Tough times as Rwanda cuts down on spending

Saturday June 11 2016

Workers in Kigali off-load goods imported from other East African countries. PHOTO | CYRIL NDEGEYA

Workers in Kigali offload goods imported from other East African countries. The International Monetary Fund estimates Rwanda’s current level of reserves cover at 3.5-4 months of imports. PHOTO | CYRIL NDEGEYA 

By BERNA NAMATA

Rwandans will be forced to tighten their belts further after the government assented to austere demands from international lenders in a desperate bid to shore up the franc in the face of falling export earnings.

Although government expenditure will increase slightly to Rwf1.95 trillion ($2.60 billion) in the 2016/17 financial year starting next month, from Rwf1.81 trillion ($2.31 billion) currently, it is a drop of two percentage points as a proportion of the economy.

Funding for projects is thus expected to drop significantly as Kigali tightens expenditure including restraining imports in order to conserve foreign exchange.

The country has nascent private enterprises and the government is the key driver of economic activities. This would in turn mean less money going to suppliers and projects being deferred in some cases. In essence, the spending power of the average citizen will be affected.

A combination of lower commodity prices for Rwanda’s major exports especially minerals coupled with a persistently high import bill has drastically impacted the country’s international reserves, forcing it to borrow from the International Monetary Fund (IMF).

The IMF loan has come with stringent conditions for the government including cutting imports.

As a result, ordinary Rwandans will pay more for imported basic items such as sugar, rice and clothing which have now been subjected to higher taxes.

For instance, in the new financial year 16/17, taxes on used clothes used by the majority of Rwandan households because they are affordable will increase by 1150 per cent — from $0.2 per kg to $2.5, while those on shoes rise by 900 per cent, from $0.5 per kg to $5 per kg.

Yet, despite these measures, and given the country’s development needs with a rapidly growing economy, its import bill is still expected to continue to rise faster than exports.

“There are no signs that Rwanda’s terms of trade are likely to improve over the short run which is why the IMF has come in with new financing program to support the country over the next 18 months. This period is going to be difficult and require belt tightening,” Thomas Alun, the IMF resident representative to Rwanda told The EastAfrican.

Last week, the executive board of the IMF approved an 18-month arrangement under the standby credit facility worth $204 million to help government boost its international reserves to reduce the country’s exposure to financial turbulence due to shortage of reserves.

The country will be immediately allowed access to $102 million.  

While definite figures of the current state of reserves in the central bank are not readily available, the IMF estimates them at just 3-3.5 months — which can pay for one quarter of the annual import bill.

Although the reserves are still above the IMF critical threshold of three months of import cover, there are concerns that if the pressures persist this will have a dampening effect on the growth rate of the economy.

But business executives in the country are signalling a likely increase in lending rates as well as limiting access to financing if foreign exchange pressures persist as they may fuel imported inflation.

While inflation has remained under control, at 1.8 per cent and 2.5 per cent in 2014 and 2015, respectively, due to the fall in oil prices and good agriculture harvests, it is expected to pick up in 2016 at 4.7 per cent.

Inflation

“There is a direct correlation between inflation and interest rates, if inflation goes beyond 5 per cent, we are likely to see a rise in interest rates,” said KCB Rwanda’s managing director, Maurice Toroitich. “To minimise foreign exchange risks, banks are likely to transfer costs to borrowers through higher charges or put on hold borrowing in foreign currency which might put a brake on investment as well as slow lending.”

Commercial banks are already feeling the pinch as forex trading incomes have declined substantially in recent months with the industry’s net foreign assets decreasing by 70.5 per cent to Rwf30.9 billion ($39.4 million) since December 2015.

“Although there may be some short-term measures that can be taken (such as a de facto rationing of foreign exchange), in essence the challenge is a long-term one, through building up domestic productive capacities and thereby increasing exports and lowering the rate of expansion of imports,” said Andrew Mold, a senior economist at sub-regional office for Eastern Africa (SRO-EA) of the United Nations Economic Commission for Africa (ECA) based in Kigali.

But for local businesses that import most of their raw materials and borrow in foreign currency, their operating costs as well as net financing costs have risen.

For example, the country’s largest brewer, Bralirwa Ltd which imports a large chunk of its raw materials experienced a 37.6 decline in after-tax profit in 2015, from Rwf11.394 billion ($14.7 million) posted in 2014 to Rwf7.106 billion ($9 million) partly due to depreciation costs.

“To compensate for this level of increased cost at a time when currency depreciation has impacted on raw materials and other costs is a challenge, particularly as passing on costs to the consumer may not deliver value,” said Jonathan Hall, the vice chairman of the board of directors Bralirwa Ltd earlier this year releasing the company’s financial results.

Resource mobilisation

The government also faces a dilemma over mobilisation of resources to fund its expenditure in the face of donor aid uncertainty. 

Donor funding, which has largely fuelled Rwanda’s economic miracle, has been shrinking from a high of over 50 per cent of the budget over the past decade following a recent shift whereby aid is directly channelled to specific projects and non-governmental organisations as opposed to budget support.

“Donor funding remains key to financing national budget, however there is tremendous progress in terms of boosting domestic revenue especially with the tax administration introducing measures to increase the tax base, streamlining tax collection measures and there is also increasing consumption patterns among Rwandans that will boost domestic indirect tax collection,” said Angello Musinguzi, a tax manager consultant at KPMG Rwanda office.

While the government has set an ambitious target to finance 62.4 per cent of its budget with domestic revenues amounting to Rwf1,216.4 billion ($1.55 million). This represents a slight increase of Rwf40.9 billion ($52.2 million) compared with Rwf1,175.5 billion ($1.50 billion) spent in 2015/16.

“The slight increase of domestic resources reflect the effects of slow economic growth brought about by external shocks such as low commodity prices,” said Finance Minister Claver Gatete.

The reminder of the budget will be funded by external resources including grants, worth Rwf733 billion ($936 million) representing 37.6 per cent of total budget.

There were no substantive tax increments expected in the new financial year. With the flow of foreign aid declining, the Treasury is keen to increase revenue collections and limit new domestic debt. 

This means taxpayers will have to tighten their belts as Rwanda Revenue Authority intensifies tax administration measures including expanding the use of electronic billing machines and expanding the tax registry specifically to increase value added tax collections.