Figure 1: Real GDP growth (E)

Figures for 2010 are estimates; for 2011 and later are projections.

In the last decade and a half, Rwanda’s economy has progressed by improving factor productivity, achieving a considerably higher level of output per worker. The mid-term outlook now depends on increased investment in core sectors. Public investment to improve power generation capacity, air transport, e-government and other sectors is expected to help sustain current growth. But the country’s continued dependence on a few export commodities represents a serious constraint and the mobilisation of domestic resources to finance investment remains low.

Rwanda has undertaken impressive reforms to create a business-friendly environment for the private sector. It has the status of best reformer in the world and is one of the freer countries in economic terms. The hope is that these achievements will translate into increased economic activity in the private sector and attract investment from around the world.

There is impressive social as well as economic progress. Rwanda is on track to meet most of the Millennium Development Goals (MDGs).

Rwanda has the potential to achieve a much higher rate of economic growth. Investment in creating a skilled labour force, removing infrastructure bottlenecks and improving farm productivity could make a huge difference in the years to come. These are some of the priorities of the government’s Economic Development and Poverty Reduction Strategy and Vision 2020.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

Rwanda’s economy made a quick rebound from the decline it experienced in 2009, which was driven partly by the contagion effect of the global economic and financial crisis that reduced demand for exports as well as liquidity constraints faced by banks in the domestic economy. It is estimated that real GDP grew at 7.4% in 2010. The main drivers of the recovery in GDP are continued growth in agriculture, recovery in the services sector, particularly telephones, construction and the export sector.

Agriculture in Rwanda is a source of livelihood to the vast majority of the population. The government has taken steps to help the sector play a developmental role,  transforming lives as well as ensuring stable food prices for the expanding non-agricultural sector. The Crop Intensification Programme seeks to improve farm productivity through the utilisation of fertilisers, improved seeds and extension services. The programme promotes the import of fertiliser in sufficient quantities, training of district and sector agronomists in its optimal application, storage of produce at village level to prevent waste, and the provision of improved seeds for crops such as maize, wheat, Irish potatoes and cassava cuttings. Of equal importance is the government’s programme for rural areas: Vision 2020 Umurenge. It combines land development activities in the hill-ranges with employment opportunities for the poorest of the poor. These concerted efforts by the government, as well as better weather conditions, have led to robust growth in the last three years. In 2010, crop production in the first two seasons increased by 8.2%, driven mainly by substantial growth in root crops (18.8%) and cereals (18.7%). The production of export crops also boomed in 2010, with coffee registering a rebound of 22.5% and tea up 10.8%. These increases can be attributed to new investments in the production of coffee, better terms of trade, the privatisation of some of the tea producing firms, and the treatment of diseases that had attacked tea leaves in the preceding year.

The industrial sector grew by 8.4% in 2010, compared with 1.4% in 2009. The construction sector led the way expanding at 10.9% after registering a mere 1.9% growth in 2009 due to liquidity constraints faced by the banks. This recovery was assisted by growth in the manufacturing sector where food processing led the way. Ongoing investment in utilities such as gas, electricity and water also contributed to the recovery.

Services expanded at a double-digit rate between 2005 and 2008, driving overall growth in the economy during the period. In 2009, growth in services retreated to 5.9% but rebounded in 2010 by growing to 7.3%. The recovery in the service sector was made possible by growth in the financial sector (20.0%) and transport and communications (10.8%), particularly the exceptional growth in telecommunications and increased Internet penetration. This is evident from Table 2 where the share of the services and construction sector in total GDP increased by about 7.5 percentage points in 2010, in comparison to 2005, while that of agriculture declined despite robust expansion in recent years.

The mid-term outlook for the Rwandan economy depends very much on strategic public investment programmes and global demand for its main exports, as well as the loosening of domestic credit to the private sector. Strategic investments include the broadening of access to electricity for the population by increasing household grid-connectivity from 6% to 16% in 2013; completion of the Fiber Optic Programme that will allow wireless access for up to 100 000 users; the international railway line that will facilitate Rwanda’s import/export trade across the borders of Tanzania and Burundi; the construction of an international airport in Bugesera, which on completion has the capacity to make Rwanda a gateway across East and Central Africa; and the new convention centre in Kigali together with a five-star hotel that caters to demands by a variety of customers visiting the country. Rising public investment and efforts to raise agricultural productivity have created an optimistic scenario for the economy to grow at 7% or more in the next three consecutive years.

The downside risks for the mid-term outlook are the reliance on a limited number of export commodities for which there is sluggish growth in global demand and the tightening of credit by commercial banks despite the efforts by the National Bank of Rwanda to reduce liquidity problems. Furthermore, low domestic resource mobilisation increases reliance on external resources and infrastructural bottlenecks continue to hamper the country’s competitiveness in regional and global markets.

Figures for 2010 are estimates; for 2011 and later are projections.

The key objectives of monetary policy in Rwanda are macroeconomic stability and sustained growth. Following a series of reforms, the current monetary policy framework is geared towards a flexible foreign exchange regime determined by market forces to encourage trade and investment, coupled with open market operations to manage money supply to ensure positive returns for bank savings in real terms and facilitate access to finance for the private sector.

Part of the economic slowdown experienced by Rwanda in 2009 could be explained by severe liquidity problems faced by domestic banks, blocking private sector access to finance. The National Bank of Rwanda intervened to ease the money supply by reducing reserve requirements from 8% to 5% in early 2009 and cut its policy rates (key repo rate) to increase the liquidity position of commercial banks. Banks responded, albeit slowly, and domestic credit expanded by 9.4% in the first three quarters of 2010 – the bulk of it being extended to the construction and services sectors. Deposit rates showed signs of picking up during the liquidity crunch to 9% but gradually eased to 6.7% as of September 2010.

By end of 2008, the consumer price index in Rwanda reached a record high of 22.3% reflecting partly the sharp increase in world food and oil prices as well as the monetary expansion of the previous year. By the end of 2009, inflation declined to 5.7% as overall import prices declined, and food prices stabilised due to a better harvest and slower growth in the money supply. In 2010, inflation declined further, reaching its lowest point in October 2010 at 0.2%. The annual average for 2010 was estimated to be 2.3% with a potential of rising in 2011 due to the surge in world prices for petroleum.

Exports suffered in 2009 due to reduced global demand for coffee and tea. In 2010, between January and September, overall receipts from exports approached USD 186 million, coffee and tea alone contributing close to 48% of export receipts. With minerals, the share reached 67% of total exports, underlying the dependency of exports on primary products. Import bills in 2010 were close to USD 998 million and almost two-thirds of it went to import capital and intermediate goods. The rise in import bills is partly explained by the shift in the direction of trade towards the East African Community and the COMESA free trade area where import barriers have been reduced considerably.

As a result, the current account balance registered an estimated deficit of 6.6% of GDP in 2010 and is projected to hit 9.1% in 2011 before falling again to 6.4% (Table 1). 

A rise in private direct investment bolstered the balance of payments in 2009 helping it achieve a surplus to the tune of USD 139 million that in effect raised the country’s reserve to 6.2 months of imports (up by 1.2 months from the previous year). In 2010, the overall balance of payments was expected to experience a moderate deficit of USD 9.4 million, reducing slightly the reserve position by a small margin from its 2009 level.

Rwanda’s level of debt is one of the lowest in sub-Saharan Africa, partly due to substantial debt relief (which amounted close to USD 1.5 billion in 2005) and the government’s prudent debt management. In 2010, Rwanda’s external debt was less than 5% of GDP while the average for sub-Saharan Africa was close to 23% and that of the EAC 26% and about 30% for Low Income Countries (LIC).

Figures for 2010 are estimates; for 2011 and later are projections.

Rwanda is one of the leading reformers in the world when it comes to creating a private sector conducive to doing business. It ranked 58th out of 183 in the 2011 World Bank’s Doing Business report, the first country in sub-Saharan Africa to be ranked so highly.  Within Africa, Rwanda has gone from a rank of only 37th in 2006, more or less on the same level as its neighbour Burundi,  to 5th in 2011, surpassing all other members of the East African Economic Community. Some of the dramatic changes the country has made include the reduction of the number of days required to start a business to just one, the minimum possible time it takes anywhere in the world. For businesses, the number of days required to obtain construction permits fell from 210 days to just less than 30 days.  The effort of the government to automate custom clearance is expected to facilitate cross-border trade by significantly reducing the time it takes to process necessary the paper work.

Rwanda was also acknowledged as a country that has made the most progress in economic freedom according to the global Index of Economic Freedom released every year by the Wall Street Journal and the Heritage Foundation. The index tracks countries based on ten factors that include freedom to do business and trade, levels of government spending and investment, transparency and competitiveness.

The improved business climate is expected to facilitate capital inflows into the country. Government estimates suggest that foreign direct investment (FDI) and other capital flows will increase by about 12% per year in the next three years from the USD 143 million recorded in 2009. The share of private sector credit-to-GDP in the last decade has increased almost six-fold, hitting a record of 12%, at least partly as a result of the government’s effort to nurture a budding private sector.

This does not mean everything necessary to foster the private sector in Rwanda is in perfect order. Infrastructure bottlenecks, high taxes and tax administration issues remain a challenge to the private sector as it competes in global and regional markets.

Other structural reforms that are underway include: measures to improve public financial management through the rollout of an Integrated Financial Management Information System to various government agencies to make the utilisation of public resources more efficient; the consolidation of social security contributions under the direct supervision and management of RRA; measures taken by the National Bank of Rwanda (NBR) to enhance the effectiveness of monetary policy through frequent meetings of the Monetary Policy Committee (MPC); and the introduction of an exchange rate corridor as a stepping stone towards a more flexible exchange rate.