Rwanda’s past successes have been notable, but the country has set even more ambitious goals for its future. A study published August 18 by the International Monetary Fund explains some of the key factors behind Rwanda key successes, including unique institution-building.
The study titled “The Development Path Less Traveled : The Experience of Rwanda“, identified what it considers as Rwanda’s most challenging “transitions” – what Rwanda must move from and to. The Chronicles is republishing the last segment of the 119-page report, which sums up the whole study. Read full adaptation below:
Rwanda’s post-conflict growth rebound was uniquely robust. It was based on a post-conflict strategy that emphasized strategic use of international support and strong systems of accountability, ownership, and goal-setting that garnered a robust support system for rapid reform.
Public investment, initially financed by large ODA flows, was carefully selected to improve living standards, creating growth-enhancing infrastructure, and kick-start new economic activities in higher value-added areas.
Still-low productivity constrains the development of a more vibrant private sector, which can serve as the engine for growth. Improving domestic productivity and private sector activity will depend on improving education outcomes, reducing input costs, and expanding access to markets.
Rwanda’s persistent efforts to bolster domestic resources have rendered tangible results. Relative to its starting point, Rwanda achieved an impressive increase in its tax-to-GDP ratio via, among others, a simplified and highly progressive personal income tax regime, and boosting compliance in all taxpayer segments. However, incentives to attract private investment have undermined some gains in indirect and corporate income taxes.
In the face of waning ODA, Rwanda has implemented policies to encourage greater external private investment and higher-value and diversified exports.
These have included macroeconomic policies, notably greater exchange rate flexibility, policies to support domestic production, such as establishment of special economic zones, the Made in Rwanda promotion campaign, and active and targeted marketing by the Rwandan Development Board. Foreign direct investment inflows and exports have increased dramatically and are more diversified, but their potential remains constrained by Rwanda’s market size, low labor productivity, and high input costs.
Rwanda’s institutions and policy reforms have placed the country among the global leaders in advancing gender equality. The increased emphasis on gender-responsive budgeting, legal reforms, financial inclusion, access to health and education services, and more inclusion in leadership positions have been a good start for increasing the productivity of women and eliminating gender-related income inequalities. Going forward, continued progress will depend on changing socioeconomic and cultural norms to correct women being predominantly employed in lower-value added (and lower-paid) and/or unremunerated activities.
In sum, the country faces four main transitions: transferring the engine of growth from the public/quasi-public activity to private sector-led growth; a more vibrant private sector; offsetting waning ODA with increased inflows of private external resources; bolstering the domestic savings rate; and improving productivity growth through, among other things, improving education and harnessing technology. With this in mind, in 2018 the Rwandan government requested that the World Bank examine reforms needed to effect these transitions and “drive” growth going forward. This resulted in the comprehensive joint Rwandan government–Bank “Drivers of Growth Study,” which identified six main reform priorities for the medium term:
Improving the quality of basic education to bolster productivity and providing more vocational training and higher education that focus on technology and innovation and are better targeted to meet labor demands.
• Developing activity in areas where Rwanda could better serve regional demand for manufacturing and international demand for products and services.
• Agglomerating economic activity in urban areas to help stimulate productivity and diversity of products and services.
• Addressing remaining constraints that disincentivize private investment, such as inadequate infrastructure (electricity, water, internet, affordable financial services), while phasing out public sector-led activities, and providing more support to private activity in areas of untapped potential, for example, mining.
• Improving agricultural productivity, which still has the largest employment share, through more research and training, improving vertical chains that link farmers to markets, and stepped up public investment in irrigation, terracing, and restoring arable land.
• While continuing to strengthen existing policies and institutions, create new institutions/regulation to support a more market-based economy, for example, commercial courts and enforcement of property rights.
The first National Strategy for Transformation (NST-1) is designed to operationalize these priorities while laying the foundation to achieve Vision 2050 and the SDGs—financing, however, will be challenging. The Rwandan government estimated NST-1 costs of roughly US$39 billion over 7 years.
The public share of costs is estimated to be 59 percent, relying on a modest increase in domestic tax revenues, continued waning of ODA grants, and frontloaded external borrowing. The estimates, however, do not necessarily reflect additional spending, aggregated from the costed sectoral strategies.
Thus, the costing reflects a top-down exercise of what is realistically feasible, rather than an aggregation of costing of the detailed sectoral strategies. This effectively means partial implementation of the NST-1, with the annual budget process determining the trade-offs. 41 percent of NST-1 costs are assumed to be covered by private investment, implying an increase to about 21 percent of GDP by FY23/24. Although domestic private investment has grown rapidly over the past 15 years––from about 5 percent of GDP in 2000 to about 13 percent in 2018––it would need more than double to meet the NST-1 share of estimated costs. This will be difficult with a private savings rate that is currently below 10 percent of GDP.
IMF staff separately estimated that additional public spending needs for full SDG achievement could be as much as 20 percent of GDP by 2030. A costing case study undertaken by IMF staff estimated that, to reach SDG outcomes comparable to the highest performing peers in the main areas of health education and infrastructure by 2030, significant additional annual spending would be needed. This could amount to additional annual public spending in 2030 of 19.6 percent of GDP.
Informal estimates suggest it would be challenging for the public sector to raise this level of financing (Figure 62), on the basis of current trends of ODA grants. Assuming grants stayed constant in percent of GDP terms through 2030 and domestic revenues increased by 4–5 percentage points of GDP (assuming higher income levels), then the remaining financing gap in 2030 could be about 7.5 percent of GDP.2 However, assuming the downward trend of ODA grants continues, the annual financing gap could be as high as 14 percent of GDP by 2030.
The Rwandan government is working to alleviate financing constraints through more aggressive efforts to attract private investment. The government’s efforts to attract private investment, including through its participation in the Compact with Africa, are paying off. The Rwandan Development Board reports substantial new FDI in areas such as tourism, construction materials, irrigation, and light manufacturing. However, directing private investment into areas important for SDG achievement is more difficult, given the longer-termnature of returns. In this respect, the government is actively seeking to use ODA “de-risking” instruments to leverage more private resources, while avoiding assuming further financial risks on the public balance sheet. This involves changing the risk-return ratio to make developmental projects more feasible for external investors, tapping into the vast pool of global private savings.
If Vision 2050 could be fully implemented, its ambitious growth objectives are possible. Setting aside the question of absorptive capacity, reaching the Vision 2050 goal of high-income by 2050 is ambitious. It would require that Rwanda see average real GDP growth rates higher than those observed for emerging Asia during its rapid growth phase. However, Rwanda’s growth rate has already averaged 7.8 percent since 2000. If growth could be sustained even at that level, through productivity gains and sustained investment, Rwanda should, at a minimum, reach upper-middle-income status by 2050.