Rwanda: Diversity can firm up fragile economy - African Business Magazine
Rwanda: Diversity can firm up fragile economy

Rwanda: Diversity can firm up fragile economy

The economic growth rate averaged 8.2% between 2006 and 2012, but Rwanda’s economy has proved vulnerable to shocks. In 2012, virtually all of Rwanda’s bi-lateral and multi-lateral donors froze or cut aid, over allegations in UN reports that Rwanda was supporting a rebellion in neighbouring Democratic Republic of Congo (DRC).

Given that foreign aid accounted for 38% of Rwanda’s budget in 2013/14, this hit Rwanda’s growth rate significantly for 2013, knocking it down to 4.6%. Aid resumed later in 2013 and most relationships with foreign powers have remained largely intact, although there are fears amongst Rwandan officials that donor countries are now less likely to treat the country with kid-gloves and that ‘genocide guilt’ is receding, 20 years after the fact.

Nonetheless, the government remains hopeful that the economy will pick up again. In March, the Central Bank Governor, John Rwangombwa, announced a projected growth rate of 6% for 2014 and 6.7% for 2015. He also said he hoped the country’s reliance on foreign aid would drop to 20% by 2018.

President Kagame, always the optimist and always driving his staff to achieve the most they can, remains confident that Rwanda’s growth rate will continue at speed. Last year he announced projections for an average economic growth rate of 11.5% over the next five years, even before all aid had been resumed. While this seems optimistic, the Rwandan economy has shown itself to have great potential.

Rwanda’s economy continues to grow and be resilient, despite the challenges faced as a result of aid cuts, and Governor Rwangombwa and Finance Minister Claver Gatete have shown themselves to be firm hands on the ship. Inflation is kept low with sound economic practises, and Rwanda has escaped much of the soaring inflation that has affected neighbouring East African countries.

The Rwanda Stock Exchange began trading in 2011 and now has just five firms listed, three cross-listed from Kenya, along with Rwandan brewery Bralirwa, and the Bank of Kigali.

Rwanda successfully launched its debut $400m Eurobond last year, and also launched a three-year domestic bond worth $18.4m in February this year. It has said it will offer further domestic bonds in August and November this year, and another international bond is also expected at some point, according to the Finance Minister and the Central Bank Governor.

Currently, many Rwandans remain subsistence farmers – small-scale farmers in rural areas growing food to eat and sell to neighbours. For Rwanda’s grand Vision 2020 plans to succeed, this needs to change.

Traditionally Rwanda’s biggest export products are coffee, tea, pyrethrum and minerals. Exports have continued to grow both in value and volume. Last year’s performance showed formal exports were worth $573m, an increase of 18.7% on 2012, while volume increased by 6.8%.

But Rwanda’s reliance on a few primary export goods remains a major challenge for the country and leaves it open to external shocks, such as the aid suspensions of 2012.

Diversity is the key
Minerals such as cassiterite, coltan and wolfram are a growing part of Rwanda’s economy, partly due to ongoing reforms and substantial investments in the sector – Rwanda invested $46.8m in the mineral sector in 2012 alone – but also due to high prices on the international market. The total value of exported minerals in 2013 was $225.7m, up from $136.1m in 2012 – an increase of 65.9%. This was largely dominated by coltan, which increased from 1,145 tons in 2012 to 2,466 tons in 2013.

The good performance in the export of minerals has helped offset the decline in the value of coffee, which fell by 23.4% because of fears of oversupply on the international market after some Latin American producers overshot their production estimates. Tea exports also declined last year because of bad weather conditions in Rwanda.

The effects of the instability in eastern DRC has also affected some of Rwanda’s exports. Items which are agro-processed like flowers, hides, skins and handicrafts declined because of the problems in DRC, said the Central Bank in February.

Although its soil is incredibly fertile and growing food comes naturally and easily to Rwanda, it has not been blessed with many natural resources, unlike neighbouring DRC. So Rwanda has to import an incredible amount of its materials.

The geographical position of the country – landlocked and far inland, known as the country of a thousand hills – means it is not easy or cheap to import goods into the country. A proposed $4.13bn rail project that would link the Dar es Salaam port in Tanzania with Rwanda and Burundi has been much discussed but there is still no concrete progress, meaning all of Rwanda’s imported goods must come by road or air.

The most commonly imported goods are items like raw materials for the food and chemical industries, as well as fertilisers and construction goods. Formal imports increased by 2.2% in value on 2012 to $2,247.4m. This modest rise was put down to the slowing down in economic activities related to the aid suspensions in 2012.

Refuge for rare species
Tourism is a growing and important part of the Rwandan economy. The Virunga mountains which straddle Rwanda, DRC and Uganda are the only place in the world where one can see the rare mountain gorillas, of which there are only around 950 left in the world. Rwanda has strategically marketed itself as the best place to see these rare creatures and charges $750 per person for an hour in their presence.

Wealthy tourists tend to fly in to Rwanda to see the gorillas as part of a tour of East Africa that includes safaris in Kenya and Tanzania. But few of these tourists tend to stay more than a few days in Rwanda, so the RDB’s tourist wing is trying to add further attractions to diversify the tourist experience and encourage them to stay.

A canopy walkway was launched in Nyungwe rainforest in the country’s south west in 2010, and the ancient Musanze caves were unveiled as a tourist attraction last year in a bid to retain foreign visitors for a few more days.

Rwanda’s economy remains strong and well managed but for the highly ambitious goals of Vision 2020 to be reached, not only will it need to diversify, but the fundamental basis of the economy will need to be changed, from one based on agriculture, to one of a knowledge-based economy.

The current reliance on relatively small-scale exports of coffee, tea and minerals, and the focus on tourism are not going to be enough to push Rwanda into the middle-income status it craves. Which is why a large part of the government’s Vision 2020 goal sees the country focusing on becoming an ICT, finance and conference hub for East Africa.

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Written by African Business Magazine

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