Will Gatete’s second budget deliver EDPRS II?

On Thursday, Finance Minister Claver Gatete told lawmakers that he wants to spend Rwf1.75 trillion in the new fiscal year starting July 1. He expects Rwf 1085.7 billion from taxpayers and Rwf 667.6 billion from friends abroad. That the budget reading had to compete with the opening of FIFA World Cup for attention is odd, but the month-long tournament is actually good for economic activity and domestic consumption—the two ingredients needed for a successful 2014/2015 fiscal year. Gatete’s intentions in the next 12 months are clear: He wants to spend big, export more but spend less on imports, inject vibrancy into the private sector so that it creates more jobs and ultimately achieve faster growth rate that feeds into EDPRS II objectives. So will the 2014/15 budget, Gatete’s second since he was appointed Finance Minister, deliver the objectives of the second Economic Development and Poverty Reduction Strategy (EDPRS II)? A close look at his allocations can provide an answer to that question. EDPRS seeks to lead Rwanda to economic development and poverty reduction. Yet in that same order, the former leads to the later—that is economic development leads to poverty reduction. EDPRS II main objective is to put Rwanda on a higher growth trajectory to ensure that the country achieves middle-income status by 2020. But slow growth in 2013/2014 meant that Rwanda lost time and therefore must make amends with just five years to deadline. That is what could have informed Gatete’s decision to allocate 52 percent of the budget to EDPRS II objectives with infrastructure and export promotion as top priorities. In fact, with 55 percent of funds to be released between July and December to finance EDPRS II thematic areas, it shows how impatient the government is for results. To attain middle-income status (lower), Rwanda’s per-capita gross national income should reach a minimum of $1,036 by 2020. The World Bank’s records indicate that this has been on an upward trajectory from $499 in 2009 to $620 in 2012, gaining $121in four years. But the four years between 2009 and 2012 the economy enjoyed faster growth rates that slumped to 4.6 percent last year. It’s therefore vital that in 2014 economic growth picks up to the projected 6 percent or even more. Annual GDP growth of 6 percent would add just $37.2 to the $620 per capita estimate. It is still low, but good. So, will these allocations spur the much needed growth to attain EDPRS II targets? For lower-middle-income countries (Rwanda’s target by 2020), the main concern is providing essential services such as clean water and electricity, health, education as well as creating jobs to boost incomes. That probably informs the intention to spend Rwf252.8 billion (14 percent of the budget) on rural development initiatives such as agriculture development that has been allocated Rwf 54.3 billion, health (Rwf54.2 billion) and social protection (Rwf53.3 billion). If these funds are promptly availed to those sectors, the results will good. The reasoning is that, successful implementation of rural development activities will improve land use, increase agricultural productivity, connect rural communities to economic opportunities through improved infrastructure and thus migrate more people from extreme poverty. Rwf 438.9 billion (25 percent of the budget) has been allocated to economic transformation thematic area whose target is to ensure sustainable rapid economic growth by increasing internal and external connectivity of the economy. This is also why infrastructure and export promotion are taking centre stage. How does Gatete intend to connect the Rwandan economy? Some tax policies seem to be the trick. For instance, tax exemption on 20-ton and above trucks as well as 15 percent tax reduction on lower tonnage trucks will ensure more vehicles to carry goods at home and within the region. Likewise, reducing import duty on cement to 25 percent could encourage property developers to respond to growing demand for low cost housing. With over 60 percent the population being young, the allocation of Rwf. 170.3 billion (or 10 percent of budget) to productivity and youth employment could also push the country closer to its EDPRS II target. By 2020, Rwanda wants to be less of an agriculture-based economy and more of an industry and services-based economy. This means more off-farm jobs. The youth are regarded as the master card to this goal and the money is expected to be invested in secondary, tertiary and vocational education, skills development, a healthy workforce and job creation. Gatete should feel encouraged by the fact that this planning excites major development partners such as the UN, whose resident coordinator, Lamin Momodou Manneh, noted that job creation is a major issue to address if Rwanda is to meet development goals. Michael Ryan, the EU envoy, echoed the same. He noted that job creation, capacity building and stimulating the private sector are pillars of economic transformation. While some economists like to argue that curbing corruption and improving governance should be top priorities of upper-middle-income economies, Rwanda’s forth thematic area is designed to achieve just that. Gatete will make available Rwf 53.1 billion to fund activities aimed at promoting citizen participation and mobilization for delivery of development, strengthening public accountability and improving service delivery. Finding the money The 2014/2015 budget paper is just a proposal and for it to work, it should be supported by timely funding from targeted sources. Successful implementation of the budget will therefore largely depend on how much taxmen at Rwanda Revenue Authority will collect, especially after fears of missed targets in 2013/2014 fiscal year. New tax cuts have been tipped to spur more trade, increase economic activity and eventually increase taxable opportunities, especially through increased consumption. Therefore, attaining EDPRS II goals will largely depend on whether the economy remains robust enough to support revenue mobilization of Rwf1,085.7 billion—the estimated contribution from domestic resources or 62 percent of the total bill. In normal circumstances, Rwanda’s internal factors such as stable inflation and security are always assured, but it’s the external factors that have always spoilt the party. The government expects its external development partners to generate at least Rwf667.6 billion (38 percent of the total Budget) including loans of Rwf 122.1 billion. Unfortunately, good relations with some development partners are not always assured—the reason why cutting dependency has become a top priority lately. The other threat regards the uncertain global economic landscape. Early this week, the World Bank trimmed its global growth forecast to 2.8 percent for the year from its 3.2 percent. This is unwelcome news for Rwanda’s exports.