17 February 2013

Rwanda: Not Yet Time for Austerity

When Finance Minister John Rwangombwa stepped inside the Lower Chamber of Parliament on February 14 to present a revised budget for fiscal year 2012/13, some legislators feared he was there to deliver bad news - austerity measures to keep the country going for the remaining part this fiscal year.

But after listening to the minister's speech that lasted about 45 minutes, they could not hide their happiness as one after the other heaped praises on Rwangombwa for a job well done in navigating the country through difficult economic times following delays in foreign aid disbursement and budget support suspensions.

Eight months ago, Rwangombwa stood before the same legislators and unveiled the most optimistic budget estimates any finance minister of a developing and aid-reliant country can possibly present even as he acknowledged that the budget had been prepared amidst "very serious downside risks on the international outlook."

During that time, the major concern was the stubborn sovereign debt crisis in the Euro Zone - the leading destination for Rwanda's exports and source of aid as well as tourism dollars. The fear, then, was that demand for exports would fall and hurt the country's revenues from products and services like coffee, tea and tourism.

Having considered all the downside risks of that time, the minister put before parliament a Frw 1,385.3 billion budget with about 47.4% of the money expected from development partners. When Rwangombwa returned to Parliament last week to make adjustments on some of his figures, the situation had changed.

First, as a result of suspension of budget support during the first half of the financial year, the resource envelope experienced Frw 156.5 billion shortfall. Secondly, there was a reduction in the reimbursements from UN peacekeeping operations and all this necessitated a return to the drawing board.

Despite the shortfalls in the original budget, the minister remained bullish even as he sliced spending from those "budget items that will not significantly affect service delivery." He presented before Parliament a bill seeking an upward revision of the budget to Frw 1,549.9 billion.

So where is the money going to come from amidst talk of aid suspensions, delays and cuts? Rwamgombwa told the MPs that Frw 227 billion had been raised from a sovereign bond (a form of borrowing) and it should be invested in those areas that can spur growth.

With unanimous approval from MPs (68 out of 69), the money will be lent to the national carrier Rwandair and completion of the Kigali Convention Centre - an estimated $300 million complex under construction in Kimihurura. The complex, the biggest single construction project in the country at the moment, comprises of a 292-room five-star hotel, a 2,600-seat conference facility, a museum and 24,000 square meters of office and shopping space.

In injecting the proceeds from the sovereign bond into this project, the government is not only looking at bolstering the construction industry - the fastest growing sector that is significantly contributing to real GDP growth - but is also eyeing tourism and conference opportunities that the project will unlock after it is completed.

Non-wage expenditures, according to the minister, have been cut by 40% to keep in line with the available resources. The wage bill is however expected to remain at the same level because the government has suspended recruitment into public service.

More good news is that mobilization of domestic resources remains on course; the Minister said that Rwanda Revenue Authority (RRA) is expected to hit its revenue collection target of Frw 641.2 billion.

Ben Kagarama, the commissioner general of RRA recently said that the tax body had managed to collect Frw 318 billion during the first half of the fiscal year that ended December 2012 - an estimated 15.6% increase in the revenue collected during the same period of the previous year. This amount is about Frw 4billion above the target for the first half of the financial year and Kagarama is confident that with growing compliance and innovations in tax administration, RRA can surpass its target.

For Rwangombwa and his team at the ministry of finance, that is indeed the good news they would wish to hear because it would a mean a breakthrough - a big departure from the past where more than half of the budget was financed by external resources. This means that by the time the Minister gets down with his team to reflect on how he managed to keep the country afloat with reduced aid, Rwandans will be walking with their heads tall, having managed to foot their bill almost entirely on their own.

Even as some donors withheld aid disbursement, real GDP grew at 7.5% in the first quarter of 2012 and 9.9% in the second, but then slowed down to 7.3% during the third quarter. The growth was on account of increase in import of capital and intermediary goods by 28.1% in volume and 24.1% in value and shows how resilient the Rwandan economy was to external shocks.

Despite the reduced resource envelop, the economy is projected to grow by about 7.5%, the highest in the east African region and well above the sub-Saharan Africa average of 5.8%.

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