24 March 2019

Rwanda: How Much More Can Rwanda Borrow?

analysis

Rwanda still has adequate room to borrow further to finance infrastructure development and other expenditure, the International Monetary Fund has said.

On the conclusion of a two-week mission in the country whereby they reviewed the Policy Coordination Instrument, among other things, the institution found that Rwanda remains at low debt distress level.

With a number of infrastructure projects planned for rollout, among the options for financing the development is debt from financiers.

Laura Redifer, the head of the IMF mission, said that there was still adequate room to incur more debt to finance planned development given the economic growth and exports growth.

In net present value, Rwanda's external debt level to Gross Domestic Product stands at about 40 per cent up from 36.6 per cent in 2017, she said.

"There has been an increase in external debt over the last several years. In present value terms, in the last five years, we have seen rates go up from 27 per cent to 40 per cent. We do not just include external debt but also guarantees. This increase has been due to a number of large projects going on," she said.

Among the major projects that have required the country to borrow include the Kigali Convention Centre, national carrier, RwandAir's expansion, and the Bugesera International Airport that is under construction.

She noted that they had observed careful debt management that has been coupled with economic growth and exports growth.

"There has been three large projects, KCC, RwandAir, and the airport under construction. We have also seen that the debt has been very carefully managed, that combined with very high growth and a focus on exports has shown there is very little risk of debt distress," she added.

Going forward, she noted that Rwanda still has room to borrow as the country is still way below the 50 per cent threshold.

The East African region has a debt threshold of 50 per cent to ensure that growth is not stifled and not a majority of resources go into paying back debt.

"One of the things we are looking at is the net present value of debt and we have 40 per cent, we are looking to keep it below the 50 per cent mark. There is still more room to borrow. About 10 per cent of GDP," she said.

She advised that the country would be better off seeking better terms such as low interests rates and longer maturity.

"If you borrow at better terms with longer maturity and lower interest you can borrow more. The objective should be to borrow on better terms," she said.

With an ambitious seven-year plan, the Government is bound to borrow, largely to finance infrastructure development projects, such as the expansion of the road network, construction of the standard gauge railway, utility penetration, establishment of secondary cities and financing of special economic zones, among others.

Officials at the Ministry of Finance and Economic Planning told The New Times that the government is comfortable with current debt levels considering that a majority of it stems from concessional loans between 75 per cent and 80 per cent.

Concessional loans is credit that is extended on terms substantially more generous than market loans usually by international development financiers, such as the World Bank, African Development Bank, among others.

The loans have significantly low-interest rates and long grace periods with the possibility of revising terms further.

When borrowing, the Government said they always aim at exhausting the concessional options before getting market value loans which are not only expensive but have shorter payment durations.

The African Development Bank recently expressed confidence on the debt level and debt management, saying that considering the current debt and the growth in export revenues, there is little risk of debt distress at the moment and in the near future.

"We are not worried about the debt that the country is securing now. These are sustainable numbers. When you look at the export revenues, which are going to support repayment, they have been growing significantly. We see commodity exports going up as well as areas, such as conference tourism," the bank said.

The bank said that the levels were currently sustainable considering export revenues.

Payment of the current and future debt is dependent on the growth of export revenues, which the Government says have been growing steadily owing to the Made-in-Rwanda initiative.

Rwanda's total exports increased by 5.5 per cent to $995.7m in 2018 and by 17 per cent in volume.

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