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Rwanda Economic Outlook
Macroeconomic performance and outlook
Real GDP was estimated to grow at 8.7% in 2019, higher than the regional average. Growth was mainly in services (7.6%) and industry (18.1%), particularly construction (30%). Investment drove growth, led by public investment in basic services and infrastructure. Real GDP per capita increased 6.1% in 2019.
Inflation moved up slightly to 1.6% in 2019, driven by increased domestic demand. Since inflation was below the 5% target, the National Bank of Rwanda reduced the monetary policy rate by 50 basis points to 5% in May 2019, stimulating bank lending to the private sector. Domestic credit to the private sector increased by 0.9 percentage point to 21.1% of GDP in 2019.
Despite strong tax revenue growth of 11.5%, similar public investment growth led to a 1.9 percentage point increase in the fiscal deficit to 6.2% of GDP in 2019. Government securities largely financed the deficit. Public and publicly guaranteed debt increased to 50.3% of GDP in 2019, though Rwanda is assessed at low risk of debt distress. Imports grew faster than exports as traditional exports slowed. The trade deficit widened by 3.5 percentage points to 11.3% of GDP in 2019, increasing the current account deficit by 1.5 percentage point to 9.2% of GDP. External reserves increased by 8% to $1.4 billion in 2019, equal to 4.7 months of imports. The exchange rate depreciated against the dollar by 5.0% in 2019 due to the growing trade deficit.
Tailwinds and headwinds
Rwanda’s growth is projected at 8.0% in 2020 and 8.2% in 2021, supported by continuing large-scale investments such as the Bugesera airport, Hakan Peat plant, and electricity infrastructure. Inflation is projected to remain around the 5% target. As fiscal policy trades off between supporting demand and ensuring public debt sustainability, the fiscal deficit is projected to increase to 6.8% of GDP in 2020 and 6.6% in 2021. The current account balance is projected to narrow to 9.1% of GDP in 2020 and 8.0% in 2021 due to a pickup in traditional exports.
Rwanda’s rapid growth, coupled with a focus on the business environment, can stimulate growth in private investment, currently low at 13% of GDP compared with the East African average of 16%. Foreign direct investment averages 3% of GDP, compared with the lowincome country average of 3.3%. The 2020 World Bank Doing Business report ranks Rwanda second in Africa.
In January 2019, the National Bank of Rwanda adopted an interest-based monetary policy framework. By June, money market interest rates (5.45%) started converging around the bank’s 5.0% rate, followed by a drop in the lending rate. This can foster private lending for investment, creating new jobs and spurring growth.
Rwanda’s fiscal space to finance development narrowed recently with a steep decline in aid from 10% of GDP in 2010 to 4.9% in 2018. Despite the country’s vision and bold strategy for economic transformation, the huge amounts needed for future growth will require blended financing to de-risk and crowd in private capital.
The high costs of transport and energy, due to Rwanda’s landlocked position and poor logistics system, constrain its ability to attract investments and keep its private sector from expanding in job-intensive industries. Energy was estimated to cost 22.2% more than the regional average in 2016.
Despite high GDP growth, Rwanda’s transformation has been slow. GDP per person employed was $3,863 in 2011 purchasing power parity dollars in 2018, compared with $13,387 in Africa. Rwanda’s low labor productivity results from only 4% of the labor force working in manufacturing, while two-thirds is still in low-productivity agriculture.
Up to 18.2% of youth ages 16–30 were unemployed in May 2019 due to a lack of jobs or appropriate skills. Rwanda has made some progress in closing the skill gap and developing its human capital.