The World Bank has revised downwards Rwanda’s economic growth to seven per cent owing to uncertainties in the global economy and a drop in donor aid.

The latest World Bank forecast differs with the IMF and government’s 7.5 per cent estimates that they had pegged on improving agriculture productivity and prudent macroeconomic policies meant to stimulate growth. 

The drop comes even as the country registered an impressive cent eight per cent economic growth in 2012, the highest in East Africa and which had experts label the local economy as one of the fastest growing in the world.

The country is now suffering from the spillover effects of aid cuts and dwindling commodity prices on the global market.

Read: Writing on the wall for Kagame as key donors cut aid

Prudent management

The slowdown in economic development implies that both the government and private sector should tighten their belt for the next 18 months.

The government had earlier used high aid inflows to support its development projects in the public sector and other related services.

“The aid shock has demonstrated not only the government’s prudent macroeconomic management capacity but also the vulnerability of the economy to the volatility of aid,” said Yoichiro Ishihara, the World Bank senior economist for Rwanda.

Now the economy is highly exposed as the foreign reserves reduced from 5.1 of imports at the end of last year to 3.2 in March, according to the bank.

By December 2011 the central bank’s international reserves stood at $1 billion but they eventually dropped to $700 million in April this year.

However, the issuance of the Eurobond led to a rebound of the reserves to the 2011 position. If the Eurobond proceeds were excluded, the reserves would have been $623 million by May this year.

Besides, the dwindling reserves, the depreciating exchange rate and rising interest rate is likely to reduce the investor confidence as their profits decrease.

Borrowers are paying an average of 17.6 per cent, up from 16.5 per cent last December. The banks came up with these rates partly because of the high cost at which they borrow.

Come up with reforms

The World Bank has advised the government to come up with reforms to stimulate the performance of the economy and also create buffers. Should the government fail to do so, the bank warns, economic growth is likely to slow down to 6.2 per cent in 2013/14.

Ministry of Finance and Economic Planning Permanent Secretary Sayinzoga Kampeta however says the prudent monetary and fiscal programmes Rwanda has embarked on are meant to safeguard the economy from external funding shocks.

She cited some the second economic and poverty reduction programme as having a detailed road map meant to position Rwanda as self-reliant country.

One of the pillars in EDPRS 2 is increased employment, productivity and creation of a bigger formal sector where government can raise more revenues.

The country also tends to grow its exports and according to Kampeta, the government tends to borrow more to fund the export sector. “We are willing to get any kind of funding to make sure we grow our exports base. This is the only way to guard the country from any external shocks,” she said.

The government has demonstrated that it is determined to fund its 2013/14 budget from domestically generated resources.

Also read: Domestic revenue to fund Rwanda’s budget

Net domestic borrowing from the banking system of Rwf160.8 billion, or 3.0 per cent of GDP as it is increasingly seeking resources to fund development programmes.

The World Bank has warned s that disbursing which directly benefits from but with it picking up again in 2014.

Agriculture is predicted to grow in 2013 but for growth to slow down again in 2014.

The industrial sector is predicted to grow in both years but at a faster rate in 2013 than 2014. Exports are predicted to increase but imports to increase at an even faster rate resulting in a predicted widening of the trade deficit from US4$ 1.38 billion in 2012 to US$1.46 billion in 2013.

The World Bank however faults some of the austerity measures the government adopted during the budget squeeze.

For instance, the government borrowed on the domestic market to carter for the shortfalls in the budget but it has resulted into a negative effect on the economy.

“While government actions have so far limited the impact on the economy, the reduction in public expenditure will begin to have a noticeable spill over effect into related private activities leading to a slowdown in the service, especially those with strong links to public expenditures,” state the global economic out looks says.

There has been a noticeable rush by commercial banks for government instruments like Treasury bills and bonds which are presumed less risky, but this is creating a liquidity problem in the economy.

Already figures from the central bank show that credit to the private sector has slowed down. For instance, in the first five months of this year, there was a moderate increase in outstanding credit of 4 per cent from January to May this year compared with 16.2 per cent recorded in the same period last year.

There was also a drop in new authorised loans to Rwf176.1 billion this year from the Rwf214.4 billion in the first months of 2012.