Transformation In Rwanda - World Bank

GDPGrowthConstructionFiscal ExpansionDigital iscal l SkillsDigital PaymentDouble-digitDouble-digitJanuary 2020 Edition No. 15Credit inflationDebt CADPrivate SectorIremboE-HealthDigital SkillsCredit inflationDebt CADPrivate SectorAccelerating DigitalTransformation in Rwanda

Rwanda Economic UpdateAccelerating Digital Transformation in RwandaJanuary 2020

TABLE OF CONTENTSAcronyms. iForeword. iiExecutive summary. iiiPART I: RECENT ECONOMIC DEVELOPMENTS .1.1. Global Growth Momentum has Faltered.1.2. Rwanda’s Economy in 2019.1.3. Rwanda’s Economic Outlook and Risks.12313PART I: ACCELERATING ECONOMIC GROWTH THROUGH DIGITAL TRANSFORMATION.2.1. A Snapshot of Rwanda’s Digital Development Journey.2.2. Securing Rwanda’s Digital Future: Critical Reforms, Investments and Innovation Needed .2.3. Conclusion.15192832References . 35LIST OF FIGURESFigure 1.1:Figure 1.2:Figure 1.3:Figure 1.4:Figure 1.5:Figure 1.6:Figure 1.7:Figure 1.8:Figure 1.9:Figure 1.10:Figure 1.11:Figure 1.12:Figure 1.13:Figure 1.14:Figure 2.1:Figure 2.2:Figure 2.3:Figure 2.4:Figure 2.5:Figure 2.6:Figure 2.7:Figure 2.8:Figure 2.9:Figure 2.10:Figure 2.11:Figure 2.12:Global and regional economic growth, 2015–21f.Prices for Rwanda’s main exports and imports, 2017–19 .Growth in EAC countries, 2013–18 and 2019f .Rwanda’s economic growth, 2016–19.Demand and real GDP growth, 2016–19.Headline inflation, 2016–19.Changes in interest rates, December 2018–September 2019 .Depreciation of Rwanda franc against the US dollar, 2014–19 .Gross international reserves, 2016–19 .Government spending and revenues, 2009–19.Drivers of changes in public spending, 2014–19.Decomposition of public debt accumulation, 2009–18.Tax years needed to repay public debt, 2006–18 .Decomposition of Rwanda’s public debt, 2007–18 .Institutional framework for digital development.Access to international bandwidth - capacity and speed.Length of national transmission network and population within reach.Mobile broadband coverage.Households possessing mobile phone, Rwanda and East Africa.Mobile Internet subscriptions by technology, 2019 and affordability of 1GB of data, 2017.Digital skills benchmarking.Regional benchmarking: Share of population that is unregistered.The logistics performance index 2018: Rwanda profile.Penetration of financial institution accounts versus mobile money accounts.Venture capital raised by African startups and amount of startup funding raised by select African countriesEast Africa is the 9th largest global market by 831

LIST OF TABLESTable 1.1:Table 1.2:Table 1.3:Table 1.4:Composition of new loans .The current account balance and financing .Rwanda’s public finances, 2015/16 to 2019/20 .GDP growth, 2016–21f .681113LIST OF BOXESBox 1.1:Box 1.2:Drivers of Rwanda’s public and publicly guaranteed debt and fiscal space. 12Major economic reforms in 2019. 13Box 2.1:Creating single digital market . 32

ACRONYMSATMAutomatic Teller MachineNPLsNonperforming LoansB2CBusiness-to-ConsumerNSTNational Strategy for TransformationBNRNational Bank of RwandaP2PPerson-to-PersonDAPDigital Ambassadors ProgramPKOPeace-Keeping OperationsDFSDigital Financial ServicesPPPercentage PointsEACEast African CommunityPPPPublic-Private PartnershipEMDEsEmerging Markets and DevelopingEconomiesREPORepurchase Agreement OperationsFSPFinancial Service ProviderREURwanda Economic UpdateFYFiscal YearRMBRwanda Mines, Petroleum and Gas BoardGDPGross Domestic ProductRRARwanda Revenue AuthorityICTInformation, Communications, andTechnologyRURARwanda Utilities Regulatory AuthorityRwfRwandan FrancIDIdentificationSSASub-Saharan AfricaIMFInternational Monetary FundTTLTask Team LeaderKTRNKorean Telecom Rwanda NetworksTVETMINECOFIN Ministry of Finance and EconomicPlanningTechnical and Vocational Education andTrainingUNUnited NationsMNOMobile Network OperatorUNCTADMSMEsMicro Small and Medium Size EnterprisesUnited Nations Conference on Trade andDevelopmentNAEBNational Agricultural ExportDevelopment BoardUS United States DollarWEFWorld Economic ForumNISRNational Institute of Statistics of RwandaY-O-YYear-on-YearRwanda Economic Update Edition No. 15i

FOREWORDThe Rwanda Economic Update (REU), published twice a year, analyzes recent economic developments andprospects and Rwanda’s policy priorities. It is intended for a wide audience of policymakers, businessleaders, other market participants, analysts of Rwanda’s economy, and civil society. The REU draws ondata reported by the Government of Rwanda and additional information collected by the World BankGroup in its regular economic monitoring and policy dialogue. The REU team is grateful to the Ministryof Finance and Planning, the National Statistics Institute of Rwanda, and the National Bank of Rwanda fortheir helpful cooperation.Each issue also has a special feature spotlighting a particular topic, in this case Rwanda’s digital economy; itdiscusses the country’s digital transformation journey to date and identifies policy challenges and proposeskey policy options to support continued growth of the sector. The current REU, the 15th, was prepared bythe World Bank Group Rwanda team, the Macroeconomics, Trade and Investment Global Practice, and theDigital Development Department. The report was drafted by Aghassi Mkrtchyan (Senior Economist, TTL),Peace Aimee Niyibizi (Economist, co-TTL), Casey Torgusson (Senior Digital Development Specialist), andIsabella Hayward (Digital Development Specialist). The work was guided by Abebe Adugna Dadi (PracticeManager, Macroeconomics, Trade, and Investment), Michel Rogy (Practice Manager, Digital DevelopmentAfrica and Middle East), Felipe Jaramillo (Country Director for Kenya, Rwanda, Uganda, and Eritrea), andYasser El-Gammal (Country Manager, Rwanda).The team is grateful to Naoko C. Kojo (Senior Economist, EMFTX), Tim Kelly (Lead Digital DevelopmentSpecialist, IDDO2), Caroline Chepkorir Koech (Digital Development Specialist, IDDO2) and Philip Schuler(Lead Economist, EA1M1 for their comments and advice on earlier drafts. The team benefitted from supportfrom Nancy Umwiza (Office Assistant) for providing logistical support, Rogers Kayihura (CommunicationOfficer) for managing communication and dissemination, and Robert Waiharo for design and layout of thereport. We are also grateful to Anne Grant for editorial support.Views expressed in the REU are those of the authors and do not necessarily reflect the views of the WorldBank Group, its Executive Directors, the countries they represent, or the Government of Rwanda.iiRwanda Economic Update Edition No. 15

EXECUTIVE SUMMARYRecent Economic Developments and OutlookIn the first three quarters of 2019, Rwanda’sgrowth continued to accelerate supported bystrong investment. The economy expanded by 10.9percent in the first nine months of 2019 compared to8.2 percent growth in the same period of 2018. Fiscalexpansion through public investment pursuant tothe National Strategy for Transformation (NST1) wasmuch wider than expected playing a key role. Nongovernment sector investment, including privateinvestment, also contributed to this acceleration.Credit to the private sector picked up, especiallyin the manufacturing sector which experienceddouble-digit growth for the second consecutiveyear. Fiscal expansion and strong domesticdemand have led to widening of Rwanda’s externalimbalances deteriorated. Rwanda continues to relylargely on concessional financing of the deficitand its tight monetary discipline reduces the risksassociated with fiscal expansion.On the production side, construction grew fastestin 2019. Supported by investment, constructionactivities expanded by nearly 31 percent in thefirst three quarters of 2019; services expanded by10.7 percent; and manufacturing by 12.3 percent.Agricultural growth was 5.8 percent. On the demandside, growth was supported by domestic demandfueled by fiscal expansion. In the first three quartersof 2019, government consumption and investmentsgrew by more than 25 percent. Private consumptiongrew 8.5 percent. The contribution of net exportsto growth was again negative—exports were lessthan expected and demand for imported goods,especially capital goods, was strong.The fiscal expansion that Rwanda embarked on inFY2018/19 to implement the NST1 has been widerthan expected. On an accrual basis, the deficitreached 6.4 percent of GDP in FY 2018/19, againstthe 5.2 percent projected. Capital spending and netlending grew by 25.4 percent, reaching about 15percent of GDP—the highest level since FY2015/16.Total revenues reached 24 percent of GDP; solid taxrevenues were offset by the shortfall in externalgrants. By the end of FY2018/19, payment delaysamounting to 0.6 percent of GDP were accumulated.The overall deficit for the calendar year 2019 isexpected to reach 8 percent of GDP.External imbalances are widening, reflectingon the one hand wider fiscal deficits and heavydemand for imports and on the other weaker thanexpected exports. The impressive growth in goodsexports in 2017 proved to be a one-off phenomenon;in US dollar terms, since 2018 the growth rate ofexports has slowed, and the trend continued into2019. International prices for the commoditiesRwanda exports were low, and export volumes ofcoffee, tea, and minerals stagnated or declined.Imports grew by 19 percent in US dollar terms inH1, driven by capital and intermediate goods. Inthe 12 months ending in June 2019, the currentaccount deficit (CAD) widened to 8.9 percent of GDP.The surge in import demand has put pressures onforeign exchange reserves.Credit growth is accelerating, supported bya positive growth outlook, accommodativemacroeconomic policies, and improved financialsector balance sheets. Bank balance sheetsimproved substantially in 2018-19 as the BNRlaunched a new regulation on credit classificationand provisioning. Having peaked at more than 8percent in 2017, nonperforming loans (NPLs) fell to5.3 percent of total loans in September 2019; thisreduced risks in the financial system and helped toaccelerate credit growth to 20.1 percent, comparedto 8.2 percent average annual growth in 2017–18.The banking sector continues to be well-capitalized.Rwanda Economic Update Edition No. 15iii