Rwanda

major macro economic indicators

(e): Estimate (f): Forecast * Fiscal year from 1st July - 30th June. 2022 data: FY21-22. **Urban inflation, main gauge of inflation

RISK ASSESSMENT

Domestic demand supports growth momentum

In 2021, despite occasional lockdowns, activity has recovered strongly from the recession brought on by the COVID-19 pandemic. In 2022, although the base effect will fade, resulting in a lower growth rate than in 2021, activity will still be strong. Private consumption will drive activity, benefiting from the increase in the COVID-19 inoculation rate. Although the vaccination campaign remains incomplete, raising the risk of a resurgence of the epidemic, the country is one of the most advanced on the continent in terms of deployment of the vaccine (nearly 20% of the population fully vaccinated by mid-November 2021, 6.6% in Africa). Moreover, with over 70% of the population employed in agriculture, household incomes are expected to benefit from the still relatively favourable prices of export crops (coffee, tea). Inflation, which is expected to remain modest, should not significantly erode these. Indeed, although it is expected to rise sharply as a result of a rebound in food prices, the likely continuation of the subsidy on petroleum products (introduced in May 2021) for part of the year is expected to contain inflationary pressures. Investment will also play a driving role. Its public share will be further supported by the implementation of the National Transformation Strategy (NST1), which is also expected to create a pull for private investment. The NST1 will emphasise investment in infrastructure, such as the Bugesera airport (to be delivered in 2023), and the development of the manufacturing sector. These industries are also expected to benefit from additional funds from the Economic Recovery Fund (ERF). Rwanda will also receive investment for the construction of a Pfizer-BioNTech vaccine manufacturing facility, which will commence in mid-2022. Imports of capital goods related to these investments will continue to weigh on the contribution of net exports, despite favourable prices for export commodities (coffee, tea, gold, tungsten). 

Government spending still high, debt continuing to rise

In 2021/22, the budget deficit will remain large. The procurement of COVID-19 vaccines, additional funds allocated to the Economic Recovery Fund, the investment effort to support the recovery, the increase in the state wage bill to recruit teachers and health workers and the support to public enterprises will contribute to a significant increase in public spending. The deficit could be reduced slightly thanks to revenue growth, which will benefit from the impacts of strong activity, coupled with the implementation of the Medium-Term Revenue Strategy. This Strategy includes fiscal policy and administrative reforms to improve domestic resource mobilisation. However, even though the authorities will focus on concessional sources, they will have to resort to external (more than 75% of the total debt stock) and domestic debt to finance the deficit. Public debt, which has more than tripled relative to GDP since 2010, will therefore continue on its upward trajectory. While this is a source of vulnerability, the small share of commercial debt (less than 10% of external debt) is tempering interest payments (7% of public expenditure).

 
In 2022, the trade deficit, which is mainly burdened by imports of capital goods, is expected to fuel a larger current account deficit. The recovery in tourism receipts, which is likely to remain incomplete in 2022, is not expected to offset the higher import bill. Profit remittances from foreign companies are expected to increase, in line with investment trends. While the transfer account surplus will mitigate the current account deficit, the decline in emergency international cooperation to combat the pandemic will reduce it. FDI and grants will finance a large part of the deficit. However, while reserves cover more than four months’ worth of imports, the Rwandan franc is expected to continue its slow depreciation.

Some signs of improvement for regional stability

President Paul Kagame was re-elected for a third consecutive term in August 2017, officially securing nearly 99% of the vote. The Rwandan Patriotic Front (RPF) and Mr Kagame’s grip on power was reaffirmed during the September 2018 legislative elections, as the RPF, acting as part of an expanded, six-party coalition, won 74% of the votes and 40 out of the 53 seats on the ballot. Regularly accused of muzzling dissent and controlling the political arena, President Kagame and the RPF are also credited with restoring peace and political stability. The political dominance of the RPF and Paul Kagame is unlikely to be called into question between now and the elections in 2023 (legislative) and 2024 (presidential) Their popularity could even benefit from the deployment of the vaccine. Although it is already one of the most attractive countries on the continent, it is continuing reforms aimed at improving its business environment. Regionally, the country sent troops to Mozambique to combat the Islamist insurgency there. In addition, efforts to normalise troubled relations with Burundi and the DRC were reported in 2021. In July 2021, the country repatriated 19 Burundian fighters and held a series of meetings with political and military officials of its northern neighbour, while three bilateral cooperation agreements were signed with the DRC in June 2021. On 31 January 2022, Rwanda reopened its land border with Uganda, ending the border dispute between the two neighbours.

Last updated: February 2022