Rwanda

In view of the country’s land-locked location and its limited natural resources, the services sector is considered a strategic one, with a potential to spur long-term growth and transform the economy. This process should be driven by technology and knowledge-based activities, yet currently the country has a shortage of skilled labour.

Rwanda is taking steps to address the developmental challenges. In this context, its medium-term development strategy, the Economic Development and Poverty Reduction Strategy (EDPRS) and the long-term strategy Vision 2020 Umurenge provide the policy framework and government priorities for economic and social development. Vision 2020 prioritises expansion of non-farm activities that increase efficiency in service delivery and better targeting of social safety nets.

Building on its previous policies, Rwanda has scored major successes. The country has been identified as the top reforming economy in Africa. The business environment and governance indicators have also improved and Rwanda has a lean and efficient public administration structure. Policy reforms are expected to continue following the success of the coalition under the ruling Rwandan Patriotic Front (FPR) in the parliamentary elections in 2008. Furthermore, the current government has pursued macroeconomic stability as one of its major objectives. The spike in year-on-year inflation above 22% at the end of 2008, caused by fuel and food price increases, had fallen to below 6% by the end of 2009. This sharp drop in inflation in 2009 was a result of many factors, including, among others, falling international fuel and food prices, the domestic credit crunch and prudent monetary policy.

The policy reforms, however, have not yet brought about the structural changes that are necessary to achieve significant poverty reduction and lower levels of unemployment, with agriculture still dominating the overall growth outcomes. In addition, the slow pace in job creation in the formal sector has resulted in a large informal sector estimated to have contributed 48% to GDP in 2008. This large informal sector has posed serious challenges to tax revenue mobilisation in spite of the increase in tax collection and tax efficiency over the past three years. As a result, Rwanda still faces a challenge in widening its tax base. Continuing efforts to improve the business environment and intensification of tax education should help increase tax compliance and a widening of the tax base. More importantly, economic diversification supported by a vibrant private sector, attracting formal business investors in labour-intensive activities, should be part of the strategy aimed at reducing poverty and unemployment.

Following the revision of Rwanda’s national accounts, data show that the country’s real GDP grew at an average rate of 8.3% over the nine years until 2008. This growth is above the 8.1% target for 2012 as set in the EDPRS. But in 2009 growth was significantly lower compared with the 11.2% recorded in 2008. The global financial crisis, especially the collapse in commodity prices, contributed to the weak growth in 2009. Internal factors, including a domestically generated credit crunch, also contributed to the slowdown in economic growth.

Growth in agriculture and services sectors, as well as private investments and public infrastructure spending, have driven economic growth in Rwanda. While agriculture will continue to drive growth in the medium term, there are limits to how much this sector can absorb the ever-growing numbers of young people. In addition, future growth is likely to be more investment-intensive. This prospect partly explains the increasing inequality levels in the country, with more than 85% of the population depending on agriculture for their livelihood. Furthermore, Rwanda’s growth trend reveals its vulnerability to the vagaries of nature, which in turn has serious implications for the external accounts, given the large share of coffee and tea in exports.

Agricultural output grew by 19.3% and 6.6% during the first and second seasons of 2009 respectively. Consequently, weaker agricultural growth dampened growth in the economy, which also had fewer large-scale investments compared with 2008.

Structural constraints, as reported in the 2009 Growth Diagnostic study, are hindering a rapid transformation of the economy. Such constraints include, among others, lack of human capital; poor skills; weak infrastructure and limited innovation potential; micro risks such as bureaucratic red tape; and low domestic savings. However, Rwanda has shown some strength in macroeconomic management and continues to make progress with structural reforms.

Feedback from development partners in December 2009 indicated improvements in fiscal policy and the business environment but there is a need for more action on monetary policy and for the participation of the civic organisations and individuals at the grassroots level in influencing the development process. The reactions also highlighted the importance of increasing transparency in policy making and implementation. In particular, the National Dialogue is considered an important instrument in reinforcing accountability and adherence to policy actions as determined in the EDPRS.

In spite of the spike in inflation in 2008, Rwanda has been fairly successful in maintaining macroeconomic stability. Inflation was brought down to single-digit levels by December 2009 mainly through the central bank’s ability to manage liquidity but also as a result of the credit crunch and falling transport costs. There are concerns that, unless properly managed, inflation could rise to 10% by the end of 2010 as the country recovers some of the lost momentum in growth. Food, rents, utilities and transport experienced upward price pressures during the last three months of 2009. In addition, international oil prices and other commodity prices are projected to continue recovering in 2010, which may push food prices up, impacting negatively on the inflation level. The transport price index gained more than 12 points in June as a consequence of rising international oil prices. The exchange rate for the Rwandese franc (RWF) was fairly stable throughout 2009, depreciating by only 2.21% against the US dollar (USD) for the full year to 31 December 2009 and 3.3% against the euro (EUR) over the same period.

Rwanda’s current account position is estimated to deteriorate by about USD 100 million between 2008 and 2009 because of a decline in export earnings. As shown in Table 1, the current account deficit has widened to 6.7% of GDP in 2009 before it recovers marginally in 2010. During the first nine months of 2009, the trade deficit was USD 395 million compared to USD 393 million for the whole of 2008. Similarly, data for the first three quarters of 2009 show that government expenditure exceeded revenues by RWF 27.9 billion, thereby reversing the surplus realised in 2008. However, the fiscal balance is expected to improve but remain in deficit during 2010 and 2011.

The agricultural sector’s contribution to GDP declined from 38% in 2004 to 33% in 2008. Overall, the agricultural sector grew by 12.6% in 2009, almost 3 percentage points lower than the 2008 level. Major drivers of growth in agriculture were cereals, tubers and coffee. Tea, fruit and vegetable production declined. The decrease in tea production resulted in a fall in both industrial and export volumes. Whereas production of peas and groundnuts increased tremendously, their relatively small share of 4.7% in total agricultural output could not reverse the overall slowdown of the sector’s growth.

Annual sales in both the industrial and service sector grew by 3.6% in 2009 compared with 37.8% in 2008. Manufacturing declined by 0.7% while the mining and petroleum services sub-sectors contracted by 19.6% each. The best performing subsectors in 2009 were energy, postal and telecommunications, and other services, all of which registered more than 25% growth but remained far lower when compared with the same period in 2008.

Actual industrial output increased in a majority of sub-sectors, with the best performance recorded in vegetable conservation (390.5%), rice production (169.4%), coffee (160.7%) and animal feeds (57.4%). In spite of the successful control of disease in the tea sector, output still fell by 42.7%. Similarly, output declined in the tobacco, textile and construction sub-sectors. The decline in construction activities from 26.9% in 2008 to 2.4% in 2009 is reflected in the output volume of the bricks and tiles sub-sector as well.

Given the high contribution of the industrial sector to GDP, overall growth is likely to fall from its level of 2008 as the services sector has also been depressed. Specifically, the decline in construction, the largest single sub-sector in industrial output, contributing 8% to GDP in 2008, will pull down overall growth in industrial output.

Revised national accounts data show the average gross capital formation (GCF) expenditure at more than 15 % of GDP in 2007 and 2008. As a result, Rwanda recorded its fastest growth in real GCF experienced since 1995. Estimates for 2009 and 2010 show a huge reduction in the growth of GCF as shown in Table 2. Growth in total consumption expenditure, which constitutes more than 90% of GDP, is also estimated to have been sluggish. Given this high proportion of consumption to GDP, domestic savings are extremely low. This outcome has been identified as one of the major constraints to long-term growth in Rwanda. In fact, a poor savings culture and limited access to banking services contributed to the domestic credit crunch in 2009.

Rwanda registered a 41% increase in private investment approvals in 2009. Investments amounting to USD 1.1 billion were approved, buoyed by Rwanda’s superior performance in policy reforms targeted at attracting private investment. Of this amount, 47.6% was foreign investment and the rest came from domestic sources and Rwandan nationals in the diaspora. The increase in investment approvals took place in spite of the cancellation of six out of eight investments by Dubai World worth USD 230 million. The two remaining projects in ecotourism were worth USD 25 million only. The largest approved investment was the 100 MW methane gas project worth USD 300 million undertaken by the Canadian firm ContourGlobal followed by the biodiesel investments by Britain’s Eco Positive and US-based Eco-fuel Global LLC amounting to USD 250 million. Millicom International Cellular of Sweden invested USD 100 million in Rwanda’s third telecom operator. However, data on investment approvals need to be treated with caution. While the Rwanda Development Board indicated a 79% implementation success rate of approved projects, inflows of these investments are spread over more than one year. Actual foreign direct investment (FDI) inflows, as reported in balance of payments data for 2007 and 2008, show inflows of USD 67 million and USD 97 million. In addition, projections in the 2009 –2012 Budget Framework Paper suggest actual investment will be significantly lower than that reported for approved projects.

Projections indicate that both private and public consumption will grow in 2010, leading to a partial recovery in growth. The slower pace of recovery in growth is explained by withdrawals via a faster increase in import expenditures compared with exports. Commodity prices are expected to recover slowly since they depend on the recovery in developed economies, leading to slower recovery in economic growth in Rwanda. 

The government’s Public Financial Management Reform Strategy 2008-12 resulted in the setting up of a secretariat that will co-ordinate the reform process. Some of the objectives set to measure progress of the reform efforts include: the achievement of goals set within the multiyear budgeting framework; setting up of institutional and legal frameworks to implement the reforms; enhancement of the effectiveness of payroll controls; and timely submission of annual financial statements and audit reports. These reforms have already started to have positive effects on efficiency in financial management. For example, the number of audits performed and properly tendered projects has increased from previous years.

From 2009, Rwanda shifted to the East African Community fiscal year that starts on 1 July and ends 30 June of the following year.  A mini-budget for January-June 2009 was approved in 2008. The mid-year review of the budget performance showed that tax revenue was RWF 5.5 billion more than the targeted RWF 178.1 billion. The main driver of this good performance in tax revenue was customs revenue, which exceeded its target by 37%, reflecting the higher-than-expected import surge during the first half of 2009. On the other hand domestic goods and services tax revenue matched the projections but income taxes were 3.2% lower than the target. Similarly, non-tax revenue did not match the target, falling short by 41%. External budgetary grants disbursed amounted to RWF 103.6 billion, almost RWF 24 billion lower than the projected level. In 2010 proceeds from the sale of government shares in tea factories, as gazetted at the end of 2009, will help boost government coffers.

Total expenditures during the first half of 2009 amounted to RWF 294.7 billion. Allocations of this amount were largely in line with EDPRS priority areas. The ministry of education was allocated 18.5% of the total budget followed by government services at 15.8%. Defence expenditures, which included the peacekeeping operation in Sudan and the Democratic Republic of Congo internationally approved operations, received 11.7% while the legislative and executive budgets received 11.8%. Government spending on priority areas amounted to RWF 170 billion; comprising RWF 111.2 billion in recurrent expenditure, RWF 55.8 billion in capital outlays and RWF  3 billion in net lending. Foreign-financed capital expenditures amounted to RWF 68.9 billion. Total government expenditure, therefore, amounted to RWF 351.9 billion, excluding arrears payments.

Overall, the targeted RWF 15.6 billion surplus was not realised, and instead a fiscal deficit of RWF 75.9 billion was incurred during the first six months of 2009. By the end of the third quarter of 2009 preliminary data pointed to a narrowing of the deficit in the third quarter as it contracted to RWF 12.5 billion as a result of increased disbursements of aid. Projections for 2009 point to a fiscal deficit of 1.9% as a result of the fall in inflation and lower profits from the corporate sector. The fiscal balance will improve, though marginally, over the next two years as reflected in Table 3 below. Also, of particular note is that Rwanda’s fiscal deficit, excluding grants, has been higher than other low-income countries since 2006.

The main objective of monetary policy in 2009 was to lower inflation to single digit level and to ensure the provision of sufficient liquidity to the banking sector following an international credit crunch. Of particular importance was the need to ensure that banks were able to provide long- term financing to the private sector. Also important was the need to achieve a co-ordinated approach to the overall macroeconomic policy framework, making use of all available policy instruments with a view to strengthening short, medium, and long-term policy effectiveness.

Rwanda experienced a liquidity crisis towards the end of 2008, which has been described as a domestically generated outcome. This necessitated the intervention of the Central Bank, which injected about RWF 13 billion into the banking sector at the end of January 2009. The liquidity crisis was in stark contrast to the excess liquidity that prevailed since 2004. This crisis was caused by a reduction in deposits by major depositors who chose to channel their resources into investment opportunities in the country and abroad while at the same time increasing their withdrawals. In addition, the increasing negative interest levels faced by depositors in the face of rising inflation increased the opportunity cost of bank deposits. While Rwanda’s crisis may not have been directly linked to the global financial crisis, its timing and character have some of the elements that defined the impact of the global crisis on economies in Africa. However, domestic factors significantly explain this outcome. For example, increases in construction and capital expenditures by both the private and public sectors led to an increase in import requirements, since a significant proportion of inputs are imported. This increase in imports occurred at a time when import prices were high, which also meant higher volumes of local currency requirements to meet import obligations.

As a result of these factors, currency demand rose by 28% in 2008 compared with 9% in 2007. On the other hand deposits increased by only 6.4% in 2008 compared with 35% in 2007. In addition, mortgage loans increased by 40% in 2008, leading to a mismatch in bank balance sheets as deposits were largely of a demand nature while loans were increasingly of a long-term nature.

In response, the Central Bank increased its policy rate from 8% to 9%, in addition to injecting RWF 13 billion in January 2009. The increase in the policy rate was meant to increase the cost to banks of borrowing from the Central Bank and thereby encourage interbank trading while at the same time ensuring that money supply was kept under control given the high inflation levels. Another objective was to reduce the extent of negative interest levels, with a view to stemming withdrawals. These measures were followed by a reduction in the reserve requirements from 8% to 5% in February. The Central Bank further introduced a refinancing instrument to allow banks to borrow funds to cover their short positions for periods ranging from three to 12 months. Furthermore, to complement this instrument, the Central Bank suspended roll-over of short-term maturing treasury bills. At the same time, a second RWF 12.5 billion deposit instrument was launched to support long-term lending. This instrument supported lending of five-year tenure.

The policy responses presented operational difficulties for the banking sector operators. For example, the high cost of the short-term instruments prevented banks from accessing them and interbank transactions were limited because surplus funds holders were demanding high interest for their funds, consistent with what the policy dictated. The challenge is for the monetary authorities to be more flexible with their interest policy to address some of the private sector concerns with a view to promoting the long-term credit market.

One of the most important outcomes from the credit crunch is that banks became more innovative by offering attractive incentives to the public to increase deposits. In particular, banks opened more branches to attract smaller depositors who had not previously been a major target for them. For instance, one of the major banks plans to open 10 new branches annually in various locations over the coming years. In addition, banks are investing in new technology-based products to enhance banking convenience as well as improve the efficiency of their services. Additionally, the spread between lending and deposit rates has narrowed as the latter increased. However, a few of the smaller banks have made losses despite an improvement in the ratio of non-performing loans from 9.3% to 8.6%.

Overall, these policy responses, together with the increased inflow of budgetary support from development partners that rose by about 9%, have improved liquidity.  Between the second and third quarters of 2009, broad money supply had risen by 7%. As a result, during the course of the year liquidity in the banking sector rose, necessitating mopping-up operations following a liquidity increase to RWF 11.5 billion in April and RWF 52.3 billion by 7 December 2009.

In 2009, Rwanda’s external position worsened compared with 2008. While imports increased by 12.3% in value and 14.9% in volume during the first nine months of 2009, compared with the corresponding period of 2008, exports decreased by 23.8% in value and 26% in volume. Export growth started to slow down towards the end of 2008 as a result of the global financial crisis. The imports/exports coverage ratio has therefore worsened to 14.3% from 21.1%.

Both the value and volume of coffee exports decreased in spite of an increase in output. The poor performance of coffee was largely a result of the fall in international prices. In 2009 coffee sold at USD 2.47 per kg compared to USD 2.58 per kg in 2008 while the price of tea rose from USD 2.13 per kg in 2008 to an average of 2.45 USD per kg in 2009. This outcome is the exact opposite for tea, where output decreased yet its value and volume of exports increased. Rwanda’s exports continued to be dominated by coffee, tea and minerals, increasing from 69% of total earnings in 2008 to 81% in 2009.

Other exports suffered the worst decline. For example, wolfram and hides and skins, which contributed only USD 20 million to export earnings, each decreased by more than 45%. Coltan and tin export earnings fell by about 38% and 44%, respectively. Positive export earnings growth was recorded in tea and the “other export” category, which grew by 31% over its 2008 level.

Services exports are dominated by transport and travel, which constitute more than 80% of receipts in this sector. This reflects the importance of the tourism sector in Rwanda, which has been attracting much investment from both local and foreign investors. For instance, the Dubai World aborted investments were all targeted at the tourism sector. In 2007 the tourist industry was the country’s largest foreign currency earner at USD 209 million which was expected to increase in 2008 despite the global financial crisis. Most of the tourists to Rwanda are business visitors, with foreign tourists accounting for about 97% of hotel occupancy. Rwanda is strategically located and has the potential to expand its distribution, financial and information, communication and technology (ICT) services sectors, given its proximity to the East and Central African markets.

In 2009 imports were dominated by capital, intermediate inputs and energy as in previous years. These three import categories represented about 72% of the total import bill. Food imports make up about 10% of all imports. The OECD countries are the major source of imports and principal export destination.

Given the poor export performance and a rise in import expenditures, coupled with a less than compensatory increase in capital flows, Rwanda’s current account deficit is projected to have widened in 2009. A slight improvement is, however, expected in 2010 thanks to a recovery in commodity prices. It is estimated that the current account deficit will widen from 6.4% in 2008 to 6.7% in 2009, and improve to 6.2% in 2010 as shown in Table 4 below.

In 2009 Rwanda moved to implement the requirements of its membership to the East African Community (EAC) and the Common Market Protocol is expected to come into force in early 2010. This included the implementation of the external common tariff, elimination of non-tariff barriers, application of the EAC Rules of Origin, simplified Certificate of Origin and harmonisation of its fiscal year to start on 1 July. Rwanda also adopted and started to apply the EAC Customs Management Act of 2004 and prohibitions and restrictions while also undertaking public awareness and capacity-building programmes related to its membership. Rwanda’s commitment to regional integration is demonstrated in its participation in projects that facilitate trade, such as the one-stop border post with Uganda and regional road and rail projects. Furthermore, regulatory reforms also help in dismantling the behind-the-border barriers to trade.

In spite of earlier projections pointing towards a fall in remittances, the Diaspora Unit in the ministry of foreign affairs reported an increase in remittances from USD 63 million in 2008 to USD 175 million in 2009. It is, however, important to note that the remittance data in Rwanda have been less than reliable because of difficulties in recording such cash flows.

Rwanda’s debt declined from USD 1.6 billion to USD 485 million in 2006 after reaching the HPIC Completion point in 2005. However, external debt has steadily built up since then to USD 700 million in 2009 and is projected almost to double from its 2006 level by 2011. In 2008 Rwanda’s debt distress classification was revised from high to moderate after the joint Debt Sustainability Analysis. About 72% of Rwanda’s debt was owed to multilaterals, with domestic debt constituting 14% of the total and the rest from bilateral arrangements. Official development assistance (ODA) flows have been high. The grants component of ODA constituted 13% of GDP in 2008 and slightly more at 13.6% in 2009. From 2000, ODA rose from USD 342 million to USD 500 million in 2004 and is estimated to have reached USD 700 million in 2008 and projected to remain at that level in the medium term. While ODA is expected to remain at the 2008 level until 2012, commitments from major donors indicate that the proportion of loans in ODA will rise from an average of 9% in 2009 to about 26% in the 2010/11 financial year. Consequently, the debt-to-revenue and grants ratio is expected to rise from 2.1% in 2009 to 2.4% in 2010. Similarly, both the debt to GDP and debt service ratios will rise in 2009. Expected better export performance in 2010 will reduce the debt service ratio marginally to 2.8% from 3% in 2009 (Figure 3). However the recent trend in debt levels seems to have been reversed as a result of the financial crisis. The present value of the public debt-to-revenue and grants is now projected to rise from 52.3% to 63% over the next two years. The implication of this scenario is that lower levels of fiscal deficits are required to maintain debt within sustainable levels of less than 1% in 2009 and 2010.

Recognising the risks of widening fiscal balances on debt sustainability, Rwanda developed a debt policy that was approved in late 2008. A major aspect of the policy is that debt financing will only be considered as an option in financing capital and economically viable programmes which advance Rwanda’s development objectives. For example, debt financing will be allowed if it promotes GDP growth, capital formation, job creation and export revenues.

Since 2008 Rwanda has undertaken institutional reforms aimed at improving the business environment. As a result, the private sector now faces fewer constraints. This improvement in the business environment is reflected in the 2009 overall World Bank Doing Business ranking, where Rwanda moved from 143^rd to 67^th out of 183 countries in the global rankings.  However, there are areas where more work is required. In particular, Rwanda moved down in the “tax payments” and “construction permits” indicators. In addition, the country remained anchored at the bottom in requirements for closing business.

During 2009, Rwanda’s parliament passed four laws that include the amended Companies Act and Insolvency and Negotiable Instruments laws meant to address issues on the conduct of business start-ups and financial transactions. The implementation of the Companies Act of 2009 resulted in reducing the number of legal steps required to start a business as well as reducing the time required to register a company to three days. Development partners have also been active by providing funds for projects related to private sector development. During 2009 the Central Public Investments and External Finance Bureau (CEPEX) managed 40 projects financed to the tune of USD 165 million, with 43% of the resource utilised by June.

The banking sector has been dominated by four main banks (owning 72% of assets). These banks have largely focused on high net-worth investors at the expense of small and medium-sized enterprises (SMEs) and were unprepared to finance long term investments, especially the large-scale projects mostly financed by foreign investors. Financial reforms of the past two years strengthened the banking sector. However, banks have largely avoided lending to small and individual borrowers and did not make significant efforts to attract small deposits until the domestic credit crunch hit them. The Private Credit Bureau, set up in 2009, is expected to expand coverage and increase the number of people from the 61 000 currently covered under the Centrale des Risques et des Impayés and improve credit allocation to smaller borrowers.

Consistent with its objective of promoting private sector activities, the ministry of trade and industry and the Private Sector Federation (PSF) started regular meetings in 2009 to promote dialogue between the policy makers and private investors with a view to improving business conditions. It has been observed that the Rwanda Revenue Authority (RRA) has made some extensive consultations with the PSF on issues relating to taxation yet the small business operators have been left out.

The government has since made public its privatisation schedule and investment projects where private sector participation is expected. The sale of three tea factories has since been gazetted, where government intends to shed 60% of its ownership. In addition, the government intends to sell 30% ownership in the beverages company Bralirwa through the capital market, 20% in the Commercial Bank of Rwanda and 50% in MTN Rwanda, the telecommunications company.

Rwanda has made significant progress in developing its infrastructure, especially in energy, transport and telecommunications. But challenges remain. Transport costs and access to land are still considered as major challenges facing the businesses. In an attempt to reduce costs faced by importers, there is a proposal to change the Value Added Tax (VAT) calculations for imports of intermediate inputs. Under this proposal, VAT calculations will be based on free-on-board (FOB) values as opposed to the current cost, insurance and freight (CIF) values as a way of improving the competitiveness of local manufactures.

The RRA has performed well in raising government revenue, with total tax revenue increasing by an average 20% annually since 2000. Between 2000 and 2006 revenue more than tripled, enabling the government to increase its expenditures. The largest tax revenue increases occurred in 2007 and 2008, largely driven by the growth of the economy and improved administration and compliance levels. Non-tax revenue has also increased, rising from RWF 3.3 billion in 2000 to RWF 22.5 billion in 2008. Rwanda is highly dependent on ODA with more than 50% of its budget financed from aid over the 2000 to 2009 period. Donors’ confidence in the Rwandan government’s proper management of donor funds has contributed to rising commitments and disbursement of aid.  In addition, the share of tax revenue has steadily increased in recent years as the economy and revenue base grew and tax administration improved.

The collection of taxes in Rwanda is governed by various laws that include law N° 06/2001 of 20/01/2001 on Value Added Tax (VAT) which replaced the Sales Tax law of 1991, law N° 25/2005 of 04/12/2005 on tax procedures, law N° 8/97 of 26 June 1997 on the Code of direct taxes on different profits and professional incomes, and Law N° 21/2006 of 18/04/2006 that established the customs law. These laws have evolved over time taking into account technological, operational and economic changes. The RRA operations are covered under the recently passed Law N° 08/2009 of 2009 which brought amendments to the original Law N° 15/97 of 1997 and determines its responsibilities, organisation and functions. Since its establishment in 1998, the RRA operates on annual preset objectives and priorities, which also serve as a basis for the assessment of its performance. The RRA is a semi-autonomous body that serves as revenue collecting authority and adviser to government on tax issues.

Overall, taxes on goods and services are the main source of revenue, contributing about 47% of total tax revenues. Direct taxes and taxes on international trade contributed 35.8% and 17.2% respectively in 2008. These figures compare well to those of 2007 where the corresponding contributions were 49%, 35% and 15 % respectively. The ratios of taxes on goods and services and direct taxes to GDP were 6.6% and 4.7% in 2007, similar to those of 2008. Overall, the RRA has raised the level of revenue from 9.5% of GDP in 2000 to 13% in 2008.

Given the narrow tax base in Rwanda, the RRA has embarked on an extensive taxpayer recruitment process. The number of institutional taxpayers rose from 20 535 in 2007 to 25 865 in 2008, a 25.9% increase. Whereas 13 large taxpayers contributed almost 90% to tax revenue in 2006, in 2008 this figure had dropped to 44%. However, tax compliance for the small-to-medium taxpayers for 2008 averaged only 49% compared to 94% for large taxpayers. The lower compliance levels in the small-to-medium taxpayers are mainly explained by the existence of the large informal sector in the Rwandan economy. For informal business operators, costs of tax compliance represent a high proportion of their costs compared with large businesses. Out of 111 839 Pay-as-you-earn (PAYE) registrants, only 37% completed tax returns, with 62% of these submitted late.  In addition, most of the informal businesses do not pay taxes. In response the RRA has stepped up tax audits, investigations, and taxpayers’ education and intensified its communication efforts. But it still faces problems with arrears clearance.

Major reforms have been implemented with a view to ensuring reliability of tax revenue collection, promotion of growth, and competitiveness and fairness. The introduction of VAT in 2000 was particularly targeted at achieving these objectives. The decentralisation of tax collection is also another important change under which local authorities have assumed collection of property taxes.

Rwanda is considered to have moderately high tax rates compared with other African countries. The highest personal income tax rate is 35%; the VAT rate is 18% (exemptions include interest on loans, agricultural inputs, educational supplies, health services and supplies, etc) and a corporate tax rate of 30%. The government is considering introducing a flat tax rate and studies to this effect are under way. Numerous tax incentives are available. For example, in order to encourage exports, exporters with balances of USD 3 to 5 million get a 3% discount. Similarly, investments of RFW 30 million and above receive 40% deduction and 50% if they establish operations in the rural areas. Graduated tax benefits are also given to employers depending on the number of employees engaged for at least six months in a year. These tax benefits range from 2% for 100 employees to 7% for 900 employees and above.

Continuing tax reforms necessitated the establishment of separate departments for large and small-to-medium taxpayers who are differentiated according to compliance history. The RRA has also established district and provincial branches to ensure its closeness to taxpayers. In 2008 the Taxpayers’ Charter was improved to communicate better taxpayers’ rights and obligations in addition to compiling all tax laws into a single tax code. Given the move to fiscal decentralisation, the RRA has also taken steps to build capacity in local authorities. The RRA also collaborates with the National Curriculum Development Centre in the design of the Entrepreneurship and Taxation subject for secondary schools as a way of developing a culture of tax compliance in the country.

The cost of financing tax administration constituted an average of 1.6% of total tax revenue for the five years to 2008. Major revenue sources in 2008 for the RRA included 3.5% retention on revenue collections, a performance bonus, a grant from the United Kingdom department for international development (DFID) and income from fees. The total income for 2008 was RWF 13.1 billion and higher than total expenditure at RWF 9.4 billion. In 2005, the RRA had 650 staff including technical assistants. Given its status the RRA staff salaries are higher than those of other civil servants, enabling the department to attract qualified and competent personnel who are less likely to involve themselves in corrupt activities. The salary bill is the largest single cost to RRA representing more than 65% of its expenditures while capital expenditures constituted about 1% in 2007 and 2008.

Current political efforts in Rwanda are fundamentally linked to the government's desire to create an ethnically tolerant nation that thrives on economic growth, job creation and higher wages. In this context, Rwanda has made some progress in creating alliances that have a bearing on the overarching objective of creating opportunities for the Rwandan population.

In 2009, the government took steps to address the rebels’ situation in the Democratic Republic of Congo (DRC), undertaking a huge military exercise that saw the capture of the rebel leader Laurent Nkunda. This operation became feasible after Rwanda signed a peace agreement with the DRC in 2008 and to some extent reduced the threat of destabilisation posed by the rebel group. But the development, which gained international support, also helped to ease tensions arising from the negative coverage the country has been receiving in recent years. A specific positive outcome from these political developments in 2009 was Rwanda’s admission to the Commonwealth in November, described as an acknowledgment of the country’s achievements after the dark era of genocide in 1994. In addition, Rwanda has re-established diplomatic relations with France.

The government has also made efforts in maintaining transparency in its transition towards better governance and a transition to a democratic dispensation. In this context, consistent improvements on the Transparency Index have been recorded. Rwanda’s Transparency Index improved from 2.5 in 2006 to 3.3 in 2009. This has been due to the establishment of institutions and a legal framework to fight corruption. The country is now ranked 89^th out of 180 countries assessed. Improvements in political governance have also been mirrored in the economic governance as well. The Economic Governance Indicator has risen from 54.2 in 2008 to 59.1 in 2009 and Rwanda now ranks 10^th in sub-Saharan Africa.

The outcome of the presidential elections in 2010 will be important to any future progress on the reform agenda and continuity in policy.

The revised National Accounts of Rwanda show that per capita income rose to USD 492 in 2008, more than double its 2002 level of USD 223. Also, the 2009 UN Human Development Report observes that the Human Development Index (HDI) for Rwanda in 2007 was 0.460, slightly higher than its 2005 level of 0.452. However, the country was ranked lower, at 167^th out of 182 countries, and has consistently underperformed when compared to average sub-Saharan Africa countries. While Rwanda is ranked 100^th out of 135 countries in terms of poverty rates, it has made tremendous progress in reducing poverty from 70% in 1995 to about 60% in 2006 but  achieving the target of 23.8% by 2015 will be very difficult. It has also been noted that income inequalities have increased, with income growth concentrated in the urban areas.

The link between poverty and income inequalities and household endowments has prompted the government and donors to address rapidly the issue of land ownership. With more than 85% of its population’s livelihood being in agriculture, DFID has moved to expedite the granting of title deeds to landowners. The programme which is funded by GBP 20 million (British pounds) over the next five years to 2014 is expected to benefit 1 million households holding land under the informal system. Women are also expected to benefit from this process, which will enable them to use land as collateral when borrowing from banks. Improving the income levels of rural households is central to fighting poverty and income inequalities. Estimates indicate that at the current population growth rate of about 2.8%, 2.2 million jobs in other sectors need to be created to achieve the Vision 2020 objective of reducing dependence on agriculture to 50%. Such an outcome will be difficult to attain unless supported by rising agricultural investments and productivity.

While there is a dearth of statistics, anecdotal evidence points to some achievements in the social sector. Government continues to invest in social programmes. The free nine-year education policy resulted in net primary enrolment rates reported to be 94% in 2008. Education received 18.5% of the budget allocation in 2008 compared to 6.9% and 6.2 % for health and agriculture respectively. Education expenditure increased by 37% in the three years to 2009 with 63% of it spent on the nine-year basic education programme, which is financed primarily through a capital grant set at RWF 2 500 for each enrolled child in 2006 but which has proved to be insufficient.

Health expenditure has also increased but not at the same level as the general increase in the budget of 24% in 2009. Improvements have been recorded in access to health services with 60% of the population living within five kilometres of a health centre. Vaccination rates are at 95%, essential drugs are generally available and HIV prevalence rates have fallen.

Employment data in Rwanda remain scanty. The government’s Labour Market Information System shows that since 1995 employment numbers rose from below 2.5 million to about 4.4 million in 2008. However, the employment-to-population ratio has consistently declined from about 87% in 1995 to less than 80% in 2007. These trends paint a grim picture of the labour market, a situation that has been acknowledged at the official level. Labour market reforms and other structural reforms meant to enhance investment and a transformation of the economy are therefore important. Efforts in this direction continue but a clear strategy to reverse the trends has still to be developed.