Now Rwanda plans financial sector reforms

 

Revellers laugh their hearts out as comedian Patrick Idringi aka Salvador performs during the Comedy Kings Show at Executive Carwash, Kigali, on March 29, 2013. Photo/CYRIL NDEGEYA  Nation Media Group

By JOHN GAHAMANYI The EastAfrican

In Summary

• Challenged with funding constraints, the Treasury is increasingly desperate to generate more domestic revenues. The reforms, including tax reforms, are contained in the investment code that is still under review.
• The reforms will also help bolster capital markets’ contribution to economic growth by scaling up the number of companies listed on the Rwanda Stock Exchange.

Rwanda plans to implement reforms in the financial sector as it tries to make the case for boosting domestic revenues after last year’s aid suspensions exposed the country to the risks of reliance on donor aid to finance the economy.

Challenged with funding constraints, the Treasury is increasingly desperate to generate more domestic revenues. The reforms, including tax reforms, are contained in the investment code that is still under review.

As part of the reforms, The EastAfrican has learnt, the central bank is reviewing the financial sector legal and regulatory framework.

Specifically, the National Bank of Rwanda Law and the Banking Law are undergoing review and BNR has drafted a Law on Deposit Insurance Fund, which is under discussion among stakeholders.

According to Finance Minister Claver Gatete, the government aims to scale up support for the country’s financial sector in order to boost savings and investment.

National savings are still very low at 2.8 per cent of GDP, while investments stand at 23.7 per cent, of which private investments are 9.5 per cent, according to IMF data.

Rwanda’s domestic revenue, estimated at 12.7 per cent of gross domestic product as of 2011/2012, is insufficient to fund government expenditure, forcing the country to rely heavily on donor aid, which accounts for approximately 50 per cent of government expenditure.

The reforms, Mr Gatete said, will also help bolster capital markets’ contribution to economic growth by scaling up the number of companies listed on the Rwanda Stock Exchange. The RSE lists only two domestic firms — Bank of Kigali and beer maker Bralirwa.

Experts say the market needs a critical mass of listed stocks if it is to be a conduit for growth.

“We need to make sure that we can attract all the funds around the capital — the equity funds, unit funds, all the venture capital and so many other funds especially leveraging the pension funds that can grow and invest,” the minister said.

With an asset base of Rwf1.3 trillion ($2.1 billion), Rwf99 billion ($156 million), Rwf235 billion ($369.7 million) and Rwf350 million ($550.7 million) for banks, MFIs, insurance firms and pensions, the financial sector is still too small to drive growth and development.

“If we can help grow those assets, they can raise more resources to support economic development by lending to the private sector; we have to find a way of working with the private sector, in terms of public-private partnerships,” Mr Gatete said.

With the future of donor aid uncertain, the government is increasingly compelled to engage non-traditional investors and institutions beyond the World Bank, the African Development Bank and its bilateral partners.

This resonates with the International Monetary Fund, which has warned of the consequences of excessive reliance on donor aid to fund economic activities.

READ: IMF now tells national bank to change tack

The IMF identified eight critical areas where the focus must be in order to address weaknesses in tax policy and revenue administration.

These are improving taxpayer compliance; strengthening the tax policy unit; improving tax gap analysis; revising the investment code to reduce exemptions; complementing withholding taxes on dividends and interest by a capital gains tax at a similar rate; and reforming the VAT administration.

The IMF says that although Rwanda’s economic outlook remains favourable, it is subject to uncertainties around donor aid and the global environment, while the export base is narrow and poverty needs to be further reduced.

Rwanda’s economy is considered an economic success story with real GDP growth averaging above eight per cent per year over the past decade.

And despite the problems last year, it grew by eight per cent, a slight decline from the 8.6 per cent that was registered a year ago.

However, experts argue that structural reforms to improve export capacity are crucial, while investment projects need to be prioritised in order to manage risks.

Although improvements in cash crop production have raised export volumes in recent years, the IMF says investment needs have led to a persistent deficit.

“The narrow export base makes Rwanda vulnerable to commodity price movements. Aid flows cover the bulk of the deficit,” the Fund said in its latest report on Rwanda’s economy.