RWANDA
Economy
(Updated: February 2005)
Trends
Since 1995, the Rwandan economy has been one of the fastest growing in Africa and indeed the world. Real annual GDP growth averaged 7,7% from 1998-2002, but slowed down to an estimated 3.5% in 2003. The main reason for the impressive growth rate in previous years is that the country had been steadily recovering from the steep economic decline of the years preceding 1995. From 1990 Rwanda was embroiled in a civil war that culminated in genocide in 1994 and a subsequent mass flight of refugees. The economic impact of these events was severe, and real annual GDP growth dropped to -10% in 1993, and -49% in 1994. Since coming to power in 1994, the Rwandan Patriotic Front (RPF)-dominated government has restored security throughout the country and ensured the return of most subsistence farmers to their fields. In addition, and with considerable assistance from international donors, the government has rebuilt and in some cases expanded rural and urban infrastructure and has managed to contain currency depreciation and consumer price inflation. Poverty nonetheless remains severe, and the government's main economic challenge is to stimulate new sources of poverty-reducing growth. The government's ambitious long-term plan is to transform Rwanda, which is one of the poorest and most rural countries in Africa , into an information and communications technology-based economy. In the short- to medium-term however, and largely as a result of the participatory process that generated Rwanda's well-received Poverty Reduction Strategy Paper (completed in late 2002), the focus is on rural recapitalisation, and the boosting and diversification of agricultural production.
Labour
92% of the population lives in rural areas - the highest percentage in Africa. Almost all economically active rural inhabitants work as subsistence farmers. Including several thousand tea estate workers, an estimated 4.5 million people work in the primary sector. There are fewer than 10,000 industrial workers, and an unknown but growing number are employed as artisanal miners. There are an estimated 65,000 salaried workers in total, most of who are civil servants.
Economic structure
Agriculture contributed 44% of GDP in 2001, according to official statistics, which probably underestimate the sector's economic contribution. The main cash crops, tea and coffee, contribute under 2% of GDP, but generate the bulk of export earnings. In 2003, official estimates indicated that coffee accounted for 24% of total export earnings and tea for 35%.
2001 was an anomaly, as revenue from mining exports, particularly of colombo-tantalite (coltan), exceeded revenues from tea and coffee for the first time. Although coltan production in Rwanda has increased steadily over the past few years, reaching a record 555 tonnes in 2001, this spike was due primarily to the re-export of Congolese coltan which is frequently incorrectly recorded as being of Rwandan origin.
In addition, there was a temporary surge in the international price of coltan in late-2000-2001 which fuelled export earnings for that commodity. Manufacturing, which consists primarily of agricultural processing, alongside limited import substitution, contributes around 20% of GDP, but the sector is under severe pressure due to regional imports and the high cost of inputs. Tourism collapsed in the 1990s, and although the sector is recovering, its contribution to tertiary sector output has yet to reach pre-war levels. The tertiary sector as a whole is dominated by wholesale and retail trade and contributed 37% of GDP in 2001. However, official statistics for the sector are particularly unreliable, and should be treated with caution.
Agricultural production, food security
Rwanda is one of the least urbanised countries in Africa and has by far the highest rural population density on the continent. The average size of smallholdings is less than one hectare, which is generally too small for harvests to sustain farmers, let alone provide a marketable surplus. The main food crops are beans, sweet potatoes, sorghum, plantains, bananas, potatoes, cassava and maize. Agricultural yields are poor because of decades of over-farming and a shortage of farming inputs, especially fertiliser. Meanwhile, the population is growing an estimated 2.9% per annum, and food security is an increasing worry for the government. Government policy is to boost agricultural production, both for domestic consumption and for export to the rest of the region. The plan for this is to recapitalise rural areas, increase input provision, and to encourage land consolidation. Largely because of improved security conditions, agricultural production has risen steadily since 1994, though drought has affected harvests in some years. Nonetheless, production per head remains below 1990 levels. There is considerable, though almost entirely unrecorded, export of agricultural produce to the eastern DRC, where production has collapsed, and a small but growing recorded export trade, particularly in potatoes to Uganda and the Middle East.
Post-war coffee production peaked in 1999/2000 at 18,800 tonnes, less than half its pre-war level. Production has since tailed off sharply, mainly because of inadequate inputs and a decline in the international price. Total coffee production in 2003 was estimated at just 14,000 tonnes. Tea production was 14,200 tonnes in 2003, and the government hopes this figure will double when all the tea estates are privatised. Although the country's nine tea estates were due to be privatised in 2001, by 2004, the Rwandan government had only received offers for two of the tea estates. In addition to tea and coffee, there is a small floriculture export industry, and limited production and export of pyrethrum extract and quinquina.
Mining
Rwanda has deposits of cassiterite, colombo-tantalite (coltan), wolfram, gold and sapphires. Cassiterite production peaked at 1,000 tonnes in 1990, but was dropped to 555 tonnes in 2001. Recorded coltan production soared from 147 tonnes in 1999 to 1,300 tonnes in 2001, when coltan was the country's largest export earner. Part of the increase in production is due to the opening of new mines in Rwanda. However, the increase is primarily due to the fraudulent re-export of coltan of Congolese origin, as well as the spike in international coltan prices in late 2000-2001.
According to the UN panel investigating the illegal exploitation of resources from the DRC, Rwanda fraudulently exported gold and diamonds from the DRC throughout the war. It is a well-known fact that the various parties involved in the war in the DRC were involved in the illegal exploitation of that country's mineral wealth, and that certain economic interests are at the heart of ongoing conflict in the eastern DRC. Competition over gold and diamonds was also motivating factor in the clashes between Ugandan and Rwandan armed forces in Kisangani in 2000. Rwanda has denied the allegations that it was involved in the plunder of the DRC's mineral wealth, arguing that its interests in the DRC are purely of a security nature.
Industry
80% of manufacturing industry is in food, beverages and tobacco. There is also limited chemical and pharmaceutical manufacturing, and a tiny textiles and clothing sub-sector. Industry contributed 23.3% of GDP in 2001. About half of this was accounted for by manufacturing and the remainder by mining, construction and energy production. Cushioned by tariffs and subsidies during the pre-1994 era, manufacturers have in recent years protested at what they call unfair competition from the region, particularly Uganda . The average import tariff declined from 17.5% in 1998 to 11% in 2002. Additional problems in the sector include high input costs, and weak domestic purchasing power, which has been compounded by rising consumption taxes, including VAT and increased levies on tobacco and alcohol.
Commerce and tourism
The tourism industry centres on the Virunga national park in the northwest, where gorillas may be viewed in their natural habitat. The park re-opened in 1999, and concentrates on low volume, high value tourism. Visitor numbers are rising, but remain lower than before the war, due to international perceptions that Rwanda is unsafe. In the southwest is the Nyungwe tropical forest, which offers good opportunities for hiking, but is also prone to infiltration from Burundi-based anti-government militia. In addition, there is the Akagera national park in the north east, though this is poorly stocked with game in comparison to regional competitors. Much of Rwanda 's tourism revenue comes from the hospitality industry in the capital Kigali , where over-pricing, particularly for hotels, is entrenched. The tertiary sector is dominated by commerce. An increasing portion of domestic retail and wholesale trade is controlled by Asians of Ugandan origin. Commerce and tourism's contribution to GDP was valued at Rwafr78.4bn in 2000, but, despite the best efforts of the Rwanda Revenue Authority (RRA), most activity in the sector remains unrecorded.
Economic policy
As part of its strategy to establish macroeconomic stability and stimulate rapid GDP growth, the Rwandan government signed a three-year enhanced structural adjustment facility with the IMF in June 1998. This was later converted into a US$93million poverty reduction and growth facility (PRGF). In October 2001, the IMF approved the Rwandan government's progress and disbursed additional funds under the PRGF, bringing total disbursed funds toUS$63 million. The first PGRF expired in April 2002, and a second one was not approved until June 2003 due to disagreements between the IMF and the Rwandan government over fiscal discipline targets. Although a second PRGF was agreed, relations between the IMF and the Rwandan government continued to deteriorate, leading to the suspension, in late 2003, of the PRGF on the grounds that the Rwandan had not met agreed targets, largely due to overspending. Donors significantly reduced their disbursements in the aftermath of the suspension, forcing the Rwandan government to increase public spending. Faced with poor prospects for economic growth in 2003/2004, the government was ultimately forced to adopt a more disciplined approach and reign in public spending. In March 2004, the IMF agreed to reengage with the Rwandan government, provided it was able to fully finance its projected 2004 fiscal deficit, which is targeted at 12.5% of GDP.
The cornerstones of the Rwandan government's approach to economic reform and increased growth are:
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Liberalising trade barriers, which have already decreased from 17.5% in 1998, to 11% in 2002. Although this has reduced much-needed revenue, it has increased regional trade.
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Proceeding with the privatisation of Rwanda 's 74 parastatals. So far only 30 of the smallest parastatals have been privatised, with revenue from sales reaching only US$77 million at the end of 2003.
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Attracting much-needed foreign investment. Since 1994, the vast majority of foreign investors in Rwanda have been South African.
The Rwandan government elaborated a Poverty Reduction Strategy in 2001 – a PRS is a prerequisite to access to a PRGF – which placed emphasis on rural recapitalisation, the development of human resources, promoting the private sector and the state's capacity, as well as good governance. A second review of the PRS, covering the period from June 2003 – June 2004 was completed in late November 2004. According to the review, the decentralisation process is lagging due to the ongoing lack of capacity at the local government level. Local governments still do not have the necessary capacity to handle budgetary allocations, with the result that only 5% rather than the forecast 10% of national domestic revenue will be allocated to local government for expenditure in 2005.
Additional concerns included the unpredictability of donor disbursements and the fact that there is insufficient communication between the government and the donor community which finances the bulk of the PRS.
According to a supplementary budget for 2002, which was passed by the National Assembly in July, the fiscal deficit for 2004 ws expected to reach 14.3% of GDP, which was expected to be at least partially offset by an anticipated 10% increase in revenue and grants. Although tax collection has certainly improved since the RRA began operations in 1998, and government revenue has risen in real terms every year since then, revenue increases are not sufficient to cover the increase in public spending. As a result the government is counting on donor funds to make up the difference. However this approach seems to be a perennial miscalculation by the government, which often assumes unrealistic levels of donor support when planning its annual budgets. By mid-2004 only 36% of anticipated budget support had been received. Additional funds are expected, but the government will likely again have to make cuts in some of its proposed programmes, most likely in the crucial areas of poverty reduction.
Recorded exports in 2003 dropped to US$64million, the lowest in a decade, due primarily to the continued weakness in international tea and coffee prices and a failure to significantly diversify the economy. Imports reached US$221million in 2003, resulting in a US$157 million trade deficit.
Foreign aid and donors
Rwanda is a major recipient of international development assistance. Between 1995 and 2000, roughly US$3.9bn was pledged and US$2.7bn disbursed, and although assistance levels are falling, on a per capita basis they remain among the highest in Africa. The EU, World Bank, IMF , US and UK are the major donors. Total external foreign debt is estimated at US$1.3bn, and servicing it remains a considerable drain despite debt relief.
International donors have been supportive of Rwanda since 1994, but relations have become more strained recently because of its involvement in the war in the DRC. Although donors back the proposal to increase spending under the PRSP, the government and IMF clashed during 2002's so-called "Article IV" negotiations for a new three-year Poverty Reduction and Growth Facility (PRGF) from the Fund, over the proposed future level of the fiscal deficit. The government argued strongly for its increased expenditure proposals but was eventually forced to back down in order to suit the requirements of the IMF. Despite the concessions, the IMF board of directors almost did not approve the PRGF because of a last-minute linkage by the US and French delegates of the lending arrangement to the immediate withdrawal of the RDF from the DRC. This was one of the factors that pushed the government into the June 2002 Pretoria Accord and its timely implementation. The accord stipulated that Rwanda withdraw its troops from the DRC in 90 days. The government urgently needed to reach an agreement with the IMF on a new PRGF, as this is a necessary prerequisite for almost all bilateral and multilateral donors.
Membership of regional and international economic groupings / alliances:
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African Union
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EU-ACP Convention
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Common Market for Eastern and Southern Africa (COMESA)
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Economic Community of Central African States (ECCAS/CEEAC)
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Economic Community of the Great Lakes States (CEPGL)
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EAC: Rwanda has applied to join the East African Community, which currently consists of Uganda, Kenya and Tanzania. In September 2004, the EAC ministerial committee announced that it would begin the process of approving Rwanda and Burundi 's membership applications. The process is expected to take until November 2005.
