Here is how to tame Rwanda’s trade deficit

THE GOOD news that the dairy sector had joined the list of non-traditional exports earning $22.41 million to during the last three months of 2013 was sadly overshadowed by the big trade deficit.
Industries are setting up at the Special economic zone to boost local manufacturing. (Timothy Kisambira)
Industries are setting up at the Special economic zone to boost local manufacturing. (Timothy Kisambira)

THE GOOD news that the dairy sector had joined the list of non-traditional exports earning $22.41 million to during the last three months of 2013 was sadly overshadowed by the big trade deficit.

According to National Institute of Statistics’ (NISR) figures for the period between October and December, 2013 Rwanda’s total trade was worth $564.6 million but the country earned $121.5 million from exports and spent $415.5 million on imports.

This led to a trade deficit of $443.1million during the last quarter of 2013 alone. But Rwanda’s trade deficit is not breaking news; it’s something that the authorities have their eyes and thoughts on as they try to figure out ways of taming it.

In fact, officials of the National Bank of Rwanda (BNR) say there is nothing to worry so much about because a country that is going through massive reconstruction will most certainly spend a lot on imports of capital goods and machinery — very costly items that will drive up the import bill. “The country must import a lot in order to support recovery,” says Thomas Kigabo, the BNR chief economist.

According BNR, while the first nine months of 2013 saw total imports slightly decrease by 1.1 per cent in value, volumes increased by 4.1 per cent; the exports’ receipts of $436.3million earned in that period could only pay for less than 27 per cent of the total imports leaving a deficit of $1201.8 million.

Some economists argue that a trade deficit is not necessarily bad because it often corrects itself over time. Secondly, it shows that incomes are going up to the extent that a country can afford expensive foreign goods.

However, critics point out that self correction of a negative balance of trade depends on the nature of imports and they also argue that spending on imports only helps exporting economies expand and create jobs at the expense of importing countries.

It’s therefore important to closely examine the nature of Rwanda’s imports if a solution to enhancing exports’ performance is to be found.

Taking the first three quarters of 2013 as an example, one can note that Rwanda’s imports are, dominated by consumer goods on which $1644.2 million was spent.

Consumer goods, alternatively called final goods are products that are purchased for consumption purposes; the only way Rwanda could ever stop spending on such items is by either producing them locally or stopping to consume them entirely by placing deterring tariffs on them.

Between January and September last year, consumer imports were dominated by healthcare products at 27.5 per cent, beverages and tobacco grew by 12.3 per cent with goods of domestic use accounting for 4.4% according to BNR’s third quarter trade report.

Local manufacturers should be particularly concerned that Rwandan consumers prefer imported beverages and tobacco — a trend that saw the volume and value of such goods surge by 12.3 per cent and 17.8 per cent respectively, in the first nine months of 2013. This happened despite the current boom in the local beverage industry. Imported beverages normally include alcoholic drinks such as luxurious wines and liquors.

Another interesting observation is that as tobacco imports surged, the value of imported pharmaceutical products also increased by 43.3 per cent as Rwandans spent more on healthcare.

There is therefore need to limit the outflow of foreign currency on avoidable consumables such as fancy beverages and foreign tobacco; these might be wanted but they’re not needed by consumers.

The only imports needed are capital goods; durable products such as machines that are used in the production of goods and services to spur economic growth through increased local production, job creation, revenue generation and boosting local incomes.

However, during the first nine months of last year; Capital goods which are dominated by transport materials and machines, devices & tools decreased both in value and volume, respectively by 9.3 and 22.4 per cent. 

Rwanda also imports a large amount of intermediate goods that are also important given that they’re used as inputs in the production of other goods. While their value tapered a little by 0.8 per cent, volumes increased by 9.5 per cent mainly driven by construction materials.

BNR reckons that cement and related products represent 80 per cent of the total volume of imports of construction materials, understandable given the booming construction sector. Other intermediary products include industrial products such as fertilizers, energy and lubricant products of which more than 95 per cent is petroleum.

Between October and December last year, cement and mobile phones retained their lead as top imports costing $17.68 million, and $14.53 million respectively.

As of October last year, Rwanda’s trade deficit stood at $1.2 billion, against export receipts of $583.1 million.

How can this gap be bridged?

Part of the solution has been presented by the dairy sector’s impressive performance in the last quarter of last year as it justified the importance of diversification of the current export base in order to back up the country’s traditional exports of coffee, tea and minerals.

It is about time that we conceded to signs that coffee and tea cannot bring in all the foreign exchange the country needs —especially when these two are exported as raw materials.

Over 60 per cent of Rwanda’s population is below 24 years according to the United Nations Population Fund country office; their professional preferences lie not in tea and coffee plantations but in urban based arts and industries such as ICT; this means future decades will have few Rwandans interested in tending to coffee trees or picking tea leaves.

Also, Rwanda’s rapid population growth means more pressure on the existing land space for agriculture, the basis of traditional exports. The combined effects of generation shift, rapid urbanization and population growth point to one need; development of a new export model that factors in the new realities in Rwanda, that’s a young population whose interests are in the cities rather than the farms.

The country should consider launching a determined attempt at import substitution industrialization (ISI), a trade and economic policy that advocates replacing foreign imports with domestic production, according to Nelson Brian (2009).

ISI is based on the premise that a country should attempt to reduce its import dependency through the local production of industrial products.

In Rwanda’s case therefore, investment promoters need to focus attention on attracting investors who’re willing to establish factories to produce consumer products that currently dominate imports such as phones, clothes and others.

China’s a good example where the ISI model seems to have worked. For instance, instead of importing cars from USA or German, auto-makers such as Audi, BMW, General Motors and many others have established production plants in China to cater to the local market. The same was done by Apple and now the Chinese have their own iPhone plant at home also supplying other markets in Asia and Africa.

The benefits of ISI are plenty. First, the country not only saves its foreign currency but can also export to earn more; factories create jobs and government earns revenues all of which leads to economic growth and a healthier balance of trade.

Can such an approach work for Rwanda? At least there’s no evidence that it can’t. Investors need a strong market base and cheaper labour — both of which can be provided by the growing population in the region. Rwanda’s favourable investment environment and political stability also further make ISI prospects viable.

In an interview early this week; Chen Hao, an official of the Chinese Ministry of Commerce for African Affairs said that last year, the trade value between Rwanda and China hit $240m, an increase of over 50 per cent year-on-year. In the last three months of 2013, according to NISR, imports from China (mainly electronics) were the highest in value registering $87.69 million.

Meanwhile, China’s investments in Rwanda are still low — just $2.6m last year. It is not impossible for Rwanda to convince some Chinese investors to set up factories here to produce and supply a market whose potential has been proven.

The opportunity is that, Chinese manufacturing is suffering over-production and a break in serving a fresh market of East Africa based through Rwanda would be hard to resist.

For instance, China’s steel industry turned in a loss in the first quarter of 2012 due to overproduction that led to excessive stockpiles; a plant in Rwanda would delight EAC’s booming construction sector.

Another example, China’s cement industry, one of the largest in the world also suffered overproduction last year after output went up by 160 million tons in 2012, cutting overall profits by 50 per cent.

Rwanda’s minerals are normally sold on the cheap only to return in form of expensive imports but promotion of an ISI model would see such a trend change as raw materials are processed here to serve local markets.

While it might need the government to take the lead, it’s also a challenge for Rwanda’s private sector to seize the emerging opportunities.

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