Rwanda: Foreign investors are cautious despite the accolades for the country’s economic progress.

Written by Aimé Sindayigaya and edited by Jules Niyibizi

To foreigners, Rwanda is known for the genocide that gripped the country in 1994 and mostly for having achieved remarkable economic and human development in the preceding years. However, experts report that Foreign Direct Investments (FDIs) remain extremely low in Rwanda and that this is a major risk facing Rwanda’s economic future [1]. Why would foreign investors be cautious despite Rwanda’s economy accolades?

According to the Economist, Rwanda’s economy was the 10th fastest growing in the world, with an average annualised GDP growth rate estimated at 7.6 % from 2001 to 2010. The overall human development conditions in Rwanda have also improved if one compares the human development level of the country today with the level it was in the 1980s without adjusting for the inequality factor in the estimates[2]. As a result of its economic and human development progress, Rwanda has received worldwide plaudits. This has helped galvanise the Rwandan government’s project of attracting FDIs.

FDI is defined as direct investments of foreign companies in a country other than that of the investing companies. These investments involve foreign investors buying companies or expanding thier business activities in another country. This implies that the more FDIs Rwanda is able to attract the more economic growth the country could achieve which can then be translated towards achieving the country’s Vision 2020 project and tackling the human development issues facing millions of ordinary people in Rwanda.

Rwanda appears to have taken the right steps towards attracting FDIs to the country. It has received International praise and been credited for having maintained a healthy macro-economic environment, embracing an open trade policy, creating a vibrant investment climate, reducing corruption, setting favourable tax incentives for businesses and ensuring security is maintained on its sovereign soil. These have lead to Rwanda being nominated 3rd easiest country to do business in Africa by the World Bank.

Rwanda has also shown a potential of attracting FDIs. According to the World Bank data Rwanda has had a steady increase in FDIs since 2002 up until 2006. The level of FDIs increased significantly in 2007 at a level of 1.8% of GDP and at 2.2% and 2.3% of GDP in 2008 and 2009 respectively. Unfortunately, in 2010 the FDIs level dropped considerably and was only 0.75% of GDP.

The reasons for a decrease in FDIs to Rwanda since 2010 could be attributed to the ongoing global economic crisis in general context. However, the FDIs barriers specific to Rwanda towards investing in the country are noteworthy.

Likely deterrents for FDIs to Rwanda

My intelligent guess is that attracting FDIs should also be about addressing a number of concerns pertinent to investors which should in effect lead to policy reforms. For instance, the purchasing power is unequally distributed among Rwanda’s population and this could prevent FDIs flowing into the country. Among reasons that could entice foreign investors to relocate is to expand their business operations with a view to market their products and services to Rwanda’s consumer market or to take advantage of untapped business opportunities available in the country and serve regional consumers. Therefore, for FDIs to direct their investments in Rwanda depends on the purchasing power level of the consumers in the country. In case, this level is judged very low by investors, then invariably the decision to direct investments to Rwanda would be discarded. If according to the World Bank, 82.4% of Rwanda’s population lives on less than $2 a day, how do investors perceive the level of the country’s consumers’ purchasing power?

As explained in the article, “Rwanda: Wealth inequality, an impediment to sustainable development”, the rising income inequality in Rwanda makes the purchasing power across the country unequally distributed and this could prevent foreign investors that target large scale consumer bases to invest in Rwanda. Due to the rising wealth inequality, Rwanda’s investment climate is appealing to small scale investments that target high end consumers with a substantial purchasing power. In this context, I wonder if Rwanda can achieve the rapidly needed sustainable human development for its people by solely attracting small scale investments.

Whilst small scale investments are also significant to the economic growth of Rwanda, what the country certainly needs is to attract large pools of foreign direct investments that could bring to the masses; employment, practical skills, knowledge transfer and the much needed infrastructure in the country which could make a huge contribution towards the economic and human progress of the country. However, this cannot be achieved due to the growing wealth inequality in Rwanda which does not allow a fair distribution of purchasing power among a large portion of the country’s consumers.

Rwanda worryingly also faces geopolitical risks. The source of this instability stems from Rwanda’s domestic and regional socio political factors. A report titled“Rwanda: assessing risks to stability” published in 2011 by the Centre for Strategic and International Studies outlines the social division, the matter related to politics in Rwanda and the regional factor with reference to the Democratic Republic of Congo, among the vulnerabilities of Rwanda.

It is true that both the internal political affairs of Rwanda and its alleged involvement in the ongoing conflict in the Eastern part of the Democratic Republic of Congo have been subject to very strong critics from the international community. These critics have had vast coverage in the worldwide media and they originate from highly respected sources that are relied upon by foreign investors to help with their investment decision making. I guess, in the international business perspective the problem is not about whether the allegations are true or false, it is the extent to which the image of Rwanda is tarnished as a result of these allegations and consequently deters potential FDIs being directed to the country.

During an interview with the Financial Times (a British Business newspaper) a journalist asked a former Prime Minister of Rwanda, “You are making it easy for investors to come in, but are they worried about Rwanda’s history and genocide?” The question is an example illustrating how the social cohesion of a nation is important in the mindset of foreign investors particularly in a country such as Rwanda that has had a painful history of social instability. The fact that there is no common agreement between the incumbent leadership in Rwanda and its opposition in exile, on whether today most Rwandans genuinely feel that national unity has been achieved since the genocide of 1994, could prove worrying for foreign investors. According to “BTI 2012 Rwanda Country report” published in 2012 by the Bertelsmann Stiftung’s Transformation Index, “Neither the electoral results nor the public opinion surveys commissioned by the Senate, the continuing activity of Force Democratique de Liberation in DRC (FDLR) nor the anti-RPF propaganda of the escaped or exiled Rwandese abroad can be taken as reliable sources to prove success or failure of the restoration of nation unity”. This would obviously leave foreign investors baffled and unable to understand and quantify the real risk associated with the social aspect of Rwanda. Frankly speaking, the worse risk from any rational investor’s point of view is being unable to understand the sort of the risk they are likely to encounter in their business venture. Because of this, some FDIs could certainly abstain from investing in Rwanda.

Other possible factors that could deter FDIs flowing into Rwanda could be the country’s geography. It is a landlocked country with no port. However, Rwanda has addressed this issue by developing a plan together with Burundi and Tanzania to construct a new railway line connecting all three countries to the port of Dar Es Salam. In addition, Rwanda is planning to build a New Airport that could see the country becoming a regional airline hub servicing the entire African subcontinent because Rwanda is centrally located[3]. However, both projects of constructing railway and building a new airport are said to have been shelved for now because they require massive investments and include a high element of risk[4].

The fact that Rwanda is considered a small economy that is dependent mainly on agriculture and that has no significant natural resources and other major industries could deter FDIs. The shortage of having a wide range of economic activities could lead some potential FDIs to view Rwanda as a place unable to offer them the sort of lucrative opportunities they would seek for. Nonetheless, Rwanda is trying to address this through its vision of transforming its economic dependency on agricultural production to a knowledge based economy. If this vision is successful then the economy of Rwanda will have more economic activities that could attract investors.

Additional factors that could make foreign investors cautious towards investing in Rwanda could be the skills shortage in Rwanda’s labour market. There is also a lack of adequate infrastructure like paved roads, cheap transport, electricity supply (In 2011, only 14% of the population in the country had access to electricity. It remains expensive but is a key component to manufacturing if this is to be developed), or the difficulties investors encounter in accessing easily affordable land in Rwanda etc.

Feasible solutions

In order for Rwanda to draw the attention of foreign investors who are attracted by a broad consumer base with significant purchasing power, policy makers in Rwanda have to tackle the rising income inequality so that a large portion of Rwanda’s population achieve a level of purchasing power that can attract prospective large scale investors to invest in the country. The way forward for Rwanda towards tackling income inequality is to learn from the principles of wealth distribution from developed countries. Rwanda should try to proportionally redistribute opportunities arising from the country’s economic transformation as it moves from an agrarian to a knowledge based economy with a great focus given to the inhabitants of the rural areas of the country. Rwanda has to ensure that land is to some extent equally distributed among the population since the majority of them still depend on agriculture as a source of income. Rwanda has also to ensure that the landowner’s agricultural production is fairly traded at the price that procure them revenue which can enable them to increase their purchasing power.

With regards to reducing the geopolitical risk in Rwanda. The incumbent leadership in Rwanda and its opposition in exile need to seat together and find resolutions to their political differences. This would lead to eradicate the risk stemming from Rwanda’s domestic political factor and transform the country into a vibrant environment in which both large and small investors would not be cautious to do business in. Burma is a leading example that politicians in Rwanda, be it the incumbent leadership or its opposition, should be inspired to follow suit. Burma is a country in South-eastern Asia famously known for Aung San SuuKyi, a female politician who was imprisoned for 21 years in the country and was recently released. Due to political reasons, the international community took economic sanctions against Burma. According to The Guardian, thanks to the continued progress towards political reform made in Burma and the request from both the country’s incumbent leadership and its opposition, the economic sanctions against Burma have been lifted by the US. Many developed countries in the world such as the Canada, UK, Australia had also lifted thier economic sanctions against Burma. The implications have been that FDIs have certainly started flowing to Burma. According to the voice of America competing soft drink giants Coca-Cola and Pepsi-Co are returning to invest in Burma for the first time in many years and the ConocoPhilips and Chevron (energy companies) are said to be looking for investment opportunities in Burma as well. The debate is not whether or not Burma will become Asia’s next economic tiger but rather what the timing will be.

There are no economic sanctions that have been taken against Rwanda by the international community but what Rwanda’s politicians have to learn from Burma’s example is that sense of establishing, regardless of their political viewpoints, common, solid principles and institutions. This is to enable Rwanda to better manage its geopolitical risks that stem from its internal political affairs and to allow Rwanda not only to maximise its FDIs but also to attain sustainable economic and human development for its people. Failure of politicians to reaching a consensus on political matters and placing National Unity at the helm of their political agenda will be jeopardising the current and future economic and human development of Rwanda. The saddest part of the story is that the majority of the Rwandan population who are the ordinary people at the bottom level of the social and political hierarchy of Rwandan society will be the most affected.

The divisive regional conflicts going on in the Eastern part of the DRC have to be tackled with all bordering countries co-operating to help bring about sustainable peace to that region. Perhaps a frank and straight to the point dialogue among regional policy makers aimed at developing a universal, transparent and far-sighted framework on how to export natural resources from the East of the DRC needs to be addressed instead of plundering those resources. This would enable an orderly flow of FDIs to the region to help further develop the regional economy. This would certainly not just benefit a sole country but the entire Great lakes region. Ultimately, we would truly experience African lions on the move as depicted in the McKinsey Global Institute report.

Insightful Quotient is a website that encourages debates on how to achieve sustainable development in developing countries using an intercultural cooperation. Therefore, we welcome your insightful arguments that provide scrutiny and ideas that can elaborate further the analysis and suggestions detailed in this article.

[1] page 4 and 5
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