Sustainable debt will keep Rwandan economy afloat

The World Bank will tomorrow release its analysis of 2015 global economic prospects, predicting slower growth that could culminate into higher interest rates for countries seeking to borrow to reinvigorate economic activity.
Low global demand will hurt revenue from exports such as tea. (File)
Low global demand will hurt revenue from exports such as tea. (File)

The World Bank will tomorrow release its analysis of 2015 global economic prospects, predicting slower growth that could culminate into higher interest rates for countries seeking to borrow to reinvigorate economic activity. 

Slow growth means low economic activity; weak demand and hence low commodity prices on the international market. This could hurt export earnings of many countries.

As countries earning less from exports, they’ll be short of foreign currency to pay for import, some of which they can’t do without—including capital goods. When that happens, economies will experience widening trade deficit. Some might even find it hard to service external debt burdens.

With low revenues from export, global debt stock may rise beyond sustainable levels, especially for countries that already have very high public debt-to-GDP ratio; they risk defaulting.

So, what’s Rwanda’s current state of public debt?

According to officials at the National Bank of Rwanda (BNR) and the Ministry of Finance and Economic Planning, the country is in a safe zone.

In December, BNR governor John Rwangombwa said Rwanda’s public debt is not worrying with debt to GDP ratio still below the radar and does not only ensure comfortable servicing, but also provides room for more borrowing, should need arise.

Public debt or national debt is the money owed by a central government to various lenders inside (internal debt) or outside the country (external debt).

According to an annual economic report released this month by the finance ministry, Rwanda’s total public and publicly guaranteed debt for the fiscal year 2013/14 rose to $2.295.5 billion (30.5 per cent of GDP) from June 2013 to June 2014.

Out of the total public debt, $1,754.2 billion (76.4 per cent) is owed to foreign lenders which is equivalent to 23.3 per cent of GDP, while $541.3 million is domestic debt.

According to Amina Rwakunda, the chief economist at the ministry, Rwanda’s public debt is below the regional radar of 50 per cent, which indicates a prudent public debt policy and management.

During the 2008 crisis, several countries in Europe such as Greece, overran their financial reserves and reached to a point where they could no longer afford to repay their debts.

Global economic experts encourage countries to keep public debt to GDP ratio below 40 per cent. But such precautionary measures, experts say, tend to only apply to small and poorer economies of the world leaving bigger economies to play by different rules.

For instance, the United States of America debt to GDP ratio was 104.5% in 2013 according to the IMF, 243.2 per cent in Japan, 93.5 per cent for France, 90.1 per cent in UK and 78.1 per cent for Germany.

At 22 per cent, China, the world’s second largest economy has one of the best debt-to-GDP ratios among rich economies and it also holds the largest portion of USA’s external debt.

What’s the source of Rwanda’s debt?

Stella Rusine Nteziryayo is the director of the debt office at the Ministry of Finance and she told Sunday Times that Rwanda is not under any public debt pressure because most of the country’s debt consists of concessional loans.

Experts note that unlike commercial loans, concessional borrowing has long term repayment periods moreover at very low interest rates ranging between 0-2 per cent.

According to official statistics, the total of Rwanda’s concessional loans amounted to $1.279 billion as of June 2014 which is 55.7 per cent of the total public debt and 17.0 per cent of the country’s GDP. Rwakunda says that Rwanda’s main concessional creditors are IDA, AfDB and IFAD, whose funds were used for projects in the areas of transport, construction, energy, poverty reduction and rural development.

Meanwhile as of June 2014, total of commercial loans were $475.20 million, 20.7 per cent of the public debt and equivalent to 6.3 per cent of Rwanda’s GDP.

While Rwanda normally doesn’t provide guarantees for debt undertaken by private sector entities; the government has guaranteed loans given to RwandAir which amounted to $ 75.2 million by June 2014.

The loans to RwandAir form also part of the country’s total public debt stock because the national career is regarded as part of the public sector.

Because of that, in April 2013, Rwanda issued its first international bond for $400 million in order to repay an expensive debt owed to Citi and PTA Bank by RwandAir as well as to finalize the construction of the Kigali Convention Center and to invest in a hydro power project.

The bond which has a ten-year maturity period is equivalent to 17.4 per cent of Rwanda’s national debt total and 5.3 per cent of GDP.

Other external sources contribute US$75.2 million (3.3 per cent of the debt) and equivalent to 1.0 per cent of GDP.

Domestic debt

While concessional loans continue to constitute the majority of Rwanda’s external debt portfolio, treasury bills form the bulk of the country’s domestic debt.

The annual economic report for the financial year 2013/2014 indicates that domestic debt had increased to US$541.3 million as of June 2014 from US$ 478.6 million in June 2013.

In a bid to mobilize funding locally, government has been issuing treasury bonds to finance several economic development projects and according to Minecofin, government owes local investors Rwf 156.5 billion as of June 2014.

Debt serving

External debt servicing burden increased between June 2013 and June 2014 mainly because that period marked the first fiscal year in which a full year of Eurobond interest repayments had to be made, the Ministry of Finance says. The country dedicated 4.5 per cent of export earnings to service the debt burden in 2013.

For the year 2014, the government had committed to dedicate 5.3 per cent of all export revenues to reduce the debt burden. Apart from export earnings, governments usually use a portion of domestic tax revenues to pay off debts.

In 2013, the government committed 4.2 per cent of total revenues to debt servicing while in 2014, that portion was increased to 5.3 per cent of all projected collections last year.

The first ever projection by the ministry shows that the national debt outlook is sustainable from 2014 through 2034.



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