Rwanda: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geological potential: cassiterite, coltan, gold
- Tourism potential
- Skilled labor, good infrastructure
- Significant progress on governance and the business climate
- Heavily dependent on commodity prices (tea, coffee) and international aid
- Geographically isolated and exposed to geopolitical tensions in the Great Lakes region
- Strong demographic pressure and population density among the highest in Africa
Solid Growth Outlook
Hit by drought conditions at the beginning of the year and the completion of major projects driving the construction sector, growth, although still firm, moderated in 2017. Activity is expected to pick up again in 2018, bolstered, primarily, by more favorable weather conditions. A better harvest should support the increase in exports of tea and coffee (almost 25% of exports) and, accordingly, enable these items to make a larger contribution to growth in 2018. Private as well as public investment in infrastructure projects, including that of Bugesera airport, should help the construction sector resume momentum after several consecutive quarters of contraction. These investments will also contribute to the expansion of manufacturing industries and to the strength of the services sector, which accounts for almost 50% of GDP. Finally, the resumption of credit growth, buoyed by a relatively accommodative monetary policy, is expected to result in a rebound in household consumption, which will also benefit from moderate inflation, below the 5% target fixed by the National Bank of Rwanda. But high unemployment (about 17%) and still low incomes from agriculture will limit the growth of private consumption.
After peaking in February 2017, inflation fell sharply during the year due to the mitigation of the effects of the drought on food prices and weak internal demand. Prices are, however, expected to rise at a more sustained pace in 2018, under the combined effects of the central bank’s accommodative stance and higher energy prices.
Ongoing Fiscal and External Budget Adjustments
The more cautious fiscal policy adopted since the 2016/17 budget year is set to be continued in order to achieve the goals set by the IMF under its Economic Policy Support Instrument (PSI) programme. The public finances will continue to rely heavily on grants (over 20% of net revenues), despite a net decline in recent years. Efforts to broaden the tax base are likely to be hampered by the tax incentives introduced in support of the “Made in Rwanda” policy. With the Economic Development and Poverty Reduction programme (ESDRP II) maturing at the end of 2018, capital investment spending is expected to fall. The fiscal deficit is, therefore, expected to narrow gradually.
Despite efforts to reduce the budgetary imbalance, the current account deficit is expected to widen in 2018. This development will mainly be down to movements in the trade balance, as increased coffee and tea exports will not offset the higher import bill for capital goods needed for the construction of Bugesera airport. By excluding these imports linked to Bugesera airport, the import substitution policy with products “Made in Rwanda” should help bring the bill down. This policy is an integral part of Rwanda’s strategy to reduce external imbalances in the years ahead. Financed for many years with international donor assistance, the current account deficit is now also financed by FDI's and borrowing. Investments agreed by the government in recent years have led to a rapid increase in this deficit. However, the risk of over-indebtedness remains limited and adjustments to the budget and external accounts are intended to guarantee future debt sustainability.
Attractive Business Climate Despite Regional Tensions
President Paul Kagamé secured a third consecutive term in office in August 2017, officially winning almost 99% of the votes cast. Silencing all dissent and having lifted all constitutional obstacles beforehand, the regime of Paul Kagamé and the Rwandan Patriotic Front (FPR), attacked in July 2017 in an Amnesty international report for violations of political freedoms, ensured an election result that came as no surprise. Nonetheless, the poll reaffirmed the hold Mr. Kagamé and the FPR have on the country. Often criticised by the international community for the lack of political freedom, Rwanda nonetheless stands out in Africa for its attractive business climate. Ranked 41st (out of 190 countries) in the World Bank’s 2018 Doing Business report, jumping 15 places in one year, the country is singled out in the report as having implemented the most reforms in the past 15 years. The country has, in particular, risen to second in the world as regards registering property and sixth for getting credit.
Tensions in the Great Lakes region continue to be a potential source of instability. Skirmishes between the M23, an armed militia group operating in the Kivu region (western Congo) and the armed Rwandan group, the FDRL (Rwandan Liberation Front) make for fraught relations with neighboring Congo-Kinshasa. Meanwhile, the government of Congo continues to allege Rwandan support for the M23 combatants. Relations with Burundi have also deteriorated since the outbreak of the Burundian political crisis in 2015.