The private sector might continue to face major challenges with regards to accessing long term financing and might resorts to foreign borrowing. Despite the effects of the external shocks of the global financial crisis, the country’s business community, facilitated by reforms is steadily growing with leaders optimistic 2010 has a lot in offing.
In 2009 a lot was realized in establishing an enabling environment fuelling business growth as evidenced by Rwanda’s recognition as a top reformer in the World Bank 2010 Doing Business survey.
Government also intensified efforts of opening up Rwanda to the world and bringing the world closer to Rwanda.
Rwanda entrance into the EAC Customs Union, the signing of the EAC Common Market protocol, the opening up of embassies in the DRC, are all among the windows of opportunity the private sector has to utilise in 2010.
During the 2009 ‘3rd Annual Presidential Round Table’, President Paul Kagame also granted a request by the federation to have two meetings with the business community in the year.
Effect of the global recession
In 2009 Rwanda‘s private sector was not shielded from the ripple effects of the economic crisis. Some key sectors of the economy were hit hard.
Prices of commodities fell, there was a reduction on inflows of foreign currency due to decline in mineral, coffee and tourism receipts. The crisis also made it difficult to mobilize credit both on the domestic and foreign market.
Domestic liquidity issues
On the local market domestic liquidity issues also made it difficult for private sector to access credit, stalling growth of so many projects notably in manufacturing, service and industry sectors respectively.
Second quarter statistics show that credit to the private sector dropped by as much as 24 percent or from Rwf94.4 billion in the first half of 2008 to Rwf71.7 billion in same period this year.
Challenges and areas for government support
In 2010 the private Sector through their umbrella organization (PSF), has to address all the outstanding issues that had not been addressed from last year‘s business round table.
Some include valuation of industrial properties in old Gikondo industrial park and a compensation package if necessary. While the valuation exercise was commissioned by the Ministry of Trade, PSF officials are saying that the process is taking long.
“A clear road map is needed by the affected investors who are not allowed to expand or apply for bank loan on the strength of their assets in the old park since 2005,” PSF Chairman Robert Bayigamba said recently.
While works at the new industrial park are in advanced stages, the management of the park (Rwanda Investment Group –RIG), says it has so far received limited applicants from the old park.
The main issue is that the cost of land in the new KIP is tenfold more expensive than the value of land in the old industrial park.
Information availed shows that the management of the park is still waiting for government intervention to purchase the plots from the management of the park and move the industrialists from the old park to the new park.
Other challenges in 2010
The private sector also continues to face a major challenge with regard to accessing long term financing and sometimes resorts to foreign borrowing.
However the current tax law as amended in December 2008 does not favour foreign borrowing. Deductible interest expense in respect of foreign currency denominated loans is only allowable up to LIBOR+1 percent for income tax purposes.
LIBOR is an acronym for London Interbank Offered Rate.
In addition to the above issues which have been pending, according to the business community, the country’s road and air transport costs also have a negative impact on their businesses as there are the highest in the region.
This is due to the long distance from the nearest sea port which poses serious transport challenges by affecting the price of goods and services.
For the year 2010 after numerous appeals, the private sector have requested for a review of the imposition of Value Added Tax (VAT) on international transport service.
According to the business community, this puts them at a disadvantage considering that foreign registered transporters have been relieved of VAT and can afford to charge less for transport, out competing locally registered transporters.
PSF says fuel costs in Rwanda are the highest in the region, given the tax component that favours heavy transporters of fuel from outside Rwanda.
The business community also called on government to put in place separate policy instruments that will promote Small and Medium Enterprise (SMEs) development to a level where they can innovate and compete in the regional and niche external markets.
The private sector also mentioned that it is “worst hit” with shortage of soft and hard skills that are critical for Rwanda’s economic development.
Credit to the private sector dropped from Rwf94.4 billion in the first half of 2008 to Rwf71.7 billion in same period this year.
While works at the new industrial park are in advanced stages, RIG says it has so far received limited applicants from the old park.
Current tax law, as amended in December 2008 does not favour foreign borrowing.