Domestic demand supports growth momentum

In 2021, despite occasional lockdowns, activity has recovered strongly from the recession brought on by the COVID-19 pandemic. In 2022, although the base effect will fade, resulting in a lower growth rate than in 2021, activity will still be vigorous. Private consumption will drive action, benefiting from the increase in the COVID-19 inoculation rate. Although the vaccination campaign remains incomplete, raising the risk of a resurgence of the epidemic, the country is one of the most advanced on the continent regarding vaccine deployment (nearly 20% of the population fully vaccinated by mid-November 2021, 6.6% in Africa). Moreover, with over 70% of the people employed in agriculture, household incomes are expected to benefit from the still relatively favorable prices of export crops (coffee, tea). Inflation, expected to remain modest, should not significantly erode these. Indeed, although it is expected to rise sharply due to a rebound in food prices, the likely continuation of the subsidy on petroleum products (introduced in May 2021) for part of the year is expected to contain inflationary pressures. The investment will also play a driving role. Its public share will be further supported by implementing the National Transformation Strategy (NST1), which is also expected to create a pull for private investment. The NST1 will emphasize investment in infrastructure, such as the Bugesera airport (to be delivered in 2023) and the development of the manufacturing sector. These industries are also expected to benefit from additional economic Recovery Fund (ERF) funds. Rwanda will also receive investment for constructing a Pfizer-BioNTech vaccine manufacturing facility, which will commence in mid-2022. Imports of capital goods related to these investments will continue to weigh on the contribution of net exports, despite favorable prices for export commodities (coffee, tea, gold, tungsten). 

Government spending is still high, and debt continues to rise

In 2021/22, the budget deficit will remain significant. The procurement of COVID-19 vaccines, additional funds allocated to the Economic Recovery Fund, the investment effort to support the recovery, the increase in the state wage bill to recruit teachers and health workers, and the support to public enterprises will contribute to a significant increase in public spending. The deficit could be reduced thanks to revenue growth, which will benefit from the impacts of the solid activity, coupled with the implementation of the Medium-Term Revenue Strategy. This Strategy includes fiscal policy and administrative reforms to improve domestic resource mobilization. However, even though the authorities will focus on concessional sources, they must resort to external (more than 75% of the total debt stock) and domestic debt to finance the deficit. Public debt, which has more than tripled relative to GDP since 2010, will continue upward. While this is a source of vulnerability, the small share of commercial debt (less than 10% of external debt) is tempering interest payments (7% of public expenditure).

In 2022, the trade deficit, mainly burdened by imports of capital goods, is expected to fuel a more significant current account deficit. The recovery in tourism receipts, likely to remain incomplete in 2022, will not likely offset the higher import bill. Profit remittances from foreign companies are expected to increase, in line with investment trends. While the transfer account surplus will mitigate the current account deficit, the decline in emergency international cooperation to combat the pandemic will reduce it. FDI and grants will finance a large part of the deficit. However, while reserves cover more than four months’ worth of imports, the Rwandan franc is expected to continue its slow depreciation.

Some signs of improvement for regional stability

President Paul Kagame was re-elected for a third consecutive term in August 2017, securing nearly 99% of the vote. The Rwandan Patriotic Front (RPF) and Mr. Kagame’s grip on power were reaffirmed during the September 2018 legislative elections. The RPF, acting as part of an expanded, six-party coalition, won 74% of the votes and 40 out of the 53 seats on the ballot. Regularly accused of muzzling dissent and controlling the political arena, President Kagame and the RPF are also credited with restoring peace and political stability. The political dominance of the RPF and Paul Kagame is unlikely to be questioned between now and the elections in 2023 (legislative) and 2024 (presidential). Their popularity could even benefit from the deployment of the vaccine. Although it is already one of the most attractive countries on the continent, it is continuing reforms to improve its business environment. Regionally, the country sent troops to Mozambique to combat the Islamist insurgency there. In addition, efforts to normalize troubled relations with Burundi and the DRC were reported in 2021. In July 2021, the country repatriated 19 Burundian fighters. It held a series of meetings with political and military officials of its northern neighbor, while three bilateral cooperation agreements were signed with the DRC in June 2021. On 31 January 2022, Rwanda reopened its land border with Uganda, ending the border dispute between the two neighbors.