Start small but think big: Supporting SMEs to grow and export (Part I)

In most countries in the world, SMEs comprise the vast majority of all firms in the economy. The same is true in Rwanda where SMEs account for 98% of all businesses and 82% of employment. The vast majority of SMEs in Rwanda are micro-enterprises or household enterprises (93%) which require a low level of know-how and technology. Ten per cent of SMEs are in manufacturing or mining, and only 9% work in financial and professional services. SMEs are essential for job creation. Over the last 10 years, the number of people employed in non-farm jobs increased from 408,000 in 2001 to 1.4 million in 2011 – 100,000 jobs per year, the majority in SMEs. Non-agricultural employment has increased to 27.3% of all jobs in 2012, from 12.1% in 2002 and SME turnover growth averaged 11% per annum from 2010 to 2012. SMEs also have a large role to play in informal cross border trade within the region, which is a sizeable proportion of Rwanda’s overall trade. Informal exports comprised 16% ($110 million) of the total exports in 2013, an increase of 8% from 2012. The DRC is by far Rwanda’s largest informal export market with US$90.3 million informally exported there in 2013, or 82% of total informal exports. Burundi and Uganda are also large informal export markets with total informal exports to the two countries amounting to US$8.8 million and US$ 11.1 million, respectively, in 2013. Encouraging SMEs to export regionally is a pathway to encouraging their growth and success. In Rwanda, between 2008 and 2013 firms formally exporting over US$ 1 million contributed 88% of Rwanda’s total exports and come from both traditional and non-traditional export sectors. MDEs drove the majority of Rwanda’s export growth since 2008 accounting for 88% of total export growth between 2008 and 2013. Breaking down growth by sector, the largest contributors to export growth are the mineral sector and agro-processing and manufacturing sector (A&M). If Rwanda is to hit export targets set under EDPRS II, a rapid increase in the number of million dollar exporters, combined with sustained export growth from existing million dollar exporters is required. This is because the evidence suggests that large exporters drive export growth. Large exporters can emerge through large-scale investment (domestic or FDI) or businesses can grow over time from small exporters to large exporters. Of Rwanda’s 65 Million Dollar Exporters in 2013, 26 (40%) graduated from exporting under US$ 1 million per annum into Million Dollar Exporters over the past six years. Firms need to be successful in the domestic market before pursuing growth through exporting to the region and further. SMEs should, therefore be nurtured and supported so that they can successfully operate domestically, before they begin to export outside of Rwanda. It is worth noting, however, that an enterprise can also produce a specific product for a niche export market from the start with little or no presence in the domestic market. There are three strategic choices that Rwanda has made to support SME growth, given their importance in the overall business community: Firstly, the Government has worked to create a supportive business environment which allows firms to be established and function smoothly. This is reflected in Rwanda’s World Bank Doing Business rankings, where the country jumped 22 places in 2014 to the 32nd place in the world in terms of overall ease of doing business. Rwanda was the second best performing country globally in the 2014 report and, since 2005, the country has been the top performer in the world and advanced the furthest towards the regulatory frontier. For example, The time it takes to register a business fell from 16 days in 2006 to just two days in 2013 according to the World Bank report, and the cost of starting a business, expressed as a percentage of income per capita, has decreased from 188.3% in 2006 to 4.4% in 2013. With online registration a business can be started in only six hours and at zero cost. This makes Rwanda the 9th globally in ease of starting a business. Other reforms have been in the area of registering property where Rwanda is the 8th country the world over in ease of registering property for an SME. The establishment of a private credit reference bureau has moved the country from a global ranking of 159 in 2006 for getting credit, to 24 in 2012 and up to 13th place in the latest report of 2014. New company laws have seen Rwanda climb to the 22nd place this year for protecting investors. These reforms improved the extent of disclosure and the strength of investor protection. The writer is Permanent Secretary, Ministry of Trade and Industry.

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Start small but think big: Supporting SMEs to grow and export (Part I)