Rwanda Economic Outlook

Economic performance and outlook

Real GDP growth in the first half of 2017 was an estimated 2.9%, down from 8.2% in the same period in 2016, due to weak performance in services and industry. Services, which accounted for 46% of GDP, increased 6% in the first half of 2017, short of the 9% in the same period in 2016, due to contraction in trade and transport. Steady recovery in 2016 and higher commodity prices, particularly for coffee and tea, led to 5% growth in agriculture during the first half of 2017, down from the 6% in the same period in 2016. Agriculture accounted for 32% of GDP. Industry, which accounted for 15% of GDP, posted zero growth in the first six months of 2017, down from 10% in the second half of 2016, due mainly to completion of major construction projects and weak performance in mining and quarrying. Economic performance improved in the second half of 2017 and is projected to continue to do so in 2018, due to favorable weather conditions and higher commodity prices. Macroeconomic evolution The government’s 2016/17 fiscal policy remained focused on public expenditure efficiency to support growth and reduce poverty, in line with its fiscal consolidation strategy. The fiscal deficit in 2016/17 was 1 percentage point lower than projected. The tax-­to-­GDP ratio in 2016/17 remained stable at an estimated 15.6%, due to tax incentives that support the Made in Rwanda campaign to increase domestic production. The 2017/18 budget is expected to continue fiscal consolidation and is characterized by stable development spending and gradual growth in recurrent spending, due partly to a new teacher’s statute and increasing wages. The Central Bank implemented an expansionary monetary policy in the first half of 2017 to support growth in private-­sector credit. In the same period credit to the private sector increased 8.3%, slightly higher than the 8%

Macroeconomic evolution

The government’s 2016/17 fiscal policy remained focused on public expenditure efficiency to support growth and reduce poverty, in line with its fiscal consolidation strategy. The fiscal deficit in 2016/17 was 1 percentage point lower than projected. The tax-­to-­GDP ratio in 2016/17 remained stable at an estimated 15.6%, due to tax incentives that support the Made in Rwanda campaign to increase domestic production. The 2017/18 budget is expected to continue fiscal consolidation and is characterized by stable development spending and gradual growth in recurrent spending, due partly to a new teacher’s statute and increasing wages. The Central Bank implemented an expansionary monetary policy in the first half of 2017 to support growth in private-­sector credit. In the same period credit to the private sector increased 8.3%, slightly higher than the 8% in 2016, and headline inflation was 7.5%, above the 5.1% in the first half of 2016, due to higher food prices. The trade deficit narrowed due to increased exports as a result of improved production and higher commodity prices. The Rwandan franc was relatively stable. The risk of external debt distress remains low, though greater domestic revenue mobilization is required to maintain debt sustainability.

Tailwinds

Agriculture remains an important contributor to growth; industry’s contribution is expected to increase with industrialization efforts. Three factors are likely to influence the economic outlook. First, the recovery in commodity prices and global demand is expected to increase export revenues and contribute to a buildup in official reserves. Second, ongoing investment in fertilizer, improved seeds, and irrigation, as well as higher prices for coffee and tea, are expected to boost food and export crops. Third, the Made in Rwanda campaign and public infrastructure investment are projected to boost growth in industry.

Headwinds

The country is vulnerable to weather shocks affecting the largely rain-­dependent agriculture sector; ongoing investment in irrigation will reduce rainfall dependence. Given that the country exports predominantly unprocessed raw materials, any fluctuations in commodity prices will reduce export earnings and increase external sector vulnerabilities. Initiatives such as Made in Rwanda seek to increase value addition, reducing vulnerability to commodity price fluctuations. Insecurity and instability in the Great Lakes Region, a major trading partner, pose risks. Regional peace and security measures, including those under the African Union and the International Conference on the Great Lakes Region, are expected to increase peace and stability.

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