RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA 88941 v1 RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA RWANDA FY2014-2018 COUNTRY PARTNERSHIP STRATEGY FOR RWANDA Photo: World Bank Exective Summary 1 Rwanda’s progress has been rapid in recent years, building on a two-decade-long Poverty reduction and shared prosperity turnaround which has been remarkable in both its pace and breadth. A highly strategic 2 Efforts in reducing both poverty and inequality—from high starting points— have been impressive. The poverty headcount approach to development has galvanized dropped, with the share of population living domestic and external resources around below the national poverty line falling from nationally-defined goals and delivered high 59 percent in the early 2000s to 45 percent in rates of economic growth, a significant decline 2011. In Kigali, home to 10 percent of Rwanda’s in poverty, a reduction in inequality and progress population, the incidence of poverty decreased in nearly all developmental outcomes. Rwanda from 22.7 percent in 2001 to 16.8 percent has done extremely well to reap the post- conflict dividend, and now it is time to focus in 2011. Starting from a much higher base, on challenging second-generation economic the rest of the country experienced a 15 reforms of export diversification, structural percentage point drop in poverty. The poverty transformation, regional integration and financial gap ratio, which takes into account the sector deepening. Alongside this economic distance separating the poor from the poverty transformation, the Government will need to line, dropped by almost 10 percentage points, boost the incomes of the poorest to maintain the from 24.4 percent in 2001 to 14.8 percent in gains in poverty reduction and oversee the social 2011. This implies that those who still live and institutional transitions that come with rapid below the poverty line are now closer to it than economic change. This strategy sets out how the they were in 2001, which bodes well for future combined World Bank Group resources can best poverty reduction. Inequality, as measured by help Rwanda achieve its poverty reduction and the Gini coefficient, fell from 0.52 to 0.49. shared prosperity goals. Accelerating Economic Growth iii 3 Though growth was strong throughout the last decade, it is only in the last five years that there has been an effective translation transformation are supported by appropriate skills, and (iv) accountable governance, to improve service delivery and increase citizen into poverty reduction. The first half of the participation in and satisfaction with delivery decade (2001-2006) was characterized by high of development. These thematic areas are growth in Kigali and low, pro-rich growth in supported by eight foundational issues which the rest of the country, leading to an increase are long-term ongoing priorities and seven in inequality and modest poverty reduction. cross-cutting issues.1 The second half of the decade (2006-2011) experienced higher overall growth, mainly concentrated in rural areas, and recorded an exceptionally strong growth rate for the poor, in 5 The Government has set demanding targets across the four thematic areas. These include targets for economic growth, reduction particular the extremely poor. The net result is a of poverty and extreme poverty, increases in the decade of strong growth and poverty reduction installed electricity capacity, promotion of exports, during which welfare gains were realized shifts towards a more urbanized population, at each point in the distribution and were enhancements in access to infrastructure, relatively higher for the poor. The agriculture improvements in the quality of the labor force, sector has seen household-level agricultural creation of jobs and SMEs and improved quality production more than double between 2001 of public services. Though some targets are very and 2011, accounting for 35 percent of the ambitious, the direction established by the results national’s reduction in poverty. framework of the EDPRS 2 accords strongly with Bank Group and IMF assessments of the priority Government’s visions and aspirations challenges. Taken together, the targets represent 4 The Government’s medium term vision a highly ambitious agenda for inclusive growth and targets are set out in a series of over the coming years. sectoral, locality-specific and overarching strategic development plans. The medium term goals are set out in the second Economic 6 Projections show that poverty targets, though demanding, are attainable— but only if past patterns of growth in Development and Poverty Reduction Strategy (EDPRS 2), which aims to accelerate private consumption and reduction in inequality are sector-led growth and further reduce poverty, repeated in the future. Growth alone is unlikely including extreme poverty. It seeks to do so to reduce poverty sufficiently, and therefore a while reducing aid-dependency and increasing balanced approach that emphasizes rapid self-reliance. The four thematic areas are: (i) growth for the lowest two quintiles of the economic transformation, to achieve high population will be crucial. While the vision for and sustained growth and restructure the the future emphasizes the need for off-farm economy towards services and industry, employment to be created for an increasingly (ii) rural development, to bring the national urbanized population, an anchor in agricultural poverty rate below 30 percent, (iii) productivity productivity and rural development will remain and youth employment, to ensure growth and important to achieve this balance. 1 The foundational issue areas are macroeconomic stability, demographics, food security, basic education, primary health care, rule of law, PFM, and decentralization; cross cutting issue areas are capacity building, environment, gender, regional integration, HIV/AIDS and non-communicable diseases (NCDs), disaster management, and social inclusion. iv F Y 2 0 1 4 - 2 0 1 8 • country partnership strategy for R WA N D A 7 Accelerating growth and creating jobs through the intensification and deepening of the private sector lies at the heart of Rwanda, comprising: (i) alignment with the twin goals of growth and poverty reduction; (ii) comparative advantage relative to other the development challenge and implies donors; (iii) opportunity to maximise internal significant action at policy and investment WBG synergies and present a coherent ‘one levels. The imperative for job creation is Bank Group’ approach; (iv) client demand; extremely strong; the total non-farm labor force (v) risk especially with respect to capacity increased from 442,000 in 2001 to 1.4 million in constraints both on the side of Government 2011. About 100,000 formal and informal jobs and the WBG. Based on this approach, the CPS are currently created per year, which is only identifies selected priorities for WBG support half the annual growth needed to maximize within three main themes. benefits from the demographic dividend. 8 Despite the very strong performance with respect to the investment climate, 10 The first theme has as its objective: ‘accelerating economic growth that is private-sector driven and job-creating’. This multiple challenges remain. The private sector includes IDA investments and analytical is relatively small and weak, and geography, work in energy (to tackle high costs and low low productivity and high energy costs make reliability which are major barriers to enterprise Rwanda expensive for enterprises dependent development) and urban development (to on sea ports or energy-intensive processes. enable the Government’s industrial strategy The domestic market is relatively limited and and also help reduce poverty which is lower expanding trade has been hampered by cross- in urban areas). It envisages active investment border tensions and inefficiencies. Enterprise by IFC in the financial sector, supported by surveys—and feedback from the private analytical work by both IFC and the World sector during the consultations for this CPS— Bank. IFC also foresees direct investments in confirm key challenges, highlighting access the private sector by IFC, alongside potential to finance and availability of land as the most MIGA guarantees. Both IFC and the WB will severe constraints, followed by infrastructure engage in policy and analytical work in private (electricity and transport) and labor skills. sector development, leveraging of public- Other issues relate to the arbitrary, uncertain private partnerships (PPPs) and investment and unpredictable way in which certain areas climate work. of regulation are enforced. Strategic options 11 The second theme is: ‘improving the productivity and incomes of the 9 The resources of the WBG are modest poor through rural development and social relative to the financing needs of the EDPRS. protection’. With 80 percent of the labor force Selectivity in using IDA and close collaboration dependent on agriculture, this sector is key to with IFC and MIGA are critical in delivering the increasing incomes. This needs investments maximum impact with these limited funds. in agricultural productivity (partly because of The CPS identifies a set of principles used limited scope for expanding cultivable land in defining future areas of engagement in area), nutrition (to combat child malnutrition in Accelerating Economic Growth v rural areas), rural roads and IFC investments in integration and cross-border investments will horticulture, agribusiness and microfinance. In hopefully bring with it greater political stability social protection, IDA will support an expansion and security in the region. of Rwanda’s social protection system, notably the flagship Vision Umurenge Program. Support will also help strengthen core service delivery and the effective management and 14 Rwanda has expressed its interest in a number of cross-border investments in the Great Lakes region to make use of harmonization of Rwanda’s social protection regional IDA resources. These include the system. There will be additional investments financing of hydropower generation on the for specific vulnerable groups (for example, borders with DRC and Burundi and improved demobilized ex-combatants or victims of transport connections. IFC and MIGA stand gender-based violence). ready to engage in such projects where a private sector role exists (e.g., the Rusizi 3 Power 12 The third theme comprises: ‘Supporting accountable governance through public- financial management and decentralization’. Generation project). Some of IFC’s Rwanda- based clients already serve both the domestic market and those of neighboring countries, This supports the Government’s objective of particularly eastern DRC. Looking East, Rwanda decentralising decision-making and making has expressed interest in a number of projects Government more open and participatory in its that could provide faster access to the sea or processes. This will include likely IDA investment more reliable access to affordable energy. in PFM, fiscal decentralization, statistical systems and open data. A team is currently considering Delivering for results the viability of a Program for Results operation that would drive results in areas of public financial management, fiscal decentralization, 15 IDA allocations for the CPS period remain indicative at this stage. The working assumption is that allocations will be similar statistical capacity and open data. to those in the past, perhaps a little higher in 13 Working across these themes is the need recognition of the improving CPIA score and the to invest in and promote greater regional switch from a mix of grants and credits to credits integration. Rwanda’s size and location will only. As such, IDA may commit approximately mean that stronger integration with regional US$200-250 million a year during IDA17, likely economies will be vital for further growth. spread across three investment operations, two There are two elements to this. The first relates PforR operations and one series of three DPOs. to the need to expand markets for potential In addition, regional IDA should be leveraged investors, to the need to turn “land-locked” into for some priority investments. “land-linked” in the interests of competitiveness. Countries of the region represent potential markets for exports, managers of transport corridors and facilitators of cross-border trade. 16 Budget support has been a highly effective instrument for the delivery of predictable, flexible financing to a reform- As such regional integration is as foundational minded government who spent the resources to the future growth path as having a sound well. But fluctuations in aid flows have to be domestic investment climate. Secondly, regional managed carefully, and this CPS anticipates vi F Y 2 0 1 4 - 2 0 1 8 • country partnership strategy for R WA N D A different combinations of instruments that offer some flexibility in the financing that is delivered. This CPS proposes less emphasis on 18 MIGA currently has two active projects (KivuWatt and Bakhresa Grain Milling) in Rwanda (total gross exposure of $110 million. development policy lending. The Government MIGA is open for business across all of its has requested more of the IDA17 allocation Political Risk Insurance product lines, including in the form of program for results (PforR) Transfer Restriction, Expropriation, Breach of operations. While the previous CAS disbursed Contract and War and Civil Disturbance, as well 66 percent in the form of budget support, this as the Non-Honoring of Sovereign Obligations. CPS is likely to disburse the same proportion as a mix of PforR and Development Policy Managing risks Operations. 19 Risks to growth and poverty reduction arise from variable climatic conditions, 17 IFC has ten deals outstanding in Rwanda with committed volume of US$38 million. They envisage that their investments and the private sector response to government reforms. Stepping up measures to make agriculture more climate-resilient, for will rise to US$120m by the end of the strategy instance through the construction of irrigation period, the bulk of which would be in the facilities and terracing which the Bank is financial sector. IFC expects to engage in the supporting, will be critical. Support for the financial sector through a local currency credit private sector is targeted at taking advantage line, a local currency bond issue and supporting of a better business environment. External risks the establishment of a microfinance bank. In relate to the pace of regional integration and the infrastructure sector they have identified the potential for regional conflict, more-rapid- likely support to the Rusizi III power generation than expected tapering of donor inflows, and project, Lake Kivu methane extraction a prolonged slump in the global economy. The projects and Kigali Bulk Water Supply. With CPS seeks to mitigate the risks on the regional respect to manufacturing, IFC is considering integration side through regional projects, investment for a mix-use commercial building the exposure to flu ctuations in aid flows in Kigali. IFC’s Advisory Services portfolio has through the choice of instruments and the aid been highly valued and regularly received dependence through measures to improve acknowledgement for innovation and impact domestic revenues. through the IFC awards schemes. The Rwanda Entrepreneurship Development Program, the Rwanda Investment Climate Program and the Efficient Security Markets Initiative (ESMID) have been particularly useful. Accelerating Economic Growth vii