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Posted on Tuesday, 01 July 2014 17:32

Rwanda's bet: Middle-income or bust

By Honoré Banda in Kigali

Constructing the future means a shift from exporting raw materials into services. Photo©Vincent Fournier for TARRwanda's two decades of recovery have been remarkable. Now it faces an uphill struggle to sustain economic growth in order to graduate into middle-income status. A liberalised financial sector has begun the country's transformation but much will depend on the growth of its service sector.

The construction cranes shuddering over Kigali tell a similar story to those in so many of the continent's capital cities. Few, however, have undergone such a dramatic turnaround.

The regime led by President Paul Kagame for the past 14 years appears well able to sit out the political noise generated by the assassination of former spy chief Patrick Karegeya in January, and United Nations reports that implicate the Rwandan army in Congolese rebel movements.

Holding out against international public opinion is one thing. Vaulting into middle-income status is another, which is where the drying up of foreign aid may complicate matters for Kigali.

The transformation requires a structural shift of the economy away from the export of unprocessed natural resources into higher-value goods and services.

Gross domestic product (GDP) per capita stood at about $620 per person in 2012, according to the World Bank, and would have to rise to $1,036 to qualify Rwanda as a lower middle-income country.

A recent economic slowdown has not only shaken business confidence but also forced the government to rethink its development financing mechanisms.

Gone are the days when state-controlled conglomerates like Crystal Ventures would run the only construction and manufacturing concerns in town.

"The challenge is how to create an environment that attracts investment by the private sector but also by the public sector from outside the country," says Claver Gatete, Rwanda's finance minister.

Since 2006, the government has made an intensive effort to privatise state-owned enterprises and reduce the government's non-controlling shareholdings in private companies.

Foreign investors now own controlling interests in some of Rwanda's largest firms.

Opening up the economy

John Rwangombwa, Rwanda's central bank governor, says the liberalisation of the economy has enabled the growth of private investment and contributed to the expansion of the financial sector.

Today, Kenya Commercial Bank, Equity Bank, Ecobank and I&M Bank are operating in the country.

"What was done after 1995 was to open up the economy, and in 1997 the central bank was given total independence. This was a big step towards the right economic management, and all controls were removed," he says.

He cites the deregulation of foreign exchange, amongst other things.

The International Monetary Fund gives the National Bank of Rwanda high marks for its management of the regulatory system.

Since 2008, the government has undertaken a series of pro-investment policy reforms to ensure Rwanda remains competitive in attracting foreign investment.

In 2013, the World Bank rated Rwanda as the second-best reformer since 2005 and placed the country 52nd in the world in its doing business rankings.

Exports slow to grow

But while macroeconomic stability has been achieved and the business environment is strong, there has yet to be any real domestic private sector take-off. This hurts Rwanda most in its trade balance.

The country faces a dilemma of boosting exports amid rising investment needs. The country's exports, though increasing, have been growing at a slower pace than its imports.

Currently, the country depends on a narrow export base dominated by coffee, tea and minerals.

And while the government has been implementing its national export strategy since 2012, most initiatives for export promotion have failed.

Dickson Malunda of the Institute of Policy Analysis and Research-Rwanda explains how far behind its peers Rwanda is: "Exports represent less than 10% of GDP, compared to an average of 32% of GDP for sub-Saharan Africa. The level of exports has been growing over the past 10 years, but growth is still less than 5% and only just above the average for all of sub- Saharan Africa. Measured on a per capita basis, Rwandan export performance is even weaker – annual exports per capita are just $18, while the average for sub-Saharan Africa is$145."

Exports fetched $703m in 2013, up from $590.8m in 2012, largely boosted by mineral receipts, which increased by 89.6%.

However, coffee and tea receipts declined by approximately 10% and 16%, respectively, fetching $54.9m and $55.5m.

As a result, the country's trade deficit narrowed slightly to $1.1bn in 2013 compared to $1.3bn in 2012.

Boosting manufacturing exports has been a traditional way out for emerging countries, but Rwanda's landlocked nature and weaknesses in infrastructure place a heavy burden on trade.

Some, however, argue that these very problems could be a boon for domestic production of currently imported consumer goods.

Andrew Mold, an economist with the United Nations Economic Commission for Africa, underscores the need to avoid adopting a "naive export strategy" where companies must "export or perish" regardless of the conditions of global markets and the inherent disadvantages in their trading costs and geographical location.

GDP per capita needs to rise from $620 to $1,036 for Rwanda to be a middle-income country

"Rather than expect a dramatic turnaround in export fortunes to high-income markets, the focus for Rwanda should now be on exploiting products destined for national, regional and other developing country markets," Mold argues.

"There is plenty of scope to start producing many products which are currently imported," he says, adding that focus should be placed on recapturing the domestic market.

Others disagree, pointing to recent interest from Chinese investors, who may build a sock factory for export to China.

The government is also looking to expand the services sector and has hired consultants to revise its export strategy.

New service sectors, including financial and information and communication technology (ICT), are expected to be Rwanda's future growth engines.

The government is targeting software development, call centres and outsourced business processes.

Service sector promotion

According to the World Bank, service exports in Rwanda grew annually at more than 10% between 2005 and 2012, starting from a base of less than $40m in 2005 to almost $85m by 2012.

To promote the service sector, the government will give incentives including reducing corporate tax from 30% to 15% in the next financial year, beginning July.

So far, the country has managed to attract investment from Mara Ison, UST Global and Techno Brain to offer business process outsourcing (BPO) and information technology services.

"BPO creates a lot of opportunities in terms of job creation. It is a value proposition for exports," says Hubert Ruzibiza, the head of services development at the Rwanda Development Board (RDB).

Everything remains embryonic, however. To fast-track private investment, Rwanda's President Paul Kagame appointed Valentine Rugwabiza, a former deputy director-general at the World Trade Organisation, to lead the RDB last year.

Her post was also elevated to a cabinet position, putting Rwanda a step ahead of its counterparts in East Africa, where the investment promotion bodies remain semi-autonomous government agencies with little influence on decision-making processes.

Her job – to foster the emergence of strong domestic companies – is critical to Rwanda's dream of middle-income status. ●



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