To promote inclusive development and maximize benefits for its people, Rwanda is being urged to proactively diversify the destinations for Foreign Direct Investments (FDIs) beyond Kigali.
FDIs refers to investments made in the country from a foreign individual or company as a way to expand their market, hence, bringing in capital, technology, skills, employment opportunities.
This call for diversification was emphasized in the 21st Rwanda Economic Update report by the World Bank, titled "Inclusiveness of Foreign Direct Investments in Rwanda." The report examined the latest economic trends and the state of FDIs in the country.
According to the Central Bank's 2022 Foreign Private Capital (FPC) census report, there was a significant increase in FDI flows in 2021, amounting to $399.3 million compared to $274.1 million recorded in 2020. This growth can be attributed to favorable investment conditions and the utilization of both debt and equity instruments.
The largest share of FDI originated from Mauritius, accounting for 30.5 percent, primarily invested in the financial, ICT, manufacturing, and electricity sectors. India followed with 17.9 percent invested in construction, while China invested 17.6 percent in tourism and manufacturing.
FDIs continue to play a crucial role as a source of private investment in Rwanda. However, the World Bank report highlights that the initial investment figures reported by firms during registration with the Rwanda Development Board are often significantly higher than the actual inflows.
Similarly, foreign investors tend to overestimate the number of jobs they expect to create when registering their investment projects.
"It is essential to establish an investment tracking system to understand, on a company-by-company basis, why FDIs are not realizing their full potential. This understanding is crucial from a policy perspective," the report states.
This tracking system should explore whether firms are seeking greater tax incentives or if government policies are contributing to the gap between expected and realized investments.
Furthermore, the report strongly recommends directing FDIs to be inclusive in regions of the country beyond Kigali. Currently, the Rwanda Development Board's 2022 annual report reveals that 77.3 percent of all foreign investments flowed into Kigali city, followed by the Northern Province (11.7 percent), Eastern Province (8.9 percent), Western Province (1.4 percent), and Southern Province (0.5 percent).
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Rolande Pryce, Country Manager of World Bank Rwanda, highlighted that while FDI firms contribute significantly to employment generation in Rwanda, the jobs are concentrated in sectors that provide limited benefits to women and youth.
"Encouraging FDIs in areas outside Kigali could have a significant impact on poverty reduction... modifying the incentives framework to encourage investment in women-led startups is another effective approach," she said.
The report also emphasizes that a key motivation for attracting FDI is to create opportunities for local firms to engage with foreign investors through supply chain relationships. This interaction can generate local demand, improve the quality of domestic firms' products, and foster the sharing of best practices with local businesses.
Serge Kamuhinda, CEO of Volkswagen Rwanda, acknowledged that geographical inclusiveness of FDIs faces various challenges, such as logistic costs and the lack of skilled labor, considering that 45 percent of the population are children.
"We need to adopt a structural perspective and determine whether we should redirect FDIs in a manner that addresses the specific needs of different regions," he noted.
Regarding the shortfall in job creation targets by investors, Kamuhinda emphasized the importance of developing industrial policies that go beyond investment promotion and focus on the sustainability of FDIs.
Delphine Uwase, Acting Head of Strategy and Competitiveness at RDB, mentioned that they are working on modifying agreements with investors to include inclusive aspects in job creation, such as specific percentages for youth and women, setting a minimum wage, among other measures.
