IMF expert speaks out on Rwanda's outlook for 2017

The International Monetary Fund last week projected that the economic growth will re-bound this year at 6.2 per cent. This follows a slight dip in 2016 where the growth stood at 5.9 per cent. Last week, The New Times’ Collins Mwai spoke to Laure Redifer, the IMF team leader for review of Rwanda’s Policy Support Instrument, for insights on the drivers for growth, risks and other aspects of the economy. Excerpts: Recently, you announced that Rwanda can look forward to economic growth of about 6.2 per cent. What are the key drivers of the anticipated growth? Redifer during a function in Kigali recently. / Timothy Kisambira As you are aware, there have been favourable rain and we expect a rebound in the agriculture sector. Because it was quite slow last year, there is going to be a base effect. When there is very low production before and the production increases, you get a bigger growth rate. We are also expecting growth results from Made-in-Rwanda campaign. Some of these incentives of production have an impact and we are also seeing more production of goods domestically that were previously imported. Because of the exchange rate depreciation, the country has also become more competitive overseas. We are seeing an increase in exports, which creates growth. We are seeing a lot of production in various areas and all these combined will bring growth to 6.2 per cent. What are the main risks you foresee that could get in the way of the anticipated growth? I do not foresee many risks. Another shock would be if commodity prices somehow drop again which is not something that we are projecting at this stage. The risks are more medium-term and not things that Rwanda can do much about. The weather risk remains but the Government is doing all it can to improve the country’s resilience to changing weather patterns. Inflation had quite some impact in holding back growth the ending financial year. To what extent do you figure imported inflation was prevalent? Inflation was mostly due to food prices. The main products that were affected were vegetables. Since the borders were open, there were people coming from other countries and buying food from Rwanda. In terms of imported inflation, considering the exchange rate depreciation, which has been about 20 per cent in the last few years, we would have expected imports to become more expensive which has not happened. There has not been a lot of imported inflation. There has been a modest increase in international fuel prices which might bring up prices a bit has not been very profound. You mentioned the role of Made-in-Rwanda in driving growth, do you think there ought to be more incentives to boost its impact in growth? The Government took two types of measures; letting the exchange rate adjust which has seen trade deficits narrowed, and restrained public spending which also saw a decrease in imports and promotion of local products. There has been structural efforts to narrow the trade imbalance. There is still a lot to be done but Rwanda being a landlocked country, it has to import to grow, but trying to foster domestic production is a good idea. Whether one needs incentives for that, there always has to be a balance to make sure that it does not undermine domestic revenue. There has to be a balance there. Speaking of exports, is the country losing out on a lot due to low value addition of exports? The highest value exports you have are in metals, minerals and business tourism which is also an export. Agriculture exports can add value with a little more processing before exporting and it would create more growth that way. Certainly, that is an important thing to do. What are your thoughts on how the Government handled the exchange rate adjustments? We were encouraged to see it. It really was the central tool of adjustment. It depreciated almost 20 per cent between 2015 and 2016 which it needed to do. It probably needs to adjust further as there are some foreign exchange shortages and we are also seeing that the central bank is only selling to the market and not buying and selling. That indicates that much more adjustments are needed. We do not want to speculate on how much because it is not a target, it depends on the market. The levels of public debt have no doubt gone up; what are IMF’s observations on the reasons behind the rise? Certainly, the public debt has gone up for a number of reasons. The first is basic accounting, when the exchange rate depreciates, it is just more expensive in Rwandan Franc and the GDP growth has been a bit slower. Even without any change in borrowing at all, the ratios go up a bit. There have also been big investments by public enterprises such as Kigali Convention Centre and RwandAir, which have increased the public debt ratios. Going forward, the Government wants to build a new airport and they are really looking at ways to diversify the risks so that they do not have to put it all on the balance sheet or put a burden on the tax payer, they are really keenly aware that they have to make sure it is handled in sustainable way. They are considering innovative ways to bring in different investors so that everyone has a bit of the risk thus spreading out the risk. That is an example of how they are undertaking the big investments without overburdening the tax payers. Considering the levels of public debt and the Government’s ambition to largely domestically fund the budget, is there a chance that the revenue authorities can collect more without burdening taxpayers? What I would suggest is that a lot of gains that have been made in domestic revenue collection to-date have been using policy. There is more that can be done at administrative level to make people pay what they owe. There is still a lot of avoidance, hence the tax administrative measures are necessary and fortunately, they are doing a lot on this. There are also other types of tax that at this stage of development, Rwanda needs to do such as property tax. There is basically a need to get into some of the tax pockets that Rwanda has not been getting into. The other thing is that some of these tax incentives that have been provided need to be targeted well to producers that are benefiting. It is important to get the balance right which is an ongoing process. What is your take on the view that regional integration initiatives like the East African Community could lead to some risks like inflation? I think regional integration is mostly beneficial. Other than during drought, which brought about inflation shocks, it has multiple benefits. It has brought about the certainty of having a larger market and getting rid of the currency risk. Having open borders across the region and having different currencies, there is a lot to be gained from integration. Rwanda’s financial sector is largely bank-dominated, which, in a sense, has affected the quality of financial inclusion. Any idea of how we could go beyond being bank dominated? When we say bank dominated, we mean most of the assets are in the banking sector. I would say that most of the inclusion on access to financial is from community based institutions and micro-finance institutions. It does limit development to some extent because there is still a high cost to development financing. It does limit development financing because there is still cost of financing because there is no larger types of financing that can compete with banks. There is need for more competition and for more people to be included in the formal financial structures not just micro-finances which has not brought down the cost. A lot has been done to include more people but there is more to be done in terms of sophistication and depth. editorial@newtimes.co.rw

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IMF expert speaks out on Rwanda's outlook for 2017