Paulo Drummond is a deputy division chief in the African Department of the International Monetary Fund (IMF). Drummond last month led an IMF mission to the country as part of the periodic reviews of the Fund’s Policy Support Instrument (PSI) to Rwanda. In an interview with Peterson Tumwebaze, he spoke about macroeconomic challenges developing countries face and mitigation measures.

Tell Rwandans about the new IMF Policy Support Instrument objectives and its role in Rwanda?

The policy is part of IMF technical support to Rwanda; first as means to maintain macroeconomic stability and rapid inclusive growth, but also reduce the country’s dependency on aid. The reforms agreed upon in this policy are expected to facilitate the economic transition towards private sector-led growth.

What reforms are you talking about?

They include government’s objectives of enhancing revenue mobilisation by broadening the tax base, removing exemptions and improving tax administration. Other reforms include strengthening public finance management, improving the effectiveness of the monetary policy while increasing access to finance by the private sector.  

How will these reforms accelerate economic growth?

We are saying that there should be increased domestic, public and private resource mobilisation so as to mitigate the risk of external economic shocks.

This is very crucial for economic sustainability and economic development of the country. Engaging the financial sector while maintaining a stable macroeconomic policy will not only aid credit flow towards the private sector, but also create confidence among investors. This will be a plus to the country’s economic development.

At the same time, attracting more investments into agriculture and energy, while emphasising institutional capacity building is a reality for Rwanda if it must achieve EDPRSII objectives.

Economic growth slowed down to 4.6 percent in 2013, lower than your forecast of 6-7 percent. Are you surprised?

We are not surprised because there are good reasons why the economy slowed down; we had anticipated it. Strong reliance on aid by Rwanda meant that a slowdown in aid would directly translate into a slowdown in the country’s economic growth.

But also low productivity of the agriculture sector was to blame for the slow growth rate. However, the good news is that these are temporary shocks. As the agriculture season recovers and aid begins to flow in again, we are anticipating a rebound in the economic growth.

How do you conduct tax reforms without making the country a tax heaven?

Conducting tax reforms and extending tax incentives to investors is critical for Rwanda’s investments because the dollar you give away as a tax incentive could earn you two dollars elsewhere. This is real because government can actually reduce its expenditure and concentrate on service delivery by allowing the private sector to invest in those critical areas that will spark economic growth. This will only happen when there are incentives to attract investors into those sectors.

What do you advise the government to do to attract more foreign direct investments? It looks like business reforms have not done much.

Decisions by investors always take into account the ability to make profits and the risks that surround the business.

For Rwanda’s case, investors could also be looking at the size of the market and the ability to use Rwanda as a base to export to other markets. That is why it’s now very important for government to allow the economy to expand towards regional and international market, so that business people can begin seeing the country in terms of regional markets. This must be complimented with reducing the cost of doing trade.

Secondly, Rwanda cannot produce cement because the cost of producing cement is huge in terms of high cost of energy, infrastructure and perhaps transport costs.

So, attracting investors in the energy sector and other crucial sectors will be very vital in the country’s economic development.

Government is scaling up efforts to mobilise domestic savings. Do you think the economy can depend on domestic savings?  

You cannot achieve high growth based only on domestic savings; both foreign and domestic savings will be crucial for the country’s economic expansion.

What would you consider the main threat to economic sustainability?

The general weakening of the global economy poses a risk not only to Rwanda, but almost all growing economies around the globe. Also, more volatility amongst some crucial sectors of the economy, especially agriculture, is yet another unpredictable risk given the fact that the sector is the country’s economic backbone.

The good news is that government is aware and is already doing everything right to minimise some of these risks.

How can some of these risks be mitigated?

The country should continue providing a stable macroeconomic frame work, prioritise investment projects, give tax incentives to investors and continue reducing the cost of doing trade in the country.