Rwanda: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geological potential: cassiterite, coltan, gold, precious stones (aquamarine, ruby, sapphire)
- Tourism potential
- Developing industrial base
- One of the most favorable business environments on the African continent
- Significant progress in governance and relative political stability
- Highly dependent on commodity prices and international aid
- Landlocked and exposed to geopolitical tensions in the Great Lakes region
- High demographic pressure, population density among the highest in Africa
Despite strong growth, the pandemic will depress activity
Hard hit by the crisis following the COVID-19 pandemic in 2020, growth is expected to pick up again in 2021 with the gradual lifting of the lockdown measures taken to stem the progression of the disease. Private consumption should benefit from this reopening process. In particular, the recovery in services should support employment in urban centers, while the income of rural households could benefit from the pick-up in agriculture (over 60% of total employment), whose recovery will nevertheless remain threatened by climatic hazards, such as floods and droughts, and also potentially by the desert locusts that are ravaging East Africa. In the absence of a climate shock affecting food supply, inflation should gradually decline and support the recovery in consumption. Public investment, which has driven the country's strong economic momentum in recent years, should continue to play a leading role through accelerated implementation of infrastructure projects that had to slow down because of the crisis. The National Strategic Transformation Plan (NST) will keep prioritizing trade-related infrastructure projects, while work on the Bugesera International Airport will continue, supporting the construction sector. Despite continued efforts to support private investment in the agriculture and mining sectors, and historically low interest rates, progress in this area will be constrained by a persistently uncertain international environment. While tourism, and particularly conference tourism, should recover, it is also expected to continue to be hurt by the uncertainty associated with the pandemic. Furthermore, despite the expected recovery in export crop revenues (coffee, tea, horticulture) and international gold prices, which are set to remain relatively high in 2021, export growth will remain constrained.
The stimulus plan accelerates indebtedness
The budget deficit is expected to remain high in 2021, given the additional spending associated with the country’s economic stimulus package. In addition to health measures (purchase of personal protective equipment, the establishment of quarantine facilities), the plan includes, for households, cash payments to precarious workers and support for the purchase of agricultural inputs and, for businesses, the establishment of an economic stimulus fund. The stimulus plan also provides for capital investment spending in public works in fiscal year 2020/21. These funds will supplement the infrastructure investment planned under the NST. Thus, 40% of the budgetary resources will be allocated to capital investment expenditure. With the budget forecasting a decline in tax revenue in FY2020/21, the government will rely on domestic borrowing and external loans, mainly concessional, to finance the deficit. Although external public debt accounts for about three-quarters of the total, it is mainly concessional (over 80% of external debt), limiting the risk of debt distress. However, its rapid rise is expected to reduce fiscal space in the future.
The crisis accentuates external imbalances
In 2021, the trade deficit, burdened by capital goods imports, will continue to fuel a large current account deficit. However, the recovery in tourism should mitigate the services deficit and help to reduce it. Given the impact of the crisis, repatriation of profits by foreign companies should be limited, lessening the income deficit. Transfers related to current international cooperation and paid to combat the pandemic will continue to contribute to a surplus in the transfer account. Although the deficit will be partly financed by FDI and subsidies, foreign exchange reserves, which have benefited from an IMF RCF, and the Rwandan franc, which depreciated by more than 4% in 2020, will remain under pressure.
Border relations still fragile, social climate tested by the pandemic
President Paul Kagame was re-elected for a third consecutive term in August 2017, officially securing nearly 99% of the vote. The Rwandan Patriotic Front (RPF) and Mr. Kagame’s grip on power was reaffirmed during the September 2018 legislative elections, as the RPF, acting within an expanded six-party coalition, won 74% of the votes and 40 of the 53 seats on the ballot. Regularly accused of muzzling dissent and controlling the political space, President Kagame and the RPF are also credited with restoring peace and political stability. Nevertheless, this stability could be tested by the increased economic difficulties resulting from the pandemic. Even so, the political dominance of the RPF and President Kagame is unlikely to be called into question between now and the elections in 2023 (legislative) and 2024 (presidential). The country is continuing reforms aimed at improving the attractiveness of its business environment, including measures to reduce financing and transportation costs. Although there is room for improvement, it is already among the most attractive on the continent.
Insecurity and fragile relations with its neighbors in the Great Lakes region are likely to remain the main political risks. Accusations of foreign state support for anti-Kagame armed groups will remain a major source of friction, particularly with Burundi. Moreover, the governments of Rwanda, Burundi and Uganda continue to accuse each other of fighting through insurgent groups in the DRC.