Bad weather major threat to faster growth

With inflation contained at a single digit, and investment in infrastructure to boost energy generation and movement of goods and services scaled-up, bad weather and decline in international commodity prices remains the biggest threat to a faster rate of economic growth.
Tea is one of Rwanda's traditional exports whose value is being hurt by falling international prices. (File photo)
Tea is one of Rwanda's traditional exports whose value is being hurt by falling international prices. (File photo)

With inflation contained at a single digit, and investment in infrastructure to boost energy generation and movement of goods and services scaled-up, bad weather and decline in international commodity prices remains the biggest threat to a faster rate of economic growth.

While the economy grew by 7.4 per cent in the first quarter of this year, a big rebound from 4.7 per cent of the same period in 2013, some economists say that it was still below the country’s growth potential of 7.8 per cent.  This, they say, calls for the need to address threats to secure a more robust recovery.

So, where is the threat?

For starters, the government and the IMF projections put this year’s growth rate at 6 per cent or above. In its latest Rwanda Economic Update report released last week, the World Bank’s projects a slightly lower rate of 5.7 per cent and 6.6 per cent for 2015.

This is well above the average growth rate projected for Sub-Saharan Africa of 5.4 per cent and 5.8 per cent in 2014 and 2015 respectively. This means that against all odds faced by all economies in Sub-Saharan Africa, the Rwandan economy will be among the fastest growing in the region—boosted mainly by industrial, construction and services sectors.

Low international oil prices and stable inflation in regional trading partners has also reduced the risk of imported inflation—a big factor for ensuring macro-economic stability for an import-dependent economy that Rwanda is today.

However, according to economists behind World Bank’s report such as Valence Kimenyi and Peace Aimee Niyibizi, the economy would have performed even better had it not been for a tumultuous agricultural season B.

“The agricultural performance of season B is likely to be negative because of the rains that came early but couldn’t stay up and that could affect the agricultural sector’s growth,” says Kimenyi.

It may be premature to arrive to conclusions because statistics for season B (February-July) are yet to be released, economists have one major issue regarding the agricultural sector.

They say that even when agriculture’s share to GDP is 33 per cent and employs almost 80 per cent of the population, the sector remains heavily dependent on unpredictable weather.

To ensure more sustainable gains from the sector, economists want the government to make agriculture ‘weather proof’ so that whether it rains or not, production can go on. This means investment in irrigation. There are on-going efforts to that direction with 5 per cent of total farmland under irrigation.

With production assured, attention could then be turned to marketing. Here, economists suggest that focus should be on processing for value addition.

Export performance

Economists are also concerned that fluctuation in commodity prices is hurting the rate of growth of the export sector. Returns from exports increased by 19 per cent in 2013 largely supported by minerals whose value increased by 65 percent.

However, 2014 half year results have been minimal with the value of total exports increasing by just 1.2 per cent compared to 13 per cent of imports. This has widened the trade deficit by 17.4 percent from $765.4 million to $898.6 million.

According to the Governor National Bank of Rwanda, John Rwangombwa, non-traditional exports and re-exports have saved Rwanda’s blushes in the first half where traditional exports such as coffee and tea fell short.

Decline in traditional exports is attributed to fall in prices on the international market.  The value of coffee for instance fell by 36.7 per cent while tea slumped by 10.2 per cent. Coltan took the heaviest hit with a value drop of 40.8 per cent while wolfram declined by 4.1 per cent.

In the end, World Bank’s recommendations are not novel; they are the same things the government is working on through EDPRS II.

Private sector 

World Bank Country Manager, Carolyn Turk, notes that Rwanda’s growth rate in the last decade has been impressive but there’s urgent need to institute structural transformations of the economy from one characterized by a large public sector and dominance of non-tradable sectors to a private  sector-led economy.

In a separate interview with The Sunday Times, Senior Economist Yoichiro Ishihara noted that Rwanda’s share of private sector to GDP was still low because of a large public sector that is also still dependent on donor aid. “That is not a safe position,” he said.

Private sector share to GDP is below 10 per cent and Ishihara says this should be grown to reach at least 20 per cent. 

The outlook report however reported that issues regarding access to credit and its cost could mar both EDPRSII targets. That while many SMEs are still struggling to find funding, those who have obtained it are paying back through the nose because of very high interest rates.

“We notice that while government is trying to stimulate more lending to the private sector by reducing the policy rates, financial institutions have not responded positively to these interventions and rates are still stuck up,” Toru Nishiuchi, a World Bank economist.

Several theories have been volunteered to explain the high rates; one of them, the high cost of operations which is thought to account for about 72 per cent of the interest for banks.

But some analysts do not accept this as a fair argument, they say it’s the absence of competition in the market with about ten commercial banks that is keeping lending rates high. An example is drawn from neigbouring Kenya where they claim the cost of operation is high but rates are relatively low.

The risk is that if private sector investment remains stagnant because of, among other factors, expensive credit, fewer new jobs will be created and incomes among Rwandans will not be strong enough to support domestic consumption.

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