14 June 2012

Rwanda: Transport and Energy Top Budget Priority - Rwangombwa

The Minister of Finance and Economic Planning, John Rwangobwa, will today present in parliament the National Budget for the Fiscal Year 2012/13, which begins on July 1. Treasury plans to spend heavily on infrastructure and boost private sector growth. The move comes amidst persistent uncertainties in the global economy. Our Business Editor John Gahamanyi talked to the Minister of Finance ahead of today's budget reading.

Below are excerptsWhat is the total national budget for the financial year 2012/13 and how does it compare with the year 2011/12?

The Budget is projected at Rwf1, 378.4 billion compared to the revised total of Rwf1, 194.2 billion in 2011/2012, about Rwf184.4 billion higher.

How do you expect to raise resources to finance this budget?

The tax revenue projections for 2012/2013 are underpinned by on-going revenue administration measures by the Rwanda Revenue Authority (RRA) and we propose the following measures;

Adjusting our investment incentives and increase taxes on imported construction materials by 5 per cent on average on import duties, VAT and excise duties. This will yield Rwf1 billion.

Revision of the investment code will yield revenue of Rwf5.2 billion.

We shall introduce Electronic Sales Register (ERS) for recording taxpayers' transactions and limit VAT evasion and help track potential taxpayers, yielding revenue of Rwf10.9 billion. We will introduce the gaming tax, which will yield Rwf1 billion.

In addition to these measures, the increase in public sector wages and salaries whilst maintaining existing tax brackets and rates will yield an additional Rwf9.3 billion in revenue.

What are the priority sectors in the next fiscal year?

We still have a big gap of financing infrastructure and that remains our top priority in the budget, at least I see this for the medium term to come. When I say infrastructure, it's mainly energy and transport.

It's key because it is an enabling factor to private sector investment. It facilitates investment and trade. If I talk of transport, it is moving people and goods. We want to connect our entire country to markets and also to service centres for the population.

On energy, we have a challenge of relying on fuel energy, which is very expensive but also not enough. So, as we increase investment in energy we are assuring reliable access but also cheaper. Normally, we are investing in infrastructure because that is the main responsibility of government to create an enabling environment to the private sector.

But we also have the productive sectors, which is agriculture and promoting the private sector. That also remains a key priority to our budget because in our vision 2020, promoting private sector growth is key. Of course we maintain health and education as key sectors because they are directly concerned with the social life of our population.

What key infrastructure will be focused on?

On energy, we have the ongoing Nyabarongo hydro power project of 28 megawatts, which remains a key priority. We expect to see the first part finalised end of next year and then end of 2014. We have Micro-Hydros that add up to 109 that will give us around 15 megawatts. We also have a peat project that will give us 15 megawatts. We'll also continue our rollout (rural electrification) programme across the country.

On transport, which has bigger projects, we have two or three main roads. We have the Kivu-Belt road, running from Rusizi to Rubavu through Karongi. We have the rehabilitation of the road from Rusizi to Huye through Nyungwe. We'll also start rehabilitating the Gatuna-Kigali road and we have many other district roads that we will be rehabilitating plus continuing with the Kigali roads.

We'll carry out the expropriation of Bugesera International Airport and start the construction of the road to Bugesera International Airport. We'll also do the extension and rehabilitation of the Kigali International Airport. Those are the main projects in the infrastructure sector.

Last year Rwanda's economy expanded by 8.6 per cent. You are projecting a strong growth rate this year, what is going to be the main driver of this growth?

Real GDP is projected to grow by 7.7 per cent in 2012. Last year the economy grew at 8.6 per cent despite the challenges worldwide. The good thing is that we had good prices for exports. So, our exports were boosted in terms of prices, which fetched us more foreign resources. This year, while we might have reduced prices, internationally, the volumes of our exports are growing.

We expect to see export receipts growing by just about 1 per cent compared to 56 per cent we experienced last year. But it will remain high and that will continue to generate trade within the economy.

We expect agriculture to remain a key source of growth. Agriculture is projected to grow at 6.5 per cent, slightly higher than the 5 per cent recorded in 2011 led by a growth in the food crops sub-sector. Growth in food crop sub-sector is projected at 6 per cent and that of export crops (coffee and tea) projected at 22 per cent.

We expect to see growth from the service sector and the construction industry to continue despite the fact that there is this international crisis. The industry and services sectors are projected to grow by 11 per cent and 8 per cent respectively.

Growth is mainly expected from agriculture, industry, construction, and then services- mainly from trade and the financial sector as we see more financial services being rolled out across the country.

The world economy is still volatile with weaker global demand, lower commodity prices and high oil prices. There are also fears of recession in debt saddled Euro zone and economic slow down in Asia. What impact will it have on the country's tourism industry as well as domestic prices?

Generally speaking, when you look at the targeted inflation for the world inflation, it is expected to go down this year compared to where we were last year. Except for fuel prices! Even fuel prices are expected to reduce this year compared to the increase we witnessed in 2011.

We expect to see better prices worldwide; we don't expect any adverse effects. The challenge we see from this crisis in Europe is low demand, this affects prices of our commodities.

While we had big increases last year, we expect to see prices of tea and coffee going down this year and that will affect our export earnings. And, that somehow impacts on our trade balance. Because of the investments going on, we expect imports to continue growing. This marginal growth in exports is going to affect out trade balance.

We don't expect any big hit on our tourists because the kinds of tourists we are dealing with are high end tourists. We might not see the big growth we got last year of almost more than 25 per cent but we don't expect any big hit on our tourists.

What policy measure will you pursue to control the impact of such risks, especially on the export side?

The Government will continue to strengthen the implementation of strategic investments for exports promotion and implementation of the export promotion strategy-diversification from traditional exports to include new export commodities, i.e. horticulture products.

How will this global economic uncertainty affect external financing?

While external financing in terms of grants to the budget will decline over a medium term horizon, they are not expected to be very much affected in the fiscal year 2012/13. Total grants to the budget are expected to increase by about 1 per cent of GDP in 2012/13 compared to 2011/12.

On attracting foreign direct investments, with the tremendous efforts put in the improvement of the business environment, we still anticipate foreign direct investments would not be significantly affected (foreign direct investments are expected to grow by 32 per cent in 2012 following a 116 per cent increase in 2011 driven by portfolio investments for BK and Bralirwa IPOs).

Financing in terms of borrowing externally both for the government and private sector does not seem to be a major concern as emerging market countries overflowing with liquidity are now turning their resources to countries with growing potentials.

Rwanda has had the lowest inflation rate in the region throughout this fiscal year thanks to well coordinated fiscal and monetary policies. This time round food production doesn't look to be as good as it was last year; no fuel tax subsidies anymore yet global pressures have persisted. How do you intend to control inflationary pressures in the coming fiscal year?

First we didn't put subsidies as such. We lowered the tax, which had a good impact on inflation. Last year, we had big pressure from imported inflation, especially from the region and even worldwide. This year, the good thing is that imported inflation is going down. That gives us a breathing space.

In agriculture, the growth (of food production) in season A 2012 is estimated at 7 per cent compared to 0 per cent in 2011, we are still waiting for the growth of season B 2012. The inflation rate dropped to 6.95 per cent in April this year from 8.18 per cent in March owing to the current good food production. We can't yet say that food production is bad this year. In addition to the food production, the fiscal and monetary policies will continue to play the role to keep inflation on single digit.

We had some adverse effects from the floods last season but it is very minimal and we are working on increasing production during this dry season-June-September. Since we had these heavy rains we have more swampy areas that can be used for production.

We have had reduced import inflation, that's why we are maintaining our inflation projection to 7.5 per cent by the end of the year. As for now, all the numbers we see give us good projections.

On the monetary side, the central bank has maintained a tight monetary policy. The decision triggered increase in lending rates in some banks and could as well slow down credit to the economy. Is this a prudent decision, especially that the economy needs more financing to maintain the high growth rate?

The central bank tried to tighten the monetary policy but they are tightening it from a very loose stance, sufficiently loose to allow adequate financing of economic activities. During 2009, when we had big pressures on financing in the economy, the central bank reduced its key repo rate to around 6 per cent. It was really very low. While the policy rate has increased by about 1 per cent in the last 8 months, the average lending rate from commercial banks has literally remained unchanged, varying between 17.04 per cent and 16.87 per cent over the 8 months. Credit to the private sector has remained robust, with an annual average growth of around 30 per cent in the fist four months of this year.

There is enough liquidity in the market that is why the changing in the central bank rate does not really affect the commercial banks.

Do we also see deposit rates going up?

In 2009, we had some sort of crisis that pushed the deposit rates to double digits and when they came down, they remained at reasonable rates. I think they are between 7 and 9 per cent. When you compared to the lending rates of between 17.04 per cent and 16.87 per cent, I think it is healthy.

The share of commercial bank loans to the agriculture sector is still tiny compared to commerce, hotels, restaurants, and public works and construction sectors. Does this budget guarantee more lending to agriculture?

That is true but the trend we saw last year was positive. Last year, credit to agriculture increased more than 100 per cent to Rwf11 billion from a year earlier. But it is still very small compared to Rwf400 billion of the total credit.

We are increasing support for the SACCOs and the other microfinance institutions. These are close to the farmers, in fact most of the SACCOs are owned by the farmers themselves and all the 416 SACCOs operating in the country have started giving credit. The biggest portion of the credit they give goes to agriculture. That's going to increase lending to agriculture.

Number two is that Equity Bank-the new bank that came into this economy, has expertise in dealing with farmers, from their experience in Kenya. They have been showing us the programmes they are working out to start dealing with farmers; we expect that to have an impact as well.

BRD (Rwanda Development Bank) has also scaled up its lending to farmers.

The other important factor is that the land titles issued to land owners will now be serving as collateral in banks for land owners willing to engage into agricultural activity and requiring financing through the banking system. Previously, the biggest problem was guarantees. Now most of the farmers have land titles for their pieces of land and that will help them access credit.

Total expenditures are projected to rise in 2012/13 partly to accommodate the public sector wage increases. Statistics show the government wage bill increased significantly between 2008 and 2012. Why increase the wages again and why have they been going up?

Total wages and salaries amounted to Rwf90.8 billion in 2008/09 and projected to increase to Rwf181.6 billion in 2012/13, an increase of about 100 per cent over the four years. Total government spending on the other hand increased by about 82.2 per cent over the same period.

During that period you are saying teachers' salaries increased twice by about 10 per cent. Then we increased (salaries) of the soldiers and policemen (10 per cent) three times. The police (force) has been growing because we had a small police from the beginning. We always try to increase it by 1,500 policemen per year because when you look at the police to population ratio, it is still not good.

Government wage bill has mainly grown because of the increase in the number of teachers, health workers, police and then defence.

Then there has been reclassification of staff in different government institutions where the staff who was, for instance, a professional is reclassified as an expert; that changes his/her salary.

Why are we increasing salaries in the next fiscal year?

As government we are really the worst remunerating agency. Since 2006 when we last increased salaries to today, this salary has been eaten up by inflation and the exchange rate depreciation by about 47 per cent. So, in real terms government workers have lost money between 2006 and today to the tune of about 47 per cent. We had to try and reduce this (loss) and we are not able to do that because we increased by only 17 per cent per individual salary.

While we need to increase development, we need to cater for the people that are delivering this service.

This is the last year of the EDPRS. How confident are you that the EDPRS targets will be met by the end of the fiscal year 2012/13?

Today we are at 85 per cent, a year before we end the RDPRS. We are 100 per cent sure that we shall achieve the EDPRS target. The main target was reducing poverty and we have already surpassed it. We had expected to reduce poverty to 46 per cent; we reduced it to below 45%. Yes, we are achieving almost all our targets in EDPRS

If you may predict, what kind of the Rwanda economy do you expect to emerge from the global economic uncertainties?

I don't see any big change. Maybe what this is doing is somehow delaying our double digit growth that we want to achieve but I expect Rwanda to remain a high grower as we are today. We are projecting an average growth of about 7.3 per cent in the medium term but based on the experience of last year we might be around 8 per cent or above. I don't expect any big changes or any big surprises in the medium term.

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