Rwanda: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Recovery driven by coffee production
Although the growth recovery was strong in 2010, it failed to reach the levels prevailing in 2008. It was driven by demand from North America and East Europe for high-quality coffee, particularly the country's main export, Rwanda Arabica. On the supply side, agricultural policy intended to spur production via subsidies effectively resulted in a 6% increase. That same growth will be repeated in 2011 despite an expected decline in the price of Arabica, which will moreover force the country to develop new sources of foreign exchange earnings. As in 2010, inflation will likely remain below 7% in 2011.
Contraction of support from financial backers
Economic activity was undermined in 2010 by a 12% reduction in aid from the main financial backers (United Kingdom, United States) with fiscal revenues declining in consequence. Similarly, in August 2010, the IMF and Rwanda concluded a technical assistance agreement that for the first time since 1998 included no financial support. And the agreed budget moreover calls for increased spending, particularly on infrastructure. The public sector deficit is thus expected to register a two-point increase and thus represent 4% of GDP in 2010 and 2011, which nonetheless remains sustainable.
The trade balance is structurally in deficit. In value terms, the volume of imports of consumer and capital goods - particularly as a result of the coming into effect of the agreement on the free circulation of goods and services concluded in the framework of the Community of East African States in July 2010 - is three times the volume of exports (mainly coffee, tea, and ores with a high proportion nonetheless traded informally). Despite substantial revenues from tourism, the services balance has also been in deficit. Public development aid (mostly allocated to infrastructure), long-Term debt, and, to a lesser degree, foreign direct investment nonetheless enable Rwanda to cover its foreign-exchange needs.
Although Rwanda has been able to reduce its foreign debt thanks to cancellations granted in 2005 and 2006 under the HIPC and MDRI programmes, it has begun to grow again, which will bear watching. It is nonetheless largely covered by concessionary debt.
Deficient governance
Since 2001, Rwanda has reformed its commercial law and institutional framework. The government instituted a new corporate law that theoretically simplifies the creation of companies and their access to credit. Nonetheless, with over 55% of the population living below the poverty line, the country remains poorly ranked based on World Bank governance indicators. Financial backers have criticized the way the elections were held and have condemned the frauds that tainted the re-election of Paul Kagamé, which partly explains the decline in the volume of public transfer payments received in 2010. The only positive indicator "corruption" is nonetheless fairly rated in comparison to other regional countries according to observers.
Strengths
- Support of international institutions
- Potential for tourism
- Energy development potential
- Dynamic coffee production
- Good institutional and legal environment
Weaknesses
- Insufficient diversification of production and exports. Vulnerable to outside shocks
- Political normalisation process still proceeding
- Deficient infrastructure and electricity network
- Dependence on international aid