Rwanda is in a dilemma over the mobilisation of resources in the coming months to boost economic growth in the face of donor aid uncertainty.

Faced with insufficient domestic revenue against the backdrop of a weak private sector, the government’s funding options continue to be limited.

In highlighting funding vulnerabilities for Kigali in the 2015/16 financial year, the Treasury has slashed the amount of money it expects to receive in grants and development assistance.

Total grants are projected at Rwf358.4 billion ($537.6 million) against Rwf417.1 billion ($625.6 million) in the current financial year 2014/15 — is a reduction of Rwf58.8 billion ($88.2 million).

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.

Now, donor funding is expected to support about 20 per cent of government expenditure in the next financial year.

The dilemma for the government now as it increases spending in the 2015/16 budget by Rwf5.9 billion ($8.85 million) from Rwf1,762.4 billion ($2.64 billion) in the current financial year to Rwf1,768.3 billion ($2.65 billion), is how to raise domestic resources to fund development spending.

Rwanda’s economy is expected to grow by 6.5 per cent this year and the next after growing 7.0 per cent in 2014.

“As our economy grows, it needs more money than what we have been getting from the donors. The only thing we can rely on is debt – we start with the most concessional debt,” Minister for Finance Claver Gatete told The EastAfrican on Thursday after presenting the budget framework to parliament.

Mr Gatete said the government is prioritising raising more domestic resources and both external and internal borrowing to bridge the shortfall in the financing.

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Total loans are projected at Rwf233.2 billion ($349.8 million) in the next financial year, which is Rwf20.6 billion ($30.9 million) higher than the Rwf212.6 billion ($318.9 million) in the revised 2014/15 budget.

“We still have room to borrow,” Mr Gatete said, underscoring that that the country’s current debt to GDP ratio is still low at 25 per cent while the IMF advised ceiling is 50 per cent.

However, domestic revenues which are expected to finance a large part of government spending in the next financial year at 67 per cent of the total budget, remain insufficient.

While total domestic revenue collections in the next financial year are estimated at Rwf1,038.1 billion ($1.56 billion), of which Rwf938.6 billion ($1.41 billion) is expected to come from tax revenue while Rwf99.5 billion ($149 million) will accrue from non-tax revenue.

Yet Rwanda’s tax body — the Rwanda Revenue Authority (RRA) — continues to miss its targets.

Over the last six months of 2014, tax and non-tax revenue collections were Rwf406.3 billion ($589.7 million), five per cent below the Rwf427.9 billion ($621.1 million) target. But experts say the targets are too ambitious, and higher than what the economy can afford.

“Growth is still largely driven by government spending as opposed to the private sector,” said Paul Frobisher Mugambwa, a senior manager for tax services at PricewaterhouseCoopers Rwanda.

While government efforts have largely focused on increasing domestic taxes, Mr Mugambwa says there is a need to rethink this strategy including intensifying efforts to collect local government taxes and increase the efficiency of the tax body.

Tax revenue in Rwanda, estimated at 14 per cent of GDP, is still low by several standards — including the East African Community convergence criteria of 25 per cent of GDP. The target is to increase this to 17 per cent of GDP in the 2015/16 financial year.