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Rwanda: Looking beyond Economic Growth numbers (Part three)

Written by Aimé Sindayigaya edited by Jules Niyibizi

Part one of this article unveiled the discrepancy between the worldwide acclaimed economic growth of Rwanda and the well being of the majority of the country’s citizens. Part two uncovered the nature of Rwanda’s economic growth and the accompanying contentious risks that Rwanda is increasingly exposed to. Both publications lead to question whether the country’s worldwide acclaimed economic achievements are irrefutable and sustainable. In this third and last part, acute threats to Rwanda’s economic development that are barely mentioned will be discussed in order to better inform stakeholders to reflect on the management and future of Rwanda’s economic affairs.

 

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Climate change

Rwanda is vulnerable to a variability in rainfall and temperature due to climate change. Extreme floods and drought in different regions of Rwanda propagate large economic losses for the country. For instance, significant rainfall events in 2007 led to approximately 20 deaths, 706 houses destroyed, 678 houses damaged and 2,500 hectares of land flooded. A 2009 assessment by the Stockholm Environment Institute (SEI) of the economic cost generated by the flood of 2007, estimated the total household damage, agricultural losses and fatalities to be between US$4 to US$22 million. These estimates could have been even higher if wider economic costs such as infrastructure, agricultural, water system damages, water contamination, soil erosion, direct and indirect effects to individuals were included.

In 2013, Rwanda’s Ministry of Disaster Management and Refugee Affairs reported that 112 people died due to climate related occurrences. 3,924 houses were demolished and around 2,201 hectare of land was devastated. The economic cost of the 2013 climate related occurrence are still to be established but they certainly amount to serious financial loss.  It is evident that climate change is and will become a prime threat to the economic and human development of Rwanda’s population. SEI reported that future economic costs of climate change in Rwanda are very uncertain but are likely to be at minimum 1% of GDP each year by 2030. At the time the report was published (in 2009), the institute estimated Rwanda’s immediate climate change adaptation costs at around US$50 million per year by 2012 and stated that greater funding of approximately between US$300 million to US$400 million per year  are needed to address current climate variability.  By 2030, Rwanda will require a lower bound cost for climate adaptation of between US$50 million to US$300 million a year. A plausible upper estimate of this cost is US$600 million per year.  Against that backdrop, in 2014 Rwanda set up a national climate fund financed by the UK Department for International Development (DfiD) to the value of £22.5 million (US$ 34 million) to invest towards climate change adaptation and mitigation in the country. However, the question is how Rwanda will manage to raise funds to tackle future climate change related problems. Talks on how to raise the necessary funds to assist developing countries such as Rwanda to tackle climate change impacts is ongoing at the international level, but they have not been conclusive yet. How Rwanda will raise sufficient funds to deal with climate change impacts and at the same time provide for its citizens, who are desperately in need of social and economic development, remains a puzzle. This is because despite Rwanda’s acclaimed economic growth, it is still a challenge for the country to raise public finance from domestic sources. Evidence also show that loss of revenue is rampant in the country. Furthermore, the country’s effective use of Official Development Assistance is subject to enquiry. The narrative below provides further details to enable stakeholders to reflect on the management and future of Rwanda’s economic affairs.

Tax and revenue losses

Rwanda’s level of tax revenue mobilization remains low despite the country’s acclaimed economic growth.  “…At 16 percent of GDP, the tax collection effort {of Rwanda} is still low compared to peers in Africa, and well below the 25 percent target set by the East African Community”, said the Managing Director of International Monetary Fund (IMF), Ms Christine Lagarde to Rwandan Parliamentarians and others in Kigali on January 27, 2015, during her three days visit to Rwanda. The main reason why Rwanda is failing to mobilise significant tax revenue is that, out of a labour force of 5.8 million available in Rwanda, only 348,000 are employed in the formal economy and therefore pay tax[1]. A significant number of the labour force of Rwanda is concentrated in the informal economy that doesn’t participate in tax payment. The Rwandan government remains the main employer in the country’s formal economy as the private sector is small. Due to reasons explained in part two of this article, Rwanda is struggling to develop an efficient business environment which could have attracted a flourishing private sector that can create decent levels of employment to elevate tax revenue mobilisation in the country.

Rwanda also loses substantial revenue from illicit financial transactions and public entities’ irregular and unauthorised expenditure.  A recent report on illicit financial flow from developing countries by the Global Financial Integrity of 2012 reveals that, on average, Rwanda lost US$ 211 million through illicit financial transactions between 2002 and 2011 (meaning US$ 23 Million each year). Furthermore, based on reports from the office of the Auditor General in Rwanda, it was established that incurred public expenditure that was not supported by any verifiable documents amounted to Frw 46 billion (US$ 63 million) between 2003 and 2013. If public wasteful & unauthorised expenditure were added that amount could be higher.  All of these funds are undoubtedly a huge loss of revenue for a developing and poor country such as Rwanda which could either be used to support the existing national climate fund or help to solve some of the social development challenges that Rwanda is facing today, such as lack of quality education in the public schools among the few.

Official Development Assistance

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Official Development assistance (ODA) or, in simpler terms, Foreign Aid flow, has been the main pillar of Rwanda’s post 1994’s acclaimed economic growth but yet its use has been and continue to be subject to scrutiny. Rwanda is on average the second country that has been receiving most of the net ODA per capita between 2005 and 2013 when it is compared with countries that have ever been on the list of top 10 recipients of ODA in Africa from 2011 to 2013 (See above graph[2]). Nonetheless, Rwanda’s effective use of aid has increasingly been subject to enquiry among international development community stakeholders leading to some of the aid donors countries suspending or delaying pledged ODA to Rwanda.  In 2008, Sweden suspended a planned US$ 14.5 million and the Netherlands withheld US$ 4.2 million budget support to Rwanda. In 2012, the United States of America, the African Development Bank, the United Kingdom, Germany and Sweden withheld budget support amounting to US$ 128.1 million. Aid suspension during both periods was due to Rwanda’s alleged involvement in the Eastern Democratic Republic of Congo’s conflict. In 2014, Belgium cancelled €40 million of aid to Rwanda over the country’s failure to meet media freedom and governance targets. As mentioned in part two of this article, this cancellation of aid to Rwanda by Belgium is a hint that further aid suspension by aid donor countries to Rwanda are possible if the country’s constitution is amended to allow the incumbent president to run for a third term.  The United States of America that provides the largest aid package to Rwanda has recently announced that it does not support a presidential third term in Rwanda.  Rwanda governance fashion has progressively evolved to one that is not up to par with principles that international development community highly values and believes to promote good governance. These principles were made compulsory prerequisites for countries soliciting ODA from international development community. It can, therefore, be argued that the politics that influence Rwanda’s current governance stance put the social and economic development of the country at risk.

Rwanda has also been spending large amounts, from its already meagre finances collected from a low domestic tax base and ODA receipts from partner countries, on dubious activities despite of all the country’s social and economic difficulties.  A high proportion of the national budget has been spent on Public relationship companies (PR) and hosting large public events in Rwanda and abroad such as National dialogue, Rwanda Day and Rwanda youth Forum. Furthermore, it was reported that Rwanda recently purchased four TL-50 air defence missiles from China, making the country the most advanced air defence missiles in East of Africa. To avoid any ambiguity, there is no thread of doubt that Rwanda’s development can benefit from strengthening the country’s security, engaging PR, or organising periodic events that reconnect Rwandans across the world to debate countrywide issues. However, policy makers at the helm of the management of economic affairs have to prioritise expenditures accordingly. For instance, some of the funds spent on the mentioned dubious activities could be more effectively used for the long term benefits of Rwanda, if they were spent on tackling pressing issues such as child malnutrition. The 2013 Cost of Hunger in Rwanda report reveals that Rwanda lost an equivalent to 11.5% of GDP due to child under nutrition, pointing out that 49.2 percent of adults in Rwanda suffered from stunting as children and therefore were not able to achieve their potential. The report reads:” In rural Rwanda where most people are engaged in manual activities, it is estimated that in 2012 alone, 40.4 billion RWF (US$ 55 million) were not produced due to a lower capacity of this group”. The report highlights the causes of under nutrition as relating to environmental (natural or entropic causes), sociocultural economic (linked to poverty and inequality) and political institutional.

Raising finances for development

Following successive aid suspension by donor countries and constraints in the tax collection capacity, Rwanda began to explore options of raising funds through local and international sources. With a view to tap into the local sources, Rwanda launched a Solidarity Fund under the name of ‘Agaciro[3] Development Fund (AgDF) in 2012, whereby the Government of Rwanda, Rwandans and friends of Rwanda voluntarily make contributions to the fund. However, considering that Rwanda has a very low domestic income base (read part one of this article) and small private sector, it remains questionable whether sufficient development financing can be raised from domestic sources. The article titled “Reality Check: What is Agaciro Development Fund?” provides viable alternatives to AgDF.

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Rwanda raised US$ 400 million ten-year Eurobond on international capital markets in 2013. Likewise in 2014, US$21.90 million was raised on the domestic market through the issuance of a 7-year local currency bond. The funds raised from both bond issuances were said to be invested towards infrastructure projects in Rwanda. Both bonds issued were oversubscribed because Rwanda bonds offered high yield. Moreover, Rwanda’s low levels of external debt and reported economic transformation success attracted investors. There is no doubt that Rwanda’s ability to raise capital on the international market is a great achievement. However, If not managed prudently, accumulated debt to invest toward development could be a time bomb and not a sustainable solution for Rwanda. In the long term raising money through bond issuance invariably increases Rwanda’s debt burden which gradually exposes the country to external risk factors such as global recessions, financial and currency crises. Based on the announcement made by officials in Rwanda that the country plans to raise up to US$ 1 Billion through a second Eurobond issue this year, the Economic Intelligent Unit warned in its report of September 2014 that an issue of that level, which is equivalent to 13 percent of the country GDP, would significantly raise Rwanda’s external debt burden that currently stands at 25 percent of GDP. Since the beginning of 2015, Rwanda has been raising funds from the domestic market, surely to protect itself from currency risk. However this is still more debts that the country is accumulating which will need to be repaid at some point in the future.  Unless fast and interrupted economic progress, that enables abundant collection of tax and foreign currency revenue, take place in Rwanda; stakeholders should remain sceptical of how the country will meet its obligations on the borrowed money. This is because Rwanda is exposed to contentious risks (read part two) that prevent it to fully achieve solid economic transformation and make its convivial economic successes sustainable.

The way forward

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The above account provides a description of why stakeholders should reflect on the management and the future of economic affairs of Rwanda. In fact, the combination of the rising country’s population, which is projected to reach between 15.4 million and 16.9 million inhabitants by 2032, the predicted heavy rainfall and high temperatures forecasted to affect the ecosystem of Rwanda, will intensify deforestation and soil erosion in a country that is already considered as high densely populated in the Sub-Saharan Africa. Population growth and climate change impacts will decrease agricultural productivity and adversely impact other sectors linked to human development and economic growth in Rwanda such as health, education and infrastructure. That is why Rwanda must revolutionise further how it manages its economic affairs if it is to achieve sustainable development for generations. This should start by Rwanda developing an efficient business environment which attracts a flourishing private sector that creates decent levels of employment to elevate the tax revenue mobilisation capacity in the country. Incumbent and prospective leaders’ foremost engagement and focus should be tackling pressing issues that prevent private sector from flourishing in the country as indicated in part two of this article. Internal social and political risks, geopolitical risks that Rwanda is exposed to being among other factors preventing the country from attracting private investments in the country should seriously be attended to. Furthermore, Rwanda’s public finance should be managed cautiously by prioritising expenditure to SMART projects that have solid and long term economic impacts to the majority of population living in the rural area of Rwanda. As for Rwanda’s borrowing spree on local and international capital markets, the advice of former President of African Development Bank Mr Donald Kaberuka, on Twitter stands that “The crisis in Greece is a reminder of the need to preserve hard won macroeconomic stability in Africa. Borrow carefully, spend wisely”. Click here to read part one


 

[1]http://www.ulandssekretariatet.dk/sites/default/files/uploads/public/PDF/LMP/lmp_rwanda_2014_final_version.pdf

[2] Graph was plotted using the World Bank Database: World Development indicators. The data were accessed in May 2015.

[3] ‘Agaciro’ is a Kinyarwandan word that can loosely be translated as ‘Dignity’

The views expressed by the author in the above article are solely the author’s personal views and not his employer.

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.

One comment

  1. This article look great and I can say it is a good research

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