Rwanda, with a population of 11 million and a gross domestic product (GDP) of just $6bn, is dwarfed by most of its neighbours. But it has managed to stand out from many of them thanks to its economic progress in the past 12 years. The east African country might still be one of the poorest in the world, but it has come a long way.
Its economy expanded by an average of 8.5% annually in the 2000s, according to investment bank Renaissance Capital, making it one of the fastest growing countries globally and leading its GDP per capita to double. Life expectancy climbed substantially (although it is a still low 55), while literacy rates went from less than 50% to almost 85%.
Rwanda has achieved this without having the oil or abundance of minerals that have helped other rapidly growing African countries in recent times. Instead, its success can largely be attributed to good governance.
The country is renowned as being one of Africa’s most efficient and least corrupt. It placed higher than all African states, bar South Africa and Mauritius, in the World Economic Forum’s latest competitiveness ranking, and on a continent usually associated with mind-numbing red tape and government opacity, businesses can be registered online and in just a few days. Several of its ministries even give regular updates on Twitter.
Donor threats
It is for these reasons that Rwanda’s finance minister, John Rwangombwa, says the country's growth spurt is far from over. He even expects GDP expansion to accelerate over the medium term. “Our target today – our strategy for the next five years – is to grow about 11.5%, which is very high compared to the 8.3% we achieved in the past 10 years,” he says.
The International Monetary Fund predicts a more modest average of 7% until 2015, but Mr Rwangombwa bases his optimism on Rwanda, despite its recent progress, still being what he calls a "virgin economy". “The room to grow is still big,” he says. “Any effort you make, any penny you invest wisely, will automatically yield results.”
At the same time, Mr Rwangombwa believes that the hefty public investment in education, agriculture, infrastructure and IT since 2000 mean the country is now better positioned to attain double-digit expansion. “In terms of the requirements – the infrastructure, the human capital and productivity – we’re doing much better than 10 years ago,” he says. “The base is stronger.”
Yet the government’s efforts could count for little should Rwanda fail to improve its deteriorating relationship with donors. Many of them have threatened to freeze aid following a United Nations report last year that accused Kigali of supporting militants in neighbouring Democratic Republic of Congo, charges furiously denied by Rwandan officials. The UK, previously a staunch ally of the Rwandan government, withheld $34m of budget support in late November, while the US and some multilateral lenders have talked of taking similar action.
This presents a stern test for Rwanda. It has gradually reduced its dependency on donors, but aid, which has poured in since the genocide in 1994, when almost 1 million people were massacred in just three months and the economy was devastated, still accounts for 40% of the country's budget.
Mr Rwangombwa admits that aid cuts, particularly in the form of budgetary support, could hurt Rwanda. But he doubts that they will be substantial enough to send growth rates tumbling. “It’s a reality that we are still heavily reliant on aid,” he says. “If the worst comes to worst, it will affect our growth by 1.5 to two percentage points. But we are confident we will get the money. We assure that all the problems concerning the Democratic Republic of Congo will become clear as we get final reports from the area. If there’s any money that’s going to be lost, I would say it will be insignificant in terms of having an impact on our growth.”
Eurobond planned
As part of a strategy to diversify its funding, Rwanda's government wants to tap the international capital markets for the first time, following several other sub-Saharan sovereigns that have sold debut Eurobonds in the past two years. Mr Rwangombwa, who The Banker interviewed in late October, said he wanted to raise at least $300m, and that the country, rated B by Standard & Poor’s and Fitch, would look to issue before the end of 2012 (it had not done so by the time The Banker went to press).
Rwanda’s ability to sustain its economic buoyancy will also come down to whether it can attract more private investment, from both locals and foreigners. So far, the bulk of investment since 2000 has been made by the government, which wants the private sector to take over by 2020. Encouragingly for Mr Rwangombwa, banks are increasingly lending to businesses – credit provision grew at about 28% in 2011, more than anywhere else in east Africa. “We need private investment to take the lead,” says Mr Rwangombwa. “The public investment has created the enabling environment needed for businesses to grow. Where we are today, we are ripe from private investments.”
Farming is seen as a crucial sector. Rwanda is mostly rural, with primary agriculture accounting for more than 70% of employment. The country’s increased prosperity since the genocide has resulted in no small measure from rising food production, to the extent that it can now all but feed itself without resorting to costly imports. Yet subsistence agriculture still dominates, and many farmers lack irrigation.
This is changing, with the government having done much to boost productivity by encouraging the use of fertilisers and making irrigation more extensive. But it knows that its plans to increase commercial farming in the next decade will hinge on whether funding is available for farmers. As such, the government is introducing a scheme that allows growers to get insurance, which should improve their chances of accessing loans. “The fact that we’ve been able to move from subsistence farming to commercial farming – albeit on a small scale – is transforming the mindset of farmers,” says Mr Rwangombwa. “The next thing is linking them to the financial sector.”
New areas of growth
Mr Rwangombwa is also targeting investment in Rwanda’s service industries, which now account for 45% of GDP, more than agriculture. The administration is particularly keen to see the growth of tourism, IT and financial services.
The development of the country's capital markets is a priority, too. Their shallowness has perhaps benefited Rwanda in recent years and was part of the reason that its currency and bond markets remained stable in 2011, when big outflows played havoc with those in Kenya and Uganda. Yet Mr Rwangombwa says that in the long term, attracting more portfolio investment will be to Rwanda’s advantage.
A Eurobond would help boost foreign interest in the domestic financial markets. So would longer term local currency securities. As such, the government, whose curve only stretches to five years, plans to issue seven- and 10-year bonds soon.
Rwanda's equity market remains tiny. Just four companies are listed on the local stock exchange, only two of which are based in the country. Officials hope most of Rwanda’s 14 banks will eventually carry out initial public offerings (the largest of those, Bank of Kigali, is the only one to have done so).
East African integration
Mr Rwangombwa says it is necessary for Rwanda to integrate further with its neighbours, especially the other four members – Burundi, Kenya, Tanzania and Uganda – of the East African Community (EAC), a customs union comprising 130 million people. Rwanda, as a land-locked country with a small population, has struggled to build a manufacturing base and suffers from high import costs. But closer ties within the EAC should make it easier and cheaper to bring in goods from overseas via Kenya and Tanzania, both of which have coastlines, and entice investment in manufacturing.
“Rwanda is a small country,” says Mr Rwangombwa. “It wouldn’t be attractive to any investor to target 11 million people as a market. So for us to be able to attract big investments, [we need to market Rwanda] as a centre of a bigger market of more than 130 million people.”
Like many politicians in the region, Mr Rwangombwa favours a single currency among EAC members. But he is realistic enough to acknowledge that the five countries still have far to go in terms of economic convergence before monetary union can take place. “At the end of the day, the single currency will be important,” he says. “But I’m cautious. We’re promoting it and working with our colleagues on it, but we are saying we need to introduce it at the right time, when we have some sort of homogenous way of managing our economies and economic variables.
“We can’t rush into it. That would just create problems.”
The more immediate priority for Rwandan policy-makers will be to try and prevent Western donors slashing aid in the coming few years. Any further loss of budget support will hurt the country’s finances, even if it manages to issue a Eurobond soon. Moreover, the tainting of its image – something Rwanda has strived so hard to build – could also lead to foreign investment dropping.
Nonetheless, the efficiency of Rwanda’s institutions and its economic reforms since 2000 will stand it in good stead whatever the outcome. While aims of 11%-plus growth might prove too ambitious, few analysts doubt that levels of 6% or 7% can be sustained for some time.
