The Executive Board of the International Monetary Fund (IMF) recently completed the first review under the three-year Policy Support Instrument (PSI) for Rwanda.
In an exclusive interview, Business Times BERNA NAMATA, talked to GERSHENSON DMITRY, IMF’s Resident Representative to Rwanda about the program and general economic outlook. Below are the excerpts;

Qn: Rwanda plans to cut spending by Rwf8.5 billion in a planned review of the FY 2010/11 budget due to a shortfall in the country’s tax revenue. How do you view the huge shortfall in Rwanda’s tax revenue in relation to your program targets to increase domestic revenue by 2 percent of GDP over the PSI period?

Ans: First of all, the shortfall is not as large as the question implies. The target of RWF 479 billion was for the full twelve months of the fiscal year 2010/11; then RWF 189 billion has been collected through November, i.e. for the first five months of 2010/11.

The RWF 8.5 billion revenue shortfall (about 2 percent of the projected tax revenues for 2010/11) is due to the lower-than-expected trade and corporate income taxes. Trade taxes are lower because imports from the EAC and COMESA countries are growing faster than expected, and those imports are taxed at lower rates. In other words, participation in the customs union benefits Rwanda by making it easier to trade with the EAC and COMESA partners, but this comes at a cost of lower tax revenues.

As for corporate income taxes, they are low due to the losses many businesses in Rwanda incurred in 2009, which was a year of sluggish economic activity; these losses were carried forward to this year, resulting in lower tax revenues.

Qn: What challenges are affecting government’s ability to mobilise domestic revenues?

Ans: The principal challenge is the structure of the economy itself. With the largely untaxable subsistence (i.e. non-cash) agriculture dominating the economy, there is not that much economic activity that can be effectively taxed, with the tax burden falling largely on those employed in the formal cash economy, including formal industry and trade.

Qn: While Rwanda’s economy is showing clear signs of recovery from the external and domestic shocks of the past two years; uncertainty in external demand, a slow pick-up in credit to the private sector, and the need to secure favorable financing to implement their investment plan to close the infrastructure gap continue to pose policy challenges.  What needs to be done to address these challenges?

Ans: There are several principal avenues for moving forward. First, and the government has already achieved a lot in this area, is to further improve the business climate in order to make Rwanda an attractive investment destination. The second avenue is to reduce the cost of doing business.

This is a very broad category, which includes, among other things, cost of transport, electricity, and skilled labor; reducing these costs will necessarily take time. Moreover, additional domestic resources need to be raised to pay for planned investment. These resources could come from the increased domestic revenue collection and from higher savings. Finally, there is a need to enhance access to credit, since 4/5 of the population, mostly in the rural areas, has no access to formal financial services at all. 

This, however, has to be done with caution to ensure that the soundness of the financial system is not compromised.

Qn: This year, the country had its first IPO (Bralirwa) in your opinion, what is going to be the impact of this on the economy?

Ans: I do not think this IPO will have a significant macroeconomic impact immediately, but it is a good step for further development of Rwanda’s financial market and, by extension, Rwanda’s capacity to attract savings.

The total amount of money to be raised is nontrivial, about 30 million dollars or ½ percent of GDP. At the same time, it is important to see where this money comes from. The money could come from the previously untapped savings (for instance, people use the money that used to be stashed in jars to buy shares); then there will be more resources available for investment, which is a good thing.

Money will also come from abroad, to the same effect. Another possibility is that the money could come from savings that are already captured by the financial system. In that case, we would simply have a reallocation of savings from one sector of the economy to another, with no additional resources available for investment.

The result would likely be a combination of all three sources: untapped savings, foreign money, and the existing savings. While the immediate macroeconomic impact looks to be rather minimal, the IPO will help Rwanda’s financial market to develop new products for attracting the previously untapped savings.

Qn: Going forward, the economy has been relatively stable this year with stable currency and relatively stable low inflation,  strong recovery in the export sector which is expected to boost overall economic growth.  In your view, what are the prospects and risks for growth in 2011?

Ans: You are correct, the twelve-month inflation is close to zero and the Rwanda franc has depreciated by some 4 percent vis-à-vis the U.S. dollar in the course of the year.
The economic outlook for 2011 is generally favorable, with the projected 6-7 percent growth in 2011 being driven by the government’s investment strategy, the recovery in external demand, and the pick-up in credit to the private sector. As the economic activity picks up, inflation is expected to reach some 6 percent next year. The principal risks to this outlook are two, one external and one domestic. On the external side, a lot will depend on the pace of the global economic recovery. Should that recovery slow down, demand for the Rwandan goods (coffee, tea, minerals) and services (tourism) will be affected negatively, thereby depressing exports.

On the domestic side, the risk is in the slower-than-expected growth in credit to the private sector (projected at more than 20 percent for 2011): tight credit will hamper economic activity and business expansion.

Ends