Grim economic outlook forces Rwanda to cut down on growth forecasts

One of the many big construction sites in Kigali. The government’s economic forecast shows hard times ahead. Photo/Cyril Ndegeya  Nation Media Group

By Kabona Esiara  Rwanda Today
 

 

In Summary

• A projected sluggish service sector, hit with low credit, is the reason for the bearish economic forecast by both experts and government officials.
• Forecasts by the Ministry of Finance show that economic growth will slow down to 7.5 per cent in 2013 and 2014 as the service sector tumbles due to limited access to bank loans.
• Growth in the service sector is seen sliding to seven per cent this year before rebounding to 8.9 per cent in 2014.

Signs of a slowdown in lending to the private sector have hit prospects of a bright economic outlook, forcing the government to make cuts in its growth forecast for this year.

A projected sluggish service sector, hit with low credit, is the reason for the bearish economic forecast by both experts and government officials.

And, according to economists, the decline in credit as banks respond to the tight monetary and fiscal policies ahead might affect spending and hurt private local investments.

READ: Rwanda’s ‘young’ banks hit by credit crunch

Despite a modest slowdown in economic activity during the second half of last year, in part due to the delay in donor disbursements, the Rwandan economy grew by eight per cent.

Limited access to bank loans

“This good performance was largely driven by the expansion of the service sector, particularly communication and transport, which expanded by 19 per cent. In industry, construction recorded a robust growth of 15 per cent,” the 2013/14 draft budget states.

However, forecasts by the Ministry of Finance show that economic growth will slow down to 7.5 per cent in 2013 and 2014 as the service sector tumbles due to limited access to bank loans.

Growth in the service sector is seen sliding to seven per cent this year before rebounding to 8.9 per cent in 2014.

But what will buttress the economy during the expected hard times, according to IMF Country Representative Mitra Farahbaksh, is the strong growth the country recorded in 2012. She also says lending to the private sector has been growing at a very rapid pace in 2012, at 34 per cent.

“Because of lower budget support relative to last year, growth is expected to decline slightly though it is still expected to be high,” Ms Farahbaksh said in an email interview.

“Lending will continue to grow, just not at such high levels.”

She added that the new poverty reduction strategy the government has adopted are supportive of the private sector and “aims to reduce considerably extreme poverty in Rwanda.” 

There has been an impressive performance in poverty reduction with some 200,000 households, or one million people, having emerged from poverty since 2006.

Trade deficit
The 2013/14 draft budget also states that the decline in service industry will be counterbalanced by a strong growth in agriculture, to be occasioned by favourable weather conditions. The growth in agriculture will benefit 80 per cent of households in a country that directly or indirectly depends on the sector for employment.

Increased agricultural production, which boosted increased food output, may slow down in 2014 and therefore cause a rebound in inflationary pressures.

“Agricultural growth is expected to decelerate slightly to 5.1 per cent in 2014,” the draft budget states. “In the baseline scenario, initial GDP growth projections of seven per cent have been made for 2015 and 2016, respectively.”

The rising demand for capital goods, raw materials for industry as well as inputs in the service sector are expected to drive up the import bill this year, heaping more pressure on Rwanda’s trade books, a view economists and government share.

Although exports are projected to increase by 15 per cent and imports by eight per cent, government forecasts indicate that the trade deficit is expected to surge to $1.46 billion (Rwf935 billion) , up from $1.38 billion (Rwf884 billion) in 2012. This means Rwanda is importing more goods than it is exporting, which calls for efforts to tap into regional and international markets.

Exports expanded significantly

Despite the decline in international coffee prices, Rwanda’s exports expanded significantly in 2012 following efforts to diversify from traditional exports coffee and tea. Last year, much of the export growth came through non-traditional exports such as flour, hides and skins, as well as pyrethrum.

ALSO READ: Rwanda targets 15pc growth in exports in four years

According to the draft budget, gross reserves will reach $925.5 million (Rwf593 billion), or 3.8 months of projected imports, at end the year.

With the Treasury increasingly desperate to fix its funding shortfall, Rwanda saw her external reserves deteriorate last year on account of suspension and delays in aid disbursements as the government drew on these reserves to fund its operations.

Nonetheless, exports are expected to remain strong next year with a growth of about 15 per cent, driven by both traditional and non-traditional products.

Rwanda faces a rising demand for capital and intermediate goods by both public and private sectors for investment, a situation that is likely to continue, driving exports high.