Igniting the SME engine

Last week, yet another set of economic data was released by the Government. This time it was the National Institute of Statistics of Rwanda (NISR) with numbers indicating the growth within individual sectors and overall GDP growth. Notable growth sectors were agriculture that grew by five per cent, industry 7 per cent and services 7 per cent. Overall, GDP growth for 2015 was 6.9 per cent. Projections from Ernst & Young (Kenya) for overall GDP growth for 2015 in the entire EAC region had been estimated at 5.5 per cent while growth for Africa as a whole was expected to be around 4 per cent. Rwanda’s growth, therefore, is well ahead of our neighbours’ and peers in the African region. Indeed, since the early 2000s all economic indicators coming out of this hilly nation have been as becoming as the weather. Why then do our brightest graduates aspire to the mundane security of a civil service job? The answer is the same as to why most businesses list government agencies as their most significant clients; the near impotency of our private business sector. My appreciation for the competitive nature of business enterprise and the pursuit of profit notwithstanding, there’s a bit of a gloomy cloud over the entrepreneurial horizon for the average Rwandan. Economies the world over, from New Zealand to Brazil and several places in between, have been driven by the ingenuity of small to medium enterprises (SMEs). Africa has not been left out; Tunisia, Egypt and South Africa are the leading lights. Closer to home, the usual suspect Kenya holds sway. Why does Rwanda seem to have missed this gravy train? A look at the numbers and some primary analysis reveals a tale of copy cat tendencies driven by caution and uncertainty. A study done by the Ministry of Trade and Industry, as a precursor to their 2010 SME development policy document, revealed that close to 98 per cent of private businesses in Rwanda belong to the SME category. Up to 93 per cent of these are involved in trade; that is, buying and selling finished goods. In terms of investment, this is the equivalent of opening a savings account. There’s minimal risk and a steady return. This is great if your ambitions revolve around paying your living costs, getting a mortgage and driving a decent car. Given the size of our market, however, growth is seriously constrained by the ever increasing number of competitors. Where SMEs have thrived such as India, Malaysia and even Kenya next door, the secret is in innovation. It begins by providing high quality and competitively priced substitutes for popular imports (import substitution) and gradually working towards producing for export. The secret sauce is in manufacturing. Making about anything domestically has a catalytic effect on the economy; it directly creates jobs, reduces importation (expenditure of foreign exchange) and spawns growth of related sectors which creates indirect jobs. Vision 2020 was never an end in itself. Rwanda has worked really hard to claim a seat at the table of respectable nations. It is my view that the positive image currently enjoyed by the country and its citizens around the world is enough dividends on the effort invested in pursuit of Vision 2020. The saying goes that opportunity comes to the prepared. Rwanda has laid a near perfect foundation and an opportunity presents itself. Latest figures show that 55.4 per cent of Rwandans are between the ages of 15 and 64. Anyone with a passing interest in demographics will know that that age bracket is defined as the working population. This portion of the population has to support the children and the elderly (0-14 and above 65s) who make up the remaining 42.1 per cent and 2.5 per cent of the population, respectively. The years 2020 to 2040 provide a window of opportunity to harness the advantages of this young and potentially productive population. The numbers of the working population will be growing steadily but, more importantly, the number of dependent children will be falling. This is where SMEs come in. Unless Rwanda can foster a vibrant SME sector in the next 5 to 10 years, the advantage of a young working population will quickly turn into the nightmare of a multitude of unemployed youth. The government seems to have taken note of this challenge by coming up with an SME development policy in 2010. This policy revolves around broad strategies of developing clusters within different sectors such as agro-processing and handicrafts, improving financing for SMEs and training youth in different skills. As a participant in the SME sector, I have the privilege of a front row seat as events unfold. From my experiences and those of my colleagues, the major challenges within the sector can be summed up thus; there’s a general sense of “me against the world”! It feels like swimming against the tide in balancing between being competitive and compliant while remaining productively in business. Rwanda Revenue Authority (RRA), the taxation body, in its efforts to meet targets borders on harassing small businesses. With a few exceptions, I strongly believe that people do not pay for office space and employ staff to operate businesses without appreciating the need to pay taxes. Rather than threats of closure, defaulting businesses could be encouraged to pay manageable monthly installments on their outstanding tax obligations. Allowing SMEs to flourish encourages other entrepreneurs to open shop and hence widens the tax base. RRA is only the enforcer of taxation but government could go further and provide other incentives for SME growth in the form of tax credits for every extra person hired and paid a salary at certain threshold. Currently all SMEs are under the supervision of Rwanda Development Board along with all other business entities. In my opinion, a separate entity (however small) in the model of Rwanda Governance Board (RGB) or Workforce Development Agency (WDA) strictly focusing on SME development would be useful in realising the ambition of grooming a vibrant SME sector. This body would do regular needs assessment by cluster and develop relevant policies and provide supervision for implementation of the policies. The said body could also arrange regular sector-wide trainings in financial management, tax compliance and other required technical skills. The dream of middle income status is Rwanda’s for the taking. Whether it translates into prosperity for the average Rwandan depends heavily on how productive the majority of its youthful population are; SMEs are the golden chariot to that economic nirvana. The author is a consultant and trainer specializing in Finance and Strategy. He is based in Kigali.

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Igniting the SME engine