Rwanda Economic Update T nth Edition | Au ust 2017 Sustaining Growth by Building on Emerging Export Opportunities Rwanda Economic Update Sustaining Growth by Building on Emerging Export Opportunities August 2017 TABLE OF CONTENTS Acronyms ............................................................................................................................................................................................................. i Foreword .............................................................................................................................................................................................................. ii Executive Summary ......................................................................................................................................................................................... iii Part I: Recent Macroeconomic Developments and Productivity Patterns ............................................................................. 1 1.1 Macroeconomic Developments in 2016 and 2017 .................................................................................................................. 2 1.2 Long-Term Productivity and Structural Transformation Patterns...................................................................................... 15 1.3 Macroeconomic Outlook and Risks.............................................................................................................................................. 20 Part II: Analysis of Rwanda’s Export Performance ................................................................................................................................ 21 2.1 Background .............................................................................................................................................................................................. 22 2.2 Overview ................................................................................................................................................................................................... 22 2.3 A Snapshot of the Main Export Categories................................................................................................................................. 25 2.4 Firm-Level Analysis .............................................................................................................................................................................. 29 2.5 Policy Considerations........................................................................................................................................................................... 36 References ........................................................................................................................................................................................................... 39 Annexes................................................................................................................................................................................................................. 41 LIST OF FIGURES Figure 1: Rwanda’s growth exceeds global and regional growth rates (GDP growth, percent)................................ 2 Figure 2: In 2016, Rwanda’s economy was among the highest growing in (Year-on-year growth) ......................... 2 Figure 3: Rwanda’s medium and long term economic growth (GDP change, percent) ............................................... 3 Figure 4: GDP Rebasing changed the weight of Sectors … ......................................................................................................... 4 Figure 5: … and growth rates over 2014-2015 ..................................................................................................................................... 4 Figure 6: A broad-based slowdown in growth was observed across sectors (Year-on-year growth, percent)..... 5 Figure 7: Growth in the industrial sector (Contribution to industrial growth, percentage points) ........................... 6 Figure 8: Agricultural growth moderated in 2016 (Contribution to agriculture growth, percentage points)..... 6 Figure 9: GDP by expenditures (Contribution to GDP growth, year-on-year, percent) ................................................... 6 Figure 10: Export growth in real terms outpaced imports growth (Annual growth rate) ............................................. 7 Figure 11: Tourism receipts continued to edge up............................................................................................................................ 10 Figure 12: The depreciation of the Rwf gathered pace in 2016 (Rwf/US$).......................................................................... 11 Figure 13: Rwanda’s currency, expressed in REER and NEER, also depreciated in 2015 (Q12010=100)........................ 11 Figure 14: Rwanda’s headline inflation accelerated in 2016 …..................................................................................................... 12 Figure 15: Rural vs. urban inflation.......................................................................................................................................................... 12 Figure 16: Credit to the private sector sharply decelerated in 2016 (Year-on-year change, percent) .................... 12 Figure 17: Lending and deposit rates relatively stable compared to money market rates ............................................. 13 Figure 18: Money market interest rates increased in 2016 (Annual average changes, basis points)..................... 13 Figure 19: Rwanda’s fiscal deficit eased in FY2015/16 ..................................................................................................................... 13 Figure 20: There has been a steady improvement in revenue collection ............................................................................... 14 Figure 21: After peaking in 2013/14 the share of capital expenditure is declining ............................................................. 15 Figure 22: Labour productivity (adjusted by hours worked): Manufacturing = 100, 2016 Labor Force Survey............ 17 Figure 23: Sources of growth by factors of production, percentage points ........................................................................... 18 Figure 24: Rwanda exports of goods and services (BoP, current US$ million) .......................................................................... 22 Figure 25: Evolution of merchandise exports .......................................................................................................................................... 22 Figure 26: Volume and value effect of merchandise exports ........................................................................................................... 23 Figure 27: Non-traditional exports (US$), 2004-2016 ............................................................................................................................ 26 Figure 28: Rwanda informal cross-border trade ..................................................................................................................................... 27 Figure 29: Performance of re-exports, US$ million, and percentage of total exports ............................................................ 28 Figure 30: Services exports, 2010-2016, balance of payments (US$ million) ............................................................................. 28 Figure 31: Receipts from tourism, 2015 ..................................................................................................................................................... 29 Figure 32: Number of Rwandan exporters ................................................................................................................................................ 30 Figure 33: Number of exporters by destinations and products ....................................................................................................... 30 Figure 35: Firm-level diversification ........................................................................................................................................................... 31 Figure 34: Exporter concentration in Rwanda, 2009-2016 .................................................................................................................. 31 Figure 36: Entry, exit, and survival in Rwanda and comparator countries .................................................................................. 32 Figure 37: Average exporter size by type of exporters....................................................................................................................... 33 Figure 38: Imported inputs and export performance ........................................................................................................................... 36 LIST OF BOXES Box 1: Rebasing Rwanda’s national accounts ................................................................................................................................. 4 Box 2: 2015/16-2017/18 Revenue mobilisation strategy at a glance ........................................................................................ 14 LIST OF TABLES Table 1: Rwanda’s balance of payments .............................................................................................................................................. 9 Table 2: Key export destinations Importer............................................................................................................................................ 23 Table 3: Coffee and tea exports-value, volume and price developments Importer.............................................................. 25 Table 4: Mineral exports performance.................................................................................................................................................... 26 Table 5: Decomposition of changes in Rwanda’s exports into intensive and extensive margin along firm dimension ........................................................................................................................................................................................ 34 Table 6: Decomposition of changes in exports by continuing exporters into intensive and extensive margin along the destination dimension............................................................................................................................................ 34 Table 7: Decomposition of change in exports to existing destinations by continuing exporters along the product dimension ....................................................................................................................................................................... 34 Table 8: Determinants of first-year export survival ......................................................................................................................... 35 Acronyms BNR National Bank of Rwanda CR Country Report COMESA Common Market of Eastern and Southern Africa EAC East Africa Community EDPRS Economic Development and Poverty Reduction Strategy EMB Electronic Billing Machines FY Fiscal Year GDP Gross Domestic Product ICT Information and Communication Technology ILO International Labor Organization IMF International Monetary Fund LFS Labor Force Survey MICE Meetings Incentives Conference and Events MINECOFIN Ministry of Finance and Economic Planning NEER Nominal Effective Exchange Rate NISR National Institute of Statistics on Rwanda RDB Rwanda Development Board REER Real Effective Exchange Rate RRA Rwanda Revenue Authority Rwf Rwandan Franc SSA Sub-Saharan Africa TFP Total Factor Productivity UN United Nations US$ United States Dollar COMESA Common Market for Eastern and Southern Africa Rwanda Economic Update • Edition No. 10 i FOREWORD T he Rwanda Economic Update (REU) reports on and synthesizes recent economic developments, and places them in a medium term, regional, and global context. It analyses the implications of these developments and policies for the outlook of the economy. These reports attempt to make an analytical contribution to the implementation of Rwanda’s national development strategy. Each edition includes a special feature on a selected topic. The report is intended for a wide audience, including policy makers, business leaders, other market participants, the community of analysts engaged in Rwanda’s economy, and civil society. The tenth edition of the REU was jointly prepared by the Rwanda Macroeconomics and Fiscal Management Global Practice team and the Trade and Competitiveness Practice team at the World Bank. The teams were led by Aghassi Mkrtchyan (Country Economist) and Hamidou Sorgo (Senior Private Sector Specialist). Peace Aimee Niyibizi (consultant) led the analysis of recent macroeconomic developments. Susan Kayonde (Private Sector Specialist) led the section on export sector performance. Hibret Maemir (Research Analyst) led the exporting firm analysis. The section on productivity and structural transformation drew on an initial draft paper by Yoichiro Ishihara (Senior Economist). Sonia Plaza (Senior Economist) and Shahrzad Mobasher Fard (Consultant) also contributed to the report. The team was supervised by Kevin Carey (Lead Economist) and Johan Mistiaen (Lead Economist and Program Leader) and Paul Brenton (Lead Economist). The report was prepared under the overall guidance of Diariétou Gaye (Country Director), Abebe Adugna (Practice Manager), Catherine K. Masinde (Practice Manager) and Yasser El-Gammal (Country Manager). Sylvie Ingabire and Karima Ladjo (Team Assistants) supported the team. Yoichiro Ishihara (Senior Economist), Marina Bakanova (Senior Economist), and Ali Zafar (Senior Economist) were peer reviewers. Although this report does not represent the official views of the Rwandan authorities, the macroeconomic unit of the Ministry of Finance and Economic Planning (MINECOFIN) and the National Bank of Rwanda (BNR) were engaged in its formulation and provided valuable comments. The World Bank team appreciates their contributions. ii Rwanda Economic Update • Edition No. 10 EXECUTIVE SUMMARY Context slowed to 4.2 percent (annualized) due to weak T he 10th Economic Update comes at an performance in agriculture and construction. important juncture for Rwanda. The country The key outcomes of 2016 and the first quarter has entered the third decade of uninterrupted of 2017 include the reversal of growing external economic growth and social progress. Rwanda’s imbalances and maintaining single-digit inflation global income ranking improved from the amid food price shocks and a sizable exchange seventh poorest in 2000 to the 20th in 2015, on the rate depreciation. back of Rwanda’s strong commitment to good governance, the principles of market economy With respect to the economy’s production and openness. The growth, however, has been side, the growth in all key economic sectors slowing down recently and is expected to remain slowed down. Agriculture grew by 3.9 percent subdued in 2017. Going forward, achieving in 2016 compared to 5 percent in 2015 largely Rwanda’s ambition of attaining middle-income reflecting unfavourable weather conditions. In status requires sustaining the average growth the first quarter of 2017, the growth in agriculture rate of the past two decades in the years to come. further slowed down to 2.6 percent. Growth in The Vision 2050, and the new EDPRS, currently the industrial activities slowed to 6.8 percent under preparation will provide the roadmap for in 2016 from 8.9 percent in 2015, reflecting adapting the economy to the evolving regional weaker performance in construction sector. and global context and maintaining a growth rate In the first quarter of 2017, manufacturing and that delivers poverty reduction and prosperity. mining maintained their annualized growth rate at 6.8 and 7.7 percent respectively, while In addition to presenting recent macroeconomic construction contracted by 0.2 percent following developments, this update also discusses the completion of large investment projects in the longer term patterns of productivity and 2016. Growth in services slowed down from 10.4 structural transformation and derives some percent in 2015 to 7.4 percent in 2016 on the back broad lessons for growth strategy. As a special of relatively weak growth in private consumption. topic for this edition, the update presents an The annualized growth rate in services in the first analysis of Rwanda’s export sector performance, quarter of 2017 was 6 percent. an important issue for Rwanda in the light of the centrality of exports for Rwanda’s long-term On the demand side, Rwanda saw a slowdown growth strategy. The key findings and insights in growth rates of both consumption and from these analyses are summarised below. investments in 2016. Growth in private consumption slowed as a result of depreciation Recent Macroeconomic Developments of the exchange rate, while the government Growth in 2016 slowed down to around 6 percent, largely maintained the rate of growth in public reflecting the need to address growing external consumption of recent years. Investment imbalances through fiscal restraint and greater growth also slowed down, mostly as a result exchange rate flexibility. This was further of slow growth in public investments as part magnified by supply shocks due to drought, and of authorities’ adjustment program and fiscal the weak prices for Rwandan exports throughout restraint for 2016 and 2017. In this context, the 2016. In the first quarter of 2017, growth further developments in 2016 and in the first months Rwanda Economic Update • Edition No. 10 iii Executive Summary of 2017 illustrated the large extent to which Export prices for commodities recovered partly the growth in Rwanda depends on public in the first quarter of 2017 helping traditional investments. With respect to net exports, the exports to somewhat reverse the negative trend volume growth in exports outperformed import of recent years. Performance of non-traditional growth but the trade balance continued to widen exports remained strong in 2016 and in the first in 2015, albeit slower than in 2015. Data from the quarter of 2017. Tourism continued to perform first quarter of 2017, however, indicate that the strongly, both in 2016 and in the first quarter of widening trend of external imbalances has been 2017. As for imports, the growth rate in 2016 was already reversed. subdued as part of the adjustment program while food imports remained strong, on the back of food In terms of prices, Rwanda experienced shortages as a result of the drought. inflationary pressures from multiple sources in 2016, including the supply shock from the Productivity and Structural Transformation drought that affected East Africa and the Horn, Patterns and the pass-through from exchange rate The growth slowdown of 2016 and 2017 driven depreciation. Inflation, historically at low single by the drought, weak export prices and digits, increased to 7.3 percent at the end of fiscal restraint to address growing external 2016 further climbing to 8.1 percent in February imbalances can be seen as a temporary 2017 before slowing down to 4.8 percent in June phenomenon. At the same time, long-term 2017. Food prices that grew by double digits were productivity patterns examined in this report the main drivers of high inflation registered in point to several factors that, if not addressed, Rwanda between July 2016 and May 2017. Rural may depress Rwanda’s growth potential. areas were more vulnerable to price pressures than urban areas because of a larger share of Structural transformation, characterised by food items in the consumption basket. an inter-sectoral movement of labour from subsistence agriculture mostly to the service The environment for monetary and fiscal sector, has been the main driver of growth policies in 2016 and in the first months of since the early 2000s. The growth in productivity 2017 was affected by several factors including within economic sectors played a smaller role. weaker global and regional growth, inflationary Service sector has contributed to the growth in pressures, and the need for external adjustment productivity as it absorbed labor from agriculture stemming from widening external imbalances and most of the entrants to the job market. Within-sector productivity growth in non-tradable in previous years. The policy response consisted services was not high, highlighting the limits of of a greater exchange rate flexibility that these services in driving the long-term growth. resulted in about 10 percent depreciation in While manufacturing sector demonstrated high 2016, fiscal restraint largely through controlling productivity growth in recent years, it attracted capital expenditures, and maintaining a stable a negligible fraction of the total increase in the monetary policy rate throughout most of 2016. labour force. Creating enabling environment These policies, supported by a new IMF program for a greater labour absorption capacity in launched in mid-2016, helped to slow down the manufacturing, coupled with an improved widening of external imbalances and return to a productivity in agriculture, will be key for path of foreign exchange reserve accumulation. sustaining growth in the medium to long-term. iv Rwanda Economic Update • Edition No. 10 Executive Summary With respect to the patterns in total factor Returning to a higher growth trajectory in 2018 productivity (TFP), it appears that TFP growth is attainable, although there are risks. In the has slowed recently with capital accumulation medium term, economic activity will benefit from becoming the main driver of growth. In this the expected recovery of prices of traditional context, the surge in public investment of 2013- exports, including minerals, tea, and coffee. A 2015 helped to maintain a high growth rate. The more competitive exchange rate will support recent slowdown underscores the dependence the non-traditional tradable activities under of the economy on government-led investment. the “Made in Rwanda” initiative. On balance, There is only limited scope to further increase the outlook in agriculture is positive, although public investment as it can lead to debt adverse climatic events pose risks. Overall, accumulation and thus cannot be sustainable medium to long term outlook will depend on the in long-term. This highlights the importance of extent to which the private sector will move to the more efficient use of available investment invest in the tradable sectors with higher growth resources to underpin strong TFP and, ultimately, and productivity potential. Other risks to growth economic growth. For the private investment, are associated with weak external environment, evidence points that allocation of capital regional tensions, and regional security outlook. investment to housing, hotels and restaurants where the expected payoffs are yet to materialise Analysis of Export Sector Performance could be one of the factors behind the slowdown From a very low base, Rwanda’s exports have in TFP growth. Going forward, creating conditions increased four-fold in the last decade from just that encourage the private sector to channel US$400 million in 2007 to US$1.6 billion in 2016. investment resources to the tradable sector Rwanda’s exports are more diversified with the where the potential for productivity growth is growth of services, re-exports and small-scale high will be key for sustaining a high growth rate cross-border trade. Exports to the region, and in long run. especially to the DRC and to the EAC countries, mainly as re-exports and through small-scale Macroeconomic Outlook and Risks cross-border trade contributed the bulk of export The impact of fiscal restraint and supply shocks growth for Rwanda. However, non-tariff barriers will be felt throughout 2017. As agriculture including cumbersome customs procedures, recovers during the year growth may be higher export bans and roadblocks continue to impede than in the first quarter of 2017 but still well the growth of intra-regional trade. below the historical average of around eight percent per annum. Tapering food price shock Traditional agricultural exports – tea, coffee, and a lower inflation would allow monetary and minerals – are still important export earners policy to become more accommodative. The but overall performance has been mixed in fiscal policy stance in the second half of 2017 will recent years. Traditional exports currently also be more expansionary. However, persistent generate less than half of the total exports external imbalances and elevated public debt will earnings, while a decade ago Rwanda’s exports constrain the use of macroeconomic instruments exclusively consisted of these traditional goods. in the medium term. In macroeconomic Export volumes of coffee have been stagnant management, the authorities will be guided by while the volume of tea production has nearly the need to maintain adequate foreign exchange doubled, although with muted economic impact reserves and maintain Rwanda’s status of low given low value addition. Declining prices and risk of debt distress. low production of traditional minerals has also substantially affected export earnings. Rwanda Economic Update • Edition No. 10 v Executive Summary Non-traditional merchandise exports have This emphasizes the need for continued efforts emerged in Rwanda, offsetting mixed to reduce barriers to imports and improve trade performance of traditional sectors. Other logistics. For Rwanda, facilitating imports of minerals, agriculture, and manufacturing, that inputs, including through effective management generated only US$4 million in 2004 reached of exchange rate policy, is a key element in US$155 million in 2016. Re-exports and small-scale promoting export diversification. The analysis exports mainly to DRC and to the EAC region also also reveals that growth of exports is driven by made a substantial contribution to export growth. incumbent firms that have managed to proceed Although re-exports do not generate substantial past the initial survival stage. This suggests that value added and jobs, they enable local clusters of measures that assist new exporters to survive economic activity that can be built upon. will have longer-term pay-offs in terms of greater export growth. Services exports are concentrated in traditional sectors of tourism and transport but exports This update also highlights several policy in high-productivity ICT and financial services considerations that are important for ensuring have started. Continued efforts to diversity sustained export growth: tourism products will help to reduce the risk of • Maintain a competitive real exchange rate over-dependence on traditional tourism which by avoiding exchange rate misalignment to currently accounts for 29 percent of total exports. encourage investments in tradable sectors. Firm-level analysis of exporters in Rwanda • Facilitate access to affordable and reliable reveals that the number of exporters has inputs and raw materials using measures such increased but the size of exporting firms is as the Duty Remission Scheme under the EAC smaller than those in regional peer countries. Common External Tariff. Exports are concentrated in a few exporters but • Focus on agriculture as a strategic sector such concentration is similar to the levels found that provides raw materials for emerging in countries with the same level of development. agribusiness, an important source of future Rwandan exporting firms are on average less export growth with strong impacts on poverty diversified, both in terms of the number of reduction. exported products as well as the number of • Continue to engage at the regional level to destination markets. Over 50 percent of exporting identify and remove non-tariff barriers within firms export only a single product to a single the EAC region. destination. The majority of firms serve only the • Improve trade logistics through needs- regional-market (EAC and DRC) and the average based infrastructure development, stronger value of exports per exporter to regional markets institutional coordination and capacity building is much smaller than that of firms who export to of logistics service providers the rest of the world. • Implement programs to reduce variable costs The challenges of small exporting firms are related on exporting with emphasis on SMEs survival and growth in the export markets. and large exporting firms. There is a high degree of churning of firms with • Continue to implement measures that make high entry and exit rates. Exporting firms that Rwanda attractive as a location for FDI that is import intermediate inputs are on average seeking to exploit opportunities for goods and more diversified in terms of both export product services in the regional market as well as under as well as destinations than pure exporters. the EBA and AGOA trade preference schemes. vi Rwanda Economic Update • Edition No. 10 PART ONE RECENT MACROECONOMIC DEVELOPMENTS AND PRODUCTIVITY PATTERNS T his section presents recent macroeconomic developments covering 2016 and the first quarter of 2017. It also discusses longer-term productivity and structural transformation patterns in Rwanda deriving lessons for sustaining a high growth. The section also presents Rwanda’s near to medium term macroeconomic outlook and discusses main risks. Rwanda Economic Update • Edition No. 10 1 Recent Economic Developments 1.1 Macroeconomic Developments in consecutive year of growth deceleration (Figure 1). 2016 and 2017 Low economic growth in SSA was driven by a slowdown in its largest economies — Nigeria The Global and Regional Context and South Africa — which together account for G lobal economic activity decelerated in 2016 to an estimated 2.3 percent growth, its worst outcome since the global financial 50 percent of the regional output. The regional GDP per capita in real terms has contracted in 2016. Low commodity prices and tight financial crisis. Economic activity in advanced economies conditions, exacerbated by domestic headwinds has been sluggish in the context of increased arising from policy uncertainty, adverse weather uncertainty about policy direction, tepid conditions, and political and security concerns, investment, and slow productivity growth continued to weigh on activity in the region. Oil (Figure 1). Growth in advanced economies is exporters continued to struggle while growth in estimated to an average rate of 1.6 percent in 2016, down from 2.1 percent in 2015. This has Rwanda, Ethiopia, Kenya and Tanzania in East been accompanied by soft imports, which have Africa and Côte d’Ivoire and Senegal in West weighed down trade flows to their weakest pace Africa, remained solid in 2016 (Figure 2), supported since the global financial crisis. Combined with by strong public infrastructure investment and historically low levels of commodity prices, this buoyant private consumption. has depressed exports from emerging countries. Figure 2: In 2016, Rwanda’s economy was among the highest Growth was particularly disappointing in growing in (Year-on-year growth) commodity exporters, estimated at 0.3 percent in Ethiopia 2016, marking a second consecutive year with a Cote d'Ivoire Tanzania growth rate below 1 percent. Senegal Rwanda Rwanda, 5.9 Kenya Mali Cameroon Growth in Sub-Saharan Africa (SSA) has Togo Guinea decelerated to 1.3 percent in 2016, down from Burkina Faso Niger 3.1 percent in 2015. This is the lowest growth Guinea-Bissau Uganda Congo, Rep. over the last two decades and marks the second Benin Madagascar Mauritania Figure 1: Rwanda’s growth exceeds global and regional Sierra Leone Seychelles growth rates (GDP growth, percent) Mozambique Ghana Sudan 10 Mauri s 9 Gabon Botswana 8 Cape Verde Zambia 7 Congo, Dem. Rep. Malawi 6 Liberia Lesotho 5 Comoros 4 Namibia Gambia, The 3 Zimbabwe South Africa 2 Angola Burundi SSA: 1.5 % 1 Swaziland Nigeria 0 Chad 2010 2011 2012 2013 2014 2015 2016e 2017f Equatorial Guinea World Advanced Economies Emerging and Developing Economies Rwanda -6 -4 -2 0 2 4 6 8 10 Sub-Saharan Africa Source: NISR, World Bank’s Global Economic Prospects (January 2017) Source: World Bank’s Global Economic Prospects (January 2017) 1 World Bank. (2016). Africa's Pulse: An analysis of issues shaping Africa's economic future. Washington: World Bank (https://openknowledge. worldbank.org/bitstream/handle/10986/25097/108582.pdf?sequence=7&isAllowed=y) 2 Rwanda Economic Update • Edition No. 10 Recent Economic Developments Global economic growth is expected to pick up Rwanda experienced solid economic growth to 2.7 percent, led by emerging and developing over the last two decades. In 2002-2016, the economies. Activity in advanced economies economy expanded at an annual average rate of is gradually strengthening and is expected to 7.8 percent (Figure 3), well above the average for grow at 1.9 percent (Figure 1). Economic recovery all Sub-Saharan African countries. Recent GDP in advanced economies, albeit relatively slow, re-basing exercise showed that the growth rates has already led to some recovery in commodity in 2014 and 2015 in Rwanda were higher than prices. The price of crude oil, for example, has previously thought (Box 1). strengthened in the first four months of 2017, averaging nearly US$53 per barrel. In parallel, Figure 3: Rwanda’s medium and long term economic growth (GDP change, percent) metal prices have made some gains on stronger 14 demand from China, while agricultural prices have been broadly stable. As domestic challenges 12 recede in several large commodity exporters, 10 together with the recovery in commodity prices, 8 8.3 8.0 7.9 emerging and developing economies will lead the 7.2 6 rebound in global growth, with output expected to climb as much as 4.2 percent in 2017. 4 2 SSA’s outlook for 2017 and beyond is only 0 13.2 2.2 7.5 9.4 9.2 7.6 11.2 6.3 7.3 7.8 8.8 4.7 7.6 8.9 5.9 slightly favourable. Overall, growth in Sub- 2002 2004 2006 2008 2010 2012 2014 2016 Saharan Africa is forecast to recover to 2.9 percent Source: NISR, World Bank staff calculations in 2017 before rising above 3.5 percent by 2018. There are downside risks to this outlook, both More recently, the growth has been externally and domestically. Despite a recent decelerating. The average growth of 7.2 percent modest uptick, commodity prices are expected in the last five years was lower than the two to remain subdued. Domestically, policymakers preceding five-year periods (8.3 percent in may not enact the reforms needed to rebuild 2002-2006 and 8.0 percent in 2007-2011). This is fiscal buffers. Addressing fiscal vulnerabilities hardly surprising; some growth moderation is in and bolstering per capita growth remain key order in low-income countries such as Rwanda policy challenges in the region. that experienced a strong “catch-up” growth. Output Key Points: The growth in 2014 and 2015 was substantially higher than previously thought. Growth in 2016 remained strong by global and regional standards but it decelerated markedly compared to 2015. Fiscal tightening and adverse weather conditions affecting agricultural output drove the slowdown. Rwanda embarked on an IMF program in 2016 to address growing external imbalances. Rwanda Economic Update • Edition No. 10 3 Recent Economic Developments Box 1: Rebasing Rwanda’s national accounts The National Institute of Statistics on Rwanda (NISR) uses the United Nations’ System of National Accounts (2008) guidelines in compiling Rwanda’s national accounts. In the last five years, NISR has carried out two rebasing exercises following the recent Integrated Household Living Conditions Survey. The purpose of the economic rebasing of early 2017, which involved changing the base year from 2011 to 2014, was to update the production structure, align structural changes in relative prices of various products with consumption patterns, utilisation, and acquisition of capital goods. The exercise has given the opportunity to improve the methods and indicators used to extrapolate the base levels. For example, NISR’s Seasonal Agricultural Surveys introduced in 2014 has greatly affected the structure of economy – something the national account at 2011-base year did not capture well. Food crops, trade, and public sector related services accounted for most of the change in Rwanda’s production structure due to rebasing (Figure 4). The share of food crops in domestic output decreased from 22.0 percent to 17.1 percent, while the overall share of agriculture declined from 32.3 percent to 28.8 percent. Industry’s share increased from 14.4 percent to 17.2 percent. The most negatively and positively affected services are respectively trade services and government led services, i.e. public administration and defence, compulsory social security. Among other major changes were the decline in the share of wholesale and retail trade, and the increase of the share of government led services. As a result of the rebasing exercise, the growth rates of 2014 and 2015 were also revised. (Figure 5) Figure 4: GDP Rebasing changed the weight of Sectors … Figure 5: … and growth rates over 2014-2015 Changes in Sectors' weight 2014-2011, percentage changes 12 11.0 10.4 Public sector led services 1.8 Livestock, foresty & fishing 1.4 10 9.0 8.9 8.9 Professional & administra ve services 1.2 Other services 1.1 8 7.6 Educa on & health related services 1.1 7.0 7.0 7.0 7.0 6.7 6.9 Transport related services 0.9 Real estate ac vi es 6.0 0.8 6 U es 0.8 5.0 5.0 5.0 Mining & quarrying 0.8 Construc on 0.6 4 Manufacturing 0.6 Financial services 0.1 Export crops -0.1 2 Hotels & restaurants -0.8 2011 2014 2011 2014 2011 2014 2011 2014 2011 2014 2011 2014 2011 2014 2011 2014 base base base base base base base base base base base base base base base base Informa on & communica on -1.0 Wholesale & retail trade -4.6 GDP Agriculture Industry Services GDP Agriculture Industry Services Food crops -4.9 2014 2015 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 Source: NISR, World Bank staff calculations Source: NISR, World Bank staff calculations Rwanda’s growth of past five years was also challenging for the economy. Domestically, affected by such adverse factors as the 2012 aid food production was hit by droughts, which led crisis and lower prices of its traditional export to supply shortages and mounting inflationary items, such as tea, coffee, and minerals. This pressures. On the external front, export prices highlights Rwanda’s dependence on external remained subdued, putting pressure on Rwanda’s flows, a key feature of its growth model, as the balance of payments and foreign exchange main vulnerability in the evolving global and reserves. The fact that Rwanda implemented large regional context. public investments in strategic infrastructure in 2014 and 2015, which had high import content, In 2016 and in the first quarter of 2017, both further exacerbated the pressures on the balance domestic and international environment were of payments. 4 Rwanda Economic Update • Edition No. 10 Recent Economic Developments In mid-2016, the Government moved quickly activities. Weak construction activities further to address growing imbalances by a policy brought the industrial sector growth down in adjustment program supported by an IMF the first quarter of 2017 to 3.8 percent. Growth in 18-month Standby Credit Facility. The program services slowed down from 10.4 percent in 2015 to focuses on muting import demand through 7.4 percent in 2016, and further to a 6 percent in a greater exchange rate flexibility and fiscal the first quarter of 2017. Despite this, the services restraint, as well as on supporting reforms remained the single biggest contributor to GDP to bolster Rwanda’s external position in the growth in 2016. medium term. Fiscal tightening aimed at reducing external vulnerabilities and improving The growth in the service sector was uneven, the foundations for growth, contributed to the with hospitality as the fastest growing service temporary growth slowdown through decelerating sub-sector. Hotel and restaurant related services credit and private consumption growth while at grew by 10.5 percent in 2016 that follows similarly the same time reversing the trend of growing strong growth in 2015 at 9.4 percent. This was external vulnerabilities. The combined effect of supported by continuing increase in the number weak external environment, completion of large of tourists: over 1.4 million arrivals in 2016 public investment projects, droughts and policy constituting a growth of 10 percent. Interestingly, adjustments, reduced growth to 5.9 percent in the number of park visitors in 2016 grew by more 2016, three percentage points lower than in 2015. than 20 percent. This growth was supported by government’s efforts to expand the capacity in Production Account the sector through concerted public and private investments in the recent years. Growth in In 2016 and in the first quarter of 2017, growth other services was slower than in the previous moderated across all across sectors. Agriculture, year. Wholesale and retail trade services grew which accounts for nearly 30 percent of GDP, grew by 6.3 percent in 2016, down from 12.7 percent by 3.9 percent in 2016, down from 5.0 percent in in 2015. Growth in financial and information & 2015, reflecting unfavourable weather conditions communication subsectors slid to 3.4 and 8.5 in 2016 (Figure 6). Growth slowed down further to percent, respectively, down from very impressive 2.6 percent in annualized terms in the first quarter 12.6 and 17.5 percent in 2015. The slowdown in of 2017. Growth in the industrial activities slowed financial services could be attributed to the weak to 6.8 percent in 2016 from 8.9 percent in 2015, credit growth in 2016. Growth in administrative reflecting weaker performance in construction and professional services has also decelerated Figure 6: A broad-based slowdown in growth was observed across sectors (Year-on-year growth, percent) to 9.8 percent and 6.1 percent respectively, down 12 from 16.3 percent and 12.7 percent in 2015. 11.0 10.4 10 8.9 8.9 The 2016 industrial growth was the lowest in 8 7.6 the recent years, largely due to decelerating 7.0 7.1 6.8 5.9 6.6 6.0 construction activities. Construction, which 6 5.0 accounts for more than 40 percent of the industrial 4.2 3.9 3.8 4 output, slowed substantially to 4.9 percent in 2016, 2.6 2 down from 15.6 percent in 2015 (Figure 7). This mostly reflects the completion of several large 0 GDP Agriculture Industry Services investment projects (Kigali Convention Center, 2014 2015 2016 2017 Q1(annualized) Marriott, etc). This slowdown was also reflected Source: NISR, World Bank staff calculation Rwanda Economic Update • Edition No. 10 5 Recent Economic Developments in the imports of construction materials. Growth the annual production volume fell by 1 percent in the manufacturing output decelerated to 6.6 putting a pressure on food prices in the second percent in 2016, down from 8.4 percent in 2015. On half of 2016. Food crops grew by 3.0 percent in 2016, the back of a partial recovery in export prices for lower than 3.6 percent in 2015. Export crops grew the minerals that Rwanda exports, the contraction only 2.4 percent in 2016, down from an impressive of the mining sector in 2015 was reversed, and growth rate of 14 percent in 2015. Rwanda’s the sector grew by 10.0 percent in 2016. smallholder based agriculture continues to rely heavily on rain-fed production, with only a Figure 7: Growth in the industrial sector (Contribution to industrial growth, percentage points) small fraction of farmers using irrigation. This highlights the importance of further increasing 12 11.0 the resilience and growth prospects of the sector 10 8.4 9.3 8.9 through investments, knowledge transfer, and 8 6.8 innovations. 6 4 Demand side of GDP 2 Consumption growth substantially slowed 0 down in 2016 and in the first quarter of 2017. Total consumption growth has moderated to 4.8 -2 2012 2013 2014 2015 2016 Mining & quarrying Manufacturing Utilities Construction Industry growth percent in 2016, down from double-digit rates of past two years driven by weak growth in private Source: NISR, World Bank staff calculation consumption (Figure 9). In the first quarter of 2017 Agricultural growth was the slowest among consumption grew only 3.4 percent. Depreciation the main economic sectors in 2016. It has of the currency and slowing credit growth were decelerated to 3.9 percent, compared to a 5 the main factors slowing down the growth percent growth in 2015 (Figure 8). Season B of in consumption. Government consumption, 2016 has been the hardest hit, with production however, grew at 9.1 percent in FY 2015/16, which volumes falling by 6.9 percent, after a 0.4 percent is in line with the growth rate of 2011-2015. drop in 2015. Vegetables, tubers and roots were The ratio of current expenditures to GDP that the most affected. This was somewhat offset by a increased by 0.8 percentage points reaching 15.2 fair production harvest in seasons A and C. Overall, percent of GDP in FY2015/16. Figure 8: Agricultural growth moderated in 2016 Figure 9: GDP by expenditures (Contribution to agriculture growth, percentage points) (Contribution to GDP growth, year-on-year, percent) 8 20 7 6.6 15 6 5.0 5 10 8.9 7.6 7.6 3.9 5.9 4 3.3 5 3 2 0 1 -5 0 -1 2013 2014 2015 2016 -10 211-2015 2014 2015 2016 Foodcrops Export crops Livestock, forestry & fishing Agriculture growth Total consumption Investment Net exports GDP growth Source: NISR, World Bank staff calculation Source: NISR, World Bank staff calculation 6 Rwanda Economic Update • Edition No. 10 Recent Economic Developments In 2016, investments grew at 8.4 percent, down 2014-2015. A decline in imports growth, together from 17.9 percent in 2015. This downturn was with a double-digit growth in real exports, has largely due to the slowdown in construction slowed down the trend of the rapid widening of investments, which grew at 2.6 percent, a rate the trade deficit. The situation in the first quarter that is less than one-fifth of the rate of 14.4 of 2017 improved further, with high growth in percent observed in 2011-2015. The aggregate both volumes and values of exports on the back contribution of investments to GDP growth slid to of stronger mineral prices and non-traditional 2.3 percent in 2016, down from 4.5 percent in 2015. exports, while imports remained subdued. The growth rate in non-construction investments remained strong in 2016, growing at 23.7 percent Business Environment versus 26.6 percent of 2015, and an average of Under a new standardised methodology,3 10.5 percent observed in 2011-2015. In annualized Rwanda moved up from 56th position in the terms, investment declined 1.8 percent in the world in ease of doing business to 54th in 2017. first quarter of 2017. According to the Doing Business 2017, Rwanda, which ranks second in Africa in Doing Business Although net exports2 continued to be negative, 2017, exemplifies an economy that used Doing their pull-on growth declined in 2016 (Figure Business as a guide to improve its business 10). Net exports contributed 1.0 percentage environment. Rwanda is among countries that point to GDP) in 2016, which is significantly have established regulatory reform committees less than - 6.7 percentage points in 2015. In real to ensure the coordination of efforts across terms (import volumes), the imports declined agencies. Doing Business shows that from by 7.6 percent on the back of a contraction in 2005 to 2017, Rwanda implemented 47 reforms intermediary goods and energy-related products across all indicators. Rwanda is one of only 10 amid weak construction activities. Exports economies that have implemented reforms in all volumes, in contrast, grew by 13.0 percent in 2016 of the Doing Business indicators and every year compared to 6.2 percent in 2015. This was entirely since Doing Business 2006. due to a strong growth in goods exports of 10.2 percent in 2016, reversing the negative trend of In Doing Business 2017, Rwanda made improvement in five indicators among ten Figure 10: Export growth in real terms outpaced imports reforms (Annex Table A2). Rwanda continued its growth (Annual growth rate) reforms making it easier to start a business by 30 fully operationalizing an electronic portal that 23.0 combines company registration, information 20 on tax obligations and duties and value added 17.9 16.5 tax registration. Among the 190 economies 13.2 12.7 12.7 13.0 included in Doing Business, Rwanda made the 10 9.1 9.1 8.4 8.4 7.6 largest improvement on the registering property 6.2 5.1 4.0 indicators in 2015/16. The Rwanda Natural Resources Authority introduced a fast track 0 Government consum on Private cons on Investment Exports Imports procedure for commercial property transfers and 2011-2015 2015 2016 improved the transparency of the land registry Source: NISR, World Bank staff calculation by establishing a land administration services Exports minus Imports. 2 http://www.doingbusiness.org/Methodology/Methodology-Note 3 Rwanda Economic Update • Edition No. 10 7 Recent Economic Developments complaints mechanism as well as by publishing and current account balances (Table 1). The statistics on property transfers. In terms of current account deficit continued to widen, from trading across borders, the government removed 13.4 percent in 2015 to 14.4 percent in 2016, on the the mandatory pre-shipment inspection for back of growing trade imbalances and declining imported products, and in enforcing contracts, official transfers. Without official transfers, it introduced the Integrated Electronic Case the current account deficit widened from 17.8 Management, a web-based application that percent of GDP to 18.5 percent. The widening integrates five main institutions of the justice current account deficit was mainly financed by sector, which, in turn, allows for the automatic public sector borrowing and increased FDIs, while registration of lawsuits, electronic organisation IMF’s 18-month Standby Credit Facility helped to and scheduling of cases and automated claims supplement the foreign exchange reserves. processing. The system is expected to result in considerable cost and time savings along with The negative balance of goods and services increased transparency and to provide more continued to widen (Table 1). Although export reliable statistical data on court operations. growth has outpaced import growth in 2016, the trade deficit reached 15.5 percent of GDP in 2016 Nevertheless, some of the gains Rwanda had from 14.9 percent of the previous year. Export made in the acquisition of construction permits values (in US dollar terms) grew 9.0 percent to and in paying taxes may have been reversed. US$745 million (8.9 percent of GDP), boosted Recent introductions of new requirements to mainly by non-traditional exports. In US dollar obtain a building permit has made it cumbersome terms, imports increased by 6.6 percent, reaching to deal with construction permits while the US$2,045 million (24.3 percent of GDP). The requirement that companies file and pay social level of current transfers continued to decline security contributions monthly instead of mainly driven by official current transfers quarterly is deemed to have complicated paying that declined steadily from 11.7 percent of taxes in Rwanda. GDP in 2011 to 4.1 percent of GDP in 2016. The balances of services and income account also 2016 was characterised by strong financial flows deteriorated from -4.9 percent of GDP in 2015 to to Rwanda that helped to cover widening trade -5.2 percent of GDP in 2016. External Sector Key Points: Rwanda’s current account deficit continued to widen in 2016, albeit with a slower pace than in the previous two years. Although exports grew faster than imports, the negative trade balance slightly widened. The growth in exports was driven by a strong performance in non-traditional export products, as export earnings from Rwanda’s traditional products remained weak. The first quarter of 2017 showed substantial improvement in the trade balance. 8 Rwanda Economic Update • Edition No. 10 Recent Economic Developments Table 1: Rwanda’s balance of payments 2016 2016 2012 2013 2014 2015 2012 2013 2014 2015 Prel. Prel. US$ million Percent of GDP Trade balance −1,376.2 −1,148.4 −1,267.1 −1,235.0 −1,300.1 −19.1 −15.1 −15.8 −14.9 −15.5 Exports (f.o.b.) 590.8 703.0 723.1 683.7 745.0 8.2 9.2 9.0 8.3 8.9 Imports (f.o.b.) 1,967.0 1,851.5 1,990.2 1,918.7 2,045.1 27.2 24.3 24.8 23.2 24.3 Services and income (net) −159.0 −254.2 −252.9 −407.4 −435.2 −2.2 −3.3 −3.2 −4.9 −5.2 Services (net) −85.2 −122.4 −77.3 −192.5 −211.1 −1.2 −1.6 −1.0 −2.3 −2.5 Income (net) −73.8 −131.8 −175.6 −214.9 −224.1 −1.0 −1.7 −2.2 −2.6 −2.7 Current transfers (net) 722.5 741.0 578.0 536.0 524.3 10.0 9.7 7.2 6.5 6.2 Current account balance Excluding official transfers −1,352.3 −1,221.2 −1,340.1 −1,476.5 −1,554.9 −18.7 −16.0 −16.7 −17.8 −18.5 Including official transfers −812.8 −661.6 −942.0 −1,106.4 −1,211.0 −11.3 −8.7 −11.8 −13.4 −14.4 Capital and financial 680.6 895.8 985.8 951.6 1,146.4 9.4 11.8 12.3 11.5 13.6 account balance Capital account 171.2 234.5 337.1 299.9 190.0 2.4 3.1 4.2 3.6 2.3 Financial account 509.3 661.3 648.8 651.7 956.4 7.1 8.7 8.1 7.9 11.4 Overall balance −200.9 223.6 −116.4 −24.0 −8.5 −2.8 2.9 −1.5 −0.3 −0.1 Source: BNR, World Bank staff calculations Exports expansion was driven by booming non- exports, down from an average of 32 percent in traditional exports. The value of non-traditional the previous ten-year period (Annex Table A). exports increased by nearly 30 percent in 2016 Weak global demand and low prices are affecting compared to 9.2 percent increase in 2015. Another Rwanda’s exports of minerals. For example, the driver of exports growth was re-exports. In 2016, export of Coltan, which had become the single- the value of exports increased by 26 percent, largest export item in 2011-2015, declined from while re-exported volume increased by more than US$134 million (23.5 percent of total exports) 40 percent. This increase was, mainly driven by to about US$40 million (6.6 percent of total petroleum products and machinery re-exported exports) between 2013 and 2016. In 2016, its to Democratic Republic of Congo and Burundi. average price stood at almost 50 percent of the Over the 2011-2016 period, the share of re-exports 2013 levels. Export values of Wolfram declined by has gradually risen from less than 10 percent to 31.5 percent in 2016 and stood at less than a half about 38 percent of total exports highlighting of the 2013 levels. Tin exports increased by 1.6 Rwanda’s role in the regional trade and country’s percent in 2016, because of a rise in international potential to develop trade-related services. tin prices. However, there has been some recovery in the prices in the last quarter of 2016 that was Meanwhile, the poor performance of Rwanda’s sustained in the first months of 2017, improving traditional mineral exports continued in 2016.4 the outlook of export performance for 20175. Their share in 2016 stood at 14 percent of total Tin, Coltan and wolfram. 4 World Bank’s Commodity Markets Outlook of January 2017, http://pubdocs.worldbank.org/en/820161485188875433/CMO-January-2017- 5 Full-Report.pdf Rwanda Economic Update • Edition No. 10 9 Recent Economic Developments Rwanda’s export crops remain vulnerable to Figure 11: Tourism receipts continued to edge up price volatility. Over the last five years, the 450 6.0 share of traditional export crops, coffee and 400 tea, declined from more than 35 percent of total 350 4.2 4.6 4.4 4.6 5.0 good exported in 2011 to 20 percent in 2016. 300 3.5 3.9 3.8 4.0 This decline largely reflected volatility in their 250 3.0 international prices, which were at their lowest 200 since 2013 (Annex Table A). The average price 150 2.0 of coffee has declined 4.9 percent in 2016, after 100 1.0 50 an 11.6 percent drop in 2015. Regarding tea, its 0 0.0 average price declined by 11.5 percent in 2016, 2010 2011 2012 2013 2014 2015 2016 following a sizeable drop in tea price at the US$ Million Percent of GDP (right axis) Mombasa Auction. These have also affected their Source: Rwanda Development Board (RBD), World Bank staff calculations export earnings. Part II of this reports focuses on in-depth analysis of Rwanda’s exports and their expanded by 4.9 percent in value. Food products, economic implications. which constitutes 40 percent of the consumer bill, drove the bulk of increases in consumer Tourism continues to be the leading earner goods imports, especially in the second half of of foreign exchange. Tourism receipts have 2016, following the weak harvest in Rwanda in increased by 4.6 percent to about US$390 million season B. Imports of capital goods increased by in 2016 (4.6 percent of GDP), generating more 9.3 percent. income than the combined value of tea, coffee, and mineral exports (Figure 11). This increase In 2016, imports of intermediate goods and was driven mainly by continuing increase in the energy-related products contracted by 16.6 number of tourists to Rwanda that reached over percent. This was driven largely by a fall in 1.4 million arrivals in 2016 constituting a growth imports of construction materials of 27.4 percent, of 10 percent. which reflects completion of large investment projects in mid-2016, as well as the increase Rwanda’s import bill rose in 2016. The value of in domestic production of cement. The other imports grew 6.6 percent in 2016 in spite of the declining import category in dollar terms was decline in volumes, but the growth rate was less energy products, although import volumes were than the average growth rate of 17.1 percent in almost unchanged, at 310 thousand tonnes, 2011-2015. Meanwhile, consumer goods imports reflecting lower international prices in 2016. Monetary Policy and Financial Sector Developments Key Points: The environment for monetary policy characterised by a combination of a growth slowdown, inflation pressures and external imbalances was very challenging in 2016. Inflation has remained high largely because of the drought; the pass-through from exchange rate depreciation also played a role. Credit growth sharply decelerated in 2016. 10 Rwanda Economic Update • Edition No. 10 Recent Economic Developments The environment for monetary policy of widening external imbalances and boosting implementation was very challenging in 2016. Rwanda’s competitiveness through a favourable Monetary authorities faced trade-offs between adjustment in the real exchange rate. various policy objectives. As a result of a greater Figure 12: The depreciation of the Rwf gathered pace in exchange rate flexibility needed to address 2016 (Rwf/US$) Rwanda’s external imbalances, the exchange rate continued to depreciate throughout the year. Its impact on consumer prices were augmented by the supply side pressures on food prices because 750 of the drought. At the same time, the monetary 5.8% 3.3% depreciation depreciation tightening since mid-2015 slowed down credit 700 in 2013 in 2014 9.7% 0.7% growth affecting the growth objective. In a 7.6% depreciation depreciation in 2016 depreciation in Q1-2017 balancing act, the National Bank maintained 650 in 2015 the policy rate unchanged throughout the year 600 but marked it down by 0.25 percentage points in Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 2012 2013 2014 2015 2016 2017 December to help to reverse the decline in credit Source: BNR, World Bank staff calculation growth. The fact that the spike in inflation was largely driven by supply shocks and was expected Figure 13: Rwanda’s currency, expressed in REER and NEER, to be transitory was an important consideration. also depreciated in 2015 (Q12010=100) 120 Depreciation of the Rwf continued throughout 115 the year but somewhat eased as the year came 110 to a close. After a 7.6 percent depreciation in 2015, the Rwf depreciated by 9.7 percent against 105 the US dollar in 2016 (Figure 12). The Rwf has also 100 depreciated against currencies of its main trading 95 partners in EAC countries. Both Real Effective 90 Exchange Rate (REER) and Nominal Effective Q1- Q3 Q1- Q3 Q1- Q3 Q1- Q3 Q1- Q3 Q1- Q3 Q1- Q3 Q1- 2010 2011 2012 2013 2014 2015 2016 2017 Exchange Rate (NEER) depreciated in 2016 by REER NEER 3.4 and 7.5 percent respectively (Figure 13)6. The Source: BNR, World Bank staff calculation depreciation decelerated towards the end of the year, while in the first months of 2017 the exchange Inflation pressures mounted throughout 2016 rate against US dollar remained relatively stable. (Figure 14). A combination of supply shocks from The greater flexibility of the exchange rate that the drought and the pass-through from exchange the authorities embarked on since 2015 served rate depreciation resulted in a 7.3 percent end- its policy purpose very well by reducing the of-year inflation in 2016, very high compared pressures on foreign reserves, reversing the trend to Rwanda’s track-record. The annual average 6 The NEER measures the average change in a country’s nominal exchange rate against a number of other currencies during a given period compared with a base year. Unlike the bilateral exchange rate, the NEER is an index, not the relative price of one currency with respect to another, weighted as an average of the exchange rates of a country with respect to its major trading partners’ currencies and their trade weights. The REER is an important refinement of the NEER, calculated by adjusting its NEER for differences in inflation at home and abroad. Both indexes, REER and NEER, provide a measure of a country’s export competitiveness: a rise in the index implies a fall in competitiveness. A country whose NEER and REER are depreciating is trading on worsening terms, as it costs that country more to buy goods and services from abroad. Rwanda Economic Update • Edition No. 10 11 Recent Economic Developments Figure 14: Rwanda’s headline inflation accelerated in 2016 … Facility in an amount of US$204 million assisted 10 the country in maintaining an optimal level 8.1 of foreign reserves through providing foreign 8 7.3 exchange and supporting policy adjustment 6 4.5 including fiscal restraint and a greater exchange 4 rate depreciation. 2 0.9 0 Credit growth decelerated from 30 percent in 2015 to around 8 percent in 2016 (Figure 16). -2 The sharp decline in the new loans, especially -4 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 to construction, drove the trend. In 2016, the Local food Imported food Energy Others Headline amount of the new loans to public works and Source: NISR, World Bank staff calculation building decreased by 17.8 percent, compared to an average of 60 percent increase in the inflation was 5.7 percent compared to 2.5 previous two years. The fall in new construction percent in 2015. Inflation peaked at 8.2 percent loans was also reflected in decelerated growth in February 2017 before starting to slow down of construction output. The slow growth in since March. Rural areas were more vulnerable broad money of 7.5 percent in 2016 reflected the to the pressures than urban areas because of a sluggish credit growth in the economy. larger share of food items in the consumption basket (Figure 15). Imported inflation (8 percent Figure 16: Credit to the private sector sharply decelerated in in 2016) resulted from pass-through from 2016 (Year-on-year change, percent) exchange rate depreciation. 40 34.8 35 Figure 15: Rural vs. urban inflation 30.0 30 General inflation index 20 25 15 20 15.6 19.0 15 14.1 21.1 10 10 11.1 7.8 5 5 4.1 0 0 Dec-12 Jun Dec-13 Jun Dec-14 Jun Dec-15 Jun Dec-16 -5 Private credit Broad money (M3) Source: BNR, World Bank staff calculation -10 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Urban Rural All Rwanda Credit and deposit rates remained stable in Source: NISR, World Bank staff calculation 2016. Bank lending rates were 17.2 percent, The level of international reserves strengthened while deposit rates were 8 percent, with a in 2016 thanks to the external adjustment high-interest rate spread (Figure 17). Despite and IMF’s Standby Credit Facility supporting a steady policy rate in 2016, the money market the adjustment. Rwanda saw a reduction in interest rates rose significantly after falling for foreign exchange reserves in 2015 and into 2016 three consecutive years (Figure 18). The annual as a result of declining export prices and large averages of Treasury bill and interbank rates investment projects with substantial import rose by around 3-percentage point amid larger components. The 18-month IMF Standby Credit issuances by the government during the year. 12 Rwanda Economic Update • Edition No. 10 Recent Economic Developments Treasury bills’ stocks increased from Rwf222.3 The budget deficit eased in the fiscal year of billion in December 2015 to Rwf252.7 billion in 2015/2016 (Figure 19). The overall fiscal deficit July 2016, before declining to Rwf238.7 billion was 3.9 percent of GDP, less than the projected (about US$291.3 million) in December 2016. 5 percent of GDP in the government’s revised budget.7 Solid revenue collections and under- Figure 17: Lending and deposit rates relatively stable compared to money market rates spending in capital spending and net lending were 20 the main drivers of lower than expected budget 18 deficit. This fiscal stance reflected Government’s 16 key priority in macroeconomic management, 14 which was aimed at restoring external balances 12 and alleviating pressures on foreign exchange 10 reserves. Like in recent years, the government 8 6 continued to rely largely on foreign sources to 4 finance the deficit. The deficit financing from 2 foreign sources increased from 3.3 percent of 0 Dec-12 Jun Dec-13 Jun Dec-14 Jun Dec-15 Jun Dec-16 GDP in 2014/15 to 3.6 percent in 2015/16. Spread Deposit rate Lending rate Source: BNR, World Bank staff calculation Figure 18: Money market interest rates increased in 2016 (Annual average changes, basis points) Figure 19: Rwanda’s fiscal deficit eased in FY2015/16 6 -42 -321 1.5 Interbank 1.5 1.2 -196 4 0.3 226 2.2 2 3.9 3.6 3.1 3.3 3.5 -100 -246 2.0 REPO -161 0 202 -2.7 -2 -4.2 -3.9 -26 -4.8 -4.8 -0.4 -5.4 -400 Treasury bills -91 -4 289 -500 -400 -300 -200 -100 0 100 200 300 400 -6 2013 2014 2015 2016 2009/10-2012/13 av. 2014/15 2015/16RB Source: BNR, World Bank staff calculation Source: MINECOFIN & IMF CR1708, World Bank staff calculation Fiscal Sector Developments in Fiscal Year 2015/16 Key Points: The fiscal deficit eased in FY2015/2016 to well below the 5 percent projected in the government’s revised budget. Domestic revenue collections increased beyond projections. Capital expenditures were slow in FY2015/2016. http://www.minecofin.gov.rw/fileadmin/templates/documents/BUdget_Management_and_Reporting_Unit/Budget_Framework_ 7 Papers/2015-2016_Budget_Framework__Paper/2015-2016__Budget_Framework_Paper.pdf Rwanda Economic Update • Edition No. 10 13 Recent Economic Developments Rwanda’s public debt has been on an upward Figure 20: There has been a steady improvement in revenue trajectory since 2013. PPG debt increased from collection 18.6 17.7 around 37 percent of GDP in 2015 to 43 percent 20 16.7 2.7 2.3 in 2016, mostly driven by external debt. This was 14.0 2.0 1.1 1.3 1.1 not only driven by new debt contracted for deficit 15 0.9 1.1 financing, but also by State-Owned Enterprises 7.6 7.6 8.1 and publicly guaranteed debt. Domestic debt 10 6.7 has been relatively stable since 2010, at around 5 9 percent of GDP (Chart on Debt). Despite the 5.3 6.0 6.6 .5 6 recent increase, public debt remains low, and 0 the joint IMF/World Bank Debt Sustainability 2009/10-2012/13 av. 2013/14 2014/15 2015/16pa Assessment analysis of 2016 confirmed Rwanda’s Direct taxes Non-taxes Taxes on goods and services Total revenue Taxes on international trade status of low risk of debt distress. Source: MINECOFIN, World Bank staff calculation Domestic revenue continued to increase on of electronic billing machines (EBMs). By June the back of reforms in strengthening the tax 2016, 11,436 VAT registered taxpayers had EBMs, administration. From 17.7 percent of GDP in the with 13,238 machines activated, marking an previous fiscal year, domestic revenue increased increase of 30.8 percent from 9,162 active EBMs to 18.6 percent of GDP in FY2015/16 (Figure 20), in June 2015.8 There has also been a slight exceeding the target by 12 percent. Overall, tax increase in taxes on international trade and collection increased by 0.8 percentage point to nontax revenues due to the new EAC-wide 16.3 percent of GDP, registering 0.5 percentage infrastructure levy and higher receipts from points higher than the target in the Revenue UN peacekeeping operations respectively. Mobilisation Strategy (Box 2). This good Performance, however, disappointed for direct performance was driven by taxes on goods and taxes by 1 percentage point of GDP lower than services, which increased by 0.5 percentage the FY2014/15, reflecting the poor performance points to 8.1 percent of GDP. This increase is of mainly construction activities. partly attributed to the continued deployment Box 2: 2015/16-2017/18 Revenue mobilisation strategy at a glance As part of its on-going fiscal consolidation path, the authorities have adopted a 3-year strategic plan in line with the second Economic Development and Poverty Reduction Strategy (EDPRS 2) and Vision 2020, the country’s two-development strategy.9 • Key priorities: (1) enhancing tax compliance; (2) improving VAT administration; (3) widening tax base; (4) improving provisions of taxpayer services; (5) strengthening internal capacity and coordination. • Key pillars: (1) revenue administration; (2) tax audit and compliance; (3) review of tax laws and procedures • Target: 0.3 percentage point of GDP increase per annum. • Policy reviews: direct income tax, tax procedures, Rwanda Revenue Authority’s organisational, functioning, and responsibility. 8 RRA (2016). Annual Activity Report 2015/16. http://www.rra.gov.rw/fileadmin/user_upload/rra_annualreport_2015-16_final.pdf http://www.old.rra.gov.rw/IMG/pdf/rra_strategic_plan_2015-2018_for_publication.pdf 9 14 Rwanda Economic Update • Edition No. 10 Recent Economic Developments Public expenditures were lower than projected percentage points of GDP due to weak indirect (Figure 21). Compared to 29 percent of GDP in taxes. Non-tax revenues and grants slightly the revised budget, total expenditure and net exceeded expectations but did not offset poor lending in FY2015/16 were about 28.3 percent of performance in tax collections. Lower spending GDP, lower than in the previous two fiscal years. under capital expenditure and net lending were This reflects lower capital spending and under- offset by higher recurrent expenditures, and the spending in both capital expenditure and net fiscal deficit was slightly higher than projected. lending by 0.9 and 0.3 percentage points of GDP, respectively. Partially offsetting this was an 1.2 Long-Term Productivity and overspending of 0.5 percentage point of GDP in Structural Transformation Patterns recurrent expenditure, mainly driven by spending Background for peacekeeping operations. Figure 21: After peaking in 2013/14 the share of capital expenditure is declining R wanda’s economy is an outstanding example of sustained high growth and poverty reduction over the long-term. Since 35 2000, the growth averaged almost 8 percent while 1.0 1.6 30 1.1 1.8 1.4 per capita GDP growth was 5.6 percent. With a per 25 capita GDP of around US$1,800 dollars in 201510, the 13.7 13.6 12.6 11.7 country has substantially narrowed the gap with 20 11.5 lower-middle income countries. Rwanda improved 15 in ranking from the seventh poorest country in 10 the world in 2000 to 20th in 2015. Four countries in 15.0 15.1 SSA (Equatorial Guinea, Chad, Sudan, and Ghana) 14.4 14.7 14.6 5 improved their relative income ranking more than 0 2009/10-2012/13 2013/14 2014/15 2015/16RB 2015/16PA Rwanda in that period but all of them did that on Source: MINECOFIN, World Bank staff calculation the back of oil and/or gas discoveries. FY2016/17 Budget and Preliminary Outturn Large public investments and strengthened institutional capacity to improve service delivery The FY2016/17 budget envisaged a further were the main pillars of Rwanda’s growth reduction of capital spending. In the revised model. Aid-fuelled infrastructure spending and budget, total expenditure and net lending are strong domestic demand accompanied by a projected at 27.6 percent of GDP, less than in shift of labour from subsistence agriculture to 2015/16. Capital expenditures will decline to 10.8 the service sector were the main features of percent of GDP, the lowest level in recent years, Rwanda’s growth experience. Public investments and 0.9 percentage points lower than in the greatly improved Rwanda’s infrastructure previous fiscal year. and service delivery, evidenced by a sizable improvement in the logistic index11 and human Execution of the 2016/17 budget has been mixed development indicators.12 At the same time the as of March 2017 (Annex Table A). Total revenue economy developed a dependence on public and grants fell short of target by 0.1 percentage investments evidenced by a growth slowdown in points of GDP. Tax revenues fell short by 0.2 2016 after the introduction of fiscal restraint. 10 In International Dollars (PPP adjusted). 11 Global Logistic Index. 12 UNDP Human Development Indicator. Rwanda Economic Update • Edition No. 10 15 Recent Economic Developments In addition to well-targeted public investments, prices in 2005-2014 came from increased labour business environment was the other important force, while the remaining 6 percentage points pillar of Rwanda’s development strategy. were due to improved labour productivity. A Rwanda ranks high in Doing Business. disaggregation14 of labor productivity shows Governance, in general, is an area that saw that almost 2/3 of overall improvement in labour substantial progress especially with respect to productivity in the period between 2005 and 2014 reducing corruption and improving governance came from an inter-sectoral shift in labour (or effectiveness. These institutional underpinning structural transformation), with remaining 1/3 played an important role in strengthening driven by productivity growth within economic economy’s supply response. In addition, Rwanda’s sectors. Within sector productivity growth reputation of a safe and well maintained was driven mostly by productivity gains in country with abundant natural beauty and agriculture and manufacturing. There were also strong environmental preservation became an gains in service sectors including transport, important factor in positioning the country as communication, financial services and retail a high-end tourism, business meetings and trade. The decline in labour productivity in convention destination. mining, construction and hotels and restaurants negatively contributed to the overall productivity. Sustaining a high rate of growth in a long-term (See Annex B). and transitioning into a higher income status requires both strong productivity growth in Although service sector has contributed to the the sectors and allocation of resources from growth in productivity as it absorbed labor less productive to more productive sectors, a from agriculture and most of the entrants to process known as a structural transformation. the job market, within-sector productivity These two factors combined determine the growth in services as an aggregate was growth prospects in the long run. This section not very high, except financial services, takes a longer term look at the productivity transportation, communications and ICT. This patterns in Rwanda. In doing this, we will look highlights the limits of non-tradable services in at two different measures of productivity – labor driving the long-term growth. At the same time, productivity and total factor productivity. while manufacturing sector demonstrated high productivity growth in recent years, it attracted Labor Productivity Trends in 2005-2014 only 34,000 new workers between 2005 and In the period between 2005 and 201413, the total 2014, which is less than 1.5 percent of the total labour force increased by 22 percent, while increase in the labour force. Manufacturing may GDP in constant factor prices almost doubled. be facing constraints in scaling up and playing a This suggests that 1.8 percentage points of total larger role in job creation and growth. 7.8 percent annual increase in output in factor For ensuring better data compatibility and sufficiently long coverage the analyses are performed for the period between 2005 and 13 2014. While more recent data from the pilot 2016 Labor Force Survey has become available recently, the data are not comparable with historical data obtained through household surveys. 14 Growth in labor productivity, measured as the growth in value added per worker, may come from different sources. Labour productivity disaggregation allows better understanding the sources and patterns of productivity growth. One of these approaches is to distinguish between productivity gains from the inter-sectoral shift of labour and so-called “within” sector productivity changes, which in Rwanda’s case can be done by using the national account and household surveys. 16 Rwanda Economic Update • Edition No. 10 Recent Economic Developments In addition to productivity analysis based on relatively large absorption potential because data from household surveys, the pilot 2016 of abundance of type of labor in Rwanda that labour force survey (LFS) allows a deeper the sector demands. Other sectors with high look into the labour market.15 LFS contains productivity, such as financial services, and ICT information on a number of hours worked, may have lower potential to absorb low skill allowing to derive a better estimate of labour labour because they would mostly demand productivity (Figure 22 shows the sectoral labour higher skill labour for growth. productive relative to manufacturing). The labour productivity in the financial sector and ICT is very Total Factor Productivity high, although these sectors combined employed Labour productivity depends on a number of less than 16,000 workers in 2016. Productivity factors such as capital intensity, quality of in construction, hotels and restaurants, and in labour and the efficiency of the overall use trade services are much lower than one could of factors of production. More light can be have assumed without using the data on hours shed on productivity patterns in Rwanda by because of longer working hours in those sectors disaggregating the contribution of different compared to manufacturing. factors of production (capital, labour, and skills) Figure 22: Labour productivity (adjusted by hours worked): to growth and estimating the residual as TFP. The Manufacturing = 100, 2016 Labor Force Survey growth driven by factor accumulation can provide 600 an important boost to the economy, but longer- 500 term sustained growth depends on whether the 400 economy is able to improve the use of available 300 factors of production. For Rwanda, estimating 200 TFP is possible only at aggregate level because 100 of the lack of sectoral data of capital stock. (See 0 Annex B for methodology). services ICT services services Other services Financial Energy and water supply Manufacturing Transport Construction Hotels and restaurants Trade and commercial Figure 23 shows the results of growth decomposition. Interestingly, the role of Source: NISR, World Bank staff calculation investments has been becoming more important recently, while the contribution from TFP Based on the patterns of within-sector growth has been declining. Although there productivity growth between 2005-2014, and are methodological issues (such as properly refined estimates of labor productivity based on accounting for underemployment), evidence 2016 LFS, it can be concluded that manufacturing on weakening TFP growth is quite strong16. This is a distinct sector in terms of a combination shows that Rwanda might have increasingly of such important characteristics as relatively relied on capital investments to maintain its high level of labor productivity, a proven record high growth trajectory. of within-sector productivity growth, and Due to methodological differences, the results from household surveys are not fully comparable with LFS thus labour productivity 15 analyses of the previous section cannot be extended to 2016. The main difference between Labor Force and household survey is that a large part of workers engaged only in subsistence agriculture is not considered as employed under the new ILO methodology used for the survey. This brings down the total number of employed to 2.8 million in 2016, compared to around 5.6 million in 2014. As a result, labour participation rate has been revised down to less than 50 percent. 16 See also IMF, Structural transformation in Rwanda, 2017. Rwanda Economic Update • Edition No. 10 17 Recent Economic Developments Figure 23: Sources of growth by factors of production, extent proportionate to the scale of investments. percentage points This may be another factor explaining the recent 9 slowdown in TFP growth. 7.9 8 7.4 7.5 7 2.3 0.9 Regarding public investments, in addition 6 3 2.4 to the basic infrastructure that has been 5 1 4 0.4 Rwanda’s focus in the last two decades, 0.4 3 2.4 the government’s recent investments in so- 2 0.4 3.4 3.8 called MICE strategy (business meetings and 1 1.7 international conventions and events), were 0 2000-04 2005-09 2010-15 aimed at creating new opportunities for the Capital Labor quality Labor force TFP GDP Rwandan economy. It will take some time for Source: NISR, World Bank staff calculation the expected results to fully materialise and generate value-added commensurate to the Growing reliance on investments and declining scale of investments. At the same time, as the role of TFP may have important implications fiscal space narrows, the premium to remove for Rwanda’s growth prospects. First, as both pressing infrastructure bottlenecks and generate domestic private savings and private investments high returns in short-term is quite high. There are low, and the government is the main force is also a critical spatial dimension in public behind investments, there is only limited scope investments through well-managed urbanisation to further increase public investments under and improved domestic connectivity, factors that the current growth model. Recent developments can positively contribute to TFP growth. showed that increasing public investments at the time of declining official concessional financing With respect to the private investments, they can lead to debt accumulation and thus cannot might have been tilted recently toward the be sustainable in long-term. This highlights the sectors where economic activities have not fully importance of the more efficient use of available peaked up. Evidence points that a larger share investment resources to underpin strong TFP of private investments have gone to housing, and, ultimately, economic growth. and hotels and restaurants in recent years. In   addition to the evidence from growing share of Factors Affecting Productivity Growth construction expenditures in total investments, In terms of possible factors behind the slower available data from the registry of investment growth in TFP in recent years, TFP growth may projects of Rwanda Development Board show slow down during a surge in investments, that hotels and restaurants received almost as as one experienced by Rwanda in 2010-15. much investments as the manufacturing sector in TFP can slow down as the new projects are 2010-2016 in spite of the large difference in their being completed. In addition, while the share contributions to the value added and employment. of investments in GDP was growing in recent years, the ratio of construction expenditures in The relatively small share of investments in investments was also on the rise as both private tradable sectors where total factor productivity and public investments were skewed toward (TFP) growth potential is high, including housing, tourism, and conference infrastructure, manufacturing and agriculture, is also evident which have not yet contributed to GDP to an from the portfolio of commercial banks that 18 Rwanda Economic Update • Edition No. 10 Recent Economic Developments shows a large increase in the share of loans has already brought some initial results, and to housing, hotels and restaurants, while the some of the trends observed here might have share of agriculture and manufacturing has been been reversed. Manufacturing sector, however, largely stagnant. remains underinvested compared to the existing potential of exports and import substitution, and Overall, evidence points to a weakened private the key policy focus should be on diagnosing and sector’s willingness to go into tradable sectors. elevating the constraints facing manufacturing As shown in the special topic of this report, sector in Rwanda.17 the dynamism in the exports sector in terms of entry and survival weakened in recent years This A renewed attention to the agriculture as a key trend is in line with evidence that investments, tradable sector is also critical. An improved use of labour and entrepreneurial capital have been Rwanda’s fertile land and rural labour can provide increasingly going into housing and hotels in the a boost to productivity in Rwanda. Agriculture is recent years. This shift could have been driven also of strategic importance as a source for inputs by market signals, changes in private sector’s for manufacturing sectors where Rwanda has incentives or market failures that favoured comparative advantages, such as agribusiness investing in non-tradable sectors. In the context and food processing, especially in the context of very low domestic savings and FDIs, the flow of high transportation costs of imported inputs. of production factors to non-tradables could have Going forward, innovative solutions to transform come with an opportunity cost for the tradable the sector and make it one of the backbones of sectors, and thus for the potential of sustaining the future growth will be needed. the productivity growth. In addition to these traditional tradable Some Lessons for a Productivity-Led Growth sectors, Rwanda should also pursue strategic Strategy new directions with high long-term returns as Rwanda is preparing its Vision 2050 and EDPRS part of a two-pronged development strategy. 3 with a focus on productivity-led growth Rwanda has gained the reputation of a safe, as the foundation of prosperous Rwanda. well-governed and politically stable country, Understanding the impediments in investing in while investments in housing, office and hotel activities with high potential for productivity infrastructure improved the quality of life for the growth and formulating policy options to visitors and expats. Rwanda aims to capitalise address them is the key focus of the authorities. on that and become a hub for financial, ICT, Productivity analysis in this section shows that transport and logistic services in the region. The three key economic areas, namely, manufacturing, two-pronged development strategy with a focus agriculture, and tradable services, have a higher on utilising existing comparative advantages productivity growth potential for Rwanda. and simultaneously creating new comparative advantages through highly targeted strategic With respect to manufacturing, the sector initiatives will be key for maintaining high growth may provide opportunities for Rwanda to trajectory in long run. Strong prioritisation and continuously improve productivity and absorb a well-thought sequencing of interventions and larger share of low-skilled labour that Rwanda investments will be key for achieving Rwanda’s has in abundance. Made in Rwanda campaign growth objectives. MINIEACOM, Draft Strategy for domestic market recapturing. 17 Rwanda Economic Update • Edition No. 10 19 1.3 Macroeconomic Outlook and Risks reserves and maintain Rwanda’s status of low risk of debt distress. I n 2017, GDP growth will continue to be below both historical trend and authorities’ medium to long-term growth targets. The impact of fiscal Returning to a higher growth trajectory in 2018 is attainable, although there are risks. In the restraint and supply shocks will be felt throughout medium term, economic activity will benefit from the first half of 2017. The impact of fiscal restraint the expected recovery of prices of traditional and supply shocks will be felt throughout 2017. As exports, including minerals, tea, and coffee. A agriculture recovers during the year growth may be higher than in the first quarter of 2017 but still more competitive exchange rate will support well below the historical average of around eight the non-traditional tradable activities under percent per annum. Tapering food price shock the “Made in Rwanda” initiative. On balance, and a lower inflation would allow monetary the outlook in agriculture is positive, although policy to become more accommodative. The adverse climatic events pose risks. Overall, fiscal policy stance in the second half of 2017 will medium to long term outlook will depend on the also be more expansionary. However, persistent extent to which the private sector will move to external imbalances and elevated public debt will invest in the tradable sectors with higher growth constrain the use of macroeconomic instruments and productivity potential. Other risks to growth in the medium term. In macroeconomic are associated with weak external environment, management, the authorities will be guided by regional tensions, and regional security outlook. the need to maintain adequate foreign exchange 20 Rwanda Economic Update • Edition No. 10 PART TWO ANALYSIS OF RWANDA’S EXPORT PERFORMANCE Rwanda Economic Update • Edition No. 10 21 Analysis of Rwanda’s Export Performance 2.1 Background Figure 24: Rwanda exports of goods and services E (BoP, current US$ million) xpansion of exports is usually associated with growth spurts in an economy, and 2,500 Rwanda will need stronger export performance 2,000 to meet the vision of attaining middle-income status. The small domestic market alone cannot 1,500 generate jobs for the working age population, 1,000 projected to grow by 220,000 per year between 2015-2020. A thriving export sector helps align 500 the domestic economic incentive structure with areas in which the country has a comparative 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 advantage. Exports also create dynamic Volumes, 2004=100 Value, US$ , 2004=100 efficiency gains by exploiting economies of scale, Source: World Development Indicators and Central Bank of Rwanda adopting foreign technologies, management and (BNR) (2017) business practices. In addition, export sectors Rwanda’s exports have been dominated by are associated with higher productivity gains minerals, tea and coffee, collectively known leading to wage premiums and job creation. as known as traditional goods. In 2016, these commodities accounted for less than half of total Increased diversification of commodity exports merchandise exports. Along with booming re- and increased number of high-value commodity exports, the growth of exports of non-traditional exports are needed to generate employment merchandise, such as agriculture products away from agriculture. However, Rwanda still and manufacturing goods, and other minerals relies heavily on commodity exports particularly currently accounting for 25 percent of total coffee, tea and minerals exposing fluctuation in merchandise exports in 2016 has also helped to commodity prices. Export receipts help to finance expand the overall exports, (see Figure 25). import of capital goods and enable countries to Figure 25: Evolution of merchandise exports maintain a favourable balance of payments. This section analyses Rwanda’s export performance focusing on the overall patterns of exports growth in the main export sectors- agriculture, mining, services and re-exports. This is followed by an analysis of exporting firms- looking at characterises, entry, exit and survival trends and growth. The section will conclude with some policy consideration based on the analysis. 2010 2011 2012 2013 2014 2015 2016 Traditional exports Re-exports Non-Traditional Exports 2.2 Overview Source: BNR R wanda, a country with a historically very small export base, has made substantial progress expanding its export opportunities After a period of a major expansion in 2009- 2012 the growth in total exports declined since 2013. This was driven by weak prices of in the recent years. Total export of goods and commodities that Rwanda exports, and also services increased almost four-fold in the last stagnant, and sometimes declining, production decade, from US$0.4 billion in 2007 to US$1.6 volumes in traditional exports. Strong growth in billion in 2016 (Figure 24). 22 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance non-traditional goods that was largely sustained The DRC and the EAC region are currently the over recent years partly compensated the most important export markets, an indication weak performance of traditional sectors, of growing regional trade. In the 2016 DRC helping to maintain the dollar value of total accounted for 32 percent of total merchandise merchandise exports at the level of 2013 and exports, while Kenya, Uganda, and Burundi ensure robust growth in volumes. (Figure 26) jointly accounted for 24 percent of exports.18 While exports of services performed better, Other important export markets include the exports remained largely stagnated at around United Arab Emirates with 14 percent per cent 15 percent of GDP in the recent years. In spite share, Switzerland 9 percent per cent share and of big strides in export diversification, Rwanda the United States with 3 percent per cent share. continues to rely on commodity exports, which is a source of vulnerability. The EAC region is Rwanda’s most important trading block. Rwanda is a member of several Figure 26: Volume and value effect of merchandise exports regional groups including the East African 700 Community (EAC), the Common Market for 600 Eastern and Southern Africa (COMESA), the 500 Economic Community of Central African States 400 (ECCAS)19 and the Economic Community of the 300 Great Lakes Countries (CEPGL). Formal exports to the EAC accounted for 26 percent of Rwanda’s 200 total exports, a total value of US$157.52 million 100 in 2016. Discounting tea which is sold at the 0 2010 2011 2012 2013 2014 2015 2016 Mombasa auction and accounts for 46.9 percent Value Volume of total formal exports to the EAC, other key Source: BNR exports products included petroleum product re-exports (mainly to Burundi), raw hides and Table 2: Key export destinations Importer Export value, US$ thousand Percentage of total exports Congo, Democratic Republic of the 197,810 32% Kenya 99,459 16% United Arab Emirates 87,026 14% Switzerland 54,905 9% Burundi 35,923 6% Singapore 20,115 3% United States of America 18,742 3% Belgium 18,302 3% Uganda 14,642 2% Hong Kong, China 11,702 2% Source: ITC data 18 This includes tea exports through Mombasa auction which if discounted will reduce the percentage of exports to the EAC region. Rwanda is not a member of the Free Trade Area under ECCAS. 19 Rwanda Economic Update • Edition No. 10 23 Analysis of Rwanda’s Export Performance skins and sorghum and motor-vehicles. Rwanda As of June 2016, the EAC Secretariat reported imports from the EAC accounted for 23 percent of that 104 NTBs have been resolved since total imports at US$527 million in 2016. Imports 2009. The reports indicate that 25 additional from the EAC include cartons, boxes, cases, bags, NTBs remain many of which are in the relate and other packing containers from Kenya, home to tax-like measures and non-application of use products and agriculture products. preferential trade arrangements; and those relating to sanitary and phyto-sanitary measures Non-Tariff Barriers (NTBs)20 within member that address concerns relating to health and states pose obstacles for increase trade safety. While the publication of the NTBs is a between Rwanda and the EAC. While member positive step, at a regional level, more emphasis states have lowered tariffs significantly on needs to be given to the removal of existing account of the Customs Union that was launched and newly created NTBs in a timely manner. The in 2010, intra-regional trade is hampered by Non- effectiveness of mechanisms will also depend Tariff Barriers (NTBs). As landlocked country, on the capacity of the National Monitoring Rwanda is particularly affected by NTBs imposed Committee to investigate the reported NTBs. by partners especially those which increase time and costs of importing and exporting. According Rwanda benefits from several trade preferences to a 2014 survey by ITC, over 75 percent of that provide competitive market access to Rwandan firms surveyed reported experiencing Europe and to the US markets but these burdensome NTBs. Of these 75 percent of are underutilized. Rwanda’s exports enjoy a exporting firms and 83 percent of importing firms competiveness advantage as a result of duty-free reported being affected by NTBs. Mechanisms preferences under the EU’s Everything but Arms for identification and reporting of NTBs has been Initiative (EBA), and the USA Africa Growth and enacted under the EAC Elimination of Non-Tariff Opportunity Act (AGOA). Like other beneficiary Barriers Act which provides for three options to countries, the challenge for Rwanda is not about identify and report NTBs: the first option is for accessing exporting markets but being able to the affected member state to discuss directly utilize these markets opportunities. In 2015, with the country imposing the NTB. This relies exports to the USA through the AGOA scheme on mutual agreement understanding between amounted to only 2% of total exports to the USA the two parties which is not always easy to or less than US$1 million. (AGOA Implementation achieve due to objectives of parties. The other Plan 2016). Exports to the EU under the EBA scheme option is through the Time-Bound Program are also limited. While Rwanda utilization under in which the affected member states notifies EBA has increased from 25.5 percent in 2015 the responsible member states after which to 61 percent in the first half of 2015, the total the National Monitoring Committee of the value of exports through the EBA scheme is low responsible country is expected to investigate accounting to 238,000 Euros in 2016. Supporting the impact of the NTB and propose a plan for exporters to enhance standards and quality of its elimination. The weakness of this measure exports will enable more firms to take advantage is that some NMCs are weak and do not have of the existing trade preferences. the capacity to conduct adequate investigations. The third mechanism relies on directives and decisions from the Council of Ministers. The EAC defines NTBs as laws, regulations and administrative requirements other than tariffs imposed by a partners state whose effect 20 is to impede trade (EALA 2015). 24 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance 2.3 A Snapshot of the Main Export The biggest challenge for coffee and tea is Categories low yield. This could be explained by low usage T of fertilizer, both mineral and organic, poor his section provides a snapshot of the main farm practices and diseases/ pests controls. four export items, including traditional Tea yields are half of those in Kenya. Coffee exports, non-traditional exports, informal cross- border trade, re-exports, and service exports. and tea production is dominated by small- It presents a brief summary of developments scale subsistence farming under traditional over the recent decade and, wherever evidence practices. NAEB reports several initiatives to permits, main challenges that the respective increase production and productivity of the two sectors face in scaling up production and exports. commodities. For coffee, this includes increased use of fertilizers and pesticides, and the provision Traditional Exports of improved varieties to farmers. In the tea sector, the Tea Expansion Program aims to develop new Traditional exports in Rwanda’s context refers tea plantations. Increase production of these to the following export products: (a) coffee and two sectors could also be achieved by attracting tea, (b) traditional minerals such as cassiterite, FDI into these sectors. coltan and wolfram, (c) hides and skins, and (d) pyrethrum (bright petal flowers). Value addition to coffee and tea has the Rwanda’s traditional agricultural exports of tea potential to boost profitability and reduce and coffee are still important export earners exposure to raw commodity price volatility. The but overall performance in the recent years was average price of fully washed coffee in 2015 was mixed. Although earnings from coffee exports in US$4.9/kg compared with US$3.6/kg for semi- 2016 at around US$60 million were almost double washed coffee in the same period. In coffee, of the earnings in 2004, the increase was due NAEB’s target is to increase the volume of fully to higher unit prices, while production volumes washed coffee that is exported and increase were stagnant, and even declining in more recent roasting of coffee. Diversifying export markets years. In contrast, the volumes of tea production for tea and coffee may also help to shield against and exports have almost doubled in Rwanda in regional price fluctuations. the recent decade, which helped to triple the earnings from tea exports, bringing it to above US$60 million in 2016. Table 3: Coffee and tea exports-value, volume and price developments Importer 2010 2011 2012 2013 2014 2015 2016 Coffee Value 56.08 74.60 60.89 54.90 59.68 62.04 58.49 Volume 18.24 15.60 16.99 19.99 15.97 18.79 18.64 Price 3.08 4.78 3.58 2.75 3.74 3.30 3.14 Tea Value 55.71 63.90 65.72 55.48 51.76 72.46 63.42 Volume 21.53 23.73 22.45 21.01 22.67 24.68 24.41 Price 2.59 2.69 2.93 2.64 2.28 2.94 2.60 Source: BNR 2017 Rwanda Economic Update • Edition No. 10 25 Analysis of Rwanda’s Export Performance Export performance of traditional minerals was Non-Traditional Exports also mixed. Volumes of mineral extraction and Non-traditional merchandise exports are exports have grown since 2004 for two out of gradually taking-off. Exports have risen from three main minerals, namely coltan and wolfram, US$3.8 million in 2004 to US$155.3 million in while production of cassiterite has largely been 2016. (Figure 27). The largest component of other stagnant. The increase of extraction of those exports was minerals (51.6 percent of total), minerals and strong international prices helped followed by agriculture (23.9 percent of total), to expand export earnings from less than US$68 manufacturing (12.8 percent of total) and other million in 20104 to US$226 million in 2013 but products (11.7 percent of total). Production of declining prices have almost completely reversed non-traditional mineral increased from around this trend and in 2016, mineral exports accounted 500 tons in 2004 to 6,600 tons in 2016. This helped for just US$86 million. (Table 4) to increase export earnings from US$2 million in 2014 to US$80 million. Exports of non-traditional This mixed performance of mineral sectors agriculture products were at around US$37 is partly explained by low productivity in the million, a large increase from less than US$1 mining sector. The sector continues to rely on million in 2004. rudimentary methods, characterized by small- scale and artisanal mining with unskilled labor. Figure 27: Non-traditional exports (US$), 2004-2016 So far the sector has attracted low FDI relative to 2,500 other sectors. FDI to the mining sector accounted for 9.6% of total FDI inflows in 2015 compared to 2,00 30% going to agriculture and 40% for services (ICT and tourism). In addition to resource, FDI brings 1,500 new technologies, improved mining methods and 1,000 skills which are needed to boost the productivity of the sector. 500 0 Export success stories are skewed towards 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 small categories. In spite of weak prices, exports Volumes, 2004=100 Value, US$, 2004=100 of hides and skins have increased in physical Source: BNR volumes more than three-fold, amounting to around US$6 million in 2016. Pyrethrum Rwanda produces several fruits and vegetables generated US$35 million in 2016, compared to both for the regional and international US$16 million in 2004, on the back of strong markets. It is estimated that over 1 million prices which almost doubled. people are employed in the horticultural sector Table 4: Mineral exports performance 2010 2011 2012 2013 2014 2015 2016 Value 67.79 151.43 136.07 225.7 203.32 117.81 86.42 % change of value 1.23 -0.1 0.66 -0.1 -0.42 -0.27 Volume (tons) 5,466 8,848 7,532 9,579 10,471 7,282 6,536 % change of volume 0.62 -0.15 0.27 0.09 -0.3 -0.1 Source: BNR (2017) 26 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance so the growth of the sector has the potential Small-Scale Exports (Cross-Border Trade) to improve livelihoods. NAEB reports export Informal exports accounted for 20.4 percent of revenues from horticulture of US$6.7 million in Rwanda’s total merchandise exports in 2016, 2015, registering a decline from US$9 million in more than doubling in dollar terms since 2010. 2014. This was mainly due to a 24 percent decline In 2016, informal trade had a positive trade in volume in this period. NAEB recognizes the balance of US$91 million as informal exports challenge of sustaining volumes requested outstripped informal imports. (Figure 28) Small- by buyers since production is dominated by scale exports include telephonic apparatus, live small-scale farmers under rain-fed conditions. animals, agriculture produce and second-hand Organizing the horticulture value chain to clothing. Small-scale cross-border trade takes increase the involvement of commercial farmers place mostly at the border areas with Rwanda’s is necessary to improve the quality and volumes neighbors Burundi, DRC, Uganda and Tanzania. of horticulture produce. The National Cross-Border Strategy estimates that 80 percent of small-scale cross-border trade Horticulture production requires an efficient takes place in the Western Province where 48 cold storage network closer to the production percent of the population were identified as areas especially for more perishable products poor, the second highest incidence of poverty such as french beans, fruits, tomatoes. (based on 2011 HHS). Currently, there are cold-storage facilities at the international airport and in different collection Cross-border traders face several challenges. centers. One of the issues is the management The most cited being payment of bribes, fines, of these facilities is important for instance harassments, confiscation of goods and sexual separating organic produce from non-organic harassment. The government recognizes these produce. Refrigerated trucks are also a good challenges and through the implementation of alternative to reach producing areas without the Nation Cross-Border Strategy (2011-2017), adequate transport networks. infrastructure including border markets, one- stop border posts and storage facilities are being Increased air cargo capacity provides developed. (MINICOM Report, 2015). For these opportunities to increase exports of high-value measures to be effective, a regional approach perishable products to key markets in Europe must be taken to ensure that commensurate and Asia. While exporters note the relative Figure 28: Rwanda informal cross-border trade high costs of air transportation, there has been 180 a decline as more air cargo capacity is created 160 with the expansion of RwandaAir in terms of new 140 routes and addition of other international flights 120 have helped to reduce the cost of air cargo. 100 80 Rwanda increased the exports of domestically 60 produced manufacturing goods from less 40 than US$1 million in 2004 to almost US$20 20 million in 2016. It is expected that with the 0 2010 2011 2012 2013 2014 2015 2016 “Made in Rwanda” campaign and renewed Exports Imports investments in tradable sectors this positive Source: BNR, NISR trend will be sustained. Brenton et al (2011), Risky Business: Poor Women Cross-Border Traders in the Great Lakes Region of Africa. 21 Rwanda Economic Update • Edition No. 10 27 Analysis of Rwanda’s Export Performance reforms are implemented across the border by around which re-exports develop. For example, oil Rwanda’s neighbors. The signing of an agreement marketers use Rwanda as a storage base before between Rwanda and DRC creating a framework exporting to Eastern DRC and Burundi. The growth for bilateral cooperation on cross-border trade of re-exports will be driven by improvements in and the removal of NTBs is considerable progress the transport, logistics and distribution services given the important of the DRC market for in Rwanda. Rwanda exports. Service Exports Re-Exports Services exports, that grew at around 20 percent Re-exports have emerged as an expanding on average in recent years are dominated by sector.22 In 2016, they accounted for 30 percent of travel services (Figure 30). Travel, including total exports with a total value of US$224 million tourism is the most important segment of services representing more than six-fold increase from exports accounting for US$390 million in 2016. 2010 (Figure 29). Petroleum products constitute Rwanda has the highest share of tourism in export over 50 percent of total re-exports in 2016. Other receipts (at around 30 percent of total exports) re-exported products include vehicles, machines among its regional peers. Business tourism is and engines destined for Burundi and DRC, key the most important segment contributing US$132 re-export markets. million in 2015 (Figure 31). The government has placed an emphasis on MICE segment with the Figure 29: Performance of re-exports, US$ million, and percentage of total exports aim of attracting more business tourist through hosting more international meeting and events. 250 35 Eco-tourists account for just 2 percent of tourist 30 200 but contribute 16 percent of revenues. Visiting 25 friends and relatives accounted for 33 percent of 150 total receipts (US$119.4 million) and holidays 26 Percent 20 15 percent (US$96.2 million). 100 10 Figure 30: Services exports, 2010-2016, balance of payments 50 (US$ million) 5 0 0 800 2010 2011 2012 2013 2014 2015 2016 Value of re-exports % of Total exports, f.o.b 600 Source: BNR, NISR 400 390 368 While re-exports are typically associated with 294 304 little value addition, Rwanda’s emergence 200 252 282 202 as an important re-export route highlights 97 91 29 51 60 75 78 country’s potential in regional trade of goods 0 2010 2011 2012 2013 2014 2015 2016 and services. Due to its central location Telecommunications computer, Financial services Construction Travel and information services between East and Central Africa, Rwanda serves Transport Maintenance and repair services as a transport hub to eastern DRC and Burundi Source: BNR, NISR Re-exports are defined as foreign goods (goods produced in other economies and previously imported) that are exported with no 22 substantial transformation from the state in which they were previously imported. IMF (2009), Sixth edition of the IMF’s balance of payments and international investment position manual (BPM6). Washington, DC: International Monetary Fund 28 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance Figure 31: Receipts from tourism, 2015 Key findings: 19.5% i. The number of exporting firms in Rwanda was increasing between 2009 and 2014 119.4% but declined markedly in recent years. 96.2% The majority of exporters serve only the regional-market (EAC and DRC). ii. Rwandan firms are considerably smaller than exporters in regional peer countries 132.1% and the average exporter size has not increased over the sample period. VFR Business Holiday Transit (other) iii. Exports are concentrated in the hands of a Source: RDB few large firms, the top 5 percent exporters The transport sector is the second most control over 80 percent of exports. Such important segment, bringing in US$91.1 million concentration is similar to other countries in 2016. Air transportation is the main sector at the same level of development. generating exports earnings. The sector has been iv. Rwandan exporters are on average less growing quite strongly recently on the back of diversified, both in terms of the number of Government’s efforts to boost the operations exported products as well as destination of RwandAir and transforming it into a regional markets. Over 50 percent of exporting firms player in air transportation industry. In addition, export only a single product to a single ICT (mostly telecommunications) and financial destination. services are emerging as important export segments, accounting for US$41.4 million and v. Incumbent exporters account for the bulk US$27.8 million respectively in 2016. of exports in Rwanda while entering and exiting exporters are much smaller. 2.4 Firm-Level Analysis vi. Rwanda exhibits significantly higher T his section examines export performance exporter entry rates and export exit rates from the perspective of firms. Looking at than regional peers. Firms that start exports by firms can provide insight into which exporting in the non-traditional sectors are firms are driving export growth in Rwanda. The less likely to survive in the foreign market analysis is based on transaction-level customs than those in the traditional sectors. data from Rwanda Revenue Authority for vii. Exporters that imports intermediate inputs the period 2009-2016. It also benchmarks the are on average more diversified in terms of performance of Rwandan exporters relative to both export product as well as destinations other countries using the World Bank’s Exporter than pure exporters. Dynamics Database. Rwanda Economic Update • Edition No. 10 29 Analysis of Rwanda’s Export Performance Exporter Base, Size, and Concentration destinations: Democratic Republic of Congo (DRC) Rwanda has a higher number of exporters than and Burundi. As left panel of Figure 33 depicts comparator countries with similar size and level DRC was by far the most important destination of GDP per capita (Figure 32). of Rwandan exports in 2014 (horizontal axis) as well as the source of the highest fall in number Figure 32: Number of Rwandan exporters of exporters between 2014 and 2015 (vertical axis). Burundi comes in the second place in terms of accounting for the huge fall in number of exporters. This fact is a clear signal warning against excessive reliance on limited number of export destinations. Rwanda should explore possible ways to break into all export markets available if Rwanda is to continue on its export growth trajectory. Looking at the number of exporters by product, the largest decline was observed in the manufacturing sector has been hit hard in 2015 Source: World Bank staff calculations (right panel of Figure 33). There was a steady increase of the number of firms entering the export market but the Rwandan exporters are considerably smaller trend slowed down in recent years. Exporting than exporters in regional peer countries. firms increased from 576 firms in 2009 to 1,506 With a mean exporter size of US$0.38 million in 2014 but has declined markedly since 2014. Rwanda’s exporters on average are much smaller In 2015 and 2016 exporter net entry in Rwanda than regional peers such as Uganda, Tanzania, became negative suggesting a decreasing pool and Kenya with larger exporters per export value of exporters. To understand the underlining of US$1.1 million, US$1.6 million and US$0.95 drivers of this trend, the number of exporters million respectively. Even comparing with low- are decomposed by destinations and products income and landlocked countries such as Malawi (Figure 33). The source of the remarkable fall and Nepal, Rwanda’s exporters are still small. The in the number of Rwandan exporters could be median exporter in Rwanda had an export value of traced to events in two of its important export US$4,900 in 2016, a decline from US$5,800 in 2009. Figure 33: Number of exporters by destinations and products Source: World Bank staff calculations 30 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance Whereas the median exporter size in Kenya Figure 34: Exporter concentration in Rwanda, 2009-2016 and Tanzania are more than 18 thousand USD. 1 0.89 0.89 Although the small export size partly reflects 0.81 0.85 0.86 0.87 0.85 .8 0.78 the size of the economy, the relatively small average and median exporter sizes of Rwandan .6 0.54 0.57 exporters prevail even after controlling for the 0.44 0.46 0.45 0.45 0.41 size of the economy and level of development. .4 0.36 The difference between mean and median values .2 per exporter reflects the skewed distribution 0.05 0.04 0.03 0.05 0.06 0.03 0.02 0.03 of exporter size in Rwanda, where many small 0 2009 2010 2011 2012 2013 2014 2015 2016 exporters coexist with a few very large firms. Herfindahl-Hirschman Index Share of top 1% Exporters Share of top 5% Exporters Source: World Bank staff calculations Rwanda is broadly similar to other countries that exports are concentrated in the hands of 5 percent exporters until 2014 and declined a few dominant exporters. The top 5 percent in 2015 and 2016 (Figure 34). This pattern exporters in Rwanda account for more than 80 correlates with recent research that shows that percent of the total value of Rwandan exports concentration in the top five firms, and even in while the top 1 percent of exporters accounted for the top firm, increase as a country’s exports grow. more than 40 percent of total export value in the For instance, Freund and Pierola (2016), show period 2009-2016. Although the size distribution that the level of export concentration among the of exporters in Rwanda is highly skewed, it does top exporters increases as exports grow as the not differ significantly from the average level most productive firms account for a larger share of concentration in many other countries with of exports. similar size and level of development. In fact, the Herfindahl index and the share of the top Rwandan exporting firms are on average 1 percent of exporters suggest that Rwandan less diversified both in terms of the number exports appear to be less concentrated controlling of exported products as well as destination for size and level of economic development. markets relative to the regional peers. A Rwandan firm exports on average two products The share of the top exporters has not changed and reach an average of 1.5 destinations, which much over time, other than the fact that there makes them the least diversified among all was a slow increase in the share of the top regional peers (Figure 35). Rwandan exporters Figure 35: Firm-level diversification Kenya 7.28 Kenya 2.69 Botswana 7.12 Ethiopia 2.34 Zambia 5.12 Uganda 2.29 Tanzania 4.17 Tanzania 2.28 Uganda 3.69 Zambia 1.78 Ethiopia 3.62 Rwanda 1.57 Rwanda 2.15 Botswana 1.43 0 2 4 6 8 0 1 2 3 Average Number of HS 6-digit Products per Exporter Average Number of Destinations per Exporter Source: World Bank staff calculations Rwanda Economic Update • Edition No. 10 31 Analysis of Rwanda’s Export Performance are less diversified in terms of product and which is introducing increasingly restrictive destination markets even after controlling measures for imports from Rwanda. Diversifying for country size and level of development. The destinations of exports helps firms to survive at average number of products exported and the the product-level (Jaud and Freund, 2015). number of destinations served per firm have not changed much since 2009 although the period 2012 While Rwandan firms manage to penetrate through 2015 has shown a slight improvement in into the regional markets (EAC and DRC), the diversification in terms of products. The average number of firms exporting to destinations number of destinations per exporter has however outside the region has not changed over time. declined over this period. This evidence suggests The average value of exports per exporter to that firms face substantial barriers to expanding regional markets is much smaller than exporters their product scope and export destinations. to the rest of the world. The presence of a very large number of new exporters and exiters in There is enormous variation across exporting every year that are very small in terms of their firms in the number of export products and exports in the neighbouring countries reflects destination markets, with most firms selling the fact that entry into regional markets entails a single product to a single destination. While a smaller fixed cost. large firms are well diversified in terms of export products and destinations, small firms are Entry, Exit and Survival of Firms less able to mitigate risk through product and Exporter entry and exit rates are significantly market diversification. In 2009, about 57 percent higher in Rwanda than in other countries in of exporting firms exported a single product the region. On average, 60 percent of Rwandan to a single destination market and accounted firms that exported in a given year did not do so for only 6 percent of the total value of export. in the previous year over the period 2009-2016. In 2016, about 59 percent of firms sell a single More than 50 percent of the new exporters that product to a single destination, but account for started exporting in a given year have stopped about 33 percent of the total value of export. exporting in the following year. On average, only Such dependence on a single market makes 30 percent of new exporters in a year survive in firms susceptible to destination-related shocks the export market into the next year. Figure 36 as is the case with Burundi which has closed shows that entry and exit rate of exporters is its borders to all imports from Rwanda and DRC highest in Rwanda compared to regional peers. Figure 36: Entry, exit, and survival in Rwanda and comparator countries Rwanda 0.63 Rwanda 0.57 Ethiopia 0.51 Tanzania 0.50 Tanzania 0.48 Zambia 0.37 Uganda 0.50 Zambia 0.43 Botswana 0.37 Zambia 0.48 Uganda 0.41 Uganda 0.36 Botswana 0.41 Botswana Kenya 0.34 0.40 Kenya 0.39 Kenya Tanzania 0.31 0.40 Ethiopia 0.38 Ethiopia 0.35 Rwanda 0.30 0 .2 .4 .6 0 .2 .4 .6 0 .1 .2 .3 .4 .5 Exporter Entry Rate Exporter Exit Rate 1-Year Survival Rate of Entrants into Exports Source: World Bank staff calculations 32 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance The entry and exit rates of exporters in Rwanda margin, including through new exporting firms or is very high even after controlling for size and firms exiting exports sector. Table 6 presents the level of economic development. The results results of decomposition by existing versus new suggest that a key challenge to export growth is destinations, while Table 7 presents the growth to sustain survival of new exporting firms. patterns based on existing versus new products. Incumbent exporters account for the bulk of Rwanda’s dramatic export growth in 2011 was exports in Rwanda while entering and exiting mainly driven by the expansion of incumbent exporters are much smaller. Figure 37 shows exporters (intensive margin). With respect to the average exports per firm by exporter type: the net contribution due to entry and exit, it was entering, exiting, continuing and surviving positive, as exports growth rate due to entry of firms and it clearly shows that both entering new exporting firms (31 percent) was bigger than and exiting exporters are very small relative export loss due to the exit of firms (7.85 %). In to continuing exporters. The figure also shows the more recent period of 2015 versus 2013, when that entering firms are larger than exiting firms Rwanda’s exports reported by the firms contracted except the year 2012. It is also interesting to note by 10.5 percent and the change was also largely that surviving new entrants are on average larger driven by the contraction of incumbent firms than exiting firms. (intensive margin). This is due to the fact that entering and exiting exporters are smaller than Figure 37: Average exporter size by type of exporters continuing exporters. The contribution of new 1,000 exporting firms more than offset the decline in 800 export by exiting firms in all years, suggesting that entry and exit in foreign market continued 600 to be associated with a positive selection effect. ,000 US$ 400 In terms of export growth patterns by existing 200 versus new destinations, the growth in exports through exporting to new destinations slowed 0 2010 2011 2012 2013 2014 2015 2016 substantially between 2009 and 2015 (Table 5). In Export Value per Entrant Export Value per Exiter Export Value per Survivor Export Value per Incumbent 2011 versus 2009, both expansions to existing Source: World Bank staff calculations markets as well entry into new markets contributed significantly to export growth by For a better understanding of firm dynamics continuing firms. The export contraction in 2015 behind the exports growth, total export growth compared to 2013 was mainly driven by a decrease can be decomposed along different dimensions in export activity by incumbent exporters to their (see Box 1 in the Appendix for the decomposition). existing destinations (destination intensive Table 5 shows the decomposition of the growth margin). While exports growth by incumbent rate of Rwanda’s total export into intensive exporters to new markets was positive, this was (contribution by incumbent firms) and extensive partly offset by exit from the existing markets. Rwanda Economic Update • Edition No. 10 33 Analysis of Rwanda’s Export Performance Table 5: Decomposition of changes in Rwanda’s exports into intensive and extensive margin along firm dimension Aggregate Continuing export growth exporters New exporters Exiting (%) growth (%) (%) exporters (%) 2009-2011 66.14 42.86 31.13 -7.85 2011-2013 26.79 9.67 27.11 -9.98 2013-2015 -10.54 -13.6 17.46 -14.4 In terms of export growth through continuing continuing products (9 %) as well as product to existing products or exporting new products, shedding. The addition of new export products new products played relatively limited role, was not enough to offset the loss in export due and even that has been declining in more to product shedding. recent periods. As shown in the table 6, in 2011, the change in export to existing destination by Although change in export of the incumbent incumbent exporters has been driven mainly exporters was the main force underlying the by the growth in exports of existing product major expansion and slowdown, entry of new (product intensive margin) rather than exports exporting firms plays an important role for of new products (product extensive margin). In export growth over the longer period. By initial 2015, Rwanda’s export to existing destinations by year cohort, firms that began exporting after incumbent exporters declined by 18.6 %, which 2009 account for about 60 percent of the total stems partly from the reductions in exports of exports in 2016. Table 8 presents data on the Table 6: Decomposition of changes in exports by continuing exporters into intensive and extensive margin along the destination dimension Continuing Continued New Exiting exporters destination destinations destinations growth growth (%) (%) (%) 2009-2011 42.86 22.71 32.87 -12.73 2011-2013 9.67 4.37 16.58 -11.29 2013-2015 -13.6 -18.64 19.51 -14.46 Table 7: Decomposition of change in exports to existing destinations by continuing exporters along the product dimension Continuing exporters' continued Continued Exiting destinations products New products products growth (%) growth (%) (%) (%) 2009-2011 22.71 34.47 7.14 -18.89 2011-2013 4.37 -0.81 11.01 -5.83 2013-2015 -18.64 -9.01 2.9 -12.54 34 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance share of exports of firms that start exporting in export markets than smaller exporting firms. a particular year over the remaining years of the The result also suggests that the probability sample. Firms that enter into exporting during of entrant survival increases with the number sample period have contributed significantly to of firms exporting the same product at the export growth over the sample period. time when the product is exported. This result suggests the presence of cross-firm synergies. What Determines Export Survival and Firm survival in the export market increases Performance? in sectors where the country has a revealed comparative advantage (RCA) at the beginning of There is a significant variation in the survival the sample year, i.e. 2009. These results suggest of new exporters across products. The analysis that the average survival rate of entrants into shows that, compared to tradition goods export markets is determined to some extent by exporters, new exporters in non-traditional are comparative advantage. Specifically, firms that more likely to exit foreign market one year after start exporting products in which the country entry. Entrant survival in the export market can be influenced by firm, industry and destination has a comparative advantage tend to survive on characteristics. To investigate the determinants average more than the other products. Firms that of entrant survival on the export market, a simple are exporting products that do not reflect the linear probability model was estimated (Table 8 country’s comparative advantage are more likely reports the results). The table shows that larger to exit the foreign market one year after entry. exporters on entry are likely to survive in the Table 8: Determinants of first-year export survival (1) (2) (3) (4) (5) (6) Dep variable: Entrant first-year survival 0.042*** 0.041*** 0.042*** 0.041*** 0.039*** 0.041*** Log value of export on entry (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) Number of firms exporting HS6 product on 0.003*** 0.003*** 0.003*** entry (0.000) (0.000) (0.000) 0.001* RCA in 2009 (0.000) 0.052*** Traditional products (0.017) 0.001 Log Distance (0.003) Importer Year FE Yes Yes Yes Yes Yes Yes Product FE (HS2) Yes Yes Yes No Yes Yes Destination FE Yes Yes Yes Yes No Yes Observations 13521 13521 13362 13521 13443 13521 R-squared 0.125 0.129 0.124 0.095 0.110 0.129 Rwanda Economic Update • Edition No. 10 35 Analysis of Rwanda’s Export Performance Although the empirical analysis sheds some 2.5 Policy Considerations light on the determinants of exporter survival, the reasons why most exporters exit after just one year deserves further scrutiny. An ongoing T his section summarizes several broad policy considerations to improve the performance of export sectors. survey on investor perception by the World Bank in collaboration with Rwanda Development Board Maintain a competitive real exchange rate could provide insights from firms to explain the that will help firms to grow and to access low survival rates. Additional surveys targeting new markets. The single most important price firms that ceased to export is recommended that affects exporters of all sizes is the real to further understand constraints faced by exchange rate (RER). As RER appreciates the exporting firms in Rwanda. price of domestic goods increases and as result Exporters that source intermediate inputs from the demand for Rwanda’s exports decreases. abroad tend to export more products and serve Recent depreciation of the exchange rate that more markets than unidirectional exporters. The is believed to have brought the exchange rate role of imports of intermediate inputs has long closer to its equilibrium, may provide the right been considered as an important determinant market signals for the private sector to invest of export performance. Import of intermediate in tradable sectors. Going forward, avoiding goods enables firms to improve their productivity, exchange rate misalignment is key for promoting upgrade technology or introduce new products. export sectors’ competitiveness and private Recent micro-level studies demonstrate that sector interests in investing in exports. firms that have access to a larger variety of imported inputs increase their productivity and Facilitate access to affordable and reliable raw export performance.25 Figure 38 shows that firms materials and intermediate inputs to drive that source intermediate inputs from abroad exports. Given that the firm analysis revealed tend to export more products (measured by that exporting firms that source intermediate firm-level count of unique HS 6 products) and inputs from abroad tend to export more serve more destination markets than pure products, facilitating access to raw materials exporting firms. and intermediate inputs is important. The Duty Figure 38: Imported inputs and export performance Number of Export Products by Exporter Type Number of Export Destinations by Exporter Type 3 2 Number of Export Destinations Number of Export Products 1.5 2 1 1 .5 0 0 p p p p p p p p p p p p p p p p Im Im Im Im Im Im Im Im Im Im Im Im Im Im Im Im ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp ExExp p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ p_ 2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Bank staff calculations 25 Amiti, M., & Konings, J. (2005). Pierola Castro, Fernandes, Thomas (2015). 36 Rwanda Economic Update • Edition No. 10 Analysis of Rwanda’s Export Performance Remission Scheme26 under the EAC Common Reduce the cost and time of importing and export External Tariff provides avenue for the importation through improved trade logistics is critical of inputs at zero percent or reduced tariffs for export growth. Continued infrastructure however the fiscal impact of such a scheme needs development coupled with institutional to be analyzed. Comprehensive identification of coordination and logistics skills development intermediate inputs and raw materials should be will contribute to reducing transport and done regularly to take advantage of this scheme. logistics costs. In the last five years, the government has taken significant infrastructure Focus on agriculture as a strategic sector developments and implemented policy changes that provides raw materials for emerging which have helped to reduce the time and cost of agribusiness, an important source of future importing and exporting. Rwanda’s ratification export growth with strong impacts on poverty of the WTO’s Trade Facilitation Agreement which reduction. Agriculture is of strategic importance entered into force in February 2017, will help to as a source for inputs for manufacturing sectors drive more reforms to expedite the movement, where Rwanda has comparative advantages, such release and clearance of goods and to facilitate as agribusiness and food processing, especially cooperation between customs and other relevant in the context of high transportation costs of agencies. imported inputs. Provide support to enable exporters to utilize Continue to advocate for the removal of non- AGOA, EBA and other trade preference. The tariff barriers that limit export growth to the AGOA Implementation Plan provides a good EAC region since the EAC is the most important basis to develop capabilities of firms to access export market. Continued engagement at the this market. There are some encouraging signs regional level and through the National Monitoring as some firms have already moved to invest Committee that is tasked with coordinating the in Rwanda to export to the US. These success notification and removal of NTBs is needed to stories needs to be replicated at a larger scale. address unresolved and future NTBs. Continue efforts to attract FDI. Although Implement programs to reduce variable costs local private sector dynamism is key, there is related to exporting. The firm level analysis potential to attract FDI that is market seeking. revealed that there is dynamism in entry and FDI inflows to Rwanda has been increasing exit of firms but there are very low survival from US$66 million in 2008 to US$379million rates in exporting markets. This suggests that in 2015. The highest recipients of FDI inflows that variable costs of exporting such as energy, in 2015 by sector were ICT with US$76.7 million, trade logistics costs, are equally important as electricity, gas and steam with US$76.1 million, the initial entry costs of discovering the export tourism with US$66.9 million, and financial and market. Reducing costs related to exports will insurance activities with US$57.9 million. Many facilitate the graduation of firms from SMEs to investors see Rwanda’s potential in accessing the top exporters. market within the EAC and COMESA, as well as the global markets in the US and the EU benefiting from existing trade preference serves. The Duty Remission Scheme is provided for under section 140 of the East African Community Customs Management Act 2004. It permits 26 the import of certain raw materials at a duty rate of different from the set tariff in the CET. Rwanda Economic Update • Edition No. 10 37 Analysis of Rwanda’s Export Performance This update also highlights some sector specific production and high cost of transportation. insights in coffee, tea and horticulture. Surveys need to be conducted of coffee farmers to establish their cost of production and to Improve the quality and marketing of tea to devise a cost-effective strategy for increasing move-up the value-chains. Efforts to improve production. Participation in the coffee futures specialty tea should continue as the prices of market to reduce uncertainty of pricing should this type of tea are increasing. Facilitating the be explored. relationship between tea factories and estates without-growers to and assure the out-growers In horticulture, marketing and production are being paid a producer price in line with world potential for specific crops should be identified, market conditions. Initiatives to improve and economies studied and private sector actors upgrading quality of production and marketing supported to meet the requirements of the in order to obtain the best price on the world market segment. In addition, bringing together market should be intensified. horticulture exporters to increase the volume of air shipment will help to reduce airfreight costs. Improve production and increase value addition Expansion and upgrading of feeder roads linking of coffee exports. Ongoing initiatives including collection centers to producing areas will help planting of new coffee trees can help to improve to preserve the quality and value of horticultural crop yield which are currently half of crop exports. Given the importance of the regional yields in Kenya. Increasing full washed coffee is markets, working with small scale cross- important because it commands a premium on border traders to consolidate exports and use the world market. More investment is needed to streamlined official channels. There is need map increase smaller washing stations that are closer the entire value-chain to identify constraints and to producers versus the large washing stations opportunities in collection, packing, marketing that were utilized due to dispersion of coffee of horticultural products. 38 Rwanda Economic Update • Edition No. 10 REFERENCES · Amiti, Mary, & Konings, Jozef (2007), Trade Liberalization, Intermediate Inputs, and Productivity: Boosing Exports through intermediate goods. · Brenton et al (2011), Risky Business: Poor Women Cross-Border Traders in the Great Lakes Region of Africa. World Bank. · Brenton, Cardot and Pierola (2012), Pathways to African Export Sustainability, World Bank. · EAC (2015), Status for the Elimination of Non-Tariff Barriers in the East Africa Community as of September 2015. · EAC (2014), Trade Report. · Fernandes, Freund and Pierola (2015), Exporter Behavior, Country Size and Stage of Development Evidence from the Exporter Dynamics Database. · GoR, (2016), AGOA Implementation Plan. · GoR, (2015), BNR Foreign Private Capital in Rwanda. · GoR, BNR(2017), Monetary Policy and Financial Stability Statement (2017). · GoR, MINICOFIN, Rwanda Annual Economic Report, 2014/2015. · GoR, NAEB Annual Report 2014-2015. · GoR, Nation Cross-Border Strategy (2011-2017). · GoR, National Export Strategy II. · GoR, National strategy for the Elimination of Non-Tariff Barriers (2011). · GoR, Private Sector Development Strategy (2013-2018). · IGC, Raising Exports and Attracting FDI in Rwanda (2016). · ITC, Rwanda: Company Perspectives – An Itc Series On Non-Tariff Measures 2014. · Pierola and Freund, The Origins and Dynamics of Export Superstars (2016). · World Bank, Rwanda Agriculture Sector Risk Assessment (2015). · World Bank, Rwanda Economic Update, Leveraging Regional Integration (2012). · World Bank, Rwanda Jobs and Employment Study (2015). · World Bank, Africa's Pulse: An analysis of issues shaping Africa's economic future (2016). Rwanda Economic Update • Edition No. 10 39 ANNEXES Annexes ANNEX A: Annex Table A1: Rwanda selected macroeconomic indicators 2012 2013 2014 2015 2016 (Annual percentage change, unless otherwise indicated) GDP growth rate 8.8 4.7 7.6 8.9 5.9 Agriculture 6.5 3.3 6.6 5.0 3.9 Industry 8.4 9.3 11.0 8.9 6.8 Services 11.6 5.2 7.0 10.4 7.1 Consumer price index End of period 3.9 3.6 2.1 4.5 7.3 Period average 6.3 4.2 1.8 2.5 5.7 Money and credit Broad money (M3) 34.8 11.1 19.6 30.0 7.8 Credit to the private sector 14.1 15.6 19.0 21.1 7.5 Policy rate (end of period) 7.5 7.0 6.5 6.5 6.3 Exchange rate (Rwf/US$) End of period 631.4 670.1 694.4 747.4 819.8 Period average 614.3 646.7 682.8 720.0 787.8 General government budget1 (Percent of GDP, unless otherwise indicated) Revenue and grants 25.3 23.5 25.8 25.0 24.5 Total revenue 14.3 15.7 16.6 17.7 18.5 Total grants 11.0 7.8 9.1 7.3 5.9 Total expenditure and net lending 26.5 28.4 29.7 29.9 27.9 Current expenditure 14.8 13.5 15.0 14.7 15.1 Capital expenditure 11.6 12.0 13.7 13.6 11.5 Net lending 0.0 2.9 1.0 1.6 1.4 Overall deficit Including grants -1.5 -5.2 -4.2 -4.8 -3.9 Excluding grants -12.5 -13.0 -13.4 -12.2 -9.8 Financing 1.4 5.2 4.2 4.8 3.9 Foreign financing 2.3 7.2 2.0 3.3 3.6 Domestic financing -0.9 -2.0 2.2 1.5 0.3 External sector Goods exports (goods and services) 15.1 16.8 16.4 18.4 19.0 Goods imports (goods and services) 32.6 32.1 33.2 35.6 37.0 Current account balance -10.2 -7.3 -11.8 -13.4 -14.4 Gross international reserves (million US$) 850.3 1,070.0 950.8 922.3 1,001.5 1 On fiscal year basis (July-June). For example, the column ending in 2012 refers to FY2011/12. 42 Rwanda Economic Update • Edition No. 10 Annexes Annex Table A2: Rwanda increased its Doing Business ranking on four indicators Rwanda EAC regional Indicators 2017 rank 2016 rank Change in rank average Starting a Business 56 59 3 102 Dealing with Construction Permits 158 109 -49 153 Getting Electricity 117 119 2 131 Registering Property 4 12 8 93 Getting Credit 2 2 no change 59 Protecting Minority Investors 102 97 -5 115 Paying Taxes 59 48 -11 107 Trading Across Borders 87 131 44 134 Enforcing Contracts 95 117 22 91 Resolving Insolvency 73 69 -4 103 Overall 56 59 3 110 Source: Doing Business Report, World Bank staff calculation Rwanda Economic Update • Edition No. 10 43 Annexes Annex Table A3: Performance in Rwanda’s formal exports 2012 2013 2014 2015 2016 I. Share of exports Traditional products 48.5 50.7 45.7 38.8 29.4 Export crops 21.4 15.7 15.4 19.7 16.4 Coffee 10.3 7.8 8.3 9.1 7.9 Tea 11.1 7.9 7.2 10.6 8.5 Minerals 23.0 32.1 28.1 17.2 11.6 Cassiterite 9.0 8.7 9.9 5.0 4.7 Coltan 9.6 19.1 14.5 9.7 5.3 Wolfram 4.4 4.3 3.7 2.5 1.6 Others 4.1 2.8 2.2 1.9 1.5 Other products 33.2 30.1 31.4 35.2 40.5 Informal cross border exports 17.2 15.6 14.9 15.8 16.4 Reexports 18.3 19.2 22.9 26.0 30.1 II. Change in value Traditional products -5.1 24.2 -7.1 -19.8 -17.4 Export crops -8.6 -12.8 1.0 20.7 -9.4 Coffee -18.4 -9.8 8.7 4.0 -5.7 Tea 2.9 -15.6 -6.7 40.0 -12.5 Minerals -10.1 65.9 -9.9 -42.1 -26.6 Cassiterite -45.4 15.5 17.8 -52.4 1.6 Coltan 47.5 136.5 -22.1 -36.8 -40.0 Wolfram 63.9 14.4 -11.5 -34.8 -31.5 Others 98.6 -17.0 -19.7 -19.9 -15.9 Other products 56.9 8.1 7.1 6.0 25.3 Informal cross border exports 42.5 7.4 -1.7 0.8 12.6 Reexports 189.8 25.0 22.5 7.6 26.1 Total 27.3 19.0 2.9 -5.5 9.0 III. Change in volume Traditional products 4.8 6.8 -3.5 0.5 -5.5 Export crops 0.3 3.9 -5.8 12.5 -1.0 Coffee 89 17.7 -20.1 17.7 -0.8 Tea -5.4 -6.4 7.9 8.9 -1.1 Minerals -14.9 27.2 9.3 -30.5 -10.2 Cassiterite -33.3 5.6 21.6 -35.4 -7.7 Coltan 28.6 115.4 -6.6 -28.3 -23.1 Wolfram 74.0 26.7 -0.2 -19.4 -3.8 44 Rwanda Economic Update • Edition No. 10 Annexes 2012 2013 2014 2015 2016 VI. Change in prices Traditional products Export crops Coffee -25.1 -23.4 36.0 -11.6 -4.9 Tea 8.7 -9.8 -13.5 28.6 -11.5 Minerals Cassiterite -18.1 9.4 -3.1 -26.3 Coltan 14.7 9.8 -16.6 -11.9 -21.9 Wolfram -5.8 -9.7 -11.4 -19.1 -28.8 Source: BNR, World Bank staff calculation Rwanda Economic Update • Edition No. 10 45 Annexes Annex Table A4: Government operations: budget and actuals FY2015/16 FY2016/17 Jul-Dec prel. Revised Actual Original Revised Jul-Dec budget actual Billion Billion Billion Billion Billion Billion Rwf % GDP Rwf % GDP Rwf % GDP Rwf % GDP Rwf % GDP Rwf % GDP Revenue and grants 1,479.0 24.1 1,540.0 24.5 1,601.9 23.5 1,567.0 22.9 762.0 22.4 764.3 22.4 Total revenue 1,104.2 18.0 1,166.2 18.5 1,236.6 18.2 1,240.4 18.1 603.4 17.7 599.1 17.6 Tax revenue 975.4 15.9 1,000.3 15.9 1,091.6 16.0 1,101.3 16.1 514.7 15.1 508.7 14.9 Direct taxes 413.7 6.7 406.2 6.5 470.0 6.9 488.5 6.5 197.6 5.8 207.7 6.1 Taxes on goods and 486.4 7.9 510.3 8.1 542.0 8.0 560.3 8.2 271.2 8.0 258.1 7.6 services Taxes on 75.2 1.2 83.9 1.3 79.6 1.2 92.5 1.4 45.9 1.3 42.8 1.3 international trade Non-tax revenue 128.8 2.1 165.9 2.6 145.0 2.1 139.1 2.0 89.0 2.6 90.4 2.7 Total grants 374.8 6.1 373.8 5.9 365.3 5.4 326.6 4.8 158.3 4.6 165.2 4.9 Budgetary grants 205.8 3.3 204.8 3.3 219.3 3.2 180.6 2.6 85.6 2.5 92.5 2.7 Capital grants 168.9 2.7 168.9 2.7 146.0 2.1 146.0 2.1 64.3 1.9 72.8 2.1 Total expenditure 1,784.9 29.0 1,756.8 27.9 1,848.8 27.1 1,891.3 27.6 901.5 26.5 982.5 26.5 and net lending Current expenditure 899.9 14.6 947.5 15.1 989.7 14.5 1,923.6 14.9 488.4 14.3 549.0 16.1 Wages and salaries 226.3 3.7 242.3 3.9 252.1 3.7 258.3 3.8 126.1 3.7 148.1 4.3 Purchases of goods 179.8 2.9 180.6 2.9 201.0 3.0 201.0 2.9 88.5 2.6 99.2 2.9 and services Interest payments 56.1 0.9 56.7 0.9 65.5 1.0 68.6 1.0 34.2 1.0 37.0 1.1 Domestic Int (paid) 26.4 0.4 25.4 0.4 28.6 0.4 30.6 0.4 16.0 0.5 18.6 0.5 External Int (paid) 29.7 0.5 31.3 0.5 36.8 0.5 38.0 0.6 18.2 0.5 18.5 0.5 Transfers 336.9 5.5 308.7 4.9 360.3 5.3 360.3 5.3 161.0 4.7 162.2 4.8 Exceptional social 100.8 1.6 159.2 2.5 110.8 1.6 135.4 2.0 78.7 2.3 103.4 3.0 expenditure Capital expenditure 776.3 12.6 720.8 11.5 750.8 11.0 741.9 10.8 356.5 10.5 109.0 9.1 Domestic 488.5 7.9 446.9 7.1 409.2 6.0 398.0 5.8 181.8 5.3 166.9 4.9 Foreign 278.7 4.7 247.0 4.4 341.4 5.0 343.9 5.0 174.7 5.1 142.1 4.2 Net landing 108.7 1.8 88.4 1.4 108.5 1.6 125.8 1.8 62.7 1.8 43.7 1.3 Change in arrears -26.4 -0.4 -27.6 -0.4 -20.0 -0.3 -20.0 -0.3 -10.0 -0.3 -12.2 -0.4 (not reduction) Overall deficit (cash basis) Including grants -332.4 -5.4 -244.4 -3.9 -266.9 -3.9 -344.3 -5.0 -149.5 -4.4 -150.4 -4.4 Excluding grants -707.2 -11.5 -618.2 -9.8 -632.2 -9.3 -670.9 -9.8 -307.8 -9.0 -315.6 -9.3 Foreign financing 239.7 3.9 226.6 3.6 343.8 5.0 350.5 5.1 250.9 7.4 216.9 6.4 (net) Domestic financing 92.7 1.5 17.8 0.3 -76.9 -1.1 -6.3 -0.1 -101.4 -3.0 -66.5 -2.0 46 Rwanda Economic Update • Edition No. 10 Annexes ANNEX B: STRUCTURAL TRANSFORMATION AND PRODUCTIVITY PATTERNS Annex Table B1: Labor force and productivity, 2005-2014 GDP/value added, constant 2014 Labor Productivity Change in Labor Force, factors prices (million Rwf per Productiv- Thousands (billion Rwf) worker) ity 2005 2014 2005 2014 2005 2014 2014/2005 Total Value Added 4,488 5,479 2,579 5,089 0.6 0.9 61.65 Agriculture, Fishing and Forestry 3,556 3,704 1,009 1,572 0.3 0.4 49.57 Mining 18 71 93 147 5.2 2.1 (60.20) Manufacturing 76 110 184 322 2.4 2.9 21.74 Utilities 4 11 37 78 8.3 7.1 (13.74) Construction 72 279 124 392 1.7 1.4 (18.83) Transport, Communication and ICT 58 115 99 287 1.7 2.5 46.87 Financial Services 13 16 70 159 5.2 9.7 85.89 Hotels and Restaurants 9 38 55 96 6.1 2.5 (59.19) Other Services 682 1,134 908 2,036 1.3 1.8 34.75 Source: NISR, World Bank staff calculation Annex Table B2: Labor Force Breakdown by Economic Sectors, thousands, LFS 2016 2016 Employed population 2,831 Agriculture, forestry and fishing 1,324 Mining and quarrying 80 Manufacturing 1,324 Electricity, gas, steam, air conditioning supply, water, sewerage and waste 11 Construction 212 Wholesale, retail trade, repair of motor vehicles, motorcycle 399 Transportation and storage 80 Accommodation and food services activities 48 Information and communication 5 Financial and insurance activities 11 Other services 79 Public administration, defense, education, health, arts and other services 291 Activities of households as employs 164 Source: NISR, World Bank staff calculation Rwanda Economic Update • Edition No. 10 47 Annexes Annex B3: Growth Decomposition Methodology A growth accounting exercise is one of the most commonly used economic tools to decompose sources of growth at a firm or country level. At a country level, the exercise decomposes the contributions of the production factors including capital, labour and productivity to economic growth. More specifically, the exercise enables us to decompose economic growth into a weighted average of the growth rate of labour and capital, and total factor productivity (TFP) as a residual. This exercise uses the following Cobb-Douglas production function: with being the capital share of income. This formula shows that changes in output can be caused by changes in capital stock (Kt), the labour force (Lt), the quality of Labor (Ht) and TFP. The application in Rwanda’s context also requires assumptions on the capital share of income , the depreciation rate , return to average years of schooling . Based on various literatures on a growth accounting, the growth accounting exercise for Rwanda assumes that = 0.35, = 5 percent, and = 5 percent. Source: Rwanda’s Economic Growth since 1994 48 Rwanda Economic Update • Edition No. 10 Annexes ANNEX C: EXPORT PATTERNS AND DYNAMICS: FIRM-LEVEL EVIDENCE Annex C1: EXPORT PATTERNS AND DYNAMICS: FIRM-LEVEL EVIDENCE In order to benchmark the performance of Rwandan exporters relative to the rest of the world, a cross- country regression has been estimated on a panel of country-year exporter dynamics indicators covering the 2006-2014 period including all developing and developed countries available in the Exporter Dynamics Database (EDD). Table C1 displays the results from cross-country regressions where the dependent variables are each of a series of exporter competitiveness and dynamics indicators. The regression controls for the size and the level of development of the country and for time trends. Each regression includes a dummy variable identifying the observations for Rwanda whose coefficient will determine how Rwanda performs relative to the benchmark countries. Rwanda Economic Update • Edition No. 10 49 50 Annex Table C1: Benchmarking Rwanda’s Export Performance and Dynamics (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Log Log Log No. of Log No. of Entrant Average Median Herfindahl Share of Share of Products Destina- 1st Year Share of Log No. of Exporter Export- -Hirschman top 1% top 5% per Ex- tions per Firm Entry Firm Exit Survival Entrants in Exporters Size er Size Index Exporters Exporters porter Exporter Rate Rate Rate TEV Rwanda Economic Update • Edition No. 10 Rwanda Dummy 0.163* -1.144*** -1.593*** -0.062*** -0.095*** 0.024 -0.597*** -0.222*** 0.201*** 0.157*** -0.121*** 0.081*** (0.087) (0.082) (0.127) (0.009) (0.023) (0.016) (0.056) (0.046) (0.016) (0.015) (0.017) (0.031) Log GDP 0.664*** 0.210*** 0.315*** -0.023*** -0.002 -0.008 0.081*** 0.129*** -0.021*** -0.020*** 0.021*** -0.006** (0.027) (0.026) (0.037) (0.004) (0.006) (0.005) (0.017) (0.012) (0.003) (0.004) (0.004) (0.003) Log GDP Per Capita 0.190*** 0.060** -0.258*** 0.002 0.039*** 0.029*** 0.076*** 0.029** -0.004 -0.003 -0.023*** -0.001 (0.030) (0.029) (0.045) (0.003) (0.008) (0.006) (0.018) (0.013) (0.005) (0.004) (0.005) (0.003) Year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Observations 394 394 388 394 393 388 387 394 357 356 284 357 R-squared 0.848 0.388 0.227 0.208 0.141 0.116 0.328 0.482 0.287 0.224 0.121 0.106 Note: Robust standard errors in brackets. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% confidence levels, respectively. Annexes Annexes Annex C2: Export Growth Decomposition The change in aggregate Rwanda export between year and year , can be decomposed into the change due to increases or decreases in export at the existing exporting firms (i.e., intensive margin), the increase due to entry of new exporting firms, and the decrease in the due to the exit of existing exporters. Where is the change in Rwanda export between year and year , is the set of continuing exporters that are active in export markets in both and , is the set of entering exporters that are active in export markets in but not in , and is the set of exiting exporters that are active in export markets in but not in . The change in exports shipped by continuing exporters can be further decomposed into new destinations, dropped destinations, and continuing destinations. The decomposition of export growth of continuing firms along the destination dimension where is the growth in exports of continuing exporters in Rwanda between and , is the set of continued destinations that are served in both and , is the set of new destinations that are served in but not in , and is the set of dropped destinations that are served in but not in . Finally, the exports of continuing firms in their continued destinations along the product dimension can be decomposed as: Where is the growth in exports of continuing exporters in their continued destinations and , is the set of continued HSs 4-digit products that are exported in both and , is the set of new products that are exported in t but not in , and is the set of dropped products that are exported in but not in . Rwanda Economic Update • Edition No. 10 51 Annexes Annex Table C2: Joint distribution of Rwanda’s export across product and destination Panel A: Distribution based on Panel B: Distribution based on number of exporters in 2009 value of export in 2009 Number of destinations Number of destinations 1 2 3 4-10 11-20 >=20 Total 1 2 3 4-10 11-20 >=20 Total 1 56.9 5.0 1.0 0.7 0.0 0.0 63.7 5.8 13.2 2.7 1.8 0.0 0.0 23.5 Number of HS 6 products (%) 2 10.8 6.1 0.7 0.9 0.0 0.0 18.4 1.0 5.0 0.7 4.6 0.0 0.0 11.3 3 3.0 1.7 0.3 0.7 0.0 0.0 5.7 0.2 0.3 0.0 5.0 0.0 0.0 5.5 4-10 4.9 2.4 1.6 1.9 0.2 0.0 10.9 14.1 1.8 13.6 14.2 0.0 0.0 43.7 11-20 0.3 0.2 0.2 0.0 0.0 0.2 0.9 0.0 0.1 0.7 0.0 0.0 0.4 1.2 >=20 0.0 0.0 0.2 0.2 0.0 0.0 0.3 0.0 0.0 0.1 14.7 0.0 0.0 14.8 Total 75.9 15.5 4.0 4.3 0.2 0.2 100.0 21.1 20.4 17.8 40.3 0.0 0.4 100.0 Panel C: Distribution based on Panel D: Distribution based on number of exporters in 2016 value of export in 2016 Number of destinations Number of destinations 1 2 3 4-10 11-20 >=20 Total 1 2 3 4-10 11-20 >=20 Total 1 59.2 2.5 0.6 0.4 0.0 0.0 62.7 59.2 2.5 0.6 0.4 0.0 0.0 62.7 Number of HS 6 products (%) 2 12.9 2.9 0.7 1.3 0.1 0.0 17.9 12.9 2.9 0.7 1.3 0.1 0.0 17.9 3 4.2 1.5 0.7 0.5 0.2 0.0 7.1 4.2 1.5 0.7 0.5 0.2 0.0 7.1 4-10 5.2 2.8 0.9 1.5 0.0 0.2 10.5 5.2 2.8 0.9 1.5 0.0 0.2 10.5 11-20 0.7 0.2 0.2 0.5 0.1 0.0 1.7 0.7 0.2 0.2 0.5 0.1 0.0 1.7 >=20 0.1 0.0 0.1 0.0 0.0 0.0 0.2 0.1 0.0 0.1 0.0 0.0 0.0 0.2 Total 82.3 9.8 3.3 4.1 0.4 0.2 100.0 82.3 9.8 3.3 4.1 0.4 0.2 100.0 Source: NISR, World Bank staff calculation Annex Table C3: Market share by cohorts Entrants cohorts Year 2009 2010 2011 2012 2013 2014 2015 2016 2009 1.000 2010 0.862 0.138 2011 0.766 0.130 0.104 2012 0.786 0.129 0.057 0.028 2013 0.592 0.095 0.077 0.046 0.190 2014 0.571 0.110 0.037 0.058 0.146 0.077 2015 0.449 0.115 0.074 0.036 0.168 0.118 0.041 2016 0.407 0.121 0.035 0.050 0.083 0.154 0.121 0.028 52 Rwanda Economic Update • Edition No. 10 Annexes Annex C3: The role of intermediate inputs on export performance – a regression analysis This section explores the link between imported intermediate inputs and export performance using a regression analysis. The objective is to explore whether firms that are both exporting and importing intermediate inputs differ in terms of a number of export performance indicators – exporter size, export growth, export product scope, market diversification, and export quality (measured by the relative unit prices). All regressions include firm fixed effect to control for time-invariant factors that lead to a correlation between imported intermediate inputs and export. The cyclical effects are also accounted by including year fixed effects. Table C4 presents the results of the regression. Columns (1-5) of Table 2 report results of the regression of different measures of firm export performance on an indicator whether exporter is also an intermediate input importer, controlling for firm and year fixed effects. The result suggests that, on average, firms that increase their reliance on intermediate inputs tend to expand their product scope, measured by firm-level count of unique HS 6 products. The result also suggests that firms importing intermediate inputs tend to expand their destination markets. Import of intermediate input does appear to affect export growth and quality of export, measured by the relative price export products. The effect of intermediate imports on firm-export performance may depend not only on the trade status but also the level of intermediate input sourcing. Thus, limiting the analysis to binary import status may mask important heterogeneity among exporting firms. The figure below displays a kernel density estimate of the distribution of intermediate input imports across exporting firms. As shown in the figure, exporting firms differ significantly in terms of the level of their imported intermediate inputs. To account for this heterogeneity, Columns (6-10) reports regression results where a continuous variable, logarithm of value of intermediate inputs, is used instead of importer-exporter status dummy. The results are generally consistent with the findings with the binary trade status indicator. A greater use of intermediate inputs is associated with higher value of export. Estimating the causal effects of imported intermediate inputs on firm-level export outcome is notoriously difficult. One of the empirical 27 challenges is that the decision to import and export may be jointly determined. The decision to import and export may be affected by change in firm’s observed and unobserved characteristics. For example, it is possible that the decision to import intermediate input is likely to be correlated with other firm characteristics that can independently increase export performance. If such things exist, the estimation may be misleading. The effect of intermediate imports on export outcome is thus subject to concerns with endogeneity and reverse causality. Although the fixed effect estimation circumvents the time-invariant heterogeneity, it is possible that the result may be biased due to the time varying confounders. In view of these concerns, the results should be interpreted as a correlation rather causality. Rwanda Economic Update • Edition No. 10 53 Annexes Annex Table C4: Intermediate Input Importers and Export Performance (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Number Export Number Export Log Number of Export Growth Log of Export Number Growth Value of of Export Destina- (Normal- Export Value of Destina- of Export (Normal- Export Export Products tions ized) Price Export tions Products ized) Price Exporter- 0.259*** 0.335** 0.159*** 0.054 0.075 Importer Dummy (0.097) (0.158) (0.059) (0.092) (0.049) Log (Import 0.039*** 0.020** 0.047*** 0.017 0.002 value+1) (0.011) (0.008) (0.017) (0.011) (0.005) Year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Observations 8383 8410 8383 3912 8410 8383 8383 8410 3912 8410 R-squared 0.008 0.031 0.015 0.034 0.002 0.010 0.016 0.032 0.035 0.001 Note: All regression results include firm fixed effect to account of time-invariant firm heterogeneity. Exporter-Importer Dummy is a dummy variable for current exporter-importer status, which takes 1 if the firm is a two-way trader in year t and 0 otherwise. One is added to the total value of import in order to avoid omitting pure exporters from the analysis due to log transformation. 54 Rwanda Economic Update • Edition No. 10 Produced by Poverty Reduction and Economic Management Unit Africa Region. Photo credits: © World Bank.