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Rwanda investor appetite wanes despite growth

Saturday June 23 2018
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C&H garment maker with a factory in Kigali’s special economic zone. Rwanda is expected to surpass its growth targets this year, but it needs more private sector input to achieve sustainable economic growth in the long term. PHOTO | CYRIL NDEGEYA | NMG

By BERNA NAMATA

The private sector’s unenthusiastic response to the improved investment climate is a major threat to Rwanda’s growth sustainability, despite the economy rebounding in the first quarter of this year.

It beat expectations with a 10.6 per cent growth, well above 1.7 per cent recorded in the first quarter of 2017.

According to analysts at the World Bank Group this has exposed the limitations of the public investment-led model.

“A lack of private sector responsiveness and failing to increase the private investment rate over time would make it very difficult to sustain a high growth rate in the long run —as is envisioned in the National Strategy for Transformation and Vision 2050,” the World Bank notes in its latest Rwanda Economic Update released on Thursday last week.

The World Bank Group projects the country’s GDP growth to accelerate to 7.2 per cent in 2018, then 7.5 per cent in 2019 and 7.8 per cent in 2020.

Projections that are higher than the 6.2 per cent released in December 2017 because of the growth momentum evident in exports and agriculture and the notable narrowing of external imbalances, according to the Bank.

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Sustained growth rates will require considerable efforts in boosting private and public investment financed by domestic savings and capital inflows in the medium- and long-term.

While Rwanda will very likely meet and possibly even surpass its growth targets this year, it has to make further inroads into expanding the role of the private sector to achieve sustainable economic growth in the long term.

A separate World Bank Group Survey of investor perceptions of the country as an investment destination also released last week shows that the country’s stability and regulatory environment as key factors influencing the high confidence investors have expressed in establishing operations in Rwanda.

Investor perception

In the region, Rwanda has the weakest awareness among potential investors as a destination for foreign direct investment compared with Kenya, Tanzania and Uganda.

According to the Survey, more than 92 per cent of existing investors have plans to invest further in Rwanda, with 45 per cent of them interested in expanding via a joint venture and 42 per cent through a strategic partnership.

However, the report also shows that investors perceive the country as having a small consumer market and high costs of transport, finance, and electricity — particularly for those in manufacturing. About 79 per cent of investors cited the quality of labour as a further limitation on their operations.

“Rwanda welcomes the Investor Perception Survey because it not only helps highlight what makes our country an attractive destination for investment, it also provides an important tool for the government about where we should invest additional resources in order to attract further foreign direct investments,” said Clare Akamanzi, chief executive officer of the Rwanda Development Board.

Net FDIs

Rwanda’s net foreign direct investment rose to $245 million — about 2.7 per cent of GDP — but remained well below the 2014 peak, according to the World Bank.

Despite the government’s aggressive investment promotion strategy, which has largely been linked to easing and reducing the cost of doing business in the country, FDI remains below three per cent of GDP, implying that private investment is still too low to drive growth.

The government is now banking on its participation in the G-20 Compact with Africa to ignite a private investment push from investors both in terms of FDI and portfolio flows.

Policy conditionality around international borrowing remains a major constraint to attracting private capital in most African countries as most still find it difficult to access funds from institutions such as the World Bank’s Multilateral Investment Guarantee Agency despite its mandate to support FDI into emerging markets.

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