Recent economic perfomance suggests that Rwanda is returning to its pre-2013 high growth trajectory…
In Q2 2014, GDP growth slowed to +6.1% y/y but this followed a strong Q1 outcome (+7.4%) that, in turn, reflected a rebound from a decade-low growth of +4.5% in full-year 2013. Q2 growth continued to be driven by the service sector (+8.5%). The important agricultural sector expanded by +4.8% in Q2, after +5.5% in Q1.
GDP growth in Rwanda has surpassed the average for Sub-Saharan Africa over an extended period. In comparison, the annual average regional growth in the ten-year period up to end-2013 was +4.9%. Moreover, growth in Rwanda is likely to remain strong as household consumption will increase as real wages improve as labour moves away from agriculture into more productive sectors.
Inflationary pressures are relatively benign
Inflationary pressures are expected to be benign in the period to end-2015, assuming that a local food price shock does not develop. EH expects inflation of around 2-3% (average and end-year in 2014), with similar rates in 2015, subject to uncertain commodity price movements.
Although declining, the current account deficit is set to remain large, requiring careful management
Revenues from the external sector remain dependent on a narrow product range, principally those related to tourism (including guided wildlife visits) and coffee. Coffee, tea and related products remain key exports, although now accounting for a markedly-reduced proportion (around 27%) of the total (previously >50%). Crop-based exports expose Rwanda to potential downside risks from weather conditions and from commodity price shocks. Mining provides scope for further diversification, with resources that include gold, tungsten and cassiterite. Strong import growth, particularly capital goods, will continue and EH expects the current account deficit will remain over -7% of GDP in 2014 and in 2015. Even so, with international support, this should be manageable and FX reserves currently provide over four months of import cover, compared with the internationally-acknowledged “safe” minimum of three months.
External debt was reduced significantly through multilateral initiaitves and servicing of debts is now manageable
Rwanda completed its programme under the HIPC initiative in April 2005 thereby signifying an effective exit from the debt relief process. Further relief under the MDRI initiative followed, with a significant improvement in external debt ratios (see chart). Since then, external debt ratios have increased but remain manageable - nominal EDT/GDP and EDT/export earnings require careful management at 24% and 81%, respectively, but servicing obligations on that debt is low (debt service/export earnings is only 1%).
Fiscal accounting is complicated by the impact of periodic interruptions to budget support financing from the donor community in response to perceptions of human rights’ abuses and allegations of an increasingly autocratic regime. Overall, EH forecasts a shortfall in the budget deficit of around -3% of GDP in both 2014 and 2015 but this assumes that donor support will be maintained, perhaps partially. Otherwise, fiscal deficits will widen even if government spending is scaled back.
Planning for the future
Rwanda is generally assessed by international agencies (including Euler Hermes, see bar chart) as having one of the most favourable business environments in Sub-Saharan Africa. Reforms have been introduced to improve the business climate and encourage inward investment. These include strengthening private property rights, reduction of bureaucratic procedures and attempts to limit corruption.
Rwanda does not have an IMF financial facility currently in place (a fully-drawn ECF expired in August 2009) but is following an economic programme that is monitored by the Fund under a Policy Support Instrument. Following the IMF's latest Article IV consultation (October 2014), the Fund declared that policy performance remains satisfactory and that all quantitative indicators up to end-June 2014 were met. This level of support and monitoring provides a measure of market assurance that future policy formulation and implementation will remain relatively consistent with current practice. The Fund acknowledges the Rwandan authorities’ medium-term plan to transition from a public sector-led, aid-dependent economy to one that is led more by the private sector.
At the end of 2013, members of the East African Community (EAC), including Rwanda, signed a protocol that outlines a ten-year transitional period towards a common currency. This is part of the ongoing move towards an increasingly integrated economic bloc.