortunes this year or will the trend continue? To understand either situation (expanding or contraction of the economy), it is important to first examine the factors and developments that played out last year, the planned fiscal year programmes and how they could influence the country’s growth or contraction this year.
Like other sub-Sahara African countries that depend on Europe and the US for export market, Rwanda was greatly affected by the eurozone and US economic crises, besides the freezing of development aid by some donors in 2012.
These developments meant that government spending was affected, which significantly hurt private sector activities that spur growth. As a result, the private sector could not secure enough funds to inject into productive sectors of the economy. This was also partly due to the tight monetary policy stance the central bank employed to control inflation and ensure the banking sector was capitalised.
The African Development Bank (AfDB) had predicted that Rwanda’s growth would slow down last year due to suspension of foreign aid, tight economic policies and weak global demand. Although AfDB had predicted minimal growth this year, too, experts suggest otherwise, arguing that the developments in the later part of 2013 will spur this year’s growth. Besides, experts say, presently the country has safeguards in place to support the economy in case of any eventualities. They add that the eurozone crisis has also eased, a development that will have a trickledown effect on countries like Rwanda which depend on Europe for export market.
In fact, the International Monetary Fund will revise upwards this year’s global growth forecast following improved economic conditions in the international arena, according to managing director Christine Lagarde. Lagarde said the Fund will in three weeks release the new forecast. This is good news for sub-Saharan Africa countries because it will mean a rebound of the export sector.
Lagarde also said IMF expects sub-Saharan Africa to enjoy continued robust growth of close to 6 per cent in 2014.
Sub-Saharan Africa is the second-fastest growing region in the world. “Countries in eastern Africa, in particular, have experienced strong growth for the last decade,” she noted.
According to Angello Musinguzi, a tax manager at KPMG Rwanda, the country is more likely to surpass growth target projected by the government, World Bank and IMF, thanks to investments that will start operations this year. Growth will also be supported by large-scale projects in infrastructure, services and industrial sectors. He said many investors are targeting Rwanda’s mining and agriculture sectors, adding that with improved infrastructure and security, investments will certainly increase.
Last year, construction, agriculture, services and financial sectors were the main drivers of growth, and the trend looks to be replicated this year.
Musinguzi, however, said these sectors will need to be supported by reliable electricity supply to contribute significantly to the economy.
He attributed last year’s lower-than-expected growth partly to poor economic performance across the East African Community (EAC) bloc due to decline in direct foreign investments (DFIs). He also tipped tourism, mining and the financial sectors as the other sectors that will influence economic growth, especially if financial institutions ease access to development capital for small-and-medium enterprises (SMEs).
Musinguzi is optimistic the economy is likely to grow by over 7 per cent this year, if the productive sectors are supported, inflation and the franc volatility are tamed, and if the situation in the global economy continues to improve. He bases his projections on positive developments in the infrastructure, agriculture, SME, telecommunications, services, health and financial sectors.
“Also, inflation in the EAC is reducing due to increase in food production, and the hospitality industry is set to improve in 2014, thanks to the implementation of single tourist visa and other initiatives, and as new hotels and other projects start operations. All these will have a positive influence on the economy,” he said.
In the flower sector, the country is set to increase exports when the cut roses project at Gishwari in Nyagatare District starts production later in the year. Also exports of summer flowers to Europe will go up following initiatives to help farmers increase output to satisfy the lucrative market. The country exported summer flowers to Europe twice, in May and October on a trial basis, generating 2,200 euros.
The financial sector’s impressive performance last year is also a good indicator. Last year, financial institutions were able to surpass the 15 per cent minimum capital requirement set by the National Bank of Rwanda, with banks hitting the 23 per cent mark and micro-finance institutions 32.3 per cent, according to the central bank governor, John Rwangombwa.
Banks also had an impressive showing of 48.8 per cent as far as adequate liquidity guidelines are concerned, compared to the 20 per cent benchmark. The industry’s total assets increased by 19.9 per cent, from Rwf1,201.4b end September 2012 to Rwf1,440.9b in September last year. Loans to the private sector rose by 12.2 per cent to Rwf848.8b from Rwf755.8b. It is hoped that this will boost businesses, especially small-and-medium enterprises.
What areas need to be focused on?
Musinguzi said it is important to build a strong skills base by putting more emphasis on the education sector, especially skills development if the EDPRS II (the second phase of the Economic, Development and Poverty Reduction Strategy), is to deliver on its targets.
“Putting emphasis on skills development will also reduce government expenditure and the constant reliance on expats in almost all sectors because Rwanda does not have skilled manpower to man industries and other sectors, he added. “Education system should also be technical skills development oriented so that the industrial sector gets the necessary personnel locally,” Musinguzi said.
The government should also increase power generation to boost the industrial and other productive sectors.
“Investors prefer environments with steady and affordable electricity supply. If the problem of inadequate power is addressed, more investments will come in.”
He, however, noted that there is need for a vibrant private sector that would tap into the benefits of EAC such as free movement of labour, single tourist visa and the single customs territory.
Andreas Nørlem Christiansen, the Educat chief executive officer, an entrepreneurship support NGO, said though the economy is performing well, it is essential for Rwanda to create a framework to encourage the private sector to focus on production for export to ease the problem of the huge import bill.
He added that there is need to woo more investors who can setup export-oriented industries to stop reliance on the traditional exports; coffee and tea.
He said that with enough support the agriculture sector will greatly influence growth levels this year.
“There are a lot of opportunities in the agriculture sector, especially when value addition is emphasised, because it creates jobs and boosts export revenues as envisaged in Vision 2020,” he said.
He, however, said the sector needs more support to adopt modern methods of production to increase output and jobs along the production value chain.
He noted that though Rwanda is focusing on becoming a knowledge economy, the sector will take long to mature and faces a lot of competition from the neighbours Uganda and Kenya. “Creating an exportable knowledge economy could take up to 20 years. So, it is important that as the industry develops other sectors are not neglected,” he pointed.
He is, however, doubtful the country would record between 7.2 and 7.5 per cent growth rate as projected by the government, IMF and World Bank, saying the economy could probably grow by 6.5 per cent.
Eusebe Muhikira, the head of trade and manufacturing department at the Rwanda Development Board, is optimistic that the technical support they have been giving to the industrial and other investors to boost production capacity will start bearing fruits and enhance growth this year.
Muhikira said the other strategy to attract new players will also boost DFIs inflows and the economy.