Country Report Rwanda
Although Rwanda’s economic policies are highly acclaimed – and have impressively improved the economic institutions in Rwanda – by the international institutions, the country’s vulnerabilities have increased significantly over the past year. In response to its claimed (by the UN) involvement in the new uptick in violence in DR Congo, several donors have withdrawn their support. This is likely to hit Rwanda hard, as donor income accounts for a large part of the country’s foreign exchange and fiscal income.
Introduction and update
Rwanda has been more or less the poster boy for the international financial institutions such as the World Bank and IMF for the past decade. As the world decided that it would put its money on Paul Kagame not only to reassure peace in the country, but also to uplift the country economically, internal criticism of Kagame’s authoritarian style grew. The results can be read in the factsheet above, as several economic governance indicators are among the highest in the emerging world. The country is perceived to be the least corrupt country in Africa. On the other hand, the country continues to rank rather poorly on indicators such as press freedom. Furthermore, despite the progress made since the civil war the country continues to score low on the Human Development Index (an indication of poverty).
These social issues are compounded by the risks related to the authoritarian style of government and by a fragile economy. The basis of the economy is agriculture and the export of agricultural and mining products. Furthermore, the government is posting continuous fiscal deficits while the country’s current account deficit is nearing double digits. Therefore, to remain in the favor of the international donor community is of the utmost importance for Rwanda. In that respect, Rwanda’s engagement with and aid to Congolese rebels has led to a strong deterioration of the relations with the donor community. This has resulted in the withdrawal of important donors such as the UK and the Netherlands from the country. In this update, we will look at the accusations made by the UN at Rwanda, and the consequences it has had for the country and will have for the country’s future.
Rwanda and DR Congo: the UN reports
For lack of better words, and in order to emphasize how damning the UN report actually is, we use the wording of the UN Security Council Report (S/2012/843):
“The Government of Rwanda continues to violate the arms embargo by providing direct military support to the M23 rebels, facilitating recruitment, encouraging and facilitating desertions from the armed forced of the Democratic Republic of the Congo, and providing arms, ammunition, intelligence and political advice. The de facto chain of command of M23 includes (Rwandan, ed) Gen. Bosco Ntaganda and culminates with the Minister of Defence of Rwanda, Gen. James Kabarebe.”
This accusation was first made in June 2012, and was refuted by the Rwandan government. Based on the government’s written response, the UN’s investigators took another look at their conclusions, but “found no substantive element of its previous findings that it wishes to alter.” Therefore, it makes a strong stance behind its accusations towards the Rwandan government.
In response to the UN report, several western governments, including those of the important donor countries the Netherlands and the UK, have reconsidered their aid packages to Rwanda. These countries have frozen their aid packages to the country. Even the US has come under pressure to cease its aid, but has so far not taken any actions. The US has been a long backer of president Kagame, but might now have to reconsider. What makes the situation rather awkward, is that Rwanda has just been voted into the Security Council as a non-permanent member.
Effects on vulnerabilities
The main vulnerabilities of the Rwandan economy lie in the field of public and external financing. The current account has been in the red for several years, even reaching double digits in 2011. This is compounded by a deficit on the fiscal account, even taking the donor aid – estimated to amount up to 50% of government income – into account. The current account balance is also financed by the outside sources, as foreign aid and concessional loans are estimated to add up to about 13% of GDP.
With UK, Dutch and German aid amounting to some 15% of overall aid, the situation has become serious, but is not yet dire. However, should Rwanda continue to support the rebel factions in DR Congo, there could be increasing pressure on other countries to withdraw aid to the Rwandan government. Then the country would not only face immediate economic, but also political and social crises.
As part of the donor support is now being frozen and unlikely to be resumed any time soon (a claim in Rwandan newspapers that aid from the Netherlands was to be resumed, was denied in Dutch newspapers), Rwanda will need to tackle the deficits with tough measures. It will mean that it needs to either stretch its local banking system, by tapping the resources of this sector to finance government expenditures, or severely lower public spending. The first option would increase the vulnerabilities within the economy by weakening the banking sector and crowding out the access to finance of local companies. The second would lead not only to deep cuts in poverty relief programs, it would also cut into investment programs intended to raise the productivity in the industrial sector.