The African Budgetary Series (ABS) offers regular, analytical insight into African economics. We provide a refreshing and objective look into issues that are driving African economies.
Rwanda’s recently announced 2.09 trillion RWF budget highlighted several key priority spending areas with transportation infrastructure and educational investments leading the charge; comprising the largest share of the budget. Health, agriculture and energy were also made priority areas. Additionally, 52.9 billion RWF was allocated to export investments. Expenditure growth has been constrained to below GDP growth levels. Expenditures as a share of GDP is projected to decline from 26 per cent currently to 25 per cent next fiscal year.
Expectations on revenue to finance the budget are projected to be at 1.8 trillion RWF or 22 per cent of GDP. Revenues are expected to decline to 21 per cent of GDP over the next two years. Rwanda has focused more efforts on revenue mobilization with an historically low tax to GDP ratio of 15 percent. New tax reforms are being implemented however they may be offset by tax policies to stimulate investment. The tax to GDP ratio is expected to remain steady for the next 3 years.
In spite of strong economic growth, Rwanda has struggled to address its growing trade deficit which is currently about 20 per cent of GDP. Sustained large trade imbalances can deplete Rwanda`s foreign exchange holdings; increase public debt (and associated debt charges) and reduce trade competitiveness. The government has made attempts to reduce imports of certain goods but is challenged by capacity restrictions. Efforts to narrow the trade imbalance, include pushing greater exports of both traditional (coffee, tea) and non-traditional goods (fruits and flowers).
The current budget marks a 7 per cent increase from last year’s 1.92 trillion RWF budget. Improved tax revenue collection reduced the government’s reliance on domestic loans and foreign grants to finance the current budget. Tax and non-tax revenue financed 66 per cent of the current budget, an increase of 4 per cent from last year. Much of the debt has been marked for infrastructure programs.
Managing Rwanda’s national debt stock will surely be a priority for the government as the total stock of debt has grown in recent years.
Rwanda’s current debt levels now approach 80 per cent of GDP and are projected to grow substantially over the next two years; heightening risks of unsustainable debt levels. Much of the debt is owed to foreign lenders.
Fiscal consolidation – policies that reduce the deficit and public debt – may be necessary in the near term.
Rwanda is still poised to maintain strong economic growth over the medium term.
Much of the growth will be driven by the services sector (hotels and restaurants) and increased mining activities. Agricultural exports are of major concern as 2016 saw a 12 per cent drop in export crops due to droughts in the eastern part of the country causing a poor harvest. Inflation is expected to rise to 7 per cent in 2017 from 5.7 per cent in 2016, mainly due to higher domestic food prices created by the droughts.
The government is looking to move forward with its ‘Made in Rwanda’ strategy of increasing local capacity.
The current budget reduces tariffs to zero for a number of essential imports with the aim of enhancing domestic skills and infrastructure. Lorries and road construction heavy machines have all been granted zero tariff status. All smart cards, ATM machines, and Point of Sale operating machines have been granted zero duties as well as the country looks to move towards being a cashless economy. In contrast, import tariffs on second hand clothing rose as the government aimed to support local clothing manufacturers.