Table of Contents Acknowledgments ....................................................................................................................................................................................................................... i Abbreviations .............................................................................................................................................................................................................................. iv Executive Summary..................................................................................................................................................................................................................... i Overview ..................................................................................................................................................................................................................................... vi PART 1: GROWTH DIAGNOSTICS............................................................................................................................................................................................................................................................................... 0 Chapter 1. Sources of Growth in Rwanda: Diagnostic of Growth Fundamentals............................................................................................................... 1 1.1. Development achievements ..................................................................................................................................................................................... 1 1.2. Development challenges........................................................................................................................................................................................... 3 1.3. Rwanda’s long term growth outlook ........................................................................................................................................................................ 9 1.4. Structure of the report .............................................................................................................................................................................................. 14 PART 2: BOOSTING PRODUCTIVITY AND COMPETITIVENESS.................................................................................................................................................................................................................. 29 Chapter 2. Development of a Productive Private Sector........................................................................................................................................................ 29 2.1. Introduction: Increased private sector activity is critical to Rwandan development............................................................................................... 29 2.2. Private sector performance ...................................................................................................................................................................................... 29 2.3. Constraints on the development of rms ................................................................................................................................................................ 33 2.4. Firm innovation and ICT services ........................................................................................................................................................................... 43 2.5. Boosting manufacturing to foster growth and employment in Rwanda ................................................................................................................ 47 2.6. Conclusions and recommendations......................................................................................................................................................................... 52 Chapter 3. Growth and Resilience rough Trade: New Post-Pandemic Policies to Drive Exports.................................................................................... 76 3.1. Introduction.............................................................................................................................................................................................................. 76 3.2. Structural challenges to exports................................................................................................................................................................................ 77 3.3. Build resilience through diversi cation and product complexity............................................................................................................................ 78 3.4. Promote services exports and foster digital trade .................................................................................................................................................... 81 3.4. Advance regional integration through coordination and trade liberalization.......................................................................................................... 86 3.5. Consolidate Rwanda’s position as a regional logistics hub....................................................................................................................................... 91 3.6. Leverage foreign investment to access international markets and promote green growth...................................................................................... 96 3.7. Conclusion................................................................................................................................................................................................................ 100 PART 3: BOOSTING JOBS AND INCLUSIVENESS................................................................................................................................................................................................................................................ 117 Chapter 4. Structural Transformation and Inclusive Productivity Growth ........................................................................................................................... 117 4.1. Introduction.............................................................................................................................................................................................................. 117 4.2. Patterns of structural transformation in Rwanda..................................................................................................................................................... 117 4.3. Determinants of structural transformation in Rwanda ........................................................................................................................................... 119 4.4. Poverty and distributional implications of structural transformation...................................................................................................................... 124 4.5. Conclusion and policy recommendations for a more inclusive structural transformation..................................................................................... 132 Chapter 5. Creating the Environment for Growth, Incomes, and Employment in the Agri-Food Sector .......................................................................... 151 5.1. Introduction.............................................................................................................................................................................................................. 151 5.2. Opportunities for the sector..................................................................................................................................................................................... 153 5.3. Challenges................................................................................................................................................................................................................. 155 5.4. Way forward ............................................................................................................................................................................................................. 165 PART 4: BOOSTING SUSTAINABILITY AND RESILIENCE ................................................................................................................................................................................................................................ 176 Chapter 6. Potential of Natural Assets and Environment to Contribute to Climate Resilient, Greener and Inclusive Growth.......................................... 177 6.1. Introduction.............................................................................................................................................................................................................. 180 6.2. Climate futures for Rwanda and their economic implications................................................................................................................................ 181 6.3. Status of Rwanda’s natural assets and implications for nature based solutions ....................................................................................................... 182 6.4. Contribution of nature based solutions to climate resilient and inclusive growth.................................................................................................. 184 6.5. NBS can contribute to maintaining a low-carbon development pathway.............................................................................................................. 188 6.6. Mobilizing climate nancing for bolstering resilience to climate change risks and maintaining a low-carbon development pathway................. 189 6.7. Options for operationalizing greater resilience to climate risks................................................................................................................................ 193 Chapter 7. Fiscal space for resilience and Sustainable growth................................................................................................................................................ 204 7.1. Introduction.............................................................................................................................................................................................................. 204 7.2. Recent scal developments and short-term outlook ............................................................................................................................................... 204 7.3. Fiscal implications of future drivers of growth......................................................................................................................................................... 210 7.4. Potential avenues for expanding scal space in Rwanda.......................................................................................................................................... 211 Conclusion .............................................................................................................................................................................................................................. 234 FIGURES Figure 0.1: Rwanda’s key drivers of economic growth .................................................................................................................................................................... viii Figure 0.2: Rwanda’s gross domestic savings as percent of GDP is low........................................................................................................................................... ix Figure 0.3: Rwanda’s exports market is increasingly concentrated on DRC ................................................................................................................................... xiii Figure 0.4: Rwanda: Structural transformation 2000–22................................................................................................................................................................ xv Figure 0.5: Damages and losses from a single 1-in-100-year ood can be substantial.................................................................................................................... xx Figure 0.6: e central government scal de cit rose sharply before the pandemic, 1990–2019..................................................................................................xxiii Figure 1.1: Regular progress in macro-poverty results for Rwanda since 2006............................................................................................................................... 1 Figure 1.2: Rwanda’s key drivers of economic growth..................................................................................................................................................................... 2 Figure 1.3: Optimism in future tourisms revenues, signaling the sector’s key role for Vision 2050............................................................................................... 3 Figure 1.4: Fast weakening of total factor productivity in Rwanda over time and compared to peers........................................................................................... 4 Figure 1.5: Human capital index scores for selected countries, 2020.............................................................................................................................................. 5 Figure 1.6: Sectoral productivity in Rwanda: Strikingly low agriculture productivity.................................................................................................................... 7 Figure 1.7: Rwanda vs comparators: Unemployment rate ............................................................................................................................................................. 7 Figure 1.8: Increasingly poor employment results compared to peer countries.............................................................................................................................. 7 Figure 1.9: Gross domestic savings and gross national savings as percent of GDP......................................................................................................................... 8 Figure 1.10: Growth path of Rwanda compared to aspirational peers: New nal and intermediate targets di cult to achieve, but inspiring.............................. 9 Figure 1.11: e growth paths of the three GDP growth scenarios of Rwanda are strong.............................................................................................................. 11 Figure 1.12: Rwanda’s growth objectives would require pushing the boundaries of realism............................................................................................................ 11 Figure 1.13: By 2050, Rwanda’s investment rates moderately higher than ow-middle income average in 2000–19...................................................................... 13 Figure 1.14: Gains in TFP growth for Rwanda................................................................................................................................................................................. 13 Figure 1.15: Impressive private investment rates in the future, but at the expense of too fast a decline in public investment rates................................................ 13 Figure 1.16: Expected delay in impact of human capital growth in Rwanda’s growth path scenarios ............................................................................................ 14 Figure 2.1: Number of people entering the labor force soaring since the COVID-19 pandemic.................................................................................................. 29 Figure 2.2: Dominating informal businesses rising in number and primarily of micro size........................................................................................................... 30 Figure 2.3: Positive correlation between per capita income and business size globally ................................................................................................................... 30 Figure 2.4: Productivity performance: Unfavorable ranking of Rwanda globally and regionally................................................................................................... 31 Figure 2.5: Insu cient and erratic job creation results.................................................................................................................................................................... 32 Figure 2.6: Average rm size over the rm life cycle........................................................................................................................................................................ 32 Figure 2.7: Establishments by starting year of operations in Rwanda, not surviving long ............................................................................................................. 33 Figure 2.8: Percentile rank (0 to 100), selected governance indicators, Rwanda and SSA average................................................................................................. 34 Figure 2.9: Rwanda’s doing business ................................................................................................................................................................................................ 34 Figure 2.10: Overall ranking of perceptions of business factors by di culty.................................................................................................................................... 35 Figure 2.11: Key infrastructure: Margin of improvement for Rwanda............................................................................................................................................. 35 Figure 2.12: Large infrastructure investment needs for Rwanda going forward............................................................................................................................... 35 Figure 2.13: Composition of SOEs in Rwanda by sector typology .................................................................................................................................................. 37 Figure 2.14: Comparison of Business of the State (BOS) presence in Rwanda and other countries ............................................................................................... 38 Figure 2.15: Policy instruments and mechanisms for reforms with state footprint ......................................................................................................................... 39 Figure 2.16: Gross domestic savings as percent of GDP country comparison ................................................................................................................................. 40 Figure 2.17: Number of bank accounts and active mobile money accounts .................................................................................................................................... 41 Figure 2.18: Retail bonds as a percentage of government securities.................................................................................................................................................. 42 Figure 2.19: Ejo Heza participation, 2018–22 .................................................................................................................................................................................. 42 Figure 2.20: Rwanda ‘s innovation and management practices to make further progress................................................................................................................ 44 Figure 2.21: Average broadband download speed (Mbps), AFE, 2022............................................................................................................................................ 46 Figure 2.22: Benchmarking of regional mobile broadband adoption............................................................................................................................................... 46 Figure 2.23: Own website in Sub-Saharan Africa ............................................................................................................................................................................. 47 Figure 2.24: Food, beverages and textiles are the main drivers of manufacturing growth................................................................................................................ 48 Figure 2.25: Manufactured exports in Rwanda................................................................................................................................................................................. 48 Figure 2.26: Processed foods imports in 6 EAC countries in 2019, 2021 and 2022 ....................................................................................................................... 51 Figure 2.27: Strategic map for program for Country Partnership (PCP) for Rwanda ..................................................................................................................... 52 Figure 2.28: Rwanda: Remittance In ows, 2010–27........................................................................................................................................................................ 61 Figure 2.29: Benchmarking Rwanda on data governance, 2023 ...................................................................................................................................................... 63 Figure 2.30: Rwanda’s performance on key dimensions of data governance .................................................................................................................................... 64 Figure 3.1: Annual export growth.................................................................................................................................................................................................... 76 Figure 3.2: Product concentration Her ndahl-Hirschman index................................................................................................................................................... 78 Figure 3.3: Market concentration Her ndahl-Hirschman index.................................................................................................................................................... 78 Figure 3.4: DTRI and its components, available ECCAS countries .............................................................................................................................................. 84 Figure 3.5: Rwanda’s exports market is increasingly concentrated on DRC................................................................................................................................... 87 Figure 3.6: Cost to export................................................................................................................................................................................................................. 87 Figure 3.7: Informal cross-border trade............................................................................................................................................................................................ 88 Figure 3.8: Intra-bloc goods imports before and after joining the bloc........................................................................................................................................... 88 Figure 3.9: Impact of COVID-19 on merchandises exports........................................................................................................................................................... 88 Figure 3.10: Real income.................................................................................................................................................................................................................... 88 Figure 3.11: People lifted from poverty.............................................................................................................................................................................................. 88 Figure 3.12: Rwanda: transit time between Dar-es-Salaam and Kigali............................................................................................................................................. 93 Figure 3.13: FDI stock (LHS) and net in ows (RHS)...................................................................................................................................................................... 97 Figure 4.1: Rwanda: Share of total employment by sector ............................................................................................................................................................. 117 Figure 4.2: Number of employees in establishments....................................................................................................................................................................... 120 Figure 4.3: Formal and informal employment by sector................................................................................................................................................................. 120 Figure 4.4: Value added per worker, broad sectors........................................................................................................................................................................... 120 Figure 4.5: FDI stock and in ows.................................................................................................................................................................................................... 121 Figure 4.6: Rwanda: green eld investment announced in polluting and green sectors.................................................................................................................. 122 Figure 4.7: Sector of employment: male and female ....................................................................................................................................................................... 124 Figure 4.8: Educational attainment by sector 2022......................................................................................................................................................................... 125 Figure 4.9: Male and female shares of employment by selected sectors .......................................................................................................................................... 126 Figure 4.10: Decomposition of changes in employment by sector and sex...................................................................................................................................... 128 Figure 4.11: Change in employment rate: urban-rural, male-female................................................................................................................................................ 129 Figure 5.1: 2022 food dollar per industry group (nominal)............................................................................................................................................................ 151 Figure 5.2: Food demand................................................................................................................................................................................................................. 154 Figure 5.3: In ation in Rwanda correlates with adverse weather events ......................................................................................................................................... 159 Figure 6.1: Damages and Losses from a Single 1-in-100-year ood under an average climate scenario........................................................................................ 182 Figure 6.2: Changes in the area of broad land cover categories between 1990 and 2015 .............................................................................................................. 183 Figure 6.3: e impact on debt of investing in restoring and managing habitat for NBT ............................................................................................................ 186 Figure 6.4: NDC emissions pro le, 2015–30, all sectors ............................................................................................................................................................... 188 Figure 6.5: Projected NDCs costs compared to 2021 scal and external ows.............................................................................................................................. 189 Figure 7.1: Central government – overall balance, revenues, and expenditures 1990–2019 ......................................................................................................... 205 Figure 7.2: Central government – primary expenditure and interest ............................................................................................................................................. 205 Figure 7.3: Central government – primary expenditure and GDP growth.................................................................................................................................... 205 Figure 7.4: Central government – total revenues and main items .................................................................................................................................................. 206 Figure 7.5: e medium-term scal outlook and the structural challenges.................................................................................................................................... 208 Figure 7.6: Central government – overall and primary de cit ....................................................................................................................................................... 209 Figure 7.7: Total expenditure – Rwanda vs. peer countries ............................................................................................................................................................ 211 Figure 7.8: Share of development budget managed at subnational levels- Rwanda and global regions......................................................................................... 213 Figure 7.9: Capital e ciency scores ................................................................................................................................................................................................. 213 Figure 7.10: Dominant micro and small projects in numbers, but trailing in terms of budget....................................................................................................... 214 Figure 7.11: Tax revenue vs GDP per capita (2021).......................................................................................................................................................................... 223 BOXES Box 0.1: CI-Energies – Re nancing operation to pave the way for private sector investment ............................................................................................ xxvi Box 0.2: India – Partial risk sharing facility .......................................................................................................................................................................... xxvii Box 1.1: Two scenarios for rapid growth ............................................................................................................................................................................... 12 Box 2.1: Reforming SOEs to crowd in private sector and achieve development impact .................................................................................................... 38 Box 2.2: Overview of manufacture and build to recovery program ..................................................................................................................................... 48 Box 2.3: An assessment of SEZ on rm behavior in Rwanda .............................................................................................................................................. 49 Box 2.4: Learning from Ethiopia’s industrial parks strategy .................................................................................................................................................. 50 Box 2.5: Strengthening the enabling environment for digital nancial services (DFS)........................................................................................................ 59 Box 2.6: Remittances are growing and can be an important source of nance.................................................................................................................... 61 Box 3.1: India’s e-invoice system............................................................................................................................................................................................ 85 Box 3.2: Improving trade and logistics in Togo..................................................................................................................................................................... 94 Box 3.3: e Xiaogan logistics infrastructure project in Hubei, China................................................................................................................................ 95 Box 3.4: Vietnam logistics statistical system .......................................................................................................................................................................... 95 Box 3.5: Assessing logistics skills, competencies and training in the Dominican Republic.................................................................................................. 95 Box 4.1: Foreign Direct Investment (FDI) and inclusiveness............................................................................................................................................... 122 Box 4.2: e bene ts and challenges of agglomeration in Rwanda ..................................................................................................................................... 123 Box 4.3: E ect of COVID-19 on the labor market ............................................................................................................................................................. 129 Box 4.4: Main social protection challenges in Rwanda ........................................................................................................................................................ 132 Box 5.1: Agriculture is central for economic transformation ............................................................................................................................................... 151 Box 5.2: Examples of impacts from COVID-19 on investments and market access in the agriculture sector ................................................................... 153 Box 5.3: Disruptive agricultural technologies in Kenya........................................................................................................................................................ 157 Box 5.4: Learning from the experience with supply side development of cold storage infrastructure ................................................................................ 162 Box 5.5: An inclusive and equitable agri-food sector ........................................................................................................................................................... 165 Box 5.6: Developing the horticulture value chain in Rwanda .............................................................................................................................................. 167 Box 5.7: Key recommendation: Soil-conscious conservation agriculture............................................................................................................................. 169 Box 6.1: Highlight of key climate actions proposed in other chapters in this report ........................................................................................................... 179 Box 6.2: Nature based tourism in Rwanda’s economy.......................................................................................................................................................... 185 Box 7.1: Fiscal and growth risks from the macroeconomic impact of climate-related shocks ............................................................................................. 207 Box 7.2: Rwanda’s PFM practices are consistent with reasonably sound scal discipline .................................................................................................... 209 Box 7.3: State-owned enterprises ........................................................................................................................................................................................... 219 TABLES Table 1.1: Headcount poverty rates by urban/rural population...................................................................................................................................................6 Table 1.2: Rwanda to consider targeting at least 90th top performers in investment rates, for Vision 2050 goals................................................................... 13 Table 1.3: Average total investment............................................................................................................................................................................................ 13 Table 1.4: Top growth performing countries (90th) rely on strong TFP growth....................................................................................................................... 13 Table 2.1: Population 16 years old and over by labor force status and level of educational attainment................................................................................... 43 Table 3.2: Average applied statutory tari s imposed by African countries on Rwanda exports, 2018..................................................................................... 87 Table 5.1: Share of value of Rwanda’s export and import per region ..................................................................................................................................... 154 Table 5.2: Discrepancies between men and women in the agricultural sector........................................................................................................................ 165 Table 6.1: Options analysis of di erent debt and non-debt instruments, including time horizon and indicative actions .................................................... 192 Table 7.1: GDP , Overall Balance and Debt (2019–28)........................................................................................................................................................... 208 Table 7.2: Summarized nancial information of government portfolio as of June 30, 2022 ................................................................................................ 219 Table 7.3: Tax expenditure by type - Rwanda ......................................................................................................................................................................... 225 a Acknowledgments is Country Economic Memorandum (CEM), focusing on Pathways to Sustainable and Inclusive Growth in Rwanda, was prepared jointly by the Government of Rwanda and the World Bank. e World Bank team was led by Calvin Zebaze Djiofack (Senior Economist) and Peace Aimee Niyibizi (Senior Economist), while the Government team was led by Stella Nteziryayo (Chief Economist, Ministry of Finance and Economic Planning), Leonard Rugwabiza (Economic Advisor, Ministry of Finance and Economic Planning), and Godfrey Kabera (Head of National Development Planning and Research, Ministry of Finance and Economic Planning). e report was prepared under the guidance of Dr Uzziel Ndagijimana (Former Minister of Finance and Economic Planning), Abha Prasad (Practice Manager, Macroeconomics, Trade and Investment) and Philips Schuler (Lead Economist). e team is grateful for guidance and support from Yusuf Murangwa (Minister of Finance and Economic Planning), Qimiao Fan (Country Director for Kenya, Rwanda, Uganda and Somalia), Keith Hansen (Former Country Director for Kenya, Rwanda, Uganda and Somalia), Sahr Kpundeh (Country Manager for Rwanda), Rolande Simone Pryce (Former Country Manager for Rwanda, currently Regional Director for the South Caucasus), Hassan Zaman (Regional Director for Eastern and Southern Africa for Equitable Growth, Finance and Institutions), Asad Alam (former EFI Regional Director, Eastern and Southern Africa, currently Regional Director for Europe and Central Asia for Equitable Growth, Finance and Institutions), and Zano Mataruka (Former IFC Resident Representative in Rwanda, currently IFC Manager in Brazil). e report bene ted from excellent peer reviewer comments by Fulbert Tchana Tchana (Program Leader), Tom Bundervoet (Lead Economist), Christopher Ian Brett (Lead Agribusiness Economist), Pablo Cesar Benitez (Senior Environmental Economist), and Soujanya Krishna Chodavarapu (Senior Private Sector Specialist). We extend special thanks for the insights and recommendations received from Dr. Lopez Roberto Calix Jose (Former Lead Economist at the World Bank), Dr. Alfred Bizoza (Associate Professor in Agricultural Economics, University of Rwanda), Dr. Richard Newfarmer (Country Director, International Growth Center), Professor Jaime De Melo (Former Head of Economic Department University of Geneva), and Dr. Bernard Hoekman (Professor and Director, Global Economics at the Robert Schuman Centre for Advanced Studies, European University Institute). e report has an overview and seven chapters written by individual chapter teams. Chapter 1: Sources of Growth in Rwanda: Diagnostic of Growth Fundamentals Lead authors: Steven Michael Pennings (Senior Economist), Guido Damonte (Temporary), Guido Damonte (Temporary), and Calvin Djiofack (Senior Economist). Core team: Ali Souag (Consultant), Aurelien Serge Beko (Consultant), Ruth Karimi Charo (Senior Education Specialist), Tihtina Zenebe Gebre (Senior Education Specialist), Lillian Mutesi (Education Specialist), Moritz Piatti (Senior Economist), and Nobuyuki Tanaka (Economist). Chapter 2: Development of productive Private Sector Lead Authors: by Calvin Zebaze Djiofack (Senior Economist), Albert Sole (Senior Private Sector Specialist), and Aurelien Serge Beko (Consultant). Core team: Brice Gakombe (Senior Financial Sector Specialist), Buddy Buruku (Senior Financial Sector Specialist), Isabella Hayward (Senior Digital Development Specialist), Leyla V. Castillo (Senior Financial Sector Specialist), Mphatso Kumwenda (Senior Country Economist, IGC), Fiona Elizabeth Stewart (Lead Financial Sector Specialist), Tania Priscilla Begazo Gomez (Senior Economist), Gokhan Akinci (Principal b Operations O cer), Jean Nicolas Arlet (Private Sector Specialist), Kobina Egyir Daniel (Senior Operations O cer), Senidu Fanuel (Senior Private Sector Specialist), Patience Rukundo Ingabire (Operations Analyst), Ezra Onchiri Kanani (Investment O cer), Priyanka Kher (Senior Private Sector Development Specialist), Fantu Farris Mulleta (Operations O cer), Wilson Muyenzi (Consultant), Sarah Ruth Ochieng (Operations O cer), Toshiaki Ono (Senior Financial Sector Specialist), Jan Alexander Kazimierz Orlowski (Economist), Kaushiki Singh (Consultant), Vera Kehayova (Consultant) and Erwin Tiongson (Professor at Georgetown University). Chapter 3: Growth and Resilience through trade: New Post-pandemic policies to drive exports Lead Authors: Christian Lippitsch (Senior Country Economist, International Growht Center), Dominique Njinkeu (Interim Executive Director, African Economic Research Consortium), and Calvin Zebaze Djiofack (Senior Economist, World Bank Group). Core team: Israel Osorio-Rodarte (Economist), Charles Kunaka (Lead Transport Specialist), and Peace Aimee Niyibizi (Senior Economist). Chapter 4: Structural Transformation and Inclusive Productivity Growth. Lead Authors: Erwin Tiongson (Professor at Georgetown University), Migle Petrauskaite (Consultant), and Calvin Zebaze Djiofack (Senior Economist). Core team: Juan Carlos Parra Osorio (Senior Poverty Economist), Aanchal Anand (Senior Urban Economist), Silas Udahemuka (Senior Human Development Specialist), Eloise Obadia (Consultant), Sheila W. Kamunyori (Senior Urban Specialist), Victor Steenbergen (Senior Economist), Marco San lippo (Associate Professor of Economics, University of Torino), Rohit Ticku (Consultant) and Aurelie Klein (Project Manager, Social Protection Programme, Rwanda and Burundi, ILO). Chapter 5: Creating the Environment for Growth Incomes, and Employment in the Agri-Food Sector Lead Authors: Asa Giertz (Senior Agricultural Economist), and Esdras Byiringiro (Agricultural Economist). Core team: Aicha Lucie Sanou (Consultant), Xiaoyue Hou (Consultant), Peace Aimee Niyibizi (Senior Economist), and Aurelien Serge Beko (Consultant). Chapter 6: Potential of Natural Assets and Environment to Contribute to Climate Resilient, Greener and Inclusive Growth Lead Authors: Diji Chandrasekharan Behr (Lead Environmental Economist, World Bank Group). Core team: Iain Shuker (former Practice Manager, current Regional Director for Eastern and Southern Africa Planet Vertical), So a Ahlroth (Consultant), Tuukka Castren (Senior Forestry Specialist), John Kalisa (Consultant), Elisson Wright (Senior Environmental Finance Specialist), Hisham Osman (Senior Environmental Engineer), Baba Ali Mwango (Consultant), Jane Turpie (Anchor Environmental), Luke Wilson (Anchor Environmental), and Irving Rodolfo Mc Liberty Zurita (Consultant). e contribution of the Global Program on Sustainability, funded by the governments of the UK, Germany and Switzerland, is gratefully acknowledged, in particular with respect to Chapter 6: Enabling Greener and Climate Resilient Growth. Chapter 7: Fiscal Space for Resilience and Sustainable Growth. Lead Authors: Juan Pablo Paladino (Consultant) and Calvin Zebaze Djiofack (Senior Economist). Core team: Leif Jensen (Consultant), Moritz Piatti (Senior Economist), Ramya Sundaram (senior Economist), Nobuyuki Tanaka (Economist), Peace Aimee Niyibizi (Senior Economist), Aijaz Ahmad-CIC (Lead Public Private Partnership Specialist), Dennis Sanchez Navarro (Economist), Henri Fortin (Lead Public Sector Specialist), Kieran omas Byrne (Consultant), Lucas Zavala (Economist), Nathan Rono Tuimising (Senior Public Private Partnership Specialist), Onur Erdem (Senior Public Sector Specialist), and Samuel Baiya (Infrastructure Specialist). c e team would also like to acknowledge numerous government o cials for providing invaluable comments and suggestions during the preparation and thematic validation discussions: O ce of the President: Gatara Francis (Former Senior Economic Advisor). Ministry of Finance, and Economic Planning (MINECOFIN): Chris Ngugabe (Director General of Macroeconomic Policy), Abel Ntegano, Arend Kouwenaar (Macroeconomic Adviser), Jacob Diko Mukete (Advisor), Emmanuel Nyirimana (Head of National Project Development and Quality Assurance Department), Ariane Zingiro (Director General of National Planning), Fred Sabiti (Technical Advisor on Environmental Mainstreaming), Didier Tabaro (Macroeconomic Policy Analyst), ierry Watrin (Green Economy and Climate Change Advisor), Yvonne Umulisa (Former Permanent Secretary, MININVEST), and Patrick Hitayezu (Former Chief Economist). National Bank of Rwanda (BNR): ierry Kalisa Mihigo (Chief Economist and Executive Director Monetary Policy and Research). National Institute Statistics of Rwanda (NISR): Ivan Murenzi (Director General), and Jean Claude Mwizerwa (Director, Economic Statistics Department). Rwanda Development Board (RDB): Elodie Rusera (Chief Skills O cer), Delphine Uwase (Head of Strategy and Competitiveness) and Jonathan Shimwa (Financial Analyst). Rwanda Biomedical Center (RBC): Francois Uwinkindi (NCDs Division Manager). Ministry of Trade and Industry (MINICOM): Antoine Kajangwe (Permanent Secretary) and Alexis Kabayiza (Chief Technical Advisor). Ministry of Agriculture: Eric Gatera (Chief Technical Advisor), Patrick Karangwa (Director General, Agriculture Modernization). Ministry of ICT (MINICT): Esther Kunda (Director General, Innovation and Emerging Technologies). Ministry of Infrastructure (MININFRA): Billy Ndengeyingoma (Strategic Advisor for Urban Development). Ministry of Local Government (MINALOC): Emmanuel Bugingo (Director, Local Economic Development). Rwanda Green Fund: Teddy Mpinganzima Mugabo (Chief Executive O cer), Laurene Manzi (Climate Finance Analyst), Lynette Umuratwa (Executive Assistant to the CEO), Felix Yvan Rugwizangoga (Chief Strategy O cer) and Alex Mulisa (Coordinator of the National Fund for Environment and Climate Change). Ministry of Environment (MoE): Beatrice Cyiza (Permanent Secretary), Dismas Karuranga (Climate Risk Mitigation Specialist) and eophile Dusengimana (Environment and Climate Change Policy Specialist). Rwanda Forestry Authority (RFA): Concorde Nsengumuremyi (Director General) and Ivan Gasangwa (Forestry Research Division Manager). e report was edited by Migle Petrauskaite (Consultant), Professor Erwin Tiongson (Georgetown University), Jose Roberto Lopez Calix (Former Lead Economist at the World Bank), William Shaw Tavel (Consultant), Kaushiki Singh (Consultant), and Vera Kehayova (Consultant). Administration, coordination and logistics activities were managed by Alice Umuhoza (Team Assistant) and Sylvie Ingabire (Senior Executive). e report was designed by Robert Waiharo (Consultant). d Abbreviations AfCFTA African Continental Free Trade Area FONERWA National Fund for Environment and Climate Change AI Arti cial Intelligence FSSP Forest Sector Strategy Plan ALMPs Active Labor Market Policy GCI Global Competitiveness Index ANP Akagera National Park GDP Gross Domestic Product ASEAN Association of Southeast Asian Nations GGCRS Green Growth and Climate Resilience Strategy ASP Adaptive Social Protection GHG Greenhouse Gases BAU Business-As-Usual GNI Gross National Income BDS Business Development Services GoR Government of Rwanda BFNA Biodiversity Financial Needs Assessment GVC Global Value Chain BNR Banque Nationale du Rwanda (National Bank of IBES Integrated Business Enterprise Survey Rwanda) ICT Information and Communication Technology BRD Rwanda Development Bank IFMIS Integrated Financial Management Information CAES Customized Agriculture System System CAF Community Adaptation Fund IHSLC Integrated Household Survey on Living Conditions CBHI Community-Based Health Insurance ILO International Labor Organization CCDR Country Climate and Development Report IMF International Monetary Fund CEM Country Economic Memorandum IP Industrial Policy CET Common External Tari IPAs Investment Promotion Agencies CFS Climate Finance Strategy KLP Kigali Logistics Platform CIT Corporate Income Tax KPI Key Performance Indicators COMESA Common Market for Eastern and Southern Africa LARS Learning Achievement in Rwandan Schools CRM Customer Relationship Management LFS Labor Force Survey CSA Climate-Smart Agriculture LODA Local Administrative Entities Development Agency CSAF Council on Small Agricultural Finance LTGM Long Term Growth Model DFS Digital Financial Services LTSS Long Term Savings Scheme DIME Development Impact Evaluation MAGERWA Magasins Généraux du Rwanda DMRS Domestic Market Recapturing Strategy MBRP Manufacture and Build to Recover Program DPI Digital Public Infrastructure MDB Multilateral Development Bank DRC Democratic Republic of the Congo MFI Micro nance Institution DTRI Digital Trade Restrictiveness Index MICE Meetings, Incentives, Conventions, and Exhibitions EAC East Africa Community MIDIMAR Ministry of Disaster Management and Refugee A airs EBM Electronic Billing Machine MINAFFET Ministry of Foreign A airs and Cooperation ECCAS Economic Community of Central African States MINAGRI Ministry of Agriculture ECD Early Childhood Development MINALOC Ministry of Local Government eCTS Electronic Cargo Tracking System MINECOFIN Ministry of Finance and Economic Planning EGF Export Growth Fund MINEDUC Ministry of Education EICV Integrated Household Living Conditions Survey MINICOM Ministry of Trade and Industry EMDEs Emerging Markets and Developing Countries MININFRA Ministry of Infrastructure ESC Employment Service Centers MININVEST Ministry of Public Investment and Privatization EU European Union MINISANTE Ministry of Health FCCL Fiscal Commitment and Contingent Liability MiR Made in Rwanda FDG Future Drivers of Growth MNE Multinational Enterprise FDI Foreign Direct Investment e MRA Mutual Recognition Agreement RSSB Rwanda Social Security Board MRV Monitoring, Reporting and Veri cation SACCO savings and Credit Cooperative Organization MSME Micro, Small and Medium Enterprise SADC Southern Africa Development Community NAEB National Agricultural Export Board SAIP Sustainable Agricultural Intensi cation and Food Security Project NAIS National Agricultural Insurance Scheme SDF Skills Development Fund NBS Nature-Based Solutions SDG Sustainable Development Goal NBT Nature-Based Tourism SDG Sustainable Development Goal NCDA National Child Development Agency SDR Special Drawing Right NCSA National Cybersecurity Authority SEZ Special Economic Zone NDC Nationally Determined Contribution SLBs Sustainability-Linked Bonds ND-GAIN Notre Dame Global Adaptation Initiative SLLs Sustainability-Linked Loans NGOs Non-Government Organizations SMEs Small and Medium Enterprises NISR National Institute of Statistics Rwanda SOC State-Owned Companies NNP Nyungwe National Park SOE State-Owned Enterprises NST National Strategy for Transformation SSA Sub-Saharan Africa NTB Non-Tari Barrier SSIT Small Scale Irrigation Technology ODA O cial Development Assistance STEM Science, Technology, Engineering, and Mathematics OECD Organization For Economic Cooperation and Development STRI Services Trade Restrictiveness Index ONA One Network Area TADAT Tax Administration Diagnostic Assessment Tool PEFA Public Expenditure and Financial Accountability TFA Trade Facilitation Agreement PER Public Expenditure Review TFP Total Factor Productivity PES Public Employment Services TPOs Trade Promotion Organizations PFM Public Financial Management TVET Technical and Vocational Education and Training PIM Public Investment Management UNCTAD United Nations Conference on Trade and Development PPP Public-Private Partnerships UNESCO United Nations Educational, Scienti c and Cultural PR(s) Policy Reforms Organization PRs Policy Recommendations UNICEF United Nations Children's Fund PRSF Partial Risk Sharing Facility US$ United States Dollars PSTA Strategic Plan for the Transformation of Agriculture USPs Unsolicited Proposals R&D Research and Development VAT Value-Added Tax RAB Rwanda Agriculture Board VNP Volcanoes National Part RDB Rwanda Development Board VUP Vision Umurenge Program REMA Rwanda Environment Management Authority WBES World Bank Enterprise Survey RERP Rwanda Economic Recovery Plan WDIs World Development Indicators RICA Rwanda Inspectorate, Competition and Consumer WEO World Economic Outlook Protection Authority WFP World Food Program RP Rwanda Polytechnic WTO World Trade Organization RRA Rwanda Revenue Authority RSB Rwanda Standards Board i Executive Summary Rwanda has achieved impressive growth and for the government to address these issues. poverty reduction over the past two decades. e Implementation should consider strengthening share of the population below the national poverty competition law enforcement, systematically line fell by more than 20 percentage points from identifying and removing regulatory restrictions, as 2001 to 2017, while life expectancy, access to health well as open and transparent privatization processes, care, and educational attainment have improved e ective control of the creation of state-owned sharply. However, while poverty continued to enterprises (SOEs), and competitive neutrality. fall until the eve of the pandemic, the amount of Public support for rms could be improved by: (i) poverty reduction generated by each percentage renewing the portfolio of support schemes after point increase in gross domestic product (GDP) an impact evaluation of the small and medium per capita fell, and the pandemic and a series of enterprises (SME) policy mix, (ii) strengthening external shocks have likely increased poverty rates. delivery capacity across government ministries and agencies, and (iii) creating markets for e economy faces severe constraints. Job creation Business Development Services (BDS) to emerge. is insu cient while productivity remains low, Improving collaboration across rms by investing re ecting infrastructure gaps, limited progress in in shared infrastructure or using matching grants innovation, and sub-optimal allocative e ciency. to promote research and development (R&D) e Human Capital Index (HCI), which measures consortia is an inexpensive approach to reducing the amount of human capital that a child born today coordination and information failures that can expect to attain by age 18, places Rwanda at impede growth. 160th out of 174 countries. High public debt levels, vulnerability to climate change, and the increasing Many Rwandan rms nd it di cult to hire pressure on natural resources will make it di cult workers with the right skills. Rwanda has one of to achieve the country’s targets of becoming an the lowest levels of educational attainment in upper-middle-income country by 2035 and a the region. Low post-graduation employment high-income country by 2050. Overcoming these rates and surveys indicate the low relevance for challenges will require greater reliance on private employers of skills learned in public universities sector investment to enhance productivity growth, and technical and vocational training institutes. raise incomes, and provide the nancing to address E orts to improve skills should focus on infrastructure shortfalls. identifying skills gaps, strengthening teachers’ skills, and continuing to improve access to Boosting productivity and competitiveness student nancing for vulnerable students. Achieving rapid private sector growth will be Micro, small and medium enterprises (MSME) unlikely without strengthening support for rms are particularly underserved by nancial services. and far-reaching reforms to economic policies. MSMEs received only 15 percent of total lending Most rms are small and informal and operate in by banks in 2019 but employed 71 percent of low-value-added sectors. Many lack appropriate establishment workers. According to the World inputs, technology, and nance. Regulations Bank Enterprise Survey (WBES) 2019, 31 percent restrict competition, rules against anticompetitive of SMEs perceived access to nance as their biggest practices are poorly enforced, the insolvency obstacle to operations, well above the average for framework is complex and not fully implemented, sub Saharan African (SSA) countries (around 22 and state-owned enterprises—with full, majority, percent) and that for large rms in Rwanda (12 or minority state shareholdings—operate in some percent). More generally, low domestic savings and markets where private sector presence is feasible. the limited share that is channeled through formal e recent publication of policies on competition, nancial institutions further constrain access to investment, and privatization provides a framework formal sources of nance. Promoting nancial ii literacy, strengthening the framework for digital Rwanda has achieved remarkable growth in nancial services, improving nancial institutions’ exports—but needs to grow faster to meet its services to low-income households, supporting development goals. Exports are vulnerable due to nancial innovation, and increasing savings the concentration in a few products and markets, through the Ejo Heza and other long-term saving coupled with reliance on gold and low-complexity programs could increase the channeling of savings primary commodities subject to large price through formal nancial institutions. uctuations. e similarity of export composition with East African Community (EAC) partners and Rwanda’s innovation performance has deteriorated. low survival rates of export relationships further In 2019, Rwanda ranked 103rd out of 120 countries limit Rwanda’s export potential. ese challenges in terms of introducing a new or signi cantly in part re ect the small average size of Rwandan improved product or service. e Government rms and their lack of innovation and technical could support innovation by reducing program pro ciency, as well as high trade costs associated fragmentation, targeting programs to di erent with limited infrastructure (e.g., high electricity stages in a rm’s growth cycle, shifting resources costs) and lingering policy impediments (e.g., from nancial assistance to technical support, some input tari s). strengthening the delivery capacity of ministries and agencies, and using grant-matching consortia Overcoming these challenges will require a to fund projects. combination of approaches. Rwanda’s services trade, particularly digital trade, could be boosted through e report outlines an agenda to strengthen trade agreements to reduce foreign restrictions and information and communication technology strengthen trade facilitation, ful lling Rwanda’s (ICT) services in Rwanda, where network coverage commitments to liberalizing trade in services has improved but broadband uptake remains low. while strengthening commitments in some areas Rwanda needs to boost digital service use among (e.g., the nancial sector), easing restrictions consumers and the private sector by increasing on foreign workers to increase access to skills, access to a ordable smart devices, expanding providing for cross-border digital payments digital skills initiatives, and improving broadband interoperability and policy improvements to quality and a ordability through network streamline restrictions and harmonize standards upgrades, densi cation, and stricter competition and regulations. E orts to simplify government enforcement. Key regulatory measures include procedures and disseminate information on a reference interconnection o er (RIO), better service trade opportunities, market access spectrum management for next-gen technologies requirements, and support mechanisms, coupled like 5G, and infrastructure sharing to lower with the development of common principles and service costs. While recent laws on personal data guidelines on services with trade partners and protection and cybersecurity have created a solid within the World Trade Organizations (WTO) regulatory foundation, their implementation and regional groups, would support the expansion is still in progress. To achieve global standards, of digital trade. Rwanda also needs to strengthen Rwanda must enhance regulations related to non- consumer protection measures and clarify rules for personal data portability and net neutrality, as e-commerce and content platforms, particularly current rules restrict cross-border data ows vital regarding products and content generated by users. for digital market integration and e-commerce. Strengthening coordination with the Democratic is e ort should be supported by regional and Republic of Congo (DRC) could improve access global collaboration on regulatory harmonization. to a market that accounts for about a third of Further public investment is needed to develop Rwanda’s exports. Finally, capacity building and foundational digital public infrastructure, such active engagement with African countries and as identi cation, trusted data sharing, and digital regional economic communities could help to payments systems, to scale digital services safely reap the bene ts of the African Continental Free and a ordably. Additionally, improvements in Trade Agreement (AfCFTA). the enabling framework and skills development are crucial for wider adoption of technologies like Several steps are required to consolidate Rwanda’s arti cial intelligence (AI). position as a logistics and transport hub for transit iii trade. Improving the e ciency of trucking rms, protection remains a challenge. Improving cities, developing warehouse facilities, eliminating including secondary cities, through infrastructure charges and other impediments to transit trade, improvements to raise density, mobility and and establishing an integrated freight transport resilience would make it easier for workers to move system using roads, railways, and air cargo would to higher-productivity jobs and increase inclusion. strengthen the transit system. Further e orts are Trade and investment treaties, along with required to harmonize taxes, fees, and charges infrastructure investments, should be directed at related to air transport. Related e orts could attracting FDI a key driver of formal job creation. focus on improving infrastructure, clarifying policies (e.g., on the hub’s form), strengthening Sustained improvements in the social protection coordination with neighboring countries over rules system would promote poverty reduction and and expanding support capacity, reducing charges support vulnerable households. e community- on transit trade, and scaling up the management based health insurance program and the social skills of Rwandan logistics providers. insurance schemes are critical to protect informal sector workers and their households. Expanding E orts are needed to improve the development the geographic reach and the linkages across active impact of foreign direct indirect (FDI). is labor market policies is important to support involves fully enforcing committed investment the sustainable integration into the labor market treaties, better integrating investment and of a broader population of vulnerable workers, competition policies, and strengthening particularly low-skilled ones. intellectual property rights through the AfCFTA. Domestically, Rwanda could strengthen the rm- Growth in agriculture is essential to meet the level investor tracking system and assess the value country’s development ambitions, and the sector for money of FDI promotion e orts, including faces both opportunities and formidable problems. tax incentives. Expanding investments in Special Demographic trends and rising incomes will Economic Zones (SEZs) and integration of SEZs shift demand to higher value-added products, into national transport and logistics infrastructure potentially increasing high-quality jobs. However, could attract more investment. SEZs could become demographic pressures and the slow transition a platform for industrial policies, fostering linkages to o -farm livelihoods is increasing the share with local suppliers and specialization along the of households with very small farm plots, and value chain. agricultural yields have plateaued or even dropped since 2013. Close to 40 percent of agricultural Boosting Inclusiveness households use improved seeds or pesticides, and Rwanda’s rapid structural transformation has only six percent of land under crop cultivation is generated substantial gains, reducing poverty and currently irrigated. Rwanda su ers widespread creating quality jobs for both men and women, as damages and losses from climate-related events, well as older and younger workers. However, the notably droughts, landslides, and ooding. ere bene ts of structural transformation have tended is a lack of organized, formal markets for most to accrue to more educated workers, worsening staple crops (except maize), markets for some inequality. While only 15 percent of the crops are dominated by unprocessed products, workforce has an upper secondary or university staples su er from poor quality, farmers are education, they hold one-third to half of industry reluctant to market their crops in the face of high and services jobs. In high-value sectors like food insecurity, and despite the rapid growth information and communications, 70 percent of horticultural exports the value chain su ers of jobs go to university-educated workers, who from insu cient cold storage and transport, make up just 7 percent of the overall workforce. underutilization of existing facilities, inadequate Education dramatically increases access to o - logistics and bureaucratic requirements. Finally, farm jobs; tertiary education makes it three times agricultural nance is limited due to high more likely, compared to those with no education. perceived risks and transactions costs for nancial is has deepened inequality in job opportunities. institutions, and limited experience of farmers Ensuring access to decent and well-paying jobs in and producers with nance (and lack of sectoral the formal economy that provide access to social knowledge in nancial institutions). iv Improvements in the sector will require greater conscious conservation agriculture and payment- government support and increased private sector for-ecosystem services, with the emphasis on the investment. Steps could include integrating expansion of the network of terraces to increase soil “Farming as a Business” as a standard component carbon. Land management interventions proposed in the government extension model, encouraging by government agencies could signi cantly reduce private investments in agri-logistics infrastructure soil erosion and increase biomass carbon storage. and cold chain development, shifting management Nature-based solutions also can reduce ood risks of post-harvest assets to the private sector, and and help to improve water quality in urban areas. modernizing the seeds sector. An Agriculture More broadly, integrating climate considerations Finance Strategy should address balancing grants in the planning and design of investments programs vs. the objectives of private nance. needed for urban development could augment e Government also should seek to scale up resilience and lower the carbon footprint of cities. vocational training for rural support services, invest e Government’s e orts to transition cooking in irrigation, strengthen land market regulations in households from biomass to cleaner energy and help to improve agricultural risk management. sources, which are central to maintaining forests, E orts to improve equity in the sector could could bene t from private sector participation and involve adopting a food policy strategy for local climate nance. food sector development, promoting investments in market infrastructure, strengthening institutions Nature-based tourism (NBT) generates substantial involved in sector regulations (e.g., for food safety, revenues. NBT, de ned as tourism to experience employment), and reducing gender disparities in natural resources in a wild or undeveloped farm productivity, land size and quality, prices form, is estimated to account for 80 percent received for products and access to nance. of the visitors entering Rwanda for leisure or conferences. NBT has played an important role in Boosting sustainability and resilience job creation, particularly increasing formal jobs in Unsustainable exploitation of natural assets and rural communities near the game parks. NBT in the continuing impact of climate change pose Rwanda remains vulnerable to poaching and illegal substantial risks to development. Soil degradation activities, underlining the importance of ensuring and erosion, deforestation, loss of biodiversity, and that the surrounding communities, who may limited access to and supply of clean water threaten have customary rights to natural resources in or growth and welfare. Rwanda is ranked 124 out of around protected areas, reap some of the bene ts. 182 countries in an index of vulnerability to climate Private investment, as provided for through new change, given the heavy reliance on agriculture legislation, could potentially assist with diversifying and nature-based tourism. Land area with high NBT o erings. vegetation cover (forests, woodlands, grasslands, and shrublands) fell by 43 percent from 1990–15, ere is considerable technical potential to while croplands more than doubled, exacerbating reduce emissions while maintaining rapid soil erosion and soil loss, as well as reducing growth. Emissions could be reduced substantially in ltration and depleting groundwater reserves. through fuel switching to lower carbon sources, e cumulative e ect of watershed destruction, improvements in operational and fuel e ciency, and inappropriate settlements, and unsustainable e orts to promote sustainable waste management agricultural practices has led to more siltation, measures. ese initiatives also would improve the sedimentation, pollution, and the risk of invasive quality of growth and limit the adverse impacts aquatic weeds. In urban areas, unplanned land-use of emissions on public health. Nevertheless, the changes have resulted in increased ood risks, land government estimates that it would cost US$11 degradation, and biodiversity loss. billion from 2020–30 (8.8 percent of GDP each year) to achieve Rwanda’s Nationally Determined Nature-based solutions can play an important Contribution (NDC) commitments (both role in maintaining natural assets and adapting unconditional and conditional). e impact on to climate change. e Rwanda Country Climate emissions of the current expenditure pattern could and Development Report (CCDR) recommends be reduced through formalizing the application of deploying nature-based programs such as soil- climate disaster risk screening of public investments v and prioritizing green investments, deploying levies su ered substantial losses, while the guaranteed or repurposing existing subsidies that undermine debt of SOEs at the end of 2022 is estimated at climate resilience, and using resilience criteria to 3.4 percent of GDP. e government has de ned determine subnational allocations. a sound legal and institutional framework for SOEs and for privatization e orts, although some e report outlines key policy measures for improvements in the laws and policies now under strengthening Rwanda’s resilience to climate review would be useful. Clear and timely reporting change. e policy measures are presented based on SOE nancial, operational performance and on whether they are short or medium term, high contribution to social goals, will be necessary to or medium priority, and high, medium or low de ne a performance management framework and feasibility. Policies are divided between those that set performance targets. enable sustainable implementation of NBS to reduce vulnerability to climate events, those that A larger role of private sector nancing in enhance the contribution of NBS to development, infrastructure projects could generate e ciency and those that maintain a low carbon growth path. gains. is could be achieved through addressing problems in substantive provisions of the law e narrowing of Rwanda’s scal space threatens on privatization, strengthening government the sustainability of the economic program. e management of public private partnerships (PPP) Central Government scal de cit rose sharply s and project screening, establishing a framework before the COVID-19 pandemic, and then to assess scal commitments and contingent increased further with the COVID-19 related liabilities, and providing for formal mechanisms expenditures and the revenue impact of the 2020 for funding project preparation and underpinning recession. Debt rose from 23 percent of GDP in public support to PPPs. 2006 to 66 percent in 2022. While sustainability outlook risks remain moderate, scal consolidation ere is scope for increasing tax revenues and is necessary, in a way that minimizes negative reducing expenditure. Rwanda’s ratio of tax spillovers on economic growth. revenue to GDP in 2021 was 4 percentage points above the average of regional peers, Fiscal consolidation should be supported by although tax performance remains below that improving the e ciency of public infrastructure of some top-performing comparators. Potential investment. Improvements could include improvements include raising rates on selected consolidating projects and allocating more excise taxes and reducing tax exemptions. Key funding to multi-year projects, which tend to have policy recommendations for expenditures include greater development impact, as well as reducing phasing-out COVID-19 and one-o special implementation delays and stalled projects. drawing right (SDR) spending, reducing budgetary While in some respects public investment rigidity, reviewing the implementation of management is of high quality, improvements investment projects according to the government could involve freeing funds tied up in poorly priorities, identifying measures for additional performing projects, performing more ex-post cost-savings and e ciency gains based on the reviews of major projects by independent experts, World Bank’s Public Expenditure Review (PER) improving the accuracy of estimates of state assets and including in the budget a medium-term in nancial statements, and fully implementing scal policy framework underlying the spending the integrated nancial management information rationalization strategy. Disaggregating the scal system (IFMIS). ere also is potential for targets in the Medium-term Fiscal Framework, e ciency gains in health and education spending for example formulating targets for the wage through progress in translating service delivery bill in di erent areas or establishing ceilings on outputs into better performance. revenue foregone, could enhance government control of the budget. Similarly, the application Greater scal space and improved productive of cost-bene t analyses and sunset clauses on tax e ciency could be achieved by strengthening the expenditure provisions would also bene t from management of state-owned enterprises (SOEs) being incorporated into the scal sustainability and through a targeted privatization program. framework over the medium term. Some SOEs receive signi cant subsidies and have vi Overview Introduction reach upper-middle income status by 2035 and For many years, the World Bank has had the honor high-income status by 2050. To get there, the and privilege of accompanying administrations Rwandan government would build on its strong with a series of diagnostics studies and policy record in far reaching reforms initiated after the recommendations. Building on this tradition, genocide against the Tutsi in 1994. Large scale public the Bank team has put together a joint e ort investment in energy, telecommunications and with the Government of Rwanda at producing road transport, strengthened business regulations, a Country Economic Memorandum (CEM) trade integration, deepened decentralization with focused on pathways to high, sustainable and accountable service delivery and broad-based social inclusive growth for the government. is e ort is achievements have led Rwanda to reach an average meant to facilitate a dialogue around a menu of GDP per-capita growth of 5 percent per year since policy options, and be informative in the spirit of 2006, second only to Ethiopia in Sub-Saharan knowledge exchange, rather than exhaustive. e Africa (SSA). topics were selected by the Government of Rwanda and the World Bank based on the original report Building on a strong and promising record, the “Future Drivers of Growth (FDG) in Rwanda” and FDG report set the country on an ambitious recent development challenges facing the country. course. It identi ed four drivers and six pillars is Overview aims to provide an overall guiding to achieve middle-income status. e four framework to highlight and bring together some of drivers of growth were innovation, integration, the critical reform priorities identi ed in the CEM. agglomeration, and competition; the six pillars were (1) human capital development and a is study is a continuation of the “FDG: knowledge-based economy, (2) regional and Innovation, Integration, Agglomeration, and international trade integration, (3) urban Competition” report that was also a joint initiative infrastructure development, (4) enterprise of the Government of Rwanda and the World development for a private sector-led economy, Bank. is report was o cially launched in 2018 as (5) productive and market-oriented agriculture, a contribution to the formulation of the National and (6) good governance in a capable state. Gender Strategy for Transformation (NST-1), which set equality, environmental sustainability, and long- the framework for economic policies over the term commitment to science and technology were 2017/18–2023/24 period (World Bank Group; cross-cutting themes to support the six pillars. Government of Rwanda, 2020). e government is now preparing a successor strategy document, is study refreshes the FDG agenda of policy NST-2, and has requested World Bank assistance reforms. After four years of implementation, in updating that earlier report to consider the progress on the agenda of FDG reforms has major policy challenges now facing the country. been broad and remarkable but a major and Hence, the study intends to contribute to the sustained e ort is still needed to complete the achievement of the menu of key reforms initiated agenda. In a nutshell, from the analysis of a total a few years ago, while refreshing the policy agenda of 82 policy recommendations, about one third for accelerating Rwanda’s progress in growth and achieved signi cant progress; about half made poverty reduction. some progress, and about one fth made little to no progress. e policy recommendations with e Rwanda government has ambitious long-term the highest average progress scores were, in order, economic goals. Vision 2050 sets an overarching Human Capital (2.35), Governance (2.25), Trade goal of reaching a gross domestic product (GDP) (2.15), Urbanization (2), Agriculture (2) and growth per-capita rate of more than 10 percent to Competitiveness and Enterprise (2).i vii e proposed upgrade aims for high, inclusive, job- implications of the ongoing con ict in Ukraine. enhancing, and green-oriented growth, supported Nevertheless, simultaneous action on various fronts by an updated and more comprehensive list of and an acceleration of the past economic trends will policy recommendations. It adds two new pillars be crucial to keep Rwanda on its path to prosperity. to the six original ones: job creation and climate change adaptation. Growth based on structural is overview is structured as follows. Chapter 1 transformation can create more and better jobs, reviews Rwanda’s growth experience and presents thus both reducing unemployment and boosting scenarios for growth potential over the next 25 years. shared prosperity. Moreover, sustained growth e next chapter considers policies to promote depends on the institutional capacity to foresee private sector productivity and competitiveness, and adapt the economy to climate change, while based on rm-level surveys and industry-level addressing its risks to facilitate a smooth transition analyses, and Chapter 3 discusses international to green growth. trade and integration. Chapter 4 reviews trends in structural transformation and inclusiveness Continuing Rwanda’s remarkable success requires of job opportunities, followed by a chapter on accelerated e orts to rebalance its economy away measures to increase productivity and incomes in from public investment greater reliance on private the agricultural sector, on which the bulk of poor investment. Despite rapid growth, Rwanda’s households depend. Chapter 6 addresses the impact economy still confronts signi cant challenges. of climate change and the ongoing deterioration in While vigorous e orts have been made to establish Rwanda’s natural assets, and Chapter 7 considers a regulatory framework that favors growth policies to improve the sustainability of scal policy. and massive investments have increased public services, the dominant role of public investment Sources of growth in Rwanda: Diagnostic of and constraints on competition have limited growth fundamentals innovation and e ciency. Many households, Rwanda’s impressive growth over the last two particularly in rural areas, have received little decades has achieved substantial reductions in bene t from the overall progress in development. poverty and improvements in living conditions. Climate change and mounting public debt GDP has increased by 7 percent a year since 2010, present serious challenges to sustainability. At the the share of the population below the national same time, steady improvements in health services poverty line fell by more than 20 percentage points and in education are critical to build human from 2001 to 2017, and life expectancy, access capital, so that Rwandans have the skills essential to health care, and educational attainment have for innovation and technological progress. improved sharply. Investment, particularly rapid Overcoming these challenges will require greater increases in public investment, has been the main reliance on private sector investment to enhance driver of growth (Figure 0.1b). Large infrastructure productivity growth, raise the incomes of poor investments have yielded signi cant improvements farmers and the supply of o -farm employment in in access to and quality of basic services (for rural and urban areas, and provide the nancing example, the share of the Rwandan population to address infrastructure shortfalls in the face with access to electricity rose from 6.1 percent in of constraints on government expenditures and 2000 to 80.1 percent in 2024 (56.2 percent grid increasing climate change related shocks. and 23.9 percent o -grid), and investment in the meetings, incentives, conventions, and exhibitions Challenges are formidable, and a bold approach is (MICE) sub-sector has boosted tourism revenues still needed. It should focus on how public policy and jobs. can encourage greater private sector participation in achieving the goals of raising productivity Despite these achievements, the Rwandan economy growth, boosting inclusion, and addressing threats faces challenges that could limit development to sustainability. Rwanda has had the capacity progress. . While poverty continued to fall until to manage several exogenous shocks including the pandemic, the amount of poverty reduction COVID-19, natural disasters and the international generated by each percentage point increase in viii GDP per capita fell from 0.36 between 2005/06 trade growth through the African Continental Free and 2010/11 to just 0.24 between 2010/11 and Trade Area (AfCFTA), a free trade area, increasing 2016/17. the importance of investments in trade facilitation to reduce trade costs. Rwanda’s past growth has neither generated su cient jobs nor resulted in rapid gains in e government has adopted ambitious targets for productivity. Rwanda’s unemployment rate long-term growth that would require accelerated stagnated at about 12 percent over 2000–18, reform e orts. Vision 2050 aims for Rwanda to higher than in most peer countries, and the share of become an upper middle-income country by 2035 those employed in the population aged 15 or more and a high-income country by 2050, so that by has fallen to about half. Total factor productivity 2050 income per capita would be almost 16 times (TFP) growth has increased by only about one larger than today’s level. e rate of GDP growth percent a year since 2000, and TFP growth made a necessary to meet these goals (14.7 percent a year negative contribution to GDP growth from 2010– to reach middle-income status by 2035 or 12.2 22. Perhaps the most important determinant percent a year to reach high-income status by 2050) of low TFP growth is limited human capital would be much more rapid than Rwanda’s growth accumulation. e Human Capital Index, which over the past couple of decades. Some of the gains measures the amount of human capital that a child made in recent years have been lost due to external born today can expect to attain by age 18, places factors including the COVID-19 pandemic, the Rwanda at 160th out of 174 countries, re ecting war in Ukraine, and repeated climate shocks. low learning outcomes and high rates of stunting. A key policy priority for long term growth should Rwanda confronts signi cant challenges to the be to keep improving human capital development. sustainability of growth. Large public investments No country can boost private sector prosperity have boosted scal de cits and pose a challenge to without proper accumulation of human capital. medium- and long-term scal sustainability. Public From the previous FDG agenda, two priorities debt rose from 20.4 percent of GDP in 2010 to are increasing human and nancial resources for 66.7 percent in 2022 (Figure 0.1a), and Rwanda’s stunting programs and moving along the ladder risk of external debt distress was downgraded from the past focus on Basic Education to a from low to moderate in the 2020 IMF/World renewed one on Secondary and Tertiary education Bank debt sustainability analysis (DSA). Rwanda’s reform. is would require strengthening dependence on agriculture and tourism makes it accountability and learning skills, while reviewing particularly vulnerable to climate change, due to the e ciency of the large increase in education increased frequency of droughts and oods, as spending during the pandemic. ree new priority well as an accelerated degradation of the country’s areas include (i) improving basic education, natural capital. On the other hand, Rwanda also (ii) developing skills for gainful employment faces an important opportunity for more rapid and inclusion, and (iii) strengthening health Figure 0.1: Rwanda’s key drivers of economic growth a) Increases in public investment have driven rising de cits b) Investment is the main driver of growth, 2000–22. and debt, 1980–2022. 140 20 16.4 20.8 120 15 30.1 100 10 80 5 15.2 100.5 94.7 60 0 40 -5 - 54.7 20 -10 - - -16.9 - -15.5 0 - -15 1980 1986 1992 1998 2004 2010 2016 2022 2000 - 2009 2010 - 2014 2015 - 2022 Fiscal balance General Government Debt to GDP (LSH) Public_investment Private_investment Capital Stock Labor TFP Source: Calculations based on World Development Indicators (WDIs) ix outcomes. e rst area mainly includes the need leverage the expansion of digital nancial services for strengthening the two-tiered Early childhood (DFS) to boost mobile savings by supporting the development (ECD) service provision modalities integration of non-banks into the payment system for increased enrollment, regular training of and allowing non-bank e-money issuers to pay 24,000 uncerti ed teachers in foundational interest on e-money accounts, as is currently the skills, and the provision of incentives to teachers’ case in Kenya, Tanzania, and Ghana. Finally, there training and supervision in the use of English- is a need to reduce the high costs for remittances, and technology-based education. e second area leveraging the East Africa Payment (comparison) includes the setting up of a long-due evaluation System and engaging the Rwandan diaspora in system for the performance of schools and capital markets. Several countries (Senegal, Brazil, technical and vocational education and training the Philippines, and Indonesia) have issued diaspora (TVET), designed in coordination with employers bonds to tap into savings from abroad (this needs and rms, and an update of the labor market a clear strategy with many channels available, such information system (LMIS) to identify critical skills as mobile apps or the ability to purchase without a to be addressed by TVET training programs. is local bank account). would allow proper lling up of skill gaps and labor Figure 0.2: Rwanda’s gross domestic savings as percent of market opportunities. Scholarships and loans to GDP is low access a ordable laptops and the internet as part of 35 social protection programs for poor, vulnerable and 30 rural students should also be scaled up. e third 25 area mainly supports the gradual increase of the 20 health sector budget by two percentage points of the 15 general budget to enhance the country’s readiness 11.2 10.5 9.1 8.7 10 for any potential health crises. 5.5 5 One reason for the limited role of private investments 0 2013 2015 2017 2019 2021 in Rwanda is the low level of domestic savings, and Ethiopia Ghana India Kenya Mauritius Rwanda Tanzania Uganda Vietnam South Africa the small share that is channeled through formal Source: calculation based on WDI nancial institutions. Gross domestic savings equaled 10.5 percent of GDP in 2021, lower than e following chapters provide deep dive analyses in most regional comparators (Figure 0.2). Despite on how Rwanda could rebalance its economy some increased access to commercial banks, the away from public investment toward greater bulk of Rwandan savers rely on either informal reliance on private investment to address three savings products or non-bank nancial institutions. major challenges: i) boosting productivity and Moreover, the use of pensions and insurance is very competitiveness; ii) boosting inclusiveness; and iii) low, and retail bonds accounted for only 8.9 percent boosting sustainability and resilience. of government securities in 2020, and this share fell during the COVID-19 epidemic. Approaches Boosting productivity and competitiveness to increasing domestic savings through formal Private sector development: reforms to enhance institutions could focus on the strengthening of competition, skills, savings, innovation, and the Ejo Heza scheme. is would imply issuing ICT services new regulations to i) expand target groups beyond Achieving rapid private sector growth is unlikely cooperatives such as through identifying other without far-reaching reforms to economic policies. potential aggregators and enhancing e orts e rapid growth in the number of rms over the targeting urban dwellers whose uptake is lower; past decade and the increase in rms participating ii) revisit incentives by allowing short-term access in international trade provide evidence of a dynamic to funds which is stringent in the current design; private sector. However, these positive signs hide and iii) adjust the minimum savings level to qualify important weaknesses. e vast majority of rms for matching incentives, which is Rwf18,000 for are in the informal sector and quite small, many now. Reforms to increase domestic savings should with less than 3 employees, and 87 percent of x workers are in the informal sector. Most of these Institute for Conservation Agriculture (RICA); and small rms operate in low value-added sectors, issuing new regulations reforming the insolvency particularly wholesale and retail trade. Severe regime and the procedures for divestiture or problems hamper rm operations, including lack of liquidation of SOEs. appropriate inputs, technology, and nance, driving down capacity utilization. Firm capabilities and sector policies Small and medium-sized enterprises’ (SMEs) Despite improvements in the investment climate, upgrading policies are aimed at empowering rms to private rms continue to face considerable produce higher-quality products and services more challenges. e government has made substantial e ciently and support their growth trajectories progress in improving the investment climate. towards higher-value added activities and new Nevertheless, further progress in strengthening the markets. SMEs may lack market knowledge or regulatory framework is essential to boost private linkages, adequate technology, know-how, access sector growth. e main constraints cited in surveys to networks or knowledge of existing regulations. of private rms include limited access to nance E orts to address rm capability shortages in (particularly for small rms), high tax rates, and these areas can contribute towards the correction di culty in nding workers with the necessary skills. of resource misallocation while helping businesses On the positive side, the share of rms mentioning navigate a business environment characterized poor electricity services as a major obstacle fell from by high costs of production, which gives little 35 percent in 2006 to less than 5 percent in 2019, bandwidth to rms to invest in innovation and re ecting the major government investments in quality. e upgrading of the SMEs support electricity infrastructure. e critical areas in need mechanisms should be preceded by an institutional of faster progress include competition, capabilities, mapping and functional analysis of all rm-level access to nance, information and communication support mechanisms across government agencies technologies (ICT) services, and innovation. (management training, matching grants or grants for research and development (R&D) consortia Competition within existing clusters or networks, etc.). Enhanced competition is essential for rapid private sector growth, but the competition landscape in Sector policies designed in collaboration with Rwanda su ers from three important problems. the private sector can accelerate productivity First, regulations that restrict competition and failure gains at the rm and sector level. e productive to e ectively enforce rules against anticompetitive development of rms is often impeded by practices impair the functioning of markets and play coordination and information failures across or an important role in worsening resource allocation within sectors. Sector development policies can and rm productivity. Second, the framework inform interventions that seek to address rm- governing rm insolvency is complex and has level capabilities and access to markets and o er an not been fully implemented, which results in low opportunity to tailor interventions and programs recovery rates, limits risk taking and contributes to address sector/cluster-speci c challenges in to resource misallocation. ird, over half of state- an integrated fashion. government agencies can owned enterprises operate in markets that could induce collaboration among rms by convening be served e ciently by private sector rms, raising FDI sector/clusters stakeholders in carrying on concerns that privileged access to resources by state- an update and prioritization exercise of Rwanda owned enterprises (SOEs) or rules that support Development Board (RDB) sector screening and SOEs could starve more dynamic private rms. e approving pilot sector competitive initiatives at the government has made e orts to privatize SOEs, sector/cluster level, which can help the government reduce government shares in private enterprises and gain capabilities through learning by doing. An attract foreign direct investment (FDI), although example is encouraging collective productive progress in some areas has been slow. Measures to inputs in the form of strategic investments such increase private sector participation would involve as shared infrastructure, workforce development updating the legal framework on competition, also or rolling out matching grants to promote R&D reinforcing the institutional capacity of Rwanda consortia. Conducting strategic industrial policies xi for the development of competitive strategic accounting for 25 percent of GDP in 2022, received sectors requires strong institutional leadership and only 1 percent of total bank loans in the same coordination capabilities. period (National Bank of Rwanda (NBR), 2023). An agenda to improve nancial access to MSMEs Skills should include a program of regular trainings in Many Rwandan rms nd it di cult to hire workers nancial literacy and business management skills; with the right skills. Rwanda has one of the lowest completion of the rst phase of the program levels of educational attainment in the region: that support the automation of the operations of almost half of all workers have not completed any Umurenge SACCOs that provides support to the formal education, and 30 percent have completed digitalization and consolidation of community only primary education. Gross tertiary enrollment savings and credit cooperatives, while consolidating is 7 percent, below the averages for sub-Saharan Umurenge SACCOs into District-SACCOS; and Africa and low-income countries. Employment harmonized requirements for nancial institutions rates post-graduation are only around 40-60 to de ne and collect data on which they base percent for public universities, compared to 90- lending decisions on MSMEs. 95 percent for the top private universities, and employer satisfaction with the relevance of skills Innovation and ICT Services of graduates from TVET schools is estimated at Rwanda’s innovation performance has deteriorated. only 60 percent ese issues may in part re ect a e share of rms engaging in innovation activities failure of skill development programs to adjust to fell dramatically from 2011 to 2019, when Rwanda changes in the demand for skills, including sectoral ranked 103rd out of 120 countries in terms of shifts in demand. introducing a new or signi cantly improved product or service. Poor innovation performance in part Avenues for skill reform supporting private sector re ects low managerial and technological adoption development should focus more on matching, capabilities. Programs to improve innovation and quality, relevance, and equity of labor. First, management practices have generated high returns Rwanda should institutionalize mechanisms like in other countries and could be scaled up in Rwanda. Sector Skills Councils (SSCs) for identi cation Moreover, Rwanda receives mixed reviews on the of skills gaps and labor market opportunities and ability to take advantage of the opportunities o ered strengthen formal channels for interaction between by advances in information, communication, academia and the private sector employers. Second, and telecommunications (ICT) services. Rwanda the quality and relevance of technical and vocational has achieved a signi cant expansion of network education and training could improve signi cantly coverage (3G and 4G broadband network coverage through enhancing the management and support rates stand at 93 and 97 percent, respectively) and is of TVET teaching sta ’s technical, pedagogical ranked rst in Africa in terms of average broadband and digital competences; upgrading of teaching download speed. However, only 29 percent of and learning conditions for all programs in priority Rwandans had a mobile broadband connection in economic sectors; and stepping up mentorship to 2022, less than half the rate in South Africa and boost the labor market attractiveness of science and Kenya, and Internet access in urban areas is more mathematics related subjects. than ve times that in rural areas. Access to nance for nancially deprived rms e report outlines an agenda for strengthening Micro, small, and medium enterprises (MSMEs) the use of ICT services in Rwanda, divided into are particularly underserved by nancial services. six areas. First, usage could be increased through MSMEs received only 15 percent of total lending improving digital capacity and network upgrades. by banks in 2019, with micro- rms receiving only 1 Second, strengthening of personal data protection percent (World Bank, 2021). Yet, MSMEs represent legislation and the cybercrime and cybersecurity over 99 percent of total establishments and employ framework could bring Rwanda’s strong regulatory 71 percent of establishment workers in Rwanda. frameworks for data safeguards and enablers Overwhelmed by MSMEs and informality, the closer to the global frontier. At the same time, the agriculture sector, a national priority sector regulatory framework should be strengthened to xii facilitate the portability of non-personal data and Rwanda’s future export growth remains vulnerable guarantee net neutrality (under the non-personal to external shocks, most notably climate change. data dimension). ird, supporting interoperable e key to resilience is diversi cation. However, systems and startups would scale up digital the country’s export portfolio is concentrated on a payments and deepen nancial inclusion. Fourth, few products and markets, relying recently on gold removing current restrictions on cross-border data exports and low-complexity primary commodities ows that inhibit further digital market integration subject to large price uctuations. Similarity of would expand cross-border e-commerce. Fifth, export composition with regional EAC partners developing innovation and ISO certi cation would and low survival rates of export relationships further foster export diversi cation. Finally, introducing limit Rwanda’s export potential. ese challenges production targets would improve managerial in part re ect the small average size of Rwandan practices. Key measures involve, among others, rms and their lack of innovation and technical issuing a decree fully liberalizing the 4G and 5G pro ciency, as well as high trade costs associated markets and implementing related provisions with limited infrastructure (e.g., high electricity in the new broadband policy; allocating more costs) and lingering policy impediments (e.g., resources to data infrastructure needed to expand some input tari s). e analysis outlines policy digital public services and open data initiatives, recommendations aimed at improving Rwanda’s and to strengthen the operational capacity for export performance and resilience, focusing on managing data risks, including cybersecurity and diversi cation, services and digital exports trade, data protection; developing and scaling up an regional integration, emergence as a regional interoperable digital payment system; issuing new logistics hub, and FDI and green growth. regulations and establishing business support and nancial services for secure web based e-commerce; Diversi cation and product complexity creating a coordination body of institutions of Increases in rm-level competitiveness are needed innovations, and a program on Opportunities to diversify markets and induce a shift away from and Knowledge Sharing on Production Targets. primary commodities and towards higher complexity Monitored SME growth acceleration programs products. e review of traditional strategies could identify high potential SMEs, and incentives combined with the design of non-traditional digital could be more clearly linked to the productivity export marketing strategies to improve market performance of bene ciary rms and focused on access, identi cation of high-potential nascent export promotion. export products, and establishment of an Exporter Support Program (ESP) would help to boost Growth and resilience through trade: New post- diversi cation. e creation of a public-private pandemic policies to drive exports sector dialogue on skills development programs of Rwanda has achieved remarkable growth in the Rwandan workforce is essential to producing exports, but exports need to grow faster to meet its higher complexity goods more e ciently. development goals. Exports of goods and services increased by 14 percent a year in real terms from Services exports and digital trade 2010-19, surpassing SSA with 2 percent export Rwanda’s services trade, particularly digital trade, growth and outperforming regional comparator should be leveraged to hasten the transition economies within the East Africa Community from low to high skill-intensive services. Policy (EAC). Export growth slowed in the second improvements could make it easier for rms to trade half of the decade and was then depressed by the in services. Easing restrictions on the visa entry COVID-19 pandemic. While export growth has and work permits of foreign workers, facilitating since picked up, it remains well below the needed recognition of foreign professional quali cations, double-digit year-on-year export growth rate to recognizing licenses and standards obtained in other achieve Rwanda’s aspiration of becoming an upper- EAC countries and regional countries unilaterally middle class country by 2035 and a high-income and establishing a regional mechanism to support country by 2050. cross-border digital payments interoperability could improve rms’ e ciency. Promoting the adoption xiii of regional standards for digital trade, the creation (along with steps to ensure the full and expedited of a single digital trade integration and the creation compliance with the WTO’s Trade Facilitation of One Network Area with AfCFTA, EAC, and Agreement). New investments in storage facilities at ECCAS could help to lower restrictions on services the DRC border would cover a wider range of goods trade. Complementary administrative e orts could (beyond oil). involve simplifying government procedures, create a Trade Promotion Agency for e-commerce and Harnessing the bene ts of the AfCFTA will digital services that would set clear rules and provide also require active engagement by Rwanda. e information on service trade opportunities through government could consider, among other things, public information platforms, and identifying developing a national trade facilitation strategy, remaining red tape and bureaucratic hurdles of based on the implementation of the AfCFTA’s government programs. Joining the World Trade annex, strengthening the capacity of relevant Organizations (WTO0 Joint Statement Initiatives government agencies and non-state actors on domestic regulation, investment facilitation for engaging actively with AfCFTA economies, and development and e-commerce would entail learning institutionalizing data collection and exchange from established best practices worldwide. Finally, to monitor and evaluate the impact of Rwanda’s updating the 2020 law relating to electronic messages integration into the AfCFTA. Reforming the and e-commerce transactions would expand safe common external tari (CET) on the basis of a harbor provisions related to intellectual property study reviewing the tari system and prioritizing rights and strengthen consumer protection. key inputs for Rwanda’s economy would bene t its producers through lower tari s on inputs. Regional integration Rwanda can improve the role of regional integration e national logistic and regional logistics hub in supporting exports through more intensive and SEZ discussions with the Democratic Republic of Congo Several steps are required to consolidate Rwanda’s (DRC). Strengthening the dialogue with the DRC, position as an infrastructure hub for transit which accounts for about a third of Rwanda’s exports trade. e e ciency of trucking rms could be (Figure 0.3), on trade regulations and promoting increased through targeted incentives to attract information exchanges and intra-EAC data and further investment. Two areas of intervention are negotiations could improve Rwanda’s access to the integration of multimodal transport into the this critical market. To do this, strengthening the national logistic infrastructure and investments in EAC secretariat in charge of enforcing minimum regional logistic infrastructure. e former involves regional assessment procedures for standards would approving budget allocations to key investments help. Rwanda also should cooperate with the DRC in both the Southern corridor and the Northern in trade infrastructure investments, including in corridor as an alternative to the Central corridor. temporary storage and repackaging facilities, single- Rwanda’s National Logistics and Distribution window modern border facilities, and trade logistics Services Strategy provides a useful framework for Figure 0.3: Rwanda’s exports market is increasingly concentrated on DRC (Percent) (Percent) 2005 2019 30 35 25 30 25 20 20 Percent 15 15 10 10 5 5 0 0 Belgium Kenya United China, Switzerland DRC DRC Switzerland United Belgium Kenya China, Kingdom Hong Kong Kingdom Hong Kong SAR SAR Source: Calculations Based on COMTRADE xiv developing an e cient logistics system. It also Living Conditions (EICV) data in earlier years and involves ensuring an e cient integration of the the more recent Labor Force Survey (LFS) data Bugesera industrial park, Bugesera airport and suggest that the agriculture share of employment Kigali Logistics Platform (KLP) to road, air and fell by 24 percentage points between 2000 and eventually rail. e latter could approve budget 2022. As workers moved out of agriculture, allocations for nal infrastructure investments employment in industry expanded to nearly 12 required by the creation of a Regional Logistics percent, while employment in services increased Hub (RLH) and the integration of SEZ into to 24 percent in 2022 (Figure 0.4). Modeled ILO the national logistic infrastructure. While the estimates and recent LFS data suggest an even open skies agreement has made great progress in deeper transformation. is rate of structural establishing an appropriate legal framework for transformation in Rwanda has been faster than air cargo, further e orts are required to harmonize many of its peers in Africa and comparable to the taxes, fees and charges related to air transport, and historic record of Asian economies. to strengthen RwandAir’s nancial sustainability. Finally, establishing a regional hub for transit trade Structural transformation in Rwanda has been led by would require clarifying policies (e.g., on the hub’s the services sector—similar to African comparator form) and strengthening the harmonization of countries and distinct from Asian economies. transport regulations with neighboring countries Unlike Asian economies that have undergone a (e.g., vehicle speci cations, axle load limits, and discrete industrialization phase, the services sector cross-border taxes). has provided more job opportunities to workers outside of agriculture in many African countries, Foreign investment and green growth including Rwanda. Continued e orts are needed to improve the development impact of FDI. Important steps include Rwanda’s structural transformation has been ensuring that committed investment treaties, such fueled by four long-term drivers: productivity as the Economic Partnership Agreement between growth, formal enterprise creation, foreign direct the EAC and the European Union, as well as investments, and urbanization. First, productivity AfCFTA, are e ective and able to achieve greater changes across sectors have led to signi cant labor integration in investment and competition policy, as reallocation towards employment opportunities well as in intellectual property rights. Domestically, characterized by higher value-added per Rwanda could establish and use e ciently an FDI worker. Second, the number of formal business tracking system to improve the e ectiveness of FDI establishments has been increasing in recent years. with proper monitoring and transparency, as well Kigali in particular has seen a concentration of as link tax and industrial policy incentives to the investments and formal job creation. ird, FDI productivity and export performance of bene ciary has been a crucial driver of formal employment FDI rms, while making such incentives time- growth. More than just creating jobs, FDI ows bound. Moreover, new regulations are needed have created higher-quality jobs and have created to attract green FDI. A dedicated program of the jobs indirectly by increasing demand for other Rwandan investment promotion agency (IPA) can goods and services. However, FDI ows have be helpful to attract low-carbon FDI. declined in recent years and Rwanda has struggled to attract sustainable investments. Finally, rural– Boosting inclusiveness urban migration has been a signi cant driver of Structural transformation, labor productivity, growth and economic transformation in Rwanda, and inclusiveness with the share of the urban population increasing Structural transformation in Rwanda accelerated from 18.4 percent in 2016 to 27.9 percent in over the past two decades, with substantial 2022. Nevertheless, the pace and extent of rural– labor reallocation out of agriculture. Estimates urban migration, though rising, still lags behind combining the Integrated Household Survey on Rwanda’s African peers. xv Figure 0.4: Rwanda: Structural transformation 2000–22 the level of complexity of exported manufacturing (Sector share of total employment; in percent) 100 goods has grown slightly over the last decade, this has been mostly in favor of labor-intensive 80 goods. Because manufacturing provides the largest potential linkages and spillovers, further integration 60 Percent of Rwandan manufacturing into regional value 40 chains (RVCs) and global value chains (GVCs) can boost long-term productivity, resilience and job 20 creation. e development of value-added services 0 1 6 is critical to boost growth in manufacturing. /0 /0 /11 /14 /17 2017 2018 2019 2020 2021 2022 00 05 10 13 16 20 20 20 20 20 Agriculture Industry Services However, the bene ts of structural transformation Source: Calculations based on NISR integrated Household Survey on Living Conditions (EICV) reports and labor force survey (LFS) microdata. have tended to accrue to more educated workers, Note: All estimates are based on the definition of employment that includes subsistence agriculture. exacerbating inequality of opportunity in the country. Although for Rwanda as a whole, those with Structural transformation has translated into upper secondary or university education represent substantial gains for Rwandan households, reducing only about 15 percent of all employed workers, they poverty, creating quality jobs for both men and represent about a third to over half of those who women as well as older and younger workers. have found employment in industry and services. Up until the eve of the pandemic, Rwanda was Of the sub-sectors in services with the highest moving much closer to its target number of decent value-added per worker, for example, the majority and productive jobs.ii Data since 2017 show that of employment opportunities have bene ted those decent and productive jobs—proxied by the NISR with a university education (70 percent in the case as o -farm or non-agricultural work—increased of the information and communications sector). steadily during the pre-pandemic period. By 2019, is is despite the university-educated accounting decent jobs had reached nearly two-thirds of total for only about 7 percent of all employed workers. employment, a broad-based increase across all age groups, for younger and older workers alike, and for Poverty reduction has declined in recent years, both men and women. exacerbated by external crises, leaving a high share of the population living in poverty. e COVID-19 Although the service sector has been the major pandemic and a series of external shocks have almost driver of structural transformation in Rwanda, certainly increased poverty rates, undoing some of the manufacturing sector has played a critical role the important gains in the standards of living. It in inclusiveness by creating jobs for women, those is estimated that the COVID-19 pandemic might living outside Kigali, and both skilled and unskilled have led to 5.1 percentage-point increase in the workers. Manufacturing FDI, in particular, has had headcount poverty rate (more than 550,000 people) important inclusive impacts: it has created jobs in 2021, compared to the no-COVID scenario. A both directly and indirectly, by spurring increased recent analysis of job creation by sector suggests that local demand for non-manufacturing goods and only agriculture consistently created employment services, more than any other FDI sector. Notably, opportunities during the pandemic, potentially manufacturing accounts for the vast majority of total re ecting coping strategies during a period of jobs created through FDI. As such, the recalibration economic hardship. As of 2022, agriculture of Rwanda’s growth model in 2021 and the renewed accounted for more than half of employment in support for the manufacturing sector and other the country, while industry’s share hovered around strategic, tradable sectors is welcome and can make 15 percent, a substantial reversal in the structural a substantial contribution to Rwanda’s pathway transformation trend. As a result, both the number towards greater productivity and better jobs. and share of decent and productive (i.e., o -farm) Manufacturing in Rwanda is mainly engaged in jobs have fallen since the eve of the pandemic. low-technology, low-skilled activities, and although xvi E ective urbanization can help drive structural ird, the inclusiveness of FDI could be transformation. At the national level, the increased by investment promotion measures government should implement Rwanda’s Spatial targeting activities that are more likely to Data Framework (SDF) and establish a Spatial Data create jobs for women and to bene t youth, Information System (SDIS) to enable data-driven such as manufacturing in the poorer districts. urban planning. Regionally, the government can In addition, creating SEZs in the poorer develop satellite and secondary cities, strengthen districts of Rwanda, and o ering higher quality local governance with city management o ces infrastructure and human capital inputs, could funded by local revenue, and enhance connectivity alleviate the lopsided concentration of FDI and through a study of inter-city links, easing improve foreign investment’s capacity to create pressure on Kigali and improving market access, inclusive growth. e rst step is to assess the productivity, and service delivery. At the city level, factors that underlie successful FDI projects in priorities should include densi cation, upgrading poorer regions as well as the constraints to such informal settlements, and ensuring climate- investment. resilient urbanization. is involves enforcing land Finally, the linkages with domestic rms could be expropriation laws, creating transparent land rights increased by encouraging supplier development management, adopting urban planning policies that programs to expand the number and capacity of minimize disaster risks, and investing in resilient quali ed local enterprises that can contract with infrastructure like drainage and ood management. foreign a liates as well as supplier databases to Improved planning at One-Stop Centers and a help investors identify potential subcontractors. national strategy for service delivery in urban areas A World Bank note summarizing supplier are also crucial to enhance livability. development programs around the world recommends combining incentives to source Additional reforms are required to improve RDB’s domestically with interventions to reduce overall e ectiveness in attracting FDI and in information barriers among the local suppliers reforming the institutional and legal framework for and to invest in their capacity. e latter seem to inclusive and green FDI. ese are as follows: work better if they involve foreign investors, as First, the government should revise legal they are clearly more aware of their needs. incentives to encourage rms to hire more women and youth or to set up operations in Improving the social protection system, including less developed regions of the country. Examples programs for the informal sector, is essential include incentives for women-led startups, for reducing poverty and supporting vulnerable training programs tailored for women and households. First, the urgency of a well-functioning youth, and measures that encourage investors adaptive social protection (ASP) system has to o er support services like childcare and increased due to pandemic-related setbacks and exible work conditions to reduce barriers to vulnerabilities. e future system should be exible, participation. Sectors prioritized by the law, able to expand coverage and support during crises. such as tourism and skills development, o er Accelerating e orts to build a dynamic social strong opportunities for women, youth, and registry is vital for e ective targeting and ASP investment in poorer districts. implementation. Second, closing the coverage gap Second, bolstering dialogue between the requires a time-bound plan for universal coverage, government (RDB), investors, and home promoting resilience, opportunity, and equity. A country governments through the production lifecycle approach should be followed, focusing of regular monitoring reports of working, health on key nancial security needs during critical life and safety conditions is another channel for stages. e recent approval of individual lifecycle enhancing the sustainability and inclusivity grants, such as child, disability, and old-age grants, of FDI. e e ectiveness of this channel in is a positive step that should be regularly reviewed. enhancing inclusivity will depend in part on ird, the new National Strategy for Sustainable policies in source countries. Graduation, delivered through a Multisectoral Plan, xvii aims to address stagnating poverty reduction. It and imports. Capturing these opportunities will be involves a comprehensive package of interventions key to realizing the growth necessary in the sector to based on household assessments, with strong realize the Government’s own growth objectives and monitoring and evaluation systems to ensure path towards a middle-income economy. e ectiveness. Success will require coordinated e orts across sectors and clear action plans. Lastly, At the same time, the agricultural sector faces addressing social protection gaps will require stable signi cant challenges that must be considered in and predictable funding. Reliance on unpredictable the strategic vision for the sector. Rwanda is one external nancing is unsustainable, necessitating an of the most densely populated countries in Africa. evaluation of administrative costs and a shift toward e share of households with very small farm plots more predictable domestic nancing options. is rising, and access to farmland has deteriorated markedly due to demographic pressure and slow Expanding and strengthening Public Employment transition from farm to o farm livelihoods. Under Services (PES) is essential. PES have the potential projected population growth and changes in dietary to provide essential job search and labor market patterns, food demand over the next two decades is intermediation assistance, yet they remain vastly estimated to be more than twice that of Rwanda’s underutilized. Expanding the geographic reach of production capacity, necessitating about 34,000 employment services centers beyond Huye, Kigali, km2 of arable land compared to Rwanda’s 12,400 and Musanze will be crucial for o ering job search km2 even under quite optimistic yield growth assistance, career counseling, and employment assumptions. Maximizing farmers’ returns on their training to a broader population of a ected workers, land and taking advantage of Rwanda’s comparative particularly low-skilled ones. Less than 5 percent of and competitive advantages will be of essence, all unemployed workers use employment service while also recognizing food imports as a central centers (ESCs) and less than 2 percent of new component of a comprehensive food security graduates nd employment through PES. A recent approach for Rwanda. ILO assessment also outlines the need to issue and implement a legal and policy framework for PES Agricultural productivity is limited, and the within the scope of Active Labor Market Policies uptake of improved technology is low in Rwanda, (ALMPs). but farmers with access to organized markets are an exception. At the national level, agricultural A prosperous agri-food sector as a driver of yields have plateaued or even dropped since 2013. growth and inclusiveness Productivity levels for certain crops and livestock Strong growth in the agricultural sector—a major remain below regional averages and well below the source of economic activity, employment and levels of top regional performers. is is largely a domestic consumption of foodstu s—is essential result of low adoption of improved technology. to meet the government’s development ambitions. Little more than a third of agricultural households ere is considerable potential for growth in both use improved seeds or pesticides, and only 12 traditional crops and high value products such as percent of households in rural areas have access horticulture. Demographic trends such as population to the internet. Despite signi cant investments, growth, urbanization and income increases are the area under irrigation is only 14 percent of expected to drive a sharp increase in food demand, irrigable land potential, and hillside irrigation is while the composition of demand is expected to often underutilized. However, farmers with access shift from cereals and beans to more livestock- to organized markets—whether working through sourced products, horticulture, and processed foods associations or as individual entrepreneurs—tend to and beverages. is shift will provide an important be an exception to this and important investments opportunity to increase the production of high in land use and technology with visible results on value products and jobs along the value chain and in both productivity and incomes are observed. Such the food service sector. Further, Rwanda has strong farmers often have better access to inputs and food trade links with regional partners, who account private extension services through o takers. e for a dominant share of the country’s food exports emergence of high-value markets has also resulted xviii in, for example, investments in greenhouse farming, Some disparate and some common issues a ect which provides a protected environment that can production in di erent agricultural value chains. increase yields and more frequent harvests, and Most staple crops, except for maize, lack organized in investments in small-scale, water use e cient and formal premium markets. Local procurement irrigation technology to produce high-value crops. by the two main processing facilities for maize has ese investments have often been supported by increased, but only meets half their needs, while the the Government and donor funded programs from markets for Irish potatoes and beans are dominated which valuable lessons can be drawn. by unprocessed products. e supply of staples is impaired by poor quality (many farmers have Improving the position of women is necessary to di culty in post-harvesting handling of staples, reach the agricultural sector’s growth potential. while the quality of domestically produced rice While Rwanda is widely recognized for its is usually not su cient to compete successfully commitment to gender equality, gender disparities with imports) and by farmers’ need to hold back persist. For example, female-managed farms are production to ensure food security in the face of 12 percent less productive than male farms, fewer frequent droughts. e horticulture value chain has women than men cultivate on land that is protected grown rapidly over the last years, largely to export against soil erosion and on irrigated land, there are markets. e ongoing rapid development of the large discrepancies between men and women in hospitality industry in urban areas and the expected their access to nance, female-managed farms are increased demand for agriculture commodities from on average 10.5 percent smaller in land, and female the school feeding program provide more organized farmers receive lower prices for their produce at market opportunities for producers. However, high markets. As women make up more than half of post-harvest losses due to insu cient cold storage those employed in the agriculture sector, the gender and transport, coupled with inadequate logistics in productivity gap will have to be bridged for the supply chains and bureaucratic requirements, pose agricultural sector to reach its potential. signi cant challenges to the value chains. Climate change impacts, land degradation, and Lack of agricultural nance remains a major groundwater management are core challenges for constraint on agricultural production. High risks the agri-food sector. Rwanda su ers widespread (in part due to lack of data), high transactions costs, damages and losses from climate-related events, limited experience of farmers and producers with notably droughts, landslides, and ooding; damages nance, lack of knowledge on the sector in lending to capital and assets from ooding could equal 0.36 organizations, limited availability of medium- to percent of agricultural capital each year from 2036 long-term liquidity, and scal disincentives (e.g., to 2065. Most crops are grown on steep slopes that high cost of registering mortgages to use land as are prone to erosion during the rainy season, and collateral) severely constrain the supply of nance the government has devoted considerable resources for agricultural operations. Most loans from to irrigation, the construction of wide terraces and micro nance institutions (MFIs) and community agroforestry development, and in building the savings and credit cooperatives (SACCOs) for capacity of farmers to adopt best practices in land agriculture production are short-term, and their use and soil protection. Irrigation and sustainable capacity and products seem to be limited. Other land practices form a substantial portion of the lenders include traders, processors, investment budget the government anticipates meeting funds, and specialized lenders for agriculture SMEs, Rwanda’s Nationally Determined Contribution although data on many of these activities are not (NDC) submitted to the United Nations available. Guarantee schemes for agricultural Framework Convention on Climate Change nance also exist, although the portfolio of (UNFCCC). Nevertheless, extreme weather events guarantees has been declining in recent years. in 2022 and 2023 (droughts and oods) had Finally, some progress has been made in increasing signi cant impacts on Rwanda’s production of key the availability of agricultural insurance, but a staples and have resulted in dramatic increases in more broad-based uptake and greater private domestic food prices. sector participation is needed. xix Strengthening government programs that support than average in Rwanda. However, many farmers private sector growth and inclusiveness is crucial lack the skills and tools for entrepreneurship, and for poverty reduction, but their share of the budget market failures limit private investment. To address remains low and misaligned with government this, the government should integrate ‘Farming as priorities. Overall, the agricultural budget is 3.9 a Business’ into the Government Extension Model; percent of the total Government budget. is can conduct a study to enable and incentivize private be compared with the sector’s total contribution to investments in agri-logistics infrastructure and cold GDP of 25 percent, to exports of 37 percent and chain development; establish a technical department to employment of 67.5 percent. While investments to research consumer market preferences; modernize constitute the bulk of the budget (rather than the seed sector by transferring management of post- recurrent spending, which tends to have lower harvest assets to the private sector; and identify returns in the sector), spending is often not in line and eliminate logistics bottlenecks, build trust in with strategic priorities. For example, research and Rwandan products, and approve incentives for extension services can generate high returns, but expanding agricultural exports in regional markets. public investment in agricultural research accounts Finally, to enhance private sector investments, for only 1.3 percent of the total agriculture budget government strategies must be consistent. e and less than 1 percent has been allocated to the fth Strategic Plan for the Transformation of extension program in the 2023–24 budget. A Agriculture (PSTA-5) should clearly separate strong and well-organized public extension system private sector investments from social protection is needed, especially in food staples of lesser policies to avoid contradictions. interest to the private sector. Progress is being made through the Farmer Field School approach and the Improve farm productivity. is report’s assessment Customized Agriculture Extension System (CAES) indicates that boosting on-farm productivity to connect the private sector, higher learning requires signi cant private investment in advanced institutions, non-governmental organizations technology and agricultural practices, which (NGOs), and development partners in agriculture in turn depends on farmers’ access to nance. extension activities. Digital platforms to manage the is highlights the need to nalize and adopt a supply chain and disseminate extension messages comprehensive Agriculture Finance Strategy that are still inadequate, as are skills programs, such as outlines a long-term approach to balance grant incubation centers. programs with the goals of private nancing in the sector. e strategy should incorporate lessons Nevertheless, for Rwanda to achieve its income learned from small-scale farmer support programs, goals, private sector investments in the agri-food such as grants and mechanization, by evaluating sector—both on and o -farm—must increase their returns on investment and sustainability, and signi cantly among farmers and entrepreneurs along suggesting improvements for better outcomes. the supply chains. is means the Government Additionally, the government should enhance data taking on primarily an enabling role, predominately quality and availability on farm production, access as a regulator and investor in public goods, with to agricultural nance, and weather conditions. only very targeted social protection interventions Beyond nance and grant programs for on-farm towards the poorest. For private goods investments, investments, the government should scale up potential market failures in the sector should be vocational training for rural services (e.g., cold based on evidence and with clear exit strategies, to chain and solar technology) and establish start-up not crowd out the private sector. programs to deliver these services. In the current context, the following is recommended Mitigate the weather shocks to agricultural for private sector led growth, job creation, and an productivity. Introducing climate-resilient equitable food environment in the agri-food sector: agricultural practices is essential, such as Promote farming as a business and facilitate market transferring climate-smart agriculture (CSA) access. One of the key messages in this report is information through digital channels (e.g., digital that farmers with reliable buyers and stable markets green extension systems) and gathering farmer data invest more in their farms and achieve higher yields to improve credit scoring mechanisms. Enhancing xx agricultural risk management is critical to prevent e continuing impact of climate change frequent events like droughts and oods from poses substantial risks to growth and inclusive hindering growth. development in Rwanda. Rwanda is ranked 124 out of 185 countries in an index of vulnerability As a rst step, the Ministry of Agriculture to climate change, given the heavy reliance of (MINAGRI) should conduct a new Agriculture the economy on climate-sensitive sectors such as and Food Security Risk (AFSR) assessment to agriculture and nature-based tourism. Climate understand the speci c impacts of di erent risks change is expected to have a broad range of adverse on various supply chains. It should also adopt an e ects on Rwanda. e number of days with a Agriculture and Food Security Risk Management maximum temperature exceeding 25°C and the Framework that addresses the sector’s prioritized frequency of large precipitation events is expected to risks. ese measures would support the adoption rise. e more common occurrence of rare climate of agricultural insurance with new products and disasters could have serious implications for output institutional strengthening. and capital assets (Figure 0.5 provides an example of the damage and losses from a 1-in-100-year ood Promote an Equitable Agri-Food Sector. For under an average climate scenario). Rapid growth Rwanda to achieve long-term growth, the agri- is expected to boost water demand sharply, likely food sector must support healthy diets, foster a resulting in water shortages. sustainable environment, and raise incomes to help farmers and workers reach the middle class. While Rwanda could embark on a low-carbon As demographic changes reshape the food system development path, attention to reducing the in the coming decades, the government should country’s vulnerability to climate risks should lay the groundwork for equitable local food sector be prioritized as ignoring climate could result in development to seize emerging opportunities. is Rwanda’s GDP falling by 5–7 percent below baseline involves adopting a Food Policy Strategy (FPS) that in multiple years by 2050. e Rwanda Country supports local food sector development, including Climate and Development Report (CCDR) in rural areas and smaller towns, and encouraging nds that the biggest risk to economic output investment in market infrastructure for local in Rwanda are weather shocks to agricultural consumption. It also requires building institutional productivity and the reduced labor productivity infrastructure for regulatory aspects like food safety caused by the increased incidence of diseases, and employment standards. both communicable and non-communicable that is associated with rising temperatures. Measures Boosting sustainability and resilience that smooth out the impact of climate variability Climate change and natural assets: policy options to would reduce the adverse impacts of climate increase resilience to climate change related shocks change on climate vulnerable sectors such as using Rwanda’s natural assets. agriculture. Figure 0.5: Damages and losses from a single 1-in-100-year ood can be substantial Capital stock GDP at market prices 2 2 Percentage deviation from baseline 0 0 Percent deviation from baseline -2 -2 -4 Average flood -4 -6 damage T e ood des Th e tr es roys tro y 11.2% of capitata t l 100-yeare flood -8 -6 in 2036 - -10 -8 t e ood pushes GDP an th to t nal 4.4% points addito t belo ts lo l w t e baseline th - -12 -10 - - -14 2020 2025 2030 2035 2040 2045 2050 -12 - 2035 2040 2045 2050 Source: Calculations based on World Bank Group (2022) xxi E ectively addressing climate change requires reducing greenhouse gas emissions. e Rwanda mainstreaming climate considerations and actions CCDR recommends initiatives like soil-conscious across sectors and mobilizing nancing from diverse conservation agriculture, payment-for-ecosystem sources in order to lower the country’s vulnerability services, and expanding terrace networks to reduce to climate shocks. e Rwanda CCDR highlights, soil erosion and increase soil carbon. Rwandan among other things, the need for climate-smart agencies have proposed various land management urbanization, soil-conscious conservation agriculture, interventions to signi cantly reduce soil erosion improvement in water supply infrastructure and and increase biomass carbon storage. Currently, 74 water demand side interventions, use of forests for percent of Rwanda’s emissions stem from livestock, productive purpose and generation of ecosystem agriculture, and land use change. Strategies such services (including nature-based tourism). Such as conservation agriculture, improved animal actions would have sectoral bene ts while also husbandry, and soil and water conservation can contributing to broader resilience in the economy. reduce greenhouse gas (GHG) emissions while enhancing resilience to climate shocks. For instance, Reducing the conversion of natural habitats preserving forestlands can prevent soil erosion and is essential for strengthening resilience in protect biodiversity, while reducing fuelwood and Rwanda’s urban development and agricultural charcoal use can lower indoor air pollution and lessen transformation—two key sectors for structural deforestation pressures, thereby cutting emissions. and economic growth. Croplands in Rwanda have more than doubled between 1990–2015, at Nature based solutions can reduce ood risks the expense of natural vegetation cover (forests, and help to improve water quality in urban areas. woodlands, grasslands, and shrublands). e Integrating climate considerations in the planning reduced vegetation cover has resulted in an increase and design of investments needed for urban in water runo and river ows, exacerbating soil development (e.g., in solid waste management, erosion and soil loss. Reduced vegetation also has mobility, industrial zones, housing, and sanitation) decreased in ltration and depleted groundwater could augment the resilience and lower the carbon reserves (a natural form of water storage that is vital footprint of cities and lower the cost of adaptation for long-term resilience). e cumulative e ect of through retro tting poorly designed and climate risk watershed destruction, inappropriate settlements, prone structures. e Government should prioritize and unsustainable agricultural practices has led to zoning to prevent settlements in ood-prone areas. siltation, sedimentation, pollution, and the risk Nature based solutions, such as landscape of invasive aquatic weeds. About 6 million tons of restoration, can contribute to climate resilience crops, valued at US$76 million (Rwf76 billion) are and growth through their impact on biodiversity lost each year due to erosion. Similarly, in urban habitat. e extensive habitat transformation that areas, unplanned land-use changes have resulted in has already occurred in Rwanda is re ected in the increased ood risks, land degradation, biodiversity low overall average habitat quality score for the loss, and an increase in the vulnerability of people country of 0.16, although a few “islands” of higher- in urban centers. Urbanization increases impervious quality habitat remain inside protected areas. surface area, thereby elevating the risk of ash oods. Landscape restoration e orts could improve habitat Damages from infrequent but severe oods would quality by 9 percent relative to current conditions by amplify short-run economic losses. e Rwanda 2050. Nevertheless, the overall habitat score would CCDR estimated that a major ood with a 100-year only increase to 0.18, re ecting the dominance of return period could destroy 11.2 percent of capital in farmland relative to natural habitats. a climate future that exceeds the 1.5oC target. Nature-based tourism generates substantial portion Sustainable land and natural asset management of Rwanda’s tourism revenues. Nature-based can boost Rwanda’s resilience to climate change tourism (NBT), de ned as tourism to experience by supporting both ecosystem services and natural resources in a wild or undeveloped form, is productive uses. Nature-based solutions (NBS) estimated to account for 80 percent of the visitors play a key role in adapting to climate change and entering Rwanda for leisure or conferences and has xxii played an important role in job creation, particularly additional sources of nancing is crucial to increasing formal jobs in rural communities near the sustainably meet Rwanda’s commitments. game parks. NBT in Rwanda remains vulnerable to poaching and illegal activities, underlining One of the major impediments to the adoption and the importance of ensuring that the surrounding scale-up of green technologies is the lack of nance communities, who may have customary rights to for such investments. Rwanda has recognized natural resources in or around protected areas, reap the need for suitable nancing mechanisms and some of the bene ts. Private investment, including facilities to acquire and transfer green technologies. through public-private partnerships as provided for A wide variety of nancial instruments are used for in new legislation, could assist with diversifying climate nance, including non-debt instruments NBT o erings. (e.g., grants from organizations dedicated to addressing climate change, wildlife conservation ere is considerable technical potential to reduce bonds, local biodiversity o sets or carbon taxes) GHG emissions while maintaining rapid growth. and debt instruments (e.g., concessional loans, GHG emissions could be reduced substantially use of proceeds bonds—green or social bonds— through fuel switching to lower carbon sources and sustainability linked bonds). A top priority is (e.g., from peat, diesel and gasoline to renewables), to nalize and adopt the national climate nance improvements in operational and fuel e ciency strategy including: (i) a taxonomy of climate (particularly in transport), and e orts to promote nance; (ii) a process of project selection for both sustainable waste management measures. In addition public and private investments; (iii) a climate to meeting GHG emissions targets, these initiatives nance information system to monitor nancing would improve the quality of growth and limit the of climate and environmental protection projects; adverse impacts of GHGs on public health. and (iv) a regulatory framework for climate-focused nancial instruments. Rwanda should strive to meet its NDC commitments without compromising growth. Mobilizing non-debt nancing is crucial to Rwanda’s 2020 NDC is to reduce 4.6 million maintain Rwanda’s limited scal space. Rwanda tons of carbon dioxide equivalent (MtCO2e) should continue accessing climate nance sources by 2030, or a 38 percent reduction against the such as the Green Climate Fund (GCF), Global projected BAU emissions in the same year of 12.1 Environment Facility (GEF), and Adaptation MtCO2e. is will involve lowering emissions from Fund. It should also use grant nancing to de- agriculture, forests, livestock and land use change. It risk investments and attract private nancing will also be important, in sectors that are expected for climate action, structuring larger funding to grow (such as energy, transport), to enable low- streams into a long-term, multi-year, multi-phase carbon growth through promoting private sector program. is programmatic approach can drive engagement. e Government estimates that it systemic change at national and sub-national would cost US$11 billion from 2020-30 to achieve levels, enhance e ciency, and promote integrated Rwanda’s NDC commitments (both unconditional cross-sector coordination. and conditional). is is equivalent to spending 8.8 percent of GDP in each year, which would represent Policies to increase the use of natural assets for an enormous share of government revenues or climate action investment spending. ere is some potential for Incentivizing the implementation of NBS and improving the impact on emissions of the current ensuring they can be sustained will require a expenditure pattern through climate disaster risk multipronged approach. It includes identifying screening of public investments, increasing data and prioritizing sites for NBS and e ectively on a project’s environmental impacts, prioritizing complementing them with physical measures where green investments, deploying levies or repurposing necessary; reducing the threat of degrading the existing subsidies that undermine climate resilience, natural assets that are part of NBS; and monetizing or including resilience criteria to determine the provisioning and regulatory services of the NBS, subnational allocations. Nevertheless, identifying to ensure they are sustainable. Restoration hotspots xxiii should be the priority locations for implementing strengthening, introduction of e cient domestic NBS, such as forest landscape restoration, and water-use technologies, and applying block-rate monitor its e ectiveness. E orts in rural areas to tari s. ese e orts will require an educational improve agricultural productivity and in urban areas program about their impact so that water users to improve urban planning with green measures understand their importance. (e.g., linking restoration of wetlands with e orts to integrate urban stormwater and drainage) could Policies should also prioritize access to water and lower threats to NBS. Supporting access to markets sanitation for the poor. A review and e ective for the goods and services that can be generated implementation of sustainable water management from NBS (e.g., wood, carbon, wildlife habitat, etc.) policies is essential. Options include reducing or reinforced by necessary incentives could accelerate eliminating value-added tax (VAT) on clean water the application of NBS. in rural areas and supporting clean water businesses to scale innovative solutions for underserved Appropriate policies can ensure that nature-based regions. Additionally, identifying and funding key solutions (NBS) contribute to growth. For instance, public investments or public-private partnerships regulations for urban wetland restoration can (PPPs) for ood control and water storage is crucial. enhance ood prevention while creating ecotourism e recent ‘Build Operate and Transfer’ agreement and recreation opportunities. Similarly, restoring between the Government of Rwanda and a Dubai- forest landscapes can support sustainable uses, such based rm for water facility management could be as wood and non-wood products and eco-tourism. replicated through similar PPPs. Policies promoting collaborative management of ecotourism sites and implementing the ministerial Fiscal Sustainability: Securing scal space to close order for National Parks can clarify private sector the infrastructure gap, improve the living standards roles, encouraging private nancing for NBS. Forest of the population, and increase resilience to climate restoration e orts can attract private investment change related shocks by increasing awareness of the nancial potential of forest and agroforest systems, including carbon Rwanda’s scal space has narrowed. e Central sequestration. e carbon framework and payment- Government scal de cit rose sharply before for-ecosystem services schemes will be key to the COVID-19 pandemic, as total expenditures unlocking this potential. outpaced revenues (Figure 0.6). Primary expenditures rose by ve percentage points of GDP from the Interventions are required to address the projected late 2000s to 2019, while revenues increased by a gap between the demand for water and the available little over 3 percentage points of GDP. e de cit supply. e expansion of physical storage facilities jumped sharply with the increases in expenditures would facilitate access to water during shortages. to cushion the impact of the COVID-19 pandemic, E orts to reduce the demand for water should along with the revenue impact of the 2020 recession, include reducing nonrevenue water through reaching 7 percent of GDP in 2022. ese trends improved infrastructure and metering, institutional drove a sharp rise in public debt, from 23 percent of Figure 0.6: The central government scal de cit rose sharply before the pandemic, 1990–2019 Overall balance (% GDP) Revenues and expenditures (% GDP) 4 40 2 35 0 30 -2 25 -4 20 15 -6 10 -8 5 - -10 0 - -12 1990 1994 1998 2002 2006 2010 2014 2018 2022 1990 1994 1998 2002 2006 2010 2014 2018 2022 Revenue Expenditure Source: Calculation based on MINECOFIN and NISR datasets. xxiv GDP in 2006 after receiving debt reduction under further expand infrastructure services while limiting the Heavily Indebted Poor Countries Initiative to the public investment program to sustainable levels. 66 percent in 2022. e rise in debt boosted interest Public investment e ciency appears to be lower payments, which rose by 1.7 percentage points of than in most regional peers, both on the basis of the GDP from the late 2000s to 2022. Despite the amount of overall growth generated by the quantity recent worsening in the scal position and the steep of public investment and measurements of selected increase in public debt, sustainability outlook risks infrastructure services relative to funds spent. remain moderate. Several aspects of public investment management Improving tax administration e ciency are of high quality in Rwanda. ese include ere is potential to further boost tax revenues. In strong institutions, comprehensive frameworks 2021, Rwanda’s tax-to-GDP ratio was 4 percentage for public investment, a legal framework aligned points above the regional average, but still lower with results-based performance, a bidding process than top performers like South Africa. Recent that has become closer to international standards e orts have included a new income tax, property (although capacity in procurement agencies tax, and stronger VAT administration. Potential remains a challenge), budget thresholds to guide measures include reducing tax exemptions, which the intensity of project review, guidelines for project cost 3.2 percent of GDP according to the 2019 implementation which are relatively rare (more tax expenditure report; recalculating the optimal standardization is also required), and e orts to income tax deduction threshold supported by encourage wide participation in the planning and electronic billing machine (EBM) receipts; and budget process. establishing a scal regime to fairly capture mineral wealth and deposit it into a Sovereign Wealth Fund. Improving public investment management is crucial for optimizing the use of public funds, A major emphasis should be made on the requiring enhancements in both allocative and improvement of tax administration e ciency. A technical e ciency. Current ine ciencies stem menu of possible key measures to adopt involve: from issues in project appraisal, implementation (i) extending MSMEs usage of free EBM software, delays, and stalled projects, as well as the prevalence this reducing their xed and variable costs of of low-performing micro and small projects tax compliance; (ii) carry on regular online and without e ective fund reallocation. Audit reports presential training to taxpayers on updated legal emphasize the need to protect funding for high- tax requirements; (ii) institutionalize a regular use return projects and strengthen implementation. of EBM and corporate income tax (CIT) data to To address these issues, measures should include report on non-compliant large rms; and (iv) introducing appraisal directives that incorporate conduct a study exploring alternative policies to risks and mitigation plans, establishing a project increase compliance through EBM technology and ranking system based on thorough feasibility supply chain incentives. studies, and consolidating micro and small projects while prioritizing multi-year projects with Improving public investment e ciency greater impact. Further improvements involve Rwanda’s challenge is to reduce scal expenditures attracting skilled professionals through career while still achieving key development goals, like development and regular compensation reviews, closing the infrastructure gap and improving living implementing training for project and contract standards. e scal consolidation process should management, conducting independent ex-post aim to limit negative impacts on economic growth. reviews, and fully operationalizing the integrated nancial management system (IFMIS). Publishing E ciency gains in public investment are essential to detailed monthly reports that focus on outcome- support growth in a constrained scal environment. based indicators for national and subnational Rwanda has achieved signi cant improvement projects (Imihigo) can also enhance transparency in the quality of infrastructure services through and accountability. massive public investment. e challenge now is to xxv ere is potential for e ciency gains in health management of scal commitment and contingent spending. While cross-country comparisons indicate liabilities (FCCLs), the grounds of admission of that Rwanda is relatively e cient at translating USP, and the guidelines enabling use of government inputs into health services, the country is less support mechanisms. Second, MINECOFIN e cient in translating service delivery outputs into needs to issue new regulations introducing a new better performance. A need for greater emphasis on methodology for PPP projects selection, also service quality and population health interventions including climate change considerations on the is warranted. Improvements in strategy and preparation of high-quality feasibility studies. administration could generate further e ciency ird, MINECOFIN will need to carry out gains. ese include, among others, the design and regular seminars for PPP managers and sta on implementation of a public nancial management PPP management. Fourth, MINECOFIN should (PFM) health sector reform roadmap, an IFMIS adopt and monitor a small number of carefully deployment to district hospitals matched with selected PPP projects. Fifth, MINECOFIN should quali ed sta system utilization, a regular training implement a media campaign toward the public program to quali ed sta in hospitals in accounting and civil society on the potential bene ts of PPPs. and reporting of various nancing sources, and the production of IFMIS reports allowing summaries Getting SOEs back on a nancially sustainable path of spending per di erent units and categories, is the second step to mobilizing private capital. and per key items (wage bill, drugs use, medical Creditworthy SOEs can access commercial loans supplies, etc.). or bond markets on the basis of their own balance sheet, although given the di cult macroeconomic Improving PPP and SOEs governance is essential environment, some form of credit enhancement to raise scal space and reduce scal risks may be necessary (see the CI-Energies example in Greater scal space and improved e ciency can be Box 0.1). Commercial debt on the balance sheet achieved by strengthening Rwanda’s PPP framework, of SOEs would also likely be consolidated with the managing state-owned enterprises (SOEs) more debt of the government in sustainability analysis, e ectively, and pursuing an extensive privatization which would not help the government overcome its program. Rwanda has a large portfolio of SOEs scal constraints. and government stakes in private companies, but its PPP framework needs improvement to attract To improve the monitoring and management more private nancing. On the SOEs front, there is of Rwanda’s SOE portfolio, several measures are limited data to assess their nancial status accurately, needed. First, the Government of Rwanda should emphasizing the need for regular, reliable nancial adopt the draft Presidential Order on the legal reporting from each SOE. Currently, some SOEs and regulatory framework for SOEs to encompass receive substantial subsidies and have experienced the entire SOE landscape and clarify institutional signi cant losses, with guaranteed debt reaching 3.4 roles in SOE management, especially following the percent of GDP at the end of 2022. e government closure of the Ministry of Public Investments and has begun de ning a sound legal and institutional Privatization (MININVEST). Clear guidance is framework for SOEs and privatization. needed on the responsibilities of MINECOFIN and sectoral policy ministries. Second, the government Upgrading the PPP framework is a rst step to should strengthen institutional capacity for SOE mobilize private nancing. First, the government oversight. MINECOFIN should conduct regular should address gaps and inconsistencies in the training for sta involved in SOE management, legal and regulatory framework governing PPPs, monitoring, evaluation, and corporate nance. recognizing PPPs within the Organic Budget Law ird, MINECOFIN should develop a performance and ensuring alignment between the PPP Act and management system for SOEs, using suitable ICT PPP guidelines, and upgrading the PPP project solutions, and prepare an annual aggregate report cycle. ese amendments should also cover the on the SOE portfolio’s performance. Lastly, the new role of Ministry of Finance and Economic government should enhance nancial reporting and Planning (MINECOFIN) from the assessment and transparency. At the portfolio level, MINECOFIN xxvi Box 0.1: CI-Energies – Re nancing operation to pave the way for private sector investment e State-owned enterprise CI-Energies is the single buyer of electricity in Cote d’Ivoire. Following external shocks in 2014–16, the appreciation of the US dollar vs. the local currency XOF, and the increase in oil price, CI-Energies had fallen behind on its payments to independent power producers (IPPs) and gas suppliers. e World Bank worked with CI-Energies and the Government of Cote d’Ivoire to place the electricity sector on a nancially sustainable path. Once the Bank team was con dent the electricity sector was on track, International Development Association (IDA) supported CI-Energies with a EUR 180 million guarantee (US$198 million) to raise EUR 300 million (US$330 million) from a commercial bank at competitive terms. CI-Energies also raised in parallel the equivalent of US$160 million in local currency. is long-term nancing coupled with strong support from the government—but no sovereign guarantee—was successful in restoring trust in the long-term nancial sustainability in the energy sector in Cote d’Ivoire. e World Bank-supported re nancing operation closed in May 2019. In July 2019, International Finance Corporation (IFC) successfully arranged a US$290 million debt package for the much-needed US$365 million expansion of the Azito IPP in Cote d’Ivoire, which will add 253 megawatt of power generation capacity. is expansion had been in preparation for years but was stuck because of the arrears situation in the sector. MIGA also provided its Breach of Contract cover for one of the sponsors (Globeleq). should produce an annual report detailing the for FDI in Sub-Saharan Africa, after Mauritius), economic and nancial performance of the overall including further e orts at investor promotion, and SOE portfolio and key enterprises. At the individual increasing the e ciency of investments, assisted by SOE level, audited nancial statements, board regulatory impact assessments and consultations on appointment processes, nancial objectives, and new regulations. board remuneration policies should be made public. Rwanda should continue to rationalize the use of Mobilization of private sector nancing would public funding for commercially viable projects to be key to close infrastructure gaps and preserve expand its scal space. Monetizing existing public scal space infrastructure assets could be a source of funding Fiscal space and e ciency gains in capital for new infrastructure projects. e rst step would expenditure programs might be achieved through a be to identify existing public assets that could be larger role of private sector nancing in infrastructure o ered for private sector participation, for example projects. Rwanda has performed well compared to by selling ownership shares. Rwanda should also regional peers in attracting private investment in allocate its limited concessional resources to projects infrastructure; most FDI is focused on infrastructure, or sectors that are not commercially viable but that and strong government commitment has supported yield large social and economic bene ts. the delivery of a large PPP pipeline. Nevertheless, further reforms are necessary for the private sector Mobilization of domestic private sector nancing, to provide the estimated 55 percent of infrastructure including long-term nance investment required to meet Rwanda’s development Deepening access to long-term nance is crucial. goals. Key steps should include addressing problems Rwanda’s local project nance market is small. in substantive provisions of the Act, strengthening E orts to increase the universe of investors in PPPs government management of PPPs and project could include easing unnecessary regulatory hurdles screening, establishing a framework to assess scal hindering local currency infrastructure nancing commitments and contingent liabilities, and by banks, revising the Rwanda Social Security providing formal mechanisms for funding project Board (RSSB) Law and/or Investment Policy to preparation and underpinning public support to allow investment in infrastructure, and designing PPPs. Some adjustments also would be useful in innovative nancing mechanisms that can crowd- Rwanda’s strong legal and regulatory framework for in domestic and regional funds and other investors FDI (Rwanda ranks second in investment climate (e.g., further issuances of infrastructure bonds, xxvii the government taking a more active yet minor role Conclusion: Implementing to succeed in project nance). It also will be important for the Strong leadership, a clear vision, and sustained government, and RDB especially, to coordinate implementation based on lessons learned are closely with the multilateral development banks essential for driving economic reforms. e recent (MDBs) and development nance institutions success of FDG reforms has been due to strong (DFIs), who have played important roles in political will and broad consensus for tough policy nancing Rwandan PPP projects. decisions. Key lessons from similar reforms elsewhere emphasize the need for e ective regulations, robust Risk sharing facilities could unlock nancing from coordination, exibility to adapt to shocks, use of the local banking sector. Local commercial banks results indicators for monitoring, and technical may not be equipped to adequately evaluate the assistance to enhance institutional capacity. Once risks associated with private projects and, therefore, the new NST-2 strategy is adopted, making a strong may not be comfortable lending to such projects. start and appointing a capable implementation Risk sharing facilities that absorb a percentage of team will be crucial. the losses on loans made to private projects could be provided by MDBs such as International Moreover, four additional lessons from the Development Association (IDA) on a funded basis implementation of recent FDG reforms can be (a loan is disbursed and set aside as collateral for the extracted from Rwanda’s own successful experiences. local commercial banks) or on an unfunded basis (a An institutional restructuring of key ministries guarantee is provided by the MDB to the bene t of may become essential for success. is was the local banks or through a local nancial intermediary case of MINECOFIN’s 2021 restructuring to such as the Banque Rwandaise de Dévelopement. strengthen the Public Investment Management e latter structure would not result in any increase System; the 2019 creation of the National in direct liabilities. Partial risk sharing facilities have Agricultural Insurance Scheme (NAIS)’s been successfully implemented in India in the energy subsidized mechanism; and the 2020 setting e ciency sector (Box 0.2), and a facility is being of the TVET Board ensuing the 2019 RDB’s prepared in Cote d’Ivoire to nance the renewal of a National Skills and Employment Strategy. eet of trucks by local commercial banks. Box 0.2: India – Partial risk sharing facility To unlock nancing for the Energy Services Companies (ESCO) market in India, the World Bank designed the Partial Risk Sharing Facility (PRSF) for Energy E ciency Project in 2015 in collaboration with India’s Bureau of Energy E ciency (BEE) and other partners. e PRSF applies the World Bank’s global experience, lessons learned, and best practices to demonstrate innovative nancing and implementation mechanisms that can tap into the signi cant private sector potential in India. e PRSF Facility of $37 million (provided by CTF and GEF), managed by the Small Industrial Development Bank of India (SIDBI), provides partial credit guarantees to sub- projects implemented by ESCOs. PRSF sub-projects range from energy-efficient variable speed drives in industries to sustainable cooling systems in buildings and LED streetlights in cities—which together cut 95,000 tons of CO2 emissions annually. PRSF has demonstrated the de-risking and leverage effect of a guaranteed instrument by mobilizing private capital over 3.35 times. It has also paved the way for commercial banks to take a more serious look at ESCOs as borrowers by building the capacity of ESCOs and banks, and standardizing tools and templates through technical assistance to achieve ESCO market transformation at scale. By demonstrating that energy e ciency projects with ESCO participation can be successful, PRSF has provided a critical piece of India’s energy e ciency market puzzle. xxviii Dedicated human and nancial resources are Signi cant human skill gaps may prevent/delay critical to the success of well-selected initiatives. the implementation of more complex reforms. Both supports were relevant for the success of e lack of quali ed professionals prevented the Integrated Early Childhood Development, carrying on (i) the planned regularization of nutrition and water, sanitation and hygiene urban plots into grids; and (ii) urban land (WASH, 2018–24) strategy; the 2022 abolition/ valuation. is requires previous institutional reduction of school fees and progress on Tertiary capacity development e orts. Education relying on a signi cant increase in Isolated scal reforms do better when the percentage of scholarships given to science, integrated into a comprehensive tax reform. technology, engineering, and mathematics e elimination of the exemption of the VAT (STEM) and higher education (including grants on service exports had a dead start (except for from foreign universities like Carnegie Mellon). Business Process Outsourcing tax exemptions, Adoption of multi-year targets positively which were approved on a case-by-case basis. contributes to introducing a performance-based Strong resistance to reform from SOEs requires a culture in the public sector. e experience with comprehensive rather than a piecemeal approach, Imihigo has been positive in gradually adopting accompanied by strong political support. e performance contracts as part of the Sector Government could start by addressing SOEs Strategic Plans and the annual assessment of that represent the higher scal burden and major ministries’ performance. sources of scal risks. Policies to attract pioneer foreign rms may prove Under the best of circumstances, regional decisive for the successful launching of some agreements achieve progress gradually and regional logistic hub initiatives. is has been only if political tensions among countries are the case with Kigali’s Logistic Platform, run by minimized. Disappointments have included the DP World, operational since 2019. Its example failure of the long-awaited reform of the CET is being followed by other logistic operators to lower tari s on inputs and the creation of an like Bollore Logistics and Magasins Généraux additional tari category that increased overall du Rwanda s.a. (MAGERWA), whereas major protection, as well as the failed proposal for a international operators like as MAERSK and regional energy market. In contrast, small but GCM (shipping lines) have started operations. promising achievements have been obtained in the expansion of the regional trade for Rwandan Last but not least, a few lessons from pending food products through strong engagement in the reforms or failed FDG reform point to key EAC and COMESA agricultural markets. di culties that should be handled when implementing reforms. Above all, sustained implementation matters. Private entrepreneurs tend to avoid policy ere is no substitute for political will to take and reforms that foster a culture of nancial sustain bold decisions, but the key to success remains transparency, likely for tax avoidance purposes, implementation. It does no good, and probably which raises the cost of credit and contributes some harm, to take half-hearted steps that are then to lower domestic savings. Examples include partly reversed when facing obstacles. Complex and di culties in building a pipeline of credible intertwined reforms will need concerted actions by ( rms) issuers of non-government bonds, and multiple o cial entities across several years. A cross- the resistance of commercial farmers and SMEs sectoral reading of the chapters and their policy grouped in cooperatives to complete reports recommendations would facilitate collective thinking required to obtain banking credits. In response, on the complexity of the issues—and highlight the scal incentives to create a culture of business political space and technical requirements for strong transparency might be needed. and coherent government action. xxix References Ministry of Agruculture (MINAGRI). (2023). Agriculture Joint Sector Review, FY2022/23. Kigali: MINAGRI. National Bank of Rwanda (NBR). (2023). Monetary Policy and Financial Stability Statement. Kigali: NBR. National Institute of Statistics of Rwanda (NISR). (2024). Seasonal Agricultural Survey. Kigali: NISR. World Bank. (2021). Rwanda Financial Sector Assessment Program. Washington, DC: World Bank. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank. World Bank Group; Government of Rwanda. (2020). Future Drivers of Growth in Rwanda : Innovation, Integration, Agglomeration, and Competition. Washington, DC: World Bank. Retrieved from https://openknowledge.worldbank.org/handle/10986/30732 Notes i Laterite evaluated multiple areas including individual PRs. Signi cant progress scored as 3, Some progress as 2 and Little or no progress as 1. Averages progress scores above 2 indicate that there was a larger number of recommendations with signi cant progress than those with little or no progress. Conversely, a score below 2 implies the opposite. ii World Bank (2023) Recent developments of the labor market in Rwanda (Washington: e World Bank). xxx PART 1: GROWTH DIAGNOSTICS Rwanda has achieved extremely rapid income growth, largely driven by increased investment, which has resulted in impressive poverty reduction and improvements in living conditions. Despite rapid growth, the Rwandan economy suffers from serious problems that could limit development progress. Rwanda’s impressive growth performance, driven mainly by strong public investment, hasn’t generated enough jobs or sufficiently increased productivity, and the benefits of growth in terms of poverty reduction have weakened. The heavy reliance on public investment cannot be maintained in the future, given fiscal constraints. Rwanda has considerable scope to improve on its remarkable growth performance through reforms to increase productivity, build human capital and encourage greater private investment. CHAPTER 1 1 SOURCES OF GROWTH IN RWANDA: DIAGNOSTIC OF GROWTH FUNDAMENTALS 1.1. Development achievements 1995 to 60 in 2021). Access to prenatal care is Rwanda has achieved rapid income growth, virtually universal, and skilled health sta attend largely driven by increased investment, which over 90 percent of births. Signi cant progress has has resulted in impressive poverty reduction and been made in increasing enrolment in education, improvements in living conditions. particularly at the primary level. Figure 1.1: Regular progress in macro-poverty results for Rwanda has faced signi cant challenges but has Rwanda since 2006 a) GDP per capita and consumer price index trends demonstrated the ability to recover. After more STARTING COVID CRISIS than a decade and a half of sluggish growth in the 0.9 C ONFLIT P ERIOD T D 2019_2020 80 0.8 POST 60 1980s, and in a context of political instability PRE-CONFLIT & (1990- RECOVERY RECOVERY 0.7 GENOCIDE PERIOD 199494 9 ) PERIOD (1995-2005) PERIOD (2006-2019) Millions of Rwf / cap POST COVID 40 that culminated in the genocide against the 0.6 19 CRISIS 0.5 20 Tutsis in 1994, Rwanda turned into one of the In % 0.4 0 fastest-growing economies in Africa (Figure 0.3 -20 1.1a). Gross Domestic Product (GDP) per 0.2 -40 0.1 capita rose by almost 5 percent a year between 0.0 -60 2000 2008 2006 2004 2002 2020 1980 1988 2010 2018 2022 1986 1990 1998 1984 2016 1982 2014 1996 1994 2012 1992 2006 and 2019, outperforming all other African Real GDP constant price 2017 Per capital countries, except Ethiopia (Figure 1.1c). Rwanda’s Real GDP constant price 2017 Per capital Growth (in %) Inflation economic development strategy is distinctive b) Life expectancy at birth and national poverty rate among comparators in the emphasis that has 90 been put on services, as set out in Vision 2020 80 and the National Strategy for Transformation 70 (NST-1). Value added in industry (propelled by 60 construction) and services (driven by information 50 40 and communication technology (ICT), trade and 30 transport) has increased by 9 and 10 percent a year, 20 respectively, since 2006, and agriculture (led by 10 crops and livestock) has grown at 5.4 percent. 0 2000 2008 2004 2006 2002 2020 1980 1988 1984 1986 1990 1998 2010 2018 2022 1982 1994 1996 2014 2016 1992 2012 National poverty line (% pop) Life expectancy at birth (years) Impressive growth allowed substantial poverty c) Rwanda vs comparators: Annual GDP growth rate (%, period average). reduction and improvements in living conditions. GDP level, e share of the population below the national Index = 100 x (Baseline / Scenario) 100.0 poverty line fell from 59 percent in 2001 to 38 percent in 2017 (Figure 1.1b). e expansion 99.5 of health services contributed to substantial 99.0 improvements in life expectancy and reductions in maternal mortality. e life expectancy of 98.5 Rwandese at birth increased from 40 years in 1995 98.0 to 69.6 years in 2022, exceeding the pre-genocide 97.5 high of 52 years achieved in 1985. By comparison, 2022 2026 2030 2034 2038 2042 2046 2050 the average life expectancy in Sub-Saharan Africa Source: Calculations based on World Development Indicators (WDIs) and National Institute of Statistics of Rwanda (NISR). (SSA) increased by only 10 years (from 50 in 2 CHAPTER 1 Rwanda CEM | 2024 Growth has been predominantly powered by Rwanda’s stellar growth performance (Figure investment. Total investment has been the 1.2a). From its level of 5.0 percent of GDP in second largest contributor to GDP after private 2000–09, public investment increased faster than consumption, growing from an average of 27.9 private investment, boasting an annual growth rate percent of GDP in 2000–09 to 32.9 percent in of 6.7 percent in 2010–21, compared to an annual 2010–14 then to 42.1 percent in 2015–22 (Figure increase in private investment of 2.6 percent over 1.2a). Capital accumulation contributed 94.7 this period. Prompted by large public investments percent of the annual average growth of Rwanda in prioritized in sectors at the heart of Vision 2020 2015–22, slightly declining from its contribution and government development priorities in NST-1,1 of 100.5 percent in 2010–14. is is a dramatic the share of capital expenditure in total primary change from the 2000s, when the contribution expenditure averaged 42.5 percent in Rwanda of capital stock was less than 55 percent. Labor between 2014/2015 and 2019/2020, falling to has become the second contributing driver of 36.8 percent in 2022/2023. e SSA average is still Rwanda’s economic growth since approximately lower, with capital expenditure accounting for 26 2010, with an almost stable share between 15 and percent of total primary expenditure. 21 percent of annual average growth (Figure 1.2b). e total factor productivity (TFP) contribution e strong focus of public investment on to growth has lost signi cant ground, becoming a infrastructure has yielded signi cant improvements drag on growth. in access to and quality of infrastructure services. Rwanda’s rating for the quality of infrastructure Public investment largely drove capital accumulation (road, communication, energy, water and sanitation, and growth in Rwanda. Public investment has water transport, air transport, rail transport, and been growing very solidly since 2005–06, fueling other transport) in the Global Competitiveness Figure 1.2: Rwanda’s key drivers of economic growth a) Rwanda’s public investment, private investment, and debt b) Factors contributions to economic growth in Rwanda, 2000–22. to GDP, 1980–2022. 140 20 16.4 20.8 120 15 30.1 100 10 15.2 80 5 100.5 94.7 60 0 54.7 40 -5 - -16.9 - -15.5 20 -10 0 -15 1980 1986 1992 1998 2004 2010 2016 2022 2000-2009 2010-2014 2015-2022 Fiscal balance General Government Debt to GDP (LSH) Public_investment Private_investment Capital Stock Labor TFP c) Contribution to real GDP d) Contribution to real value-added, 2000–22 32.9 27.9 19.7 42.1 44.0 13.2 50.0 52.2 15.9 73.0 66.5 47.6 17.0 19.0 -6.2 -3.0 -3.0 19.9 - -27.5 2000-2009 2010-2014 2015-2022 39.0 31.1 27.9 Statistical Discrepancy Households consumption Government Consumption Investment Net Export 2000_2009 2010_2014 2015_2022 Agriculture Industry Services Source: Calculations based on WDI Rwanda CEM | 2024 CHAPTER 1 3 Index (GCI) improved from 37 in 2010 to 52 lower dependency rates. Population growth is in 2019, compared to an average of 45 for SSA. projected to slow from around 2.3 percent currently For example, Rwanda’s power generation installed to about 1.4 percent over the next 30 years, as capacity rose to 238.4 megawatt (MW) in 2021, Rwanda goes through a demographic transition tripling the 2010 level. e share of the Rwandan with lower fertility rates. Other things equal, this 1 population with access to electricity rose from 6.1 percentage point slowdown in population growth percent in 2000 to to 80.1 percent in 2024 (56.2 will slow GDP growth by around half a percentage percent grid and 23.9 percent o -grid), and the point in the medium term and 0.8 percentage share of the rural population with electricity access points by 2050. However, this trend could also increased from 0.6 percent in 2003 to 40.1 percent generate a demographic dividend with a positive in 2022. e ect on growth. Speci cally, for the next 15 years, the ratio of the working age-to-total population Tourism infrastructure has been key to rate is expected to grow by around 0.5 percentage macroeconomic stability through its positive points per year, before decelerating sharply in the impact on the foreign exchange market, also 2040s. e demographic dividend is expected to targeted by public investment. e development of boost GDP and GDP per capita growth by around the meetings, incentives, conferences, and events 0.3 percentage points through the end of 2040.2 (MICE) sector led to an 11 percent per year increase in tourism earnings in 2009–19, generating more 1.2. Development challenges than 20 percent of total export earnings. As the Despite rapid growth, the Rwandan economy faces leading foreign exchange earner prior to the serious challenges that could limit development COVID-19, the tourism sector is expected to progress. Rwanda’s impressive growth performance continue to expand and diversify in parallel to any has not generated enough jobs or su ciently high growth potential service export sectors and increased productivity, and the bene ts in terms products the Government will envision as critical of poverty reduction have weakened. e heavy new drivers of growth for the country. As shown in reliance on public investment cannot be maintained Figure 1.3, fast recovery and expansion of the sector in the future, given scal constraints. is a clear objective to sustain for the Government, which will certainly need complementary fresh Productivity challenges and healthy nancial resources from the non-state Heavy reliance on public investment has been sector to support fast-growing productivity gains. accompanied by a declining contribution of total factor productivity (TFP), which remains very e slowing population growth creates a low. TFP represents the e ciency with which “demographic dividend” that will generate faster factors of production are used. Evidence shows growth in workers in the 15–64 age group, and that TFP is key to long term economic growth. Figure 1.3: Optimism in future tourisms revenues, signaling the sector’s key role for Vision 2050 a) Revenue forecast in tourism. a) Revenue forecast in tourism. 700 620 660 600 498 $200m $110m 500 425 455 400 381 424 305 Gorilla tourism Other leisure 300 282 324 293 200 251 $68m 200 186 175 164 $90m $86m 100 131 Business $46m 0 2008 2009 2020 2024 2023 2010 2018 2022 2016 2015 2019 2014 2013 2012 2021 2017 2011 Conference VFR Other visitors Source: Calculations based on Rwanda Development Board estimates. 4 CHAPTER 1 Rwanda CEM | 2024 Di erences in TFP are the most important made impressive progress on key development determinant of di erences in incomes across indicators could be explained by speci c features countries, and of long run economic growth of Rwanda’s development model. e decline in (Hall & Jones, 1999; Jones, 2016). A one percent TFP occurred in a period when Rwanda continued increase in TFP growth boosts GDP growth one- to be a top reformer in establishing an appropriate for-one in the short run and more than one-for- environment for business (Chapter 2), achieved an one in the long term, as physical capital is crowded impressive improvement in infrastructure services in. In the post-Genocide period, policies favorable (Chapters 2 and 7), was a champion of foreign direct to trade development, deepening of the nancial investment (FDI) and trade openness (Chapter 3), sector, and formation of human capital increased and experienced a structural transformation with productivity (Coulibaly, Ezemenari, & Du y, labor moving signi cantly from agriculture to 2008), and the contribution of TFP to growth was non-agriculture sectors (Chapter 4), all of which 30 percentage points during 2000–09. However, are considered as key determinants of technology TFP’s contribution plummeted to -17 percentage adoption and allocative e ciency. is apparent points during 2010–14 and continued to be paradox is in part because although resources have negative at -16 percentage points during 2015–22 moved broadly from agriculture to other sectors (Figure 1.2b). Rwanda compared well with regional with higher labor productivity, the allocative peers in terms of TFP contribution to growth, but e ciency within sectors has been suboptimal TFP’s growth contribution was well below that of in Rwanda (Chapter 5). Growth has been led the highly successful, and richer, Asian countries by non-tradable services and the public sector (Figure 1.4a). has dominated investment, limiting competitive pressures, and therefore innovation (Chapter 2), in Future TFP growth may have been further reduced important sectors of the economy. In addition, low by the pandemic’s adverse e ect on human educational attainment, limited skills training and capital, through reducing access to education and low managerial capability (Chapter 2) mean that disrupting the delivery of essential health care rms struggle to absorb and use new technologies services, such as immunizations (World Bank, despite trade openness. 2021). At the height of the COVID-19 pandemic lockdown, an estimated 3.5 million students have Human capital challenges been out of school, and statistics indicate that the Despite improved access to education and health share of students in total employment increased services, human capital remains low. e human from 3.4 percent in February 2020 to 8.8 percent capital index (HCI) places Rwanda 160th out of in August 2020. 174 countries. A child born in Rwanda just before e slowdown of TFP during a decade when Rwanda the pandemic will be 38 percent as productive Figure 1.4: Fast weakening of total factor productivity in Rwanda over time and compared to peers. a) Rwanda vs comparators: Contribution to growth, 2015–22 b) Rwanda: Productivity annual growth rates/1 15 19.3 18.2 33.7 27.2 23.0 20.8 1.1 6.2 34.5 20.7 10 Share of GDP growth, % 18.6 39.4 17.9 Growth rate (percent) 5 94.7 79.6 82.8 75.6 124.5 79.0 112.1 66.4 83.3 54.9 0 0.0 -5 -15.5 - -13.5 - 5.8 -5.8 -22.7 -32.8 -43.1 - -10 Korea, Rep. Botswana Tanzania Thailand Vietnam Ethiopia Rwanda Uganda Kenya China -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Capital Stock Labor TFP Output Growth (gY) Trend TFP Growth (gA) Instantenous Estimated TFP Growth (gA) Source: Calculations based on WDIs Note: /1 Instantaneous TFP is calculated as a Solow residual. Trend TFP is HP- ltered Instantaneous TFP. The HP lter is calculated until year 2100 and smoothed at 100. Rwanda CEM | 2024 CHAPTER 1 5 when she grows up as she could be if she enjoyed education will yield lower returns if malnourished. complete education and full health. is is lower For example, a study by the World Food Program than the average for the SSA (40 percent) and (WFP) estimates that 13 percent of all repetitions is close in rank to its East African neighbors in Rwanda were associated with undernutrition Tanzania, Uganda, and Burundi (Figure 1.5). Low (World Food Program (WFP), 2013). Every US$1 human capital can be an important constraint on invested in early childhood is estimated to return growth since human capital complements physical US$6–US$17, with potential bene ts including capital in the production process and is a key input better health, improved cognitive development to technological innovation. When de ned as the and schooling outcomes, and, eventually, increased value of individuals’ experience and skills in driving wages and productivity; and has the potential to the productivity of an economy, cross-country stop the intergenerational transmission of poverty di erences in human capital have explained 10–30 and malnutrition. At a stunting rate of 33 percent percent of per capita GDP variation (Hsieh & in 2020, investments in nutrition are therefore Klenow, 2010). of utmost economic priority. is requires a data e poor performance in the HCI is driven by driven and well-coordinated approach by agencies Figure 1.5: Human capital index scores for selected across many sectors, including health, education, countries, 2020 agriculture, water, and local government under 0.9 the stewardship of National Child Development 0.8 0.7 High income, 0.71 Agency (NCDA). Public nancial management 0.6 World and Upper-middle income, 0.56 systems need to become sensitive to nutrition 0.5 Lower middle-income, 0.48 needs to ensure priority investments are budgeted 0.4 0.38 0.3 Low income, 0.37 for across sectors, funds for priority investments are 0.2 released in a timely manner, interventions executed 0.1 and monitored, and spending data is triangulated 0.0 with outcome information to help reorient Rwanda Ethiopia Uganda Tanzania South Africa Ghana Bangladesh India Philippines Indonesia Kenya Brazil Sri Lanka Thailand Malaysia Seychelles Chile Vietnam Latvia Spain Australia Japan spending according to evidence. Source: Calculations based on HCI database Prioritizing learning in education requires lagging learning adjusted years of schooling and investments in quality. Children in Rwanda high stunting prevalence. Both the probability of a miss out on the equivalent of almost half a year child surviving the rst ve days (97 percent) and a of education compared to their neighbors due 15-year-old surviving to at least 60 years of age (81 to low quality of education. e 2021 Learning percent) are high, given Rwanda’s level of income. Achievement in Rwandan Schools (LARS) showed However, Rwandan children receive on average that only 10 percent of grade 3 students reached only 3.9 learning-adjusted years of schooling, basic pro ciency level in English and 16 percent almost half a year less than in neighboring achieved basic pro ciency in mathematics, when countries. Only about 67 percent of children are the assessment was conducted in English. English, not stunted, which is below the 68 percent average as the medium of instruction, is challenging for both of low-income countries in SSA and on par with students and teachers. Scores for pro ciency of the much poorer countries such as Malawi and the assessments improved considerably to 69 percent Central African Republic. in literacy and 61 percent in mathematics when the language of instruction was in Kinyarwanda. Other Addressing malnutrition is a priority investment. issues that contribute to poor quality in education Human capital indicators are deeply interdependent, include limited pedagogical capacity, overcrowded with progress in nutrition playing a pivotal role in classrooms, and relatedly double shifting for health and education. A well-nourished child is less teachers. Investments in quality education and vulnerable to health shocks and has greater cognitive learning should therefore be prioritized. capacity. Conversely, investments in health and Rwanda has made good progress across many 6 CHAPTER 1 Rwanda CEM | 2024 health indicators but needs to be prepared for targeted e orts to ensure broader inclusivity. ere a changing disease burden. Rwanda performs are increasing returns to scale when investing in better than most of its SSA peers in managing access to quality education and health services its communicable disease burden and has made to population sub-groups with a low baseline, so signi cant improvements in the delivery of targeting these households will yield the highest reproductive, maternal and child health services. return in addition to serving basic human needs. However, the population composition is changing and the disease burden from non-communicable e relationship between poverty reduction and disease is growing in importance. It means that the growth has weakened over time (World Bank, health system needs to evolve in response to the 2020). Between 2005/06–2010/11, the poverty actual and prospective burden of disease. is will headcount rate fell by an average of 2.4 percentage require institutional reforms, reprioritizing budget points per year as GDP per capita increased by allocations within the sector, a more prominent 6.2 percent a year. By contrast, between 2010/11– role for Rwanda Social Security Board (RSSB) as 2016/17 the fall in the poverty headcount rate a purchasing agency and investments in pandemic averaged 1.3 percentage points per year, even preparedness and response. though per capita GDP growth slowed only mildly, averaging 4.7 percent a year. us, the reduction in Equity in access to education and health services the headcount poverty rate corresponding to each is critical. ere are increasing returns to scale percentage point increase in GDP per capita—the when investing in programs meant to improve growth semi-elasticity of poverty reduction—fell access to quality education and health services from 0.36 between 2005/06 and 2010/11 to 0.24 for population sub-groups with a low baseline. between 2010/11 and 2016/17. Despite progress in recent years, there continues to be inequity in access to quality education and Increasing productivity in agriculture would health services. Access for low-income, rural, boost the income of poor workers. Since over 90 and uneducated households remain low despite percent of the poor live in rural areas (Table 1.1), progress in recent years. Similarly, important strengthening the agricultural sector, both in gender gaps remain. To make e ective use of terms of smallholder production and as a source limited resources, including for these sub-groups of labor demand, is critical to poverty reduction. of the population for which economic growth Before the pandemic, labor productivity in the has generated limited bene ts, targeting these agricultural sector was only about 18.5 percent population segments will yield the highest return that of industry and only about 24.1 percent in addition to serving basic human needs. that of services in 2019 (Figure 1.6). Increasing agricultural productivity (Chapter 5) through Jobs creation and inclusiveness challenges increasing demand for Rwandan production, Despite overall improvements in living standards, raising skill levels, improving access to inputs, some groups of the population have bene tted less and increasing agricultural households’ access than others. Low-income, rural, and less educated to regional and international markets through households have experienced slower improvements enhanced competitiveness (Chapter 3) should in key areas like education and health compared generate signi cant income gains for poor workers. to other groups, indicating the need for more Rwanda’ growth performance, driven mainly by TABLE 1.1: Headcount poverty rates by urban/rural population Distribution of poor in 2010/11 (%) 2016/17 (%) Change 2016/17 (%) Urban 16.7 15.8 -0.9 7.4 Rural 50.9 43.1 -7.9 92.6 Total 45.8 38.2 -7.6 Source: World Bank (2020) Rwanda CEM | 2024 CHAPTER 1 7 Figure 1.6: Sectoral productivity in Rwanda: Strikingly low Figure 1.7: Rwanda vs comparators: Unemployment rate agriculture productivity (percent, period average) 7.0 12 25 Million per worker (Rwf, constant 2017) 6.0 10 20 8 5.0 6 15 4.0 Percent 4 3.0 10 2 2.0 0 5 1.0 -2 0 0.0 -4 2000-2009 2010-2014 2015-2022 2000 2003 2006 2009 2012 2015 2018 2021 Rwanda Ethiopia Kenya Uganda Tanzania Botswana Agriculture Industry Services Value Added per Worker Growth (RSH) China Korea, Rep. Thailand Viet Nam Source: Calculations based on WDIs. Source: Calculations based on International Labor Organization (ILO) database. public investment, has not generated enough jobs. pandemic. Public debt rose from 20.4 percent of Rwanda’s unemployment rate has stagnated at GDP in 2010 to 73.6 percent in 2021 with the about 12 percent over 2000–18, before starting to pandemic, before declining to 66.7 percent in 2022 increase in 2019 (Figure 1.7). Rwanda has a higher (see Chapter 7). Rwanda’s risk of external debt unemployment rate than peer countries (except distress was downgraded from low to moderate Botswana), including the EAC countries with in the 2020 IMF/World Bank debt sustainability whom it shares similarities in terms of high rates analysis (DSA, [International Monetary Fund of subsistence farming, informal employment, and (IMF); World Bank, 2020). e rising public and almost no formal job search mechanisms. Moreover, publicly guaranteed debt levels re ect the weakened the share of those employed in the population aged investment–growth nexus in Rwanda, underlining 15 or more has fallen, reaching a low point in the the need to improve public investment e ciency period 2015–22 at 49.9 percent (according to the and increase the role of private sector (Chapter 2). ILO modeled estimate) or 52.6 percent (according to the national estimate), signi cantly below most Private investment has failed to increase at the pace regional peers (Figure 1.8). of public investment. Private investment increased from 12.7 percent of GDP in 2007 to 15.8 percent Fiscal sustainability challenges and limited role of the of GDP in 2022, while public investment rose private sector from 5.0 percent of GDP to 13.8 percent of GDP Rwanda’s growth performance, driven by public over this period. Rwanda’s private investment investment, poses a challenge to medium- and lagged regional peers in 2022, including Uganda long-term scal sustainability that has been (16.9 percent of GDP) and Tanzania (24.3 percent exacerbated by the e ects of the COVID-19 of GDP). In a context of slow productivity growth Figure 1.8: Increasingly poor employment results compared to peer countries a) Employment to population ratio, 15+, total (%) (modeled ILO estimate) b) Employment to population ratio, 15+, total (%) (national estimate). 90 90 82.6 80 80 76.8 70 70 60 60 54.1 53.6 52.6 49.9 50 50 40 40 30 30 20 20 10 10 0 0 2000 -2009 2010 -2014 2015 -2022 2000 -2009 2010 -2014 2015 -2022 Rwanda Botswana Tanzania Kenya Ethiopia China Uganda Korea, Rep. Rwanda Botswana Tanzania Kenya Ethiopia China Uganda Korea, Rep. Source: Calculations based on WDIs 8 CHAPTER 1 Rwanda CEM | 2024 and depleted scal space (Chapter 7), private estimated to have generated damages and losses of investment would need to further increase to approximately US$237 million, with the cost of support growth in a complementary manner of recovery and reconstruction estimated at US$336 public investments mainly well-targeted to non- million. e impact on physical assets comprised 57 business-oriented activities. percent of the total. is resulted in the disruption of infrastructure-linked services. In terms of soil However, the potential for more rapid private erosion, an estimated area of 1,080,168 hectares sector investment growth is linked to the domestic (45 percent of Rwanda’s land area) is at risk of savings capacity, which is very limited. Rwanda topsoil loss. About 6 million tons of crops are lost has speci cally targeted savings mobilization as each year due to erosion, valued at US$76 million a key growth factor for economic development. (Rwf 76 billion). Topsoil loss is estimated to be 25 Nevertheless, both gross domestic and gross tons per hectare per year. Soil erosion has increased national savings (Figure 1.9a) have remained at by 54 percent since 1990 (National Institute of modest levels since 2010 (Chapter 2). In 2021, Statistics of Rwanda (NISR), 2019). Considering gross domestic savings amounted to 10.5 percent the structure of Rwanda’s economy, in the long- of GDP, far lower than aspirational peers, such term climate change is likely to increase variability as high growth economies from east Asia (Figure in crop yields and agricultural production, cause 1.9b). Rwanda also lags neighboring East African severe ood damage to physical capital, reduce countries, such as Kenya, Uganda, and Tanzania. labor productivity, and impact demand for tourism. e Rwanda CCDR estimates that if climate risks Climate change challenges materialize, Rwanda’s GDP levels can drop by Climate change threatens to derail Rwanda’s 5-7 percent below baseline in multiple years by development through major climate shocks and 2050. During a year of severe oods (e.g., a 1-in- the long-term degradation of the country’s natural 100-year ood), such extreme events are predicted capital. Rwanda vulnerability to climate change to reduce GDP by an additional 4.4 percentage shocks accentuates productivity and inclusiveness points below the baseline scenario during the ood challenges. e impact of climate change risks year (World Bank Group, 2022). Climate change could be consequential for Rwanda’s economy in is also expected to slow the pace of structural both the short and long-term. Rwanda is vulnerable transformation in Rwanda, compromising future to climate variability because of the structure of economic growth and poverty reduction. its economy and the degradation of its natural asset base. Floods and droughts have increased Climate change poses risks for Rwanda’s nancial in Rwanda over a 30-year period and Rwanda’s sector, primarily through the banks’ exposure to Meteorology Agency attributes the unusual rainfall disasters linked to natural hazards. As of June 2021, patterns to climate change. e 2018 oods were the nancial sector assets were equivalent to 69.8 Figure 1.9: Gross domestic savings and gross national savings as percent of GDP a) Savings mobilization e orts to continue more strongly given current b) Gross Domestic Savings as Percent of GDP – Country low relative levels. Comparison. 17.3 40 16.5 15.3 35 14.5 14.3 13.4 13.7 12.3 30 11.8 11.4 11.2 11.1 10.5 25 8.7 8.7 9.1 9.1 8.6 20 8.0 7.9 7.1 7.5 6.5 6.7 5.5 11.2 15 10.5 5.5 8.7 9.1 5.0 10 5 0 2013 2015 2017 2019 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Ethiopia Ghana India Kenya Mauritius Rwanda Tanzania Gross domestic savings (% of GDP) Gross national savings (% of GDP) Uganda Vietnam South Africa Source: Calculations based on WDIs and BNR datasets Rwanda CEM | 2024 CHAPTER 1 9 percent of GDP. e banks account for 66.9 percent from climate funds, the private sector, enhanced of the assets, and micro nance institutions (MFIs) domestic climate nance, and other innovative and savings and credit cooperative organizations nancing mechanisms crucial to demonstrate (SACCOs) account for 5.6 percent. Mortgages impact and sustainability of climate action. for physical assets constituted 33 percent of total lending at the end of June 2021 and are likely to 1.3. Rwanda’s long term growth outlook be exposed to physical risks from natural hazards, Rwanda has considerable scope to improve on its although the risks are di cult to quantify with the remarkable growth performance through reforms available data. Other climate-sensitive sectors of the to increase productivity, build human capital and economy, such as agriculture, water, and energy, are encourage greater private investment. a relatively small share of the total bank lending portfolio, and transition risks are possibly limited. Rwanda’s growth success in the early 2000s spurred greater growth ambitions, with Vision 2050 e main climate change challenge for Rwanda’s (published in 2020) picturing Rwanda achieving nancial system is to ensure the system continues high income status by 2050 (US$13205 per capita), to develop in a manner that is aligned with and with an intermediate target of becoming an the vision of a low-carbon, green, sustainable upper middle-income (UMI) country by 2035 economy. Rwanda’s Green Growth and Climate (US$4255 per capita). Speci cally, achieving both Resilience Strategy (GGCRS) notes that one of UMI status in 2035 would require a 2022–35 the major impediments to the adoption and scale- average GDP growth of 14.7 percent (GDP per up of green technologies is the lack of adequate/ capita growth of 12.3 percent), and achieving high- a ordable nance for such investments (Ministry income status by 2050 would require a 2036-50 of Environment, 2021). Rwanda has recognized average GDP growth of 9.8 percent (per capita the need for suitable nancing mechanisms GDP growth of 8 percent). is means that by and facilities to acquire, use and transfer green 2035 income per capita would be ve times as technologies. is inevitably requires Rwanda to large as in 2021 to reach the intermediate target, undertake an ambitious low carbon and climate and by 2050 it would have to be almost 16 times resilient pathway by ensuring that all sectors of as large (Figure 1.10b). Assuming Rwanda achieves the existing economic model are as e cient and only high-income status in 2050, this would optimized as possible. erefore, Rwanda must require a 2022–50 average GDP growth of 12.2 transition from short term project to programmatic percent (per capita GDP growth of 10.1 percent). approach/ platform nancing. is underpins In comparison, GDP has increased by 7 percent a speed and scale through enhanced partnerships year since 2010 (Figure 1.10). for leveraging additional and innovative nance Figure 1.10: Growth path of Rwanda compared to aspirational peers: New nal and intermediate targets di cult to achieve, but inspiring a) Real annual growth -- GDP and GDP CP (% change) b) Growth path (GNI PC) magnitude comparison 16 HI 2050: $13205 GNI PC Magnitude Increase (xUS$840) 8 UMI 2035: $4255 4 2 1 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Years from when the country was at Rwanda's GNI PC level (US$840) Botswana (1970=0) China (1987=0) India (2000=0) Thailand (1965=0) Vietnam (1992=0) Threshold Source: Damonte and Pennings (2023). 10 CHAPTER 1 Rwanda CEM | 2024 Rwanda’s impressive e orts to achieve its could achieve faster growth than the baseline. development objectives have been hindered by Using the World Bank Long-Term Growth Model global poly-crisis, including the COVID-19 Public Capital extension (LTGM-PC), this study pandemic, repeated climate related shocks, and has simulated a business-as-usual (baseline) and the recent increase in global in ation. In 2020, two reform scenarios—moderate and ambitious— COVID-19 has pushed Rwanda’s economy into its which are described in Box 1.1. e LTGM-PC is a rst contraction since 1994. GDP dropped by 3.4 Solow-Swan style neoclassical growth model where percent in 2020, compared to a projected expansion output is produced using labor, public capital, of 8 percent before the COVID-19 outbreak. Both private capital, human capital and labor (see the COVID-19 and high in ation crisis in 2022, Annex for a description). e baseline re ects due to the combined e ect of Ukraine crisis and a continuation of present trends in most growth climate related shock, have likely contributed to fundamentals, as well as some modest reforms (as exacerbate Rwandan challenges of productivity and a typical country might achieve). e moderate inclusiveness (Chapter 5). e cost of the Rwanda scenario is a slightly more optimistic variant of Economic Recovery Plan (RERP) initiated to the baseline concerning assumptions about future mitigate the economic impacts of COVID-19, TFP growth, investment rates and human capital estimated at US$900 million over the two scal accumulation, and results in growth rates about years 2019/20 and 2020/21 (which is equivalent to 0.5 percentage points above the baseline. e about 4.4 percent of GDP on average per year), led ambitious scenario represents the most optimistic to a further deterioration in Rwanda’s debt position assumptions about the three growth fundamentals depleting precious scal space needed for long term that re ect not only a strong pace of reform, but development priorities. also a fair dose of good luck (such as the absence of negative shocks or implementation delays). Achieving Rwandan growth targets would Growth in the ambitious scenario accelerates over require accelerated reform e orts to attain the next 5 years to a sustained pace from 2028 of much more rapid growth rates compared to 8.5-9 percent, around 2 percentage points above other top-performing countries. Achieving the the moderate scenario, leaving per capita incomes GoR’s high growth ambition and signi cantly 6.7 times greater than currently after 30 years. is reducing the number of the poor would require ambitious scenario would generate more rapid implementing an ambitious reform agenda, growth than Botswana did from when it was at beyond that envisioned in the National Strategy Rwanda’s level of development. Results of the two for Transformation 2016/17–2023/24 (NST-1). scenarios are as follows: e x-axis in the gure denotes the number of • e growth path for the moderate reform years from when each country was at Rwanda’s scenario is shown in Figure 1.11a,b. GDP development level (normalized as year 0), and the growth accelerates to 7.9 percent by 2028, y-axis denotes the income at that time, normalized which is 0.6 percentage points faster than as a multiple of the income in year zero. e two the baseline. GDP continues to grow faster orange diamonds in this gure denote the targeted than the baseline all the way to 2050, income thresholds, with the x axis representing the time raising growth to 6.8 percent by 2050. e to that target (from 2021, the latest data, to the time the demographic assumptions are the same as target should be achieved) and y axis representing the in the baseline, resulting in GDP per capita income multiple to achieve that target. As one can see, growth in 2050 of 5.3 percent rather than all of those fast-growing countries would have missed the 4.8 percent rate in the baseline. Gross both targets by a wide margin. national income (GNI) per capita after 30 years would be 4.8 times today’s level, which With policy reforms and targeted investments is similar to the performance of ailand in that signi cantly enhance productivity, human the 30 years following its being at Rwanda’s capital, and private sector investment, Rwanda level of per capita income. Rwanda CEM | 2024 CHAPTER 1 11 Figure 1.11: The growth paths of the three GDP growth scenarios of Rwanda are strong a) Real GDP annual growth (% change) b) Real GDP PC annual growth (% change) Source: Damonte and Pennings (2023). • Potential GDP growth under the ambitious was at Rwanda’s level of development (Figure reform scenario accelerates from around 7.5 1.12b). Nonetheless, Rwanda’s per capita percent today to 8.5 percent by 2028 and income would still be lower than in China. around 8.9 percent by 2050 (Figure 1.11a). is is substantially above the rates of growth e simulations suggest many of the policies Rwanda experienced in the 2000s (of about in Rwanda’s development plan will contribute 8 percent) and is close to the fastest 5-year to growth, though each has its own dynamics. average of growth achieved post-2000. By Rwanda is particularly short of private capital, 2050 it is also around 2.6 percentage points as evidenced by a low private capital-to-output above the growth in the baseline, and 2 ratio—around half to two-thirds of lower-middle percentage points above that in the moderate income and peers, respectively (Devadas and reform scenario. In per capita terms, growth Pennings 2018)—and correspondingly a high accelerates to around 6.3 percent by 2028 and marginal product of private capital (which is then steadily to 7.3 percent by 2050. is is much higher than the marginal product of public above the fastest 5-year average growth that capital). Hence the model suggests that Rwanda’s Rwanda has experienced since 2000 (Figure planned rebalancing of investment towards the 1.11b), and thus is pushing the boundaries private sector will support growth going forward. of realism. In terms of levels, GNI per capita However, this boost to growth is larger in the after 30 years in the ambitious reform scenario short term than the long term, as the marginal would be 6.7 times today’s level, which is more product of private capital falls over time with than Botswana achieved in the 30 years after it higher private investment. Low rates of private Figure 1.12: Rwanda’s growth objectives would require pushing the boundaries of realism a) Growth path (GDP) comparison b) Growth path (GNI PC) magnitude comparison 14 16 HI 2050: $13205 GNI PC Magnitude Increase (xUS$840) 12 GDP Growth (5Y MA of % change) 8 10 UMI 2035: $4255 8 4 6 LMI Avg. (1990-2019) 4.5 2 4 SSA Avg. (1990-2019) 3.5 LI Avg. (1990-2019) 3.4 2 1 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Years from when the country was at Rwanda's GNI PC level (US$840) Years from when the country was at Rwanda's GNI PC level (US$840) Botswana (1970=0) China (1987=0) India (2000=0) Baseline Ambitious Moderate Botswana (1970=0) Thailand (1965=0) Vietnam (1992=0) Baseline China (1987=0) India (2000=0) Thailand (1965=0) Vietnam (1992=0) Moderate Ambitious Source: Damonte and Pennings (2023) 12 CHAPTER 1 Rwanda CEM | 2024 Box 1.1: Two scenarios for rapid growth e moderate reform scenario relies on growth parameters that are fairly similar to the history of the country, with a few exceptions. Here, TFP growth follows a similar path to the historical trend, but instead of increasing to 1.8 percent by 2028, TFP growth is marginally faster at 2 percent (Figure 1.14).18 e 2 percent TFP growth is between the 75th and 90th percentile over 20 years for SSA and low-income/lower-middle income countries (LIC/LMIC; Table 1.4). We assume slightly higher investment rates, which increase to 30 percent by 2029 (rather than being constant at 28 percent, Figure 1.13). ese are around the 90th percentile of SSA and LI countries over 2000–19 and correspond to the 20 years average across miracle economies in the years a er they were at Rwanda’s level of development (Table 1.2 and 1.3). All of the increase in investment is assumed to be private. We also assume that Rwanda’s average years of schooling increases to 10 by 2050 for the 20–24 age cohort (up from 9.3 years), which results in human capital growth of the workforce that is 1.2 percent by 2050 (rather than 1.06 percent in the baseline).19 e ambitious reform scenario is designed to represent a set of the most optimistic growth assumptions that are still reasonable. ey represent not only a strong pace of reform, but also a fair dose of good luck. Here, TFP growth follows a similar path to the baseline, but instead of increasing to 1.8 percent by 2028, TFP growth is substantially faster at 2.5 percent (Figure 1.14). is 2.5 percent TFP growth is between 90th percentile of LIC and LMIC over 20 years, and above the 90th percentile for countries in SSA (Table 1.4). Note this is still well below 6 percent TFP growth required for the aspirational growth in the Future Drivers of Growth study (page 10). e ambitious reform scenario assumes substantially higher investment rates, based on Rwanda’s Vision 2050 document, which reach 35 percent by 2050. is is above the 90th percentile in SSA, LIC and LMIC (Table 1.2). But perhaps more importantly, it is also relatively rare among the growth miracle economies discussed earlier. Starting from when they were at Rwanda’s level of development, the average investment rate of that group was only 30-32 percent over a 20-30 year horizon (Table 1.3). Note that this is well below the 40 percent investment rate in 2035 required for the aspirational growth scenario in the Future Drivers of Growth study (p10). We also assume rapid progress in improving human capital in the ambitious reform scenario. However, this only has a limited e ect on average growth rates, given that human capital is (mostly) formed in children, and it takes one or two decades until those children join the workforce. We assume that reforms follow the same time path as in the baseline, with the 0–4 cohort in 2020 receiving 1/3 of the e ect of reforms (“treatment”), the 0–4 cohort in 2025 receiving 2/3 treatment and the 0–4 cohort in 2030 receiving full treatment. Speci cally, we assume that average pre-tertiary educational attainment of the 20–24 cohort increases from 6.4 years currently to 11 years (similar to that of India), education quality increases from 0.57 to 0.7 (similar to that of Uruguay, de ned as Harmonized Learning Outcomes/625), adult survival rates increase from 0.81 to 0.9 (similar to Estonia), and not stunted rates increase from 0.5 to 0.9 (similar to Mexico) (all de nitions are the same as the HCI, though referring to the 20–24 age cohort). is target for the years of schooling is similar to that in Vision 2050, though for the ambitious scenario it is de ned for the age group 20–24 (rather than being a mean). Combined, all the reforms to education and health almost double human capital growth of the workforce from 1.1 percent to 1.9 percent by 2050. Rwanda CEM | 2024 CHAPTER 1 13 TABLE 1.2: Rwanda to consider targeting at least 90th top TABLE 1.4: Top growth performing countries (90th) rely on performers in investment rates, for Vision 2050 goals strong TFP growth Average total Investment (% of GDP – 2000/19) Average total Investment (% of GDP – 2000/19) Percentile Percentile Group Obs. Group Obs. 10 th 25 th 50 th 75 th 90 th 10 th 25 th 50th 75th 90th SSA 13.49 16.96 20.99 26.54 30.68 41 SSA –0.76 –.34 0.87 1.72 2.29 27 LI 13.24 15.15 19.26 23.14 29.94 21 LI & LMI –0.50 0.26 1.04 1.73 2.81 38 LMI 15.86 19.30 23.82 28.42 33.63 49 Source: Calculations based on PWT10.0 Source: Calculation based on WDI Figure 1.13: By 2050, Rwanda’s investment rates moderately TABLE 1.3: Average total investment higher than ow-middle income average in 2000–19 Average total investment (% of GDP) Total investment (% of GDP) Interval (years) 40 Country Starting year 35 35.1 1–5 1–20 1–20 1–30 30 30 28.3 BWA 1971 38.83 33.94 31.37 29.90 25 20 CHN 1989 28.54 30.50 33.57 36.80 15 10 IND 2004 33.51 33.38 . . 5 THA 1969 22.87 23.46 25.55 29.52 0 00 05 10 15 20 25 30 35 40 45 50 WDI WEO (Forecast) Baseline VNM 1995 26.23 28.57 30.01 . Ambitious Moderate Vision 2050 Average 30.01 29.97 30.13 32.07 Source: Calculation based on WDI Source: Damonte and Pennings (2023) Figure 1.14: Gains in TFP growth for Rwanda Figure 1.15: Impressive private investment rates in the future, but at the expense of too fast a decline in public investment rates Public & private investment (% of GDP) 20 18 16 14 12 10 8 6 4 2 0 2000 2004 2008 2012 2016 2020 2024 Public (WDI - MPO) Private (WDI - MPO) Public (Article IV 01/22) Private (Article IV 01/22) Source: Damonte and Pennings (2023) Source: Damonte and Pennings (2023) 14 CHAPTER 1 Rwanda CEM | 2024 investment are common for many low-income there is substantial upside potential to productivity, countries (Devadas & Pennings, 2018), as private and so high rates of TFP growth driven by structural investment is sensitive to the state of the business transformation are possible. Nonetheless, as the environment, the quality of institutions (especially economy develops, the “easy” gains from structural legal institutions), access to credit, savings rates, transformation and urbanization will fade, and so and general nancial development—all of which Rwanda will have to ensure that capital and labor are often at low levels in low-income countries. are more e ciently allocated across sectors, and Reforms in these areas will be key for supporting across rms. Continued growth in TFP and human the higher rates of private investment envisioned in capital also helps keep the physical capital-to-output the baseline and the two alternative scenarios. ratio down, and so makes physical investment more e ective for boosting growth. Improvement in human capital development can also support growth but has larger e ects in 1.4. Structure of the report the long run than in the short run. e reason is is report, requested by the GoR, aims to inform a that improvements in the education quantity or successor strategy to NST-1 in 2024 to achieve the education quality (or health) of today’s children GoR’s development goals, the same way the Future will only increase the productivity of the workforce Drivers of Growth report (referred to here as FDG) in 10-15 years when those children start working. informed NST-1. As such, the reforms in the baseline and scenarios generate the largest boost to human capital growth e challenges facing Rwanda, despite a strong of the workforce in the 2040s (Figure 1.16b). growth performance, point the way to policy Nonetheless, this is still an important area for reforms to accelerate growth. Despite rapid growth reform, as human capital is critical to long-term Rwanda’s economy confronts signi cant challenges. growth and Rwanda’s World Bank Human Capital While vigorous e orts have been made to establish Index score of 0.38 is low. Among the human a legal/ regulatory framework that supports capital boosting reforms proposed in this report, growth and massive investments have increased increasing the employability of the youth should public services, limitations remain on the level of be tirelessly pursued through improving the quality competition, innovation, and allocative e ciency. and relevance of technical and vocational education Many households, particularly in rural areas, have and training (TVET) and degree programs. received little bene t from the overall progress in development. Climate change and mounting public e most important growth driver is TFP , which debt present serious threats to scal sustainability. represents the e ciency with which factors of production Overcoming these challenges will require greater are used to produce output. e current low level of reliance on private sector investment to enhance productivity—especially in agriculture— means productivity growth, raise the incomes of poor Figure 1.16: Expected delay in impact of human capital growth in Rwanda’s growth path scenarios a) Quality score, Harmonized Learning Outcome (HLO)/625 (cohort 20–24). b) Human capital per worker growth rate. 1.0 0.9 0.8 0.70 0.7 0.65 0.6 0.5 2010 2015 2020 2025 2030 2035 2040 2045 2050 Quality score (HCI data) Baseline & moderate Ambitious Source: World Bank sta estimates Rwanda CEM | 2024 CHAPTER 1 15 farmers and the supply of o -farm employment in transformation in Rwanda and the levels of rural and urban areas, and provide the nancing productivity and employment. Well-designed to address infrastructure shortfalls in the face of urban planning, policies to attract FDI, and constraints on government expenditures. social protection policies will be critical to generate new opportunities for productive and is report focuses on how public policy can encourage inclusive employment. Chapter 5 considers greater private sector participation in achieving policies to accelerate agricultural productivity the goals of raising productivity growth, boosting through raising skill levels, improving access to inclusion, and addressing threats to sustainability: inputs, increasing resilience to climate change, • Increasing productivity will require and expanding agricultural households’ access improving opportunities for private rms to markets. through strengthening competition and the • Rwanda faces two important threats to the e ectiveness of public services. While Rwanda sustainability of its long-term growth plans. has made great strides to improve the business Chapter 6 reviews the short- and long-term environment, there remains considerable damages that can be expected from climate potential to increase the ability of Rwandan change and the current pace of unsustainable rms to compete. Policies to promote exploitation of Rwanda’s natural capital. competition and improve support for rm Policies should focus on restoring natural assets innovation and growth are discussed in Chapter in both urban and rural areas, maintaining 2. Chapter 3 discusses policies to increase protected areas, intensifying climate-resistant scale economies, promote specialization and agricultural practices and mobilizing private gain access to critical inputs and technology investment to meet Rwanda’s climate through boosting trade and FDI. commitments. Chapter 7 discusses the threat • Growth and development will depend on to scal sustainability presented by Rwanda’s reducing barriers to inclusion. e key to heavy reliance on public investment nanced raising the incomes of the poor is to increase by rising public debt. Increasing the e ciency the productivity of agriculture, on which of public investment and mobilizing more the bulk of poor people depend for their private investment in infrastructure will income, and to accelerate the structural be essential to support rapid growth while transformation to generate more o -farm jobs. containing the scal de cit. Chapter 4 reviews the rapid pace of structural 16 CHAPTER 1 Rwanda CEM | 2024 Annex 1.1. Matrix of key policy recommendations: Sources of growth in Rwanda NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame 1.1.1 Policy Area 1: Boost Domestic Savings Mobilization in Rwanda to Accelerate Private Investment. Priority Area 1: Strengthening Ejo Heza Scheme Ejo Heza: Allow short-term access to a portion of funds saved in the RSSB, MINECO- HP ST LF scheme FIN Ejo Heza: Increase the minimum savings level to be eligible for government RSSB, MINECO- MP MT LF incentives: FIN Ejo Heza: Scale up coverage through mandates and aggregators RSSB, MINECO- HP MT HF FIN Ejo Heza: Improve and ramp up communication and mobilization to reach RSSB, MINECO- HP ST HP new subscribers FIN Priority Area 2: Scaling up Digitalization in Savings. Ramp up digital and nancial literacy initiatives around savings MINECOFIN HP ST HF Create an enabling environment for digitally enabled savings, insurance MP ST HF and pension products Priority Area 3: Developing Innovative Savings Products. Enable innovation through regulatory reform and mechanisms such as HP ST HF sandboxes Engage Rwandan diaspora to subscribe to government retail bonds MT MT HF Update licensing requirements to encourage the development of more MT MT HF appropriate savings products Priority Area 4: Savings Groups Mobilization. Accelerate the digitization of savings groups and linking of savings groups HP ST HF to formal nancial institutions 1.1.2 Policy Area 2: Improve Basic Education Priority Area 1: Strengthen Mechanisms for Early Childhood Educa- tion. Strengthen the two-tiered ECD provision modalities (pre-primary class- MINEDUC, HP ST MF es, center-based, home-based, and community-based) service provisions NCDA through multi-sectoral collaboration Expand access to ECD across all modalities and improve learning environ- MINEDUC, HP MT LF ments NCDA Formalize teacher training and ongoing coaching for pre-primary teachers MINEDUC HP MT MF and service providers Priority Area 2: Accelerate Foundational Literacy and Numeracy in Early Grades. Approve the Foundational Learning Strategy to facilitate implementation MINEDUC HP MT LF by Government agencies and partners Strengthen uncerti ed teacher training by making it practical and strong MINEDUC HP ST HF focus on foundational skills instruction Shi teacher allocations policies to place experience and high-quality edu- MINEDUC MP MT LF cation in lower primary grades Integrate remedial education into the school week MINEDUC HP ST HP Curriculum revision to ensure adequate focus on foundational literacy and MINEDUC MP MT MF numeracy instruction in lower primary grades Rwanda CEM | 2024 CHAPTER 1 17 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame Priority Area 3: Improve Retention and School Completion. Strengthen teacher training and continuous development program for MINEDUC HP MT MF secondary teachers especially in STEM subjects Expand access to secondary education and address gender imbalance MINEDUC MP MT MF 1.1.3 Policy Area 3: Develop Skills for Gainful Employment and Inclusion Priority Area 1: Address Skills Mismatches with Labor Market/ Indus- try. Institutionalize mechanisms for identi cation of skills gaps and labor mar- RDB and CSO HP MT HF ket opportunities. Strengthen formal channels (such as sector skills councils for priority eco- UR, RP, RTB, in HP MT HF nomic sectors) for interaction between academia and the private sector/ collaboration with employers RDB and-CSO Priority Area 2: Improve the Quality and Relevance of TVET and Degree Programs. Strengthening of teaching sta s technical, pedagogical competences, and UR, RP, RTB HP ST HF digital skills. Recruitment of adequate quali ed sta , including technicians for work- MINECOFIN, HP MT MF shops/Labs MINEDUC Upgrading of teaching and learning conditions for all programs in priority MINECOFIN, HP MT MF economic sectors (facilities, equipment, digital resources, and internet MINEDUC connectivity-expand LAN). Adequately implement the Work-Place Based Learning Policy (internships UR, RP, RTB HP ST HF & apprenticeships) Step up mentorship support labor market attractiveness of science and MINEDUC, HEC  HP  ST HF mathematics related subjects, especially among female students in second- ary schools Priority Area 3: Access and Equity, and Work Transitions. Increase access students scholarships and loans, including access to a ord- BRD HP MT HF able laptops and internet for poor and vulnerable students. Establish gradual governments direct funding to the Skills Development MINECOFIN, HP LT HF Fund (SDF) for various windows, including SDF funding for out of school MINEDUC youths, upskilling/upgrading of existing workers micro and small enter- prises in the informal (and formal) sectors, and support for graduates pursuing entrepreneurship. Priority Area 4: Unleashing the Potential of the University of Rwanda. Implement key recommendations and milestones, in the assessment report MINECOFIN, HP LT HF of the University of Rwanda (July 2023) on ve core elements of the institu- MINEDUC, UR tions performance (size and con guration of the University of Rwanda. Innovations in Curriculum, Pedagogy, and Assessment. Research Capacity Building. Governance and Management; and Financial Sustainability) 18 CHAPTER 1 Rwanda CEM | 2024 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame 1.1.4 Policy Area 4: Strengthening Health Outcomes. Priority Area 1: Foster Efficiency Across the Health Budget Cycle. Increase gradually the budget allocation for health by 2 percentage points of the general government budget. Expand fiscal space for health to expand insurance coverage, invest in HP MT HF human resources or quality of care. Monitor closely performance to ensure additional resources are used MT HP HF effectively. Address pressing quality of care issues, including workforce gaps. Explore what drives quality of care issues through for instance mater- ST HP HF nal death audit. Invest accordingly to ensure access is matched with adequate quality ST HP HF across population income groups. Consider reallocating funding from vertical disease programs (HIV/ MT HP MF AIDS and malaria) to RSSB/CBHI benefits package based on claims analysis. Encourage partners to relax co-financing requirements for vertical MT HP MF disease interventions, to the extent possible. Take action to reduce the health workforce gap. Invest in health workforce education. MT HP LF Create the necessary budgetary space to hire. MT HP LF Ensure that nurses who have been trained are given the opportunity MT HP LF to work in the sector. Priority Area 2: Improve Equity. Equity concerns should be addressed. Subsidize insurance coverage of the near poor. MT HP HF Implement a more equitable workforce establishment plan. MT HP HF Reflect equity considerations in the proposed capitation payment MT HP HF reform. Work with districts to identify adequate and equitable district health budget allocations, taking into consideration population and need. Work with districts to identify adequate and equitable district health MT HP HF budget allocations. Take into consideration population and need in district health budget MT HP HF allocations. Rwanda CEM | 2024 CHAPTER 1 19 Annex 1.2. Description of the LTGM-public capital extension is annex provides a brief overview of the LTGM e e ect of an increase in the public investment rate Public Capital Extension (LTGM-PC; Pennings and depends on both the usefulness of public Devadas 2018), with the calibration of key parameters/ capital for production , as well as the scarcity initial conditions listed in Table 1.5 (beyond those of public capital, as measured by the public capital- discussed in Box 1.1). Like the standard LTGM, to-output ratio . For example, if = 0.1, the LTGM-PC is a neoclassical (supply side) model a large 2 percentage point of GDP increase in the of potential growth. However, unlike the standard public investment rate raises short-run growth by 0.2 LTGM, the LTGM-PC allows for a decomposition percentage points per year if (close to our of physical capital into public and private portions. initial calibration for Rwanda) but only 0.1 percentage More speci cally, GDP is given by a simple Cobb- point if . is means that a growth, driven Douglas production function: by public investment, which causes public capital to accumulate faster than GDP will quickly become less e ective, unless it is accompanied by other reforms where is the total factor productivity (TFP), to boost productivity, human capital or participation to and denote public and private capital stocks, mitigate the increase in . e e ect of an increase and is the usefulness of public capital for in the private investment share of GDP is analogous but production. ii is e ective labor used in production, will depend on the private investment share of income which is decomposed into , human capital per adjusted for congestion ( ), as well as the scarcity worker, and , e labor force is further of private capital, as measured by the private capital-to- decomposed into where is the participation rate, output ratio . In our initial calibration, Rwanda is the working-age population to total population is short of private capital, with =0.86, much ratio, and is total population. e parameter lower than peer countries.iii Combined with is the labor share. e =0.35 increase in private investment provides a massive 2 stock of public capital follows , where denotes percentage points increase in growth. However, this e ect public investment and is the depreciation rate. An quickly diminishes as rises due to higher rates of analogous expression determines by . private investment. To understand the drivers of growth, GDP growth In the long-run, the private capital-to-output ratio and can be expressed as follows (using a log-linear public capital-to-output ratios are roughly constant, approximation, where denotes the annual growth and so .v rate of variable X in period : is mean than the e ect of all non-capital drivers of growth is ampli ed because they induce further capital accumulation. As a rule of thumb, a 1 percentage point increase in TFP growth would boost GDP per capita growth by 1/ percentage points, and there would be In the short and medium terms, TFP growth has a one-to-one e ect of , or . Note the largest e ect on growth: a 1 percentage point however, that capital adjustment is very slow, and increase in TFP growth ( ) leads to an exact takes several decades to converge. However, the long- 1 percentage point increase in GDP growth. A 1 run e ects are a useful upper bound, and the e ects percentage point increase in the growth of human of drivers of growth throughout our three-decade capital, labor force participation, and working-age simulation period (2021–50) will fall in between the population increase GDP growth “direct short-run” and “long-run e ect”. by percentage points. Population growth also increases GDP growth by percentage points, though reduces GDP per capita growth. 20 CHAPTER 1 Rwanda CEM | 2024 TABLE A1.1: Selected LTGM parameters, initial conditions and common assumptions Aggregate Public Private Source Labor Share ( ) 0.55 PWT 10.0 SSA average (adjusted) Public Capital Elasticity in 0.1 Bom and Ligthart (2014) (meta-analysis) Production function ( ) Depreciation Rate ( ) 0.046 0.020 0.081 PWT 10.0 Capital-to-output ratio 2 1.14 0.86 Perpetual Inventory Method (K/Y=2 in 1965) Population (growth) 2.4% 1.4% (2050) UN Population Division (2022) Working age to total 0.7% 0.1%(2050) UN Population Division (2022) population ratio (growth) Source: World Bank (2020) Annex 1.3. Description of the LTGM-human capital extension e LTGM human capital extension (LTGM-HC) seeks to provide a detailed analysis of the e ect of where (LAYS are changes in the di erent components of the World Learning-adjusted years of schooling and EYS are Bank Human Capital Index (HCI)—schooling Expected years of schooling) and is a measure quantity, schooling quality (test scores) and health—on that depends on Adult Survival Rates and/or stunting the productivity of the workforce . Unlike the HCI, rates. e human capital of the workforce 20-64 used the LTGM-HC focuses on dynamics by embodying in production is given by the weighted average of human capital in individual age cohorts, and tracing the human capital of individual age cohorts, where how those cohorts move in and out of the workforce. is the share of the workforce of that age at time t: e resulting time series for the human capital of the workforce, (measured in productivity units) is then fed into the LTGM or LTGM-PC to estimate the e ect on economic growth. Speci cally, the human Note that the LTGM-HC is currently in beta version, capital of cohort of age a at time it takes the same form and so is not available yet on the LTGM website. as the HCI (without child mortality): Rwanda CEM | 2024 CHAPTER 1 21 Annex 1.4. E ect of COVID-19: school closures on long-run growth in Rwanda e baseline and moderate/ambitious scenarios in this workforce (Figure A1.1; calculated using the LTGM- study incorporate the e ect of school closures during HC), relative to a counterfactual with no COVID-19 COVID-19 on human capital and long run economic school closures. is then results in a fall in GDP (and growth. First, we utilize data from UNECSCO that GDPPC) growth by around 0.15 percentage points suggests that during the pandemic, schools were closed during the same period (Figure A1.1-B; calculated for 0.88 years in Rwanda on average. Consequently, using the LTGM-PC). While the reduction in growth we assume that the 5-9 and 10-14 age cohorts in 2020 is small, it accumulates over time. Consequently, lose 0.88 years of schooling: instead of receiving 6.85 by 2035 the level of GDP is persistently about 1.5 years as suggested by the HCI, they receive 5.97.26 percentage points lower than what it would have is leads to a drop in human capital growth of been without the COVID-19 school closures (Figure around 0.2-0.25 percentage points in the late 2020s A1.1-C). and early 2030s when the a ected cohorts join the Figure A1.1: Results of the growth baseline of Rwanda: Strong push needed to approach the new goals A. Human Capital per Worker growth rate B. GDP and GDPPC growth rate Human Capital Per Worker Growth Rate GDP and GDPPC Growth Rate 1.20 8.0 1.1% 7.0 1.00 6.3% 1.0% 6.0 0.80 5.0 Percent 4.8% Percent 0.60 4.0 3.0 0.40 2.0 0.20 1.0 0.00 0.0 2022 2026 2030 2034 2038 2042 2046 2050 2022 2026 2030 2034 2038 2042 2046 2050 Baseline No COVID Baseline (GDP) NO COVID (GDP) Baseline (GDPPC) No COVID (GDPPC) C. GDP level, index=100x (baseline/scenario) D. World Bank Human Capital Index (HCI) GDP level, Index = 100 x (Baseline / Scenario) 100.0 99.5 99.0 98.5 98.0 97.5 2022 2026 2030 2034 2038 2042 2046 2050 Source: Calculation based WDI and HCI da 22 CHAPTER 1 Rwanda CEM | 2024 Annex 1.5. Basic education: Main challenges and policy reforms A. Basic education context this level of access is signi cantly lower than the e achievement of Rwanda’s economic development Education Sector Strategic Plan (ESSP) targets for aspirations depends on the country’s ability to build 2023/24, which is GER of 57 percent. its human capital. In this regard, investing in the basic education system, to improve access to high quality Early childhood development (ECD) services are also education remains an urgent priority for the country. o ered through other modalities such as home-based, Basic education has a critical role in developing a skilled community-based, and center-based ECDs, which workforce that can drive the Rwanda’s competitiveness opens the opportunity to expand coverage. ese other and economic growth. It is the stage where children modalities are currently managed by the National Child acquire foundational skills including literacy, Development Agency (NCDA), which is under the numeracy, and socio-emotional skills that form the Ministry of Gender and Family. Across all modalities building blocks for higher level skill acquisition during o ered by MINEDUC and NCDA, low access and post-basic education and training levels and increased quality remain a critical challenge. Addressing these productivity in adulthood. bottlenecks requires investments in infrastructure‒in order to create more learning spaces and ensure safe e GoR has recognized the importance of basic, as and inclusive learning environment, well designed evidenced by its policies, nancing for the sub-sector, curriculum, and training and ongoing support for and priority programs. Prior to 2012, the GoR’s focus teachers and service providers. By continuing to was on enabling all children to have access and complete strengthen the di erent modalities of early childhood at least nine years of free education; in subsequent education and unlocking the binding constraints, the years, the vision has been expanded to cover 12 years GoR can ensure that all Rwandese children bene t of free education (ESSP 2018). e education sector from high quality early childhood education, which budget accounted for 18 percent of the total national will give them signi cant preparation for their basic budget in FY 2022/23 and the approved budget for education and a lifelong learning journey. 2023/24 will account for 19.1 percent of the total national budget, re ecting a consistent positive trend Access to primary and secondary education has also in the nancing allocated to the sector. A lion’s share improved signi cantly in the country. Enrollment of the education sector budget currently goes to at the primary level is almost universal with NER lower levels of education. In 2022/23, 47.8 percent of 98.9 percent in 2020/21, which re ects the GoR of the sector budget was allocated to pre-primary and sustained e ort to make basic education a ordable and primary education. e remaining allocation was 31.5 accessible (MINEDUC 2022). Access to secondary percent for secondary, 17.4 percent for tertiary and 3.3 education is improving, with GER at lower secondary percent other (Ministry of Education, Rwanda, 2023). level reaching 57 percent in 2020/21, which shows a signi cant improvement from 44.9 percent in 2017. rough sustained e orts, the country has achieved e enrollment rate drops as children transition into signi cant improvements in educational outcomes, at upper secondary level, where GER was 30 percent especially in terms expanding access; however, in 2020/21. Trend data also shows that over the past 5 challenges remain. In order to improve educational years there has been little change, with upper secondary outcomes, there is increased recognition that GER at 30 percent in 2017. e limited expansion early childhood education, including pre-primary of upper secondary education is in part driven by education, has a critical role to play, as it provides the increased focus towards expending technical and the foundation for all future learning. At the pre- vocational education and training (TVET), with primary level, which is managed by the MINEDUC, the ESSP 2018–24 aiming to shift 60 percent of enrolment is improving with gross enrollment ratio secondary age enrollment to be in the TVET sector. (GER) reaching 30.0 percent in 2020/21 compared to e shift towards multiple exit points after basic 24.2 percent in 2017 (MINEDUC, 2022). However, education is encouraging in terms of improving the Rwanda CEM | 2024 CHAPTER 1 23 Figure A1.2: Gross enrollment ratio (GER) and net Figure A1.3: Repetition and dropout rates by level of enrollment ratio (NER) by level of education, 2020/21 education, 2020/21 a) Revenue forecast in tourism. a) Revenue forecast in tourism. 149.8% 10.9% 11.0% 9.5% 8.9% 7.8% 98.9% 5.0% 56.9% 30.0% 31.3% 29.7% 25.9% 13.7% Pre -primary Primary Upper secondary Lower secondary Primary Upper secondary Lower secondary GER NER Repetition rate Droppout rate Source: Replication from MINEDUC, 2022. Source: Replication from MINEDUC, 2022 labor market prospect of youth leaving the education high share of overage age students in the system is system. However, in order to meet the country’s likely to present a challenge for teachers who must ambition of becoming a knowledge economy, more teach a more diverse group of students with varying and better investments into secondary education are levels of school readiness and learning needs. High needed to improve access, quality, and equity, as it is dropout rate is also a critical challenge in the system; an important transition stage into tertiary education. in 2020/21, the dropout rates at the primary level was 9.5 percent and 11 percent at the lower secondary ere are also signi cant ine ciencies across grades level. is means, many children leave the education along with quality related challenges. e system system before they acquire the foundational skills and continues to struggle with early grade bulge. Primary knowledge the need to be productive or pursue higher GER for 2020/21 reached 150 percent, signi cantly education or training. higher than 100 percent and NER of 98.9 percent (see Figure A1.2). e signi cant di erence between In addition to the high dropout rate, low quality of the NER and GER gures shows the high share of education remains a challenge in Rwanda’s education children who are outside of the o cial school age sector. Learning outcomes are suboptimal, including at group enrolled in the system. In the Rwanda context, foundational levels. e 2021 Learning Achievement there is a number of factors driving the early grade in Rwandan Schools (LARS) showed that only 10 bulge, including the high share of underage children percent of grade 3 students reached basic pro ciency enrolling in Grade 1, due to lack of access to pre- level in English, the medium of instruction for most primary education. e situation was exacerbated subjects, while literacy outcomes were signi cantly during the COVID-19 pandemic; primary GER for better in Kinyarwanda, with 68 percent of grade 3 2020/21 was particularly high (for example compared student reaching grade level pro ciency. About 61 to 139 percent 2019) due to re-enrollment and double percent reached basic pro ciency level in mathematics, intake in Grade 1 due to COVID-19. when the assessment was conducted in Kinyarwanda, but this gure drops to 16 percent among those In addition, the repetition rate is high, especially at the assessed mathematics using English. Challenges primary and lower secondary levels, which contributes related to language of instruction and teachers’ low to overage enrollment and increase the risk of dropout. pro ciency in English, low capacity, overcrowded e repetition rate was 11 percent at the primary level classrooms, and double shifting all contribute to the and 9 percent at the lower secondary level in 2020/21. quality of education challenge. e high rate of repetition, which contributes to the 24 CHAPTER 1 Rwanda CEM | 2024 Beyond foundational skills, strengthening Science, in the ESSP 2018–24, which identi es, among other Technology, Engineering and Mathematics (STEM) things, all learners achieving basic levels of literacy education starting in basic education is essential for and numeracy in early grades and beyond and all Rwanda to meets its vision of emerging as a globally learners entering primary school at the correct age competitive knowledge-based economy. e country and successfully complete 12 years of basic education is making signi cant investments to improve STEM as priority objectives. In line with the NST and ESSP , education by establishing and strengthening centers the GoR is implementing a number of reforms and of excellence, expanding access to digital technology large-scale investments in order to address some of and connectivity in all secondary schools (e.g., the most critical bottlenecks in the education system. through smart classrooms), to improve digital skills ese e orts are nanced both using the GoR’s own and increase the use of ICT in teaching and learning. resources and by mobilizing partner support including To ensure that these investments translate into from the World Bank. improved outcomes, more needs to be done to build teachers capacity at all levels. In order to address challenges related to distance to schools, poor learning environment, and overcrowded Gender inequality is an important challenge the classrooms, the GoR has undertook an ambitious school education system. At the primary level, girls have construction program. Using joint nancing from higher promotion and completion rates. However, Government and World Bank supported project, over this pattern changes at the secondary level with girls 22,000 classrooms and over 31,000 gender segregated having lower promotion rates and higher repetition toilets have been constructed, with strong focus on and dropout rates. Gender gaps are also apparent in accessibility for children with disabilities. is large- terms of learning outcomes. e 2020/21 LARS scale construction program used home-grown school assessment showed that girls had lower learning construction approach, which generated stronger outcomes in English literacy and numeracy at the ownership and facilitated faster implementation. ese primary 3, primary 6 and secondary 3 levels. National investments led to an additional 68,000 Rwandan examination results shows that over time, gender gaps children able to access school within a two-kilometer are closing over time. Gender gap in passing rate radius and student to classroom ratio was reduced by was about 15 percent in 2008 in favor of women, over 30 percent from 73 students to 1 classroom to 49 which has narrowed to 3 percent in 2020/21, with students to 1 classroom in 2020. boys having a pass rate of 87.5 percent and 85.3 percent. However, the gap remains wider in upper To sta the newly constructed classrooms and reduce secondary exams, with 94.8 percent of boys passing high student to teacher ratios, the GoR recruited over the school leaving examinations, compared to 89.7 50,000 teachers in the past few years. e recruitment percent of girls. process was managed through the newly revamped Teacher Management Information System (TMIS) B. Policy and strategy in basic education: system, which fostered a standardized and e cient hiring process. is system is expected to strengthen e GoR’s ongoing response to key challenges: teacher management and development processes, not e GoR’s strategic documents put strong emphasis only in terms of requirement, but also by allowing on improving basic education as a strategic focus area better coordination and targeting of teacher training for the country’s ambition of reaching middle income and capacity building programs provide both by the status by 2035. is focus is captured in Rwanda’s GoR and its development partners. To address teacher National Strategy for Transformation 2018–24 (NST capacity challenge, the MINEDUC is also developing 1), which under its Social Transformation pillar a number of teacher capacity development programs, identi es ensuring quality of education for all with focused on improving English language pro ciency, the aim building a knowledge-based economy as a digital skills, and pedagogical skills, especially for priority. e NST 1 objective are further elaborated uncerti ed teachers. Teaching and learning materials Rwanda CEM | 2024 CHAPTER 1 25 Box A1.1: Quality basic education for human capital development project e World Bank is supporting the GoR’s e ort to accelerate progress in improving access and quality of basic education, through nancing and technical assistance. e Quality Basic Education for Human Capital Development Project with a total funding envelope (US$340 million) is the agship project for World Bank’s support to the basic education sub-sector. Under the development objective of “to improve teacher competency, and student retention and learning in basic education,” the project supports a wide range of interventions aimed at building capacity to deliver quality education at scale while improving resource e ciency and sustainability. Some of the core interventions supported by the project include: • A large-scale classroom construction under the ongoing investment project nancing helped reduce distance to schools and overcrowding and improved the school environment to be safe and accessible to all. e World Bank has also supported development of new teacher standards integrated with teacher recruitment and a national database of quali ed teachers, which has improved e ciency in teacher recruitment and management. • Teacher training programs are being developed under the project in order to improve teachers’ capacity and English language pro ciency at scale, using cost-e cient blended models. • e project is also supporting textbook and other teaching and learning material procurement in order to improve the availability of Teaching and Learning Materials (TLMs) to support classroom instruction and in the process, help the GoR to put in place an e cient TLM provision system. • To address learning loss and accelerate progress, the project also supports remedial education, by piloting di erent models and scaling up cost e ective approaches that have promising impact on learning. have been developed or revised and it is expected that Rwanda is also making progressing with the signi cant provisions will be made in the next few implementation of a regular learning assessment, years to reach 1:1 ratio in textbooks. through assessments such as early grade reading assessment (EGRA), early grade mathematics e GoR has scaled up its school feeding program assessment (EGMA), and the LARS. e 2023 LARS from pre-primary up to secondary schools, with was aligned with the global pro ciency framework the aims of ensuring that every child in public (GPF) and was designed to be comparable with the and government aided schools receives at least one 2021 LARS. is means the GoR can e ectively track nutritious meal. e program is nanced by the GoR’s the countries progress over time and benchmark its budget, with increased allocation to the sector budget, performance against peer countries in order to set partner support including the World Food Program realistic yet ambitious learning targets for the system. (WFP) and the Global Partnership for Education In addition, the GoR is continuing to strengthen (GPE), complemented by parents’ contribution (up to the Comprehensive Assessment and Information 10 percent). Consolidating these resources, the GoR Management (CAMIS) system, which is used to has equipped schools with kitchens and cooking continuous learning assessment and examination to stoves and is providing a subsidy for each student’s provide feedback to the education system. Moving meal. Overall, the program is expected to contribute forward, increased e ort is needed to make the towards reduced stunting rates and child hunger, data widely available to ensure utilization for policy both of which are detrimental to learning and human making and program design, including at sector and capital development. district level. 26 CHAPTER 1 Rwanda CEM | 2024 References Coulibaly, K., Ezemenari, K., & Du y, N. (2008). Productivity Growth And Economic Reform: Evidence From Rwanda. Policy Research Working Papers. Washington, DC: World Bank. Devadas, S., & Pennings, S. (2018). Assessing the E ect of Public Capital on Growth: An Extension of the World Bank Long-Term Growth Model. Policy Research Working Paper;No. 8604. Wshington, DC: World Bank. doi: http://hdl.handle.net/10986/30569 Hall, R. E., & Jones, C. I. (1999). Why Do Some Countries Produce So Much More Output Per Worker an Others? e Quarterly Journal of Economics, 114(1), 83-116. Hsieh, C.-T., & Klenow, P. J. (2010). Development Accounting. American Economic Journal: Macroeconomics, 2(1), 207-223. International Monetary Fund (IMF); World Bank. (2020). Rwanda: Request for Disbursement Under the Rapid Credit Facility: Debt Sustainability Analysis. In Rwanda: Request for Disbursement Under the Rapid Credit Facility-Press Release; Sta Report; and Statement by the Executive Director for Rwanda (Country Report No. 2020/207). Washington, DC.: IMF. Jones, C. I. (2016). Chapter 1 - e Facts of Economic Growth. In J. B. Taylor, & H. Uhlig, Handbook of Macroeconomics (Vol. 2, pp. 3-69). Amsterdam: Elsevier. Ministry of Education, Rwanda. (2023). Joint Education Sector Review report. Kigali: Ministry of Education. Ministry of Environment. (2021). Green Growth and Climate Resilience Strategy. Kigali: Ministry of Environment. National Institute of Statistics of Rwanda (NISR). (2019). Rwanda Natural Capital Accounts: Minerals resource ows. Kigali: National Institute of Statistics of Rwanda. World Bank. (2020). Bolstering Poverty Reduction in Rwanda: A Poverty Assessment. Washington, DC: World Bank. World Bank. (2021). Rwanda Economic Update No. 16: Protect and Promote Human Capital in a Post- COVID-19 World. Washington, DC: e World Bank. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank Group. World Food Program (WFP). (2013). e Cost of Hunger in Africa: Social and Economic Impacts of Child Undernutrition in Rwanda - Implications on National Development and Vision 2020. WFP. Notes 1 e seven-year Government Plan requires more than 40 percent of the government budget to be devoted to capital spending and net lending. 2 is formula assumes a constant K/Y ratio and utilizes a labor share of . A 0.5 percentage point increase in the working age to population ratio boosts medium run growth by around 0.28 percentage point. 3 e human capital index (HCI) measures the amount of human capital that a child born today can expect to attain by age 18. It conveys the productivity of the next generation of workers compared to a benchmark of complete education and full health. 4 As per a measure using the national poverty line and National Institute of Statistics of Rwanda’s approach. 5 Based on data from the Rwanda Labor Force Survey series from 2016 to 2022, the unemployment rate in Rwanda is higher (at 16.7 percent in 2016–19 and 19.8 percent in 2020–2022 of the labor force). So, the comparison with peer countries should be favorable to Rwanda using country-level labor force surveys over the 2016–2022 period. Data limitations prevent us from making that comparison formally. 6 Rwanda’s Vison 2050 outlines how Rwanda will reach upper middle-income status in 2035 and high-income status in 2050, with domestic savings and capital in ows being identi ed as a critical lever. 7 https://en.wikipedia.org/wiki/2023_African_Great_Lakes_ oods#cite_note-4 Rwanda CEM | 2024 CHAPTER 1 27 8 Damages represent the estimated value of physical and natural assets destroyed by the oods. Losses represent the reduction in production or income that would have been generated by the destroyed assets (e.g., loss of rental income from destroyed housing). Recovery needs include not only the expected cost of replacing destroyed assets, but also of proposed social programs to support vulnerable populations, credit to restore business activity, and the establishment of a legal framework to provide insurance against natural hazards (GoR 2019). 9 e Rwandan economy is dominated by nature-based tourism, rainfed agriculture, and other extractive industries. In 2021 agriculture, forestry and sheries constituted 48 percent of employment in Rwanda and 24 percent of real output (with related manufacturing in food and beverages contributing 5 percent of real output). Similarly, in 2021 trade, transport and hospitality generated 21 percent of employment and 16 percent of real output. Goods and services derived from Rwanda’s natural resource endowment accounted for 41 percent of export revenue between 2015 and 2021. 10 e baseline scenario represents a future which assumes ‘business as usual,’ with no major new policies or infrastructure. In this analysis, the baseline scenario is based on historical trends (e.g., for water demand) and excludes commitments in Vision 2050, which is treated as an alternative scenario in the simulations, so that the e ects of Vision 2050 on water demand can be formally analyzed. e baseline scenario assumes growth in nal domestic demand and exports in each sector, based on recent trends, and represents a long-run value. e long-run growth rate of nal demand was set to 7.1% / year. 11 e pension sector represented 17% of assets, 95% of which is in the public scheme (Rwanda Social Security Board (RSSB)), and the remaining 9.2% is in the insurance sector (data from the National Bank of Rwanda, 2021). 12 Micro/ small projects and one-o projects have been a key characteristic of Rwanda’s portfolio of development projects in 2016/17– 2020/21, which are problematic for the e ciency of public (capital) expenditures (see World Bank. 2022. Rwanda Public Expenditure Review – Improving E ciency and Equity to Stimulate Sustainable Inclusive Growth. December 2022, Washington, DC: World Bank [referred to as World Bank (2022)]). 13 ese gures are expressed in 2022 Atlas US$ (with cuto s expressed as on 1 July 2022), which are updated from the nominal cuto s expressed in the Vision 2050. 14 Assuming that the TFP growth would accelerate to 3.25% by 2028, which is the highest in SSA over 2000–2019 (taken from the TED database or PWT10 databases) and is the second highest in all LI and lower-middle income countries over the same period, our estimates suggest that investment would need to reach implausibly high rates (80–100% of GDP) to achieve the growth targets. is is not surprising, as Rwanda is currently a low-income country, and the rst target skips over lower-middle income status to achieve UMI status in only 12 years. 15 e World Bank baseline growth potential is 7.2% over the medium term, before moderating to 6.3% by 2050, mostly due to slowing population growth. As slowing population growth has less e ect in per capita terms, the baseline features an almost- at GDPPC growth path of slightly below 5%, which is very similar to the experience of Rwanda over the 2010s. However, it represents an impressive increase in living standards, with GDPPC quadrupling by 2050 in the baseline. Note that the baseline is not a forecast of growth, but rather one plausible path, and rapid growth in the baseline results in risks that are skewed to the downside. 16 e countries included (and the year when they were at Rwanda’s level of development) are Botswana (1970), China (1987), India (2000), ailand (1965) and Vietnam (1992). South Korea is not included in the list, as it was already above Rwanda’s level of development in 1950, when the PWT sample begins. 17 e gures a er 30 years are relative to GNI PC in 2021—the latest data at the time of writing—and so represent GNI PC in 2051. 18 is could re ect (for example) faster structural transformation, improvements in the agricultural sector, or greater trade integrations. 19 In the moderate reform scenario, ASR, not stunted rates, and schooling quality stay the same as in the baseline. 20 is re ects the fact that historically investment has been evenly split between public and private (Figure 1.15), whereas typically private investment is much larger than public investment. 21 Future Drivers of Growth in Rwanda: Innovation, Integration, Agglomeration, and Competition (GoR WB (2020d)). 22 e LTGM-PC also allows for variation in the e ciency of public investment, though in the Rwandan context we don’t utilize this aspect due to missing data on the e ciency of public investment. 23 is is a standard calibration in the literature (not speci c to Rwanda) and is at the high end of the range estimated by Calderón, Moral- Benito, & Servén (2015). See Bom & Ligthart (2014) and Devadas & Pennings (2018) for a discussion. 24 For example, Devadas & Pennings (2018) nd that the median is 1.24 for LI countries and 1.82 for LMI countries. 25 is implies and . Substituting into equation A2, generates the long run relationship. 26 Normally we also assume the 15–19 cohort is a ected, but in Rwanda’s case most children have already nished school by age 15 (given the expected years of schooling is only 6.85 years). 27 Gross enrollment ratio (GER) is de ned as total enrolment in a speci c level of education, regardless of age, expressed as a percentage of the eligible o cial school-age population corresponding to the same level of education in a given school year (UIS, 2009). GER can exceed 100 percent due to the enrollment of over-aged and under-aged students because of early or late entrants, and grade repetition. On the other hand, the net attendance ration (NER) is total enrolment of the o cial age group for a given level of education expressed as a percentage of the corresponding population. 28 PART 2: BOOSTING PRODUCTIVITY AND COMPETITIVENESS Most Rwandan firms are small and informal, facing low capacity utilization due to various operational constraints, and average productivity lags behind regional peers. Innovation is limited and declining, while firms struggle with weak managerial and technological capabilities. Despite progress in improving the investment climate, regulatory challenges remain, including weak enforcement of anti-competitive laws, a complex insolvency framework, and SOE participation in competitive markets. Low domestic savings and limited formal financial intermediation restrict firms’ access to growth finance. Rwanda’s export growth is further hampered by similarities with regional trade partners, low diversification and product complexity, low survival rates, and vulnerability to climate shocks. Strengthening regional integration, opening digital services, boosting FDI through infrastructure and international agreements, and enhancing Rwanda’s role as a regional transit hub could significantly boost trade. This section of the report (Chapters 2 and 3) focuses on private sector productivity. However, a full discussion of productivity should also include structural transformation (Chapter 4) and public expenditure efficiency (Chapter 7). CHAPTER 2 29 DEVELOPMENT OF A PRODUCTIVE PRIVATE SECTOR 2.1. Introduction: Increased private sector jobs (National Institute of Statistics of Rwanda activity is critical to Rwandan development (NISR), 2021). ( ese patterns are also described While targeted complementary public investment brie y in Chapter 4, Section 4.3.) However, will continue to be crucial in sustaining economic the pace of job creation by establishments— growth, private investment must increase approximately 73,0002 in 2020 compared to substantially if the country’s development ambitions 2017—lags signi cantly the rate of labor force entry are to be ful lled. Public investment is and has of approximately 189,000 individuals per year been an important catalyst of economic growth (World Bank Group; Government of Rwanda, in Rwanda. rough good governance practices, 2020).3 e demand for labor would have to public investment has e ectively improved the expand by at least 160 percent to absorb all of delivery of public services and connected citizens, them in the short- to medium term. is would farms, and rms to economic opportunities. To require a major transformation in the creation of consolidate Rwanda’s productivity growth in a growth opportunities for the private sector. context of moderate risk of debt distress and scal Figure 2.1: Number of people entering the labor force soaring deterioration, however, increasing private sector since the COVID-19 pandemic participation in the economy will be essential. 400,000 According to World Bank estimates comparing the Increase in labour force growth trajectories of Rwanda with a bundle of 300,000 other high-growth countries over selected periods of 189,049 200,000 time, Rwanda cannot reach upper-middle-income (UMIC) status by 2035 without large increases in 100,000 private sector investment. Private investment needs were estimated at 32 percent of GDP by 2035, from 0 a 15.8 percent contribution in 2022 (a drop from 16 2017 2018 2019 2020 2021 2022 -100,000 percent in 2016). According to authorities’ NDC Trend Average implementation framework, the value of ongoing Source: Calculations based on NISR databases and planned projects over 2020–25 is USD 5.9 billion. However, actual investment has lagged in is chapter addresses the issues surrounding the rst three years of the project. Although Rwanda private sector growth in Rwanda. e next section aims to bridge the gap through Ireme Invest, the brie y reviews the performance of the private sector, green investment facility, it is challenging to bridge followed by Section 2.3 on selected constraints to the gap since out of a total estimated investment of private sector growth. Section 2.4 considers ICT USD 55 million in FY24/25, only USD 11 million and innovation in Rwanda, and Section 2.5 provides was approved by end-June 2024. conclusions and policy recommendations. More rapid private sector growth is also key 2.2. Private sector performance to quality job creation and poverty reduction Rwanda’s private sector has achieved considerable in Rwanda. e expansion of the private sector dynamism, as shown by the rapid creation of contributed substantially to o -farm job creation and rms since the mid-2010s and the growth in the poverty reduction in the decade before COVID-19 number of rms participating in international (World Bank, 2020). e number of registered trade. However, most rms are informal and business establishments grew by 48 percent leading small and operate in low value-added service- to the increase of jobs by registered rms by 26 based sectors. Capacity utilization is low due to percent, between 2011 and 2014, followed by an multiple barriers to rm operations, for example, increase of 31 percent in the subsequent 3 years lack of appropriate inputs, technology, and (2014–17), to over 466,000 jobs, and 10 ppts of nance. Average productivity lags that of many poverty reduction.1 Between 2017 and 2020, the regional peers. increase of jobs was 15.7 percent, to about 539,250 30 CHAPTER 2 Rwanda CEM | 2024 2.2.1. Pervasive informality and small size in the turnover of more than Rwf50 million (equivalent enterprise landscape to US$ 42,000) per year (National Institute of e rapid growth of rms is evidence of a dynamic Statistics of Rwanda (NISR), 2021). e formal private sector. e number of rms4 in Rwanda sector employs 571,201 just 18.7 percent of the increased from 146,502 in 2014 to 223,446 in overall workforce. Most Rwandan rms concentrate 2021, recording a decline only in 2017 (Figure 2.2a). in low-value-added service-based sectors. Over Another good sign of dynamism is the rapid growth 60 percent of rms operate in the wholesale and in the number of rms involved in international retail sectors, while manufacturing accounted for trade. Rwandan rms’ participation in international 8.25 percent of rms in 2021. Sixty percent of trade has increased dramatically. e share of rms employment is in agriculture and 30 percent is in involved in exporting rose from 11 percent in 2006 services. Industry has made substantial progress in to 21 percent in 2019, or higher than in any other recent years but employs only around 10 percent of country in SSA (other than Togo; 28 percent), the labor force. higher than that of most Association of Southeast Figure 2.3: Positive correlation between per capita income Asian Nations (ASEAN) countries, and higher and business size globally than the average level in high-income countries (17 percent). Notice that the share of rms involved in services exports increased sharply, while the share of exporters among manufacturing rms fell to levels well below many SSA and ASEAN countries. Most Rwandan rms remain small and are in the informal sector. In 2021, about 92.1 percent of these rms were informal, and 88.8 percent of both informal and formal rms were microenterprises with fewer than three employees (Figure 2.2b). Source: Calculations based on Establishment Surveys from various countries and Penn World Table version 10.01. Roughly two percent of companies have an annual Figure 2.2: Dominating informal businesses rising in number and primarily of micro size a) Informal businesses dominating in number the landscape of business enterprises. 250,000 93.7 93.3 95 93.1 92.5 92.7 91.6 92.1 91.1 200,000 90 205,808 203,655 197,600 Number of enterprises Share of informal (%) 171,826 150,000 85 163,471 141,543 137,251 135,216 100,000 80 50,000 75 17,638 15,963 15,953 15,821 13,244 12,172 10,172 9,251 0 70 2014 2015 2016 2017 2018 2019 2020 2021 Formal sector Informal sector Share of informal Source: Calculations based on NISR databases b) Small and medium sized rms form the majority of formal rms while micro rms dominate the informal in 2021 Formal Informal Total Micro (1-3) 2,456 13.92 196,013 95.24 198,469 88.82 Small (4-30) 9,109 51.65 9,727 4.73 18,836 8.43 Medium (31-100) 3,974 22.53 68 0.03 4,042 1.81 Large (100+) 2,098 11.90 0 0.00 2,098 0.94 Total 17,638 100 205,808 100 223,446 100 Source: Calculations based on Integrated Business Enterprise Survey (IBES) 2019–21 Rwanda CEM | 2024 CHAPTER 2 31 2.2.2. Weak productivity in private sector sector is the main sector of employment—at Low-capacity utilization, an aggregate indicator around 60 percent of total of jobs, followed by of rm-level e ciency, discourages long-term the services sector with around 30 percent—but is investment strategies. e output capacity of highly characterized by informality and subsistence Rwanda is underutilized, signaling that the activities, leading to low per capita value-added economy has infrastructure, human and physical compared to services and industry sectors. Land capital, and technologies that sit idle. e capacity misallocation combined with high informality underutilization in formal manufacturing sectors in the main employer, the agricultural sector, in Rwanda is particularly high at 57.6 percent would require the development of productive (National Institute of Statistics of Rwanda (NISR), capacities that enhance cross-sectoral linkages 2023). Most frequently selected reasons were and private investment and trade. is can help low demand, unreliable supply of inputs, and a the most productive farms and rms reach scale lack of working capital (reported by 76, 44 and and command more factors of production, thus 34 percent of companies respectively). A lack of contributing to increased productivity growth. necessary technology, machinery and spare parts, and old equipment come as 4th and 5th constraints, 2.2.3. Limited job creation followed by a lack of skilled workers and unreliable Job creation has remained insu cient and erratic. power supply. Utilization levels di er across In the rst two years of NST-1 implementation, business size typologies and economic sectors. Low Rwandan economy created 256,753 (8.7 percent demand accounts for the highest share of capacity of total employment) net new jobs in 2017 and utilization barriers across all business enterprise 247,371 (7.7 percent of total employment) a year sizes except for big formal business enterprises. later (Figure 2.5a), including farm and o -farm About 30 percent of big business enterprises cited jobs. A depressing performance occurred already unreliable input supply. Other signi cant barriers in 2019 whereby job creation signi cantly dropped for the formal sector include a lack of working to 66,585, equivalent to 2.2 percent of total capital for small business enterprises, and labor employment. Despite the COVID-19 pandemic, market regulations, and old equipment for small Rwanda managed to create 186,937 net new jobs, business enterprises (National Institute of Statistics or about 5.4 percent of total employment, a sign of Rwanda (NISR), 2023). of the adequate response of the country to counter the rst round of pandemic e ects. Following the In the agricultural sector, land misallocation drastic job creation decline of 2021, a rebound in contributes to low productivity in Rwanda. Across job creation is observed, with 258,655 net new jobs the globe, land misallocation disincentivizes the representing 7.3 percent of total employment in adoption of new technologies and reduces the 2022. In cumulative terms, total new job creation farmers’ ability to learn new techniques (World amounted to 1,030,079 over the 2017–22 period.5 Bank, 2007). Chapter 2 explores the other reasons e bulk of total job creation in Rwanda stems for low productivity and low uptake of new from the private sector, averaging 90.2 percent in technology in the sector. Moreover, the agricultural this period. Figure 2.4: Productivity performance: Unfavorable ranking of Rwanda globally and regionally a) Rwanda’s TFP performance b) Relative labor productivity (US = 1.0) 0.3 0.2 0.1 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 SSA Rwanda Asian Dragons Source: Calculations based on Penn World Table version 10.01. Source: Calculations based on Penn World Table version 10.01. 32 CHAPTER 2 Rwanda CEM | 2024 e evolution of decent and productive jobs has Figure 2.6: Average rm size over the rm life cycle been disappointing. Decent and productive jobs— de ned here as o -farm jobs as per the NISR practice—have reached a total of 134,391 over the 2017–22 period (Figure 2.5b), or an annual average of 22,399 jobs. is is far below the annual target of 214,000 decent and productive jobs set out in the NST-1. Prior to the COVID-19 pandemic, total decent and productive job creation amounted to 271,318—or an annual average of 90,439, but still way below the annual target. e (private) economic sectors leading decent and productive Source: Abreha et al. (2023), based on establishment census data and United States job creation—i.e., achieving at least 10,000 job Business Dynamics Statistics (BDS). Note: Employment distributions for SSA are based on census data covering both creation cumulatively over the 2017–22 period— registered and unregistered business establishments in the manufacturing sector. Year coverage: Burkina Faso (2015), Ghana (2013), Rwanda (2013) and United States (2013). include transportation and storage (85,612), 2.2.4. Low rms’ survival construction (50,293), other service activities (26,034), manufacturing (23,265), mining and In Rwanda, rms’ survival has been quickly quarrying (10,772). Chapter 4 presents an overview declining over the years. e comparison of of Rwanda’s progresses towards its target number of the year of starting operations in Rwanda for decent jobs. the establishments censused in 2017 and 2020 allows to see the great dynamism of establishment Very limited growth rates over the life cycle of creation in Rwanda (Figure 2.7a) since the end of rms does not favor job creation (Figure 2.6). e the genocide against the Tutsis. Out of the 1,896 overrepresentation of small-scale rms, few mid- establishments that were censused in 2017 as sized rms, and a small but important group of having started operations in Rwanda before 1970, frontier rms in Rwanda is not only the result the overwhelming majority—e.g., 1,863 (or 98.3 of a preponderance of many small-scale often percent) establishments were censused in 2020 as informal enterprises, but also from a general lack having started operations in Rwanda before 1970. of growth of rms. is stunts the job creation For the establishments that started operations capacity of most of Rwandan rms and leads to in Rwanda in 2015–17, the 2017 establishment signi cant gaps between frontier rms and the rest census had a count of 128,413 and the 2020 of the economy. establishment census a count of only 47,441, resulting in an estimated rms’ survival rate of Figure 2.5: Insu cient and erratic job creation results a) Overall job creation driven by the private sector, following erratic b) Erratic decent job (o -farm only) creation prior to the path prior to the COVID-19. pandemic as well. 256,753 250,967 258,655 186,455 247,371 239,859 155,994 165,243 231,026 -11,403 126,150 120,977 96,612 29,844 24,365 21,212 - -5,653 1,958 181,701 186,937 5,750 0 0 0 66,585 25,220 25,727 41,365 18,796 -3,596 5,236 13,482 13,775 - -325,340 -323,382 - - 293 2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022 Private sector Public sector Total Private sector Public sector Total Source: Calculations based on Rwanda’s Labor Force Survey (RLFS) in 2016–22 Source: Calculations based on Rwanda’s Labor Force Survey (RLFS) in 2016–22 Rwanda CEM | 2024 CHAPTER 2 33 Figure 2.7: Establishments by starting year of operations in Rwanda, not surviving long a) Number of establishments starting operations rising b) Share of establishments surviving between 2020 and 2017 strongly since 2015 sharply declining. (percent) 146,373 120.0 128,413 98.3 100.0 88.3 80.0 77.8 60.0 47,441 44.2 40.0 36.9 32,055 22,703 1,896 4,833 17,668 14,177 20.0 1,863 4,267 0 Before 1970 -1999 1970-1999 - -2011 2000-2011 - 2012-2014 -2014 - -2017 2015-2017 - -2020 2018-2020 - 0.0 Year of starting operations in Rwanda Before 1970 1970 -1999 2000 -2011 2012 -2014 2015 -2017 2017 establishment census 2020 establishment census Year of starting operations in Rwanda Source: Calculations based on various Establishment census (2017, 2021). Source: Calculations based on various Establishment census (2017, 2021). 36.9 percent. It has declined sharply since 2012 2.3.1. Perception of obstacles to business in (Figure 2.7b), suggesting that most of the created Rwanda by rms establishments did not have strong pro tability or 2.3.1.1. Rwanda: A champion in promoting the relied on poor marketing studies. private sector e Government of Rwanda has implemented a 2.3. Constraints on the development of rms series of reforms to enhance the investment climate Private rms in Rwanda face signi cant challenges. and attract both domestic and foreign investors. While the government has made progress in Key reforms and future plans are outlined in improving the investment climate, as re ected by Vision 2020 (now Vision 2050) and strategic the country’s rise in the Doing Business Index, key frameworks like the Economic Development and regulatory and institutional obstacles persist. Firm Poverty Reduction Strategy (EDPRS) (2013–17) surveys highlight limited access to nance, high and NST-1. ese initiatives include favorable taxes, and a shortage of skilled workers. Formal policies such as corporate tax exemptions, duty- and informal sector rms face distinct constraints. free import of inputs, no restrictions on foreign Further progress is needed to promote ownership, and one of the region’s most open visa competition by removing barriers to rm regimes (National Bank of Rwanda (NBR), 2023). entry and growth, enforcing anti-competitive Rwanda has also focused on investment facilitation laws more e ectively, and reducing state- and protection, o ering a one-stop shop for owned enterprises’ participation in competitive business registration, environmental compliance, markets. Improving the insolvency framework is and access to investment incentives. is approach also critical to increase recovery rates, encourage aligns with best practices recognized by UNCTAD, risk-taking, and improve resource allocation. the OECD, and the World Bank. Governance Low domestic savings, with only a limited share improvements have further encouraged investment, passing through formal nancial institutions, with Rwanda achieving high scores in key areas of restrict rms’ access to growth resources. While the World Bank’s World Governance Indicators banking participation has increased, more adults (WGI) over the past 20 years, including control save through informal institutions than banks, and of corruption, government e ectiveness, political few use long-term savings vehicles like pensions, stability, regulatory quality, and the rule of law insurance, retail bonds, or stocks. However, the (Figure 2.8). Importantly, this makes Rwanda a growth of the Ejo Heza savings scheme presents a regional outlier, closer to the values recorded by promising opportunity to enhance saving among East Asian countries. Over the same time span the low-income households. SSA region did not improve accordingly. 34 CHAPTER 2 Rwanda CEM | 2024 Figure 2.8: Percentile rank (0 to 100), selected governance Nevertheless, firms cite a few areas that remain indicators, Rwanda and SSA average significant obstacles to their operations. Access 80 to finance is mentioned by about 30 percent 70 60 of firms as a major constraint in 2019, double 50 the share of firms in 2006 (Figure 2.9); an 40 equal share of firms include access to finance 30 as a major obstacle in low-income countries, 20 on average. As might be expected, a large share 10 of smaller firms experience access to finance as 0 a major constraint, while this is mentioned by 2010 2010 2010 2010 2010 1996 1996 1996 1996 1996 2021 2021 2021 2021 2021 Political Stability Government E ectiveness Regulatory Quality Rule of Law Control of Corruption only about 12 percent of larger firms (Figure Rwanda Sub-Saharan -Saharan Africa East Asia Low-income countries - 2.9). A significant share of firms mentioned Source: Calculations based on World Governance Indicators (WGI) tax rates as a major problem in 2006, 2011, and 2019. About half of large firms (more It is therefore not surprising that in the annual than 100 employees) found it difficult to hire Foreign Private Capital (FPC) conducted by the workers with sufficient skills, while this was not National Bank of Rwanda, foreign investors in a frequently mentioned constraint by smaller Rwanda report a favorable opinion about several firms, as many of these are involved in low- dimensions related to doing business in the productivity activities that do not require high country. e most recent census (National Bank levels of skill. On a brighter note, electricity of Rwanda (NBR), 2023) shows an overall high was cited by around 35 percent of firms in level of satisfaction by foreign rms, especially in 2006 as an important obstacle to business, but relation to speci c dimensions such as the legal by less than five percent in 2019, reflecting framework (almost 90 percent report satisfaction), the government major investments in electricity governance (82.7 percent) and tax incentives and infrastructure. the investment framework (81.6 percent). Figure 2.9: Rwanda’s doing business a) Rwanda: Top Obstacles to Doing Business in 2006–19 b) Rwanda as Comparators: Top Obstacles to Doing Business in 2019 Access to Finance Access to finance Access to land Tax Rates Business licensing and permits Access to Land Corruption Inadequately Educated Workforce Courts Crime, theft and disorder Tax Administration Customs and trade regulations Practices of Informal Firms Electricity Customs and Trade Regulations Inadequately educated workforce Labor regulations Electricity Political instability Transport Practices of the informal sector Business Licensing and Permits Tax administration Tax rates Labor Regulations Transportation 0 5 10 15 20 25 30 35 0 10 20 30 40 50 2019 2011 2006 Lower middle income Low income High income Rwanda c) Rwanda: Top Obstacles to Doing Business by enterprise’s size in 2019 d) Rwanda: Top Obstacles to Doing Business by main sectors in 2019 60 Access to Finance Inadequately Educated Workforce 50 Customs and Trade Regulations Tax Rates 40 Practices of Competitors in the Info Electricity Transport 30 Access to Land Tax Administration 20 Corruption Crime, Theft and Disorder 10 Business Licensing and Permits Courts 0 Labor Regulations 5-19 Employees 20-99 Employees 100+ Employees 0 10 20 30 40 50 60 Access to finance Tax rates Access to land Inadequately educated workforce Manufacturing Retail Other Services Source: Calculations based on Rwanda’s Labor Force Survey (RLFS) in 2016–22. Rwanda CEM | 2024 CHAPTER 2 35 Perceptions of the major challenges in the business Rwanda’s infrastructure investment gap largely environment vary considerably between formal and stems from transport, electricity, and telecoms. informal rms. According to the latest Rwanda Rwanda’s medium-term plan (jointly prepared Integrated Business Enterprise Survey (IBES), with the support of the African Development the top challenges faced by formal rms have Bank, AfDB) suggests that the country needs to do with factors of production (inputs, land, a total investment of 7.7 percent of GDP per nance, skills), as well as sales and transport costs. year in the transport sector between 2019–24 Informal enterprises are generally preoccupied with to meet the sector’s medium-term goals, or accessing a ordable nance, water, and working 6.81 percent of GDP higher than the 2017– space. Exporters claim that the main barriers to 19 average (this difference is referred to as the growth are market intelligence, nancing, and ‘investment gap’).6 According to the Oxford transport constraints. Economics estimates,7 Rwanda needs to invest through 2040 a minimum of 1.36 percent of Perceptions of the major challenges in the business GDP per year in transport, or 0.51 percent environment vary considerably between formal of GDP higher than in 2017–19, to meet and informal rms. According to the latest Sustainable Development Goal (SDG) targets Rwanda Integrated Business Enterprise Survey (Figure 2.12). Similarly, investment needs in (IBES), the top challenges faced by formal the ICT sector to meet SDG exceed the 2017– rms have to do with factors of production 19 average by 4.2 percent of GDP through (inputs, land, nance, skills), as well as sales and 2040. Finally, despite heavy private investment transport costs. Informal enterprises are generally in the sector, the energy investment gap to meet preoccupied with accessing a ordable nance, SDG equals 1.86 percent through 2040. Figure water, and working space. Exporters claim that the 2.12 lays out infrastructure investment needs main barriers to growth are market intelligence, up to 2040, delineated by sector, as a percentage nancing, and transport constraints. of GDP. Figure 2.10: Overall ranking of perceptions of business factors by di culty a) Formal enterprises b) Informal enterprises Marketing 18.1 A ordable finance 31 Tools and machinery 17.8 Water 29.3 Land 16.9 Working space 27.4 Transport 16.9 Transport 25.6 A ordable finance 16 Regulatory environment 19.8 Internet connection 15.3 Marketing Problems 19.8 Working space 14.9 Internet connenction 18.6 Water 13.6 Tools and machinery 16.6 Regulatory environment 11.5 Electricity 16.1 Electricity 9.9 Telecommunications 14.9 Telecommunications 8.9 Packing materials 11.1 Packing materials 7.9 Land 10.4 Input materials 7.1 Input materials 6.1 Source: Calculations based on IBES 2019–21 (National Institute of Statistics of Rwanda (NISR), 2023). Figure 2.11: Key infrastructure: Margin of improvement Figure 2.12: Large infrastructure investment needs for for Rwanda Rwanda going forward Overall Infrastructure Quality Reliability of water 100 90 Road connectivity supply 80 Exposure to unsafe 70 Quality of road 60 drinking water 50 infrastructure 40 30 20 Electricity supply quality 10 Railroad density 0 Electricity access E ciency of train services E ciency of seaport services Airport connectivity Liner shipping E ciency of air transport connectivity services Rwanda Cambodia Indonesia Malaysia Thailand Vietnam Source: Calculations based on data from Oxford Economics. Source: Calculations based on data from Oxford Economics estimates. 36 CHAPTER 2 Rwanda CEM | 2024 2.3.1.2. Improvements needed in competition, Business Report stated that the recovery rate for insolvency, and state enterprise sector insolvency in Rwanda was estimated in 2020 Further improvements are necessary in three areas to be only 19.3 cents on the dollar, compared that are di cult to get at through a survey of to 32 cents in Kenya, over 40 cents in Uganda, rms, including: constraints on competition, the and 70 cents for the Organization for Economic insolvency framework, and the impact of Rwanda’s Cooperation and Development (OECD) high- large state footprint in markets. income average.9 Further, a weak insolvency framework creates the risk that more drastic and First, the landscape for private enterprises and costlier action will be needed if non-performing investors in Rwanda is characterized by the loans (NPLs) and insolvency lings increase after relative weight of incumbent rms and persisting withdrawal of COVID-19 support. E cient and barriers to entry and expansion across economic e ective insolvency frameworks promote the quick sectors. Regulations that restrict competition and exit of non-viable rms, facilitate the survival of risks of anticompetitive practices a ect market distressed but viable rms, reduce the likelihood functioning, and have an impact on productivity, of the liquidation of pro table businesses, and competitiveness, and private investment. (Pop, et increase recovery rates and return to creditors. al., 2017). In Rwanda, operational risks related to Reforming insolvency regimes can materially unfair competitive practices and vested interests improve outcomes for rms by: (i) lowering the cost are relatively high (3 out of a maximum of 4), of credit; (ii) increasing the availability of credit; among the highest legal and regulatory risks in (iii) increasing returns to creditors; (iv) supporting the country and without any improvement in the job preservation through reorganization; and (v) last four years.8 Furthermore, Rwanda scores only promoting entrepreneurship (Menezes, 2014). 5 out of 10 in the development of fundamentals for a market-based economy, according to the BTI ird, private sector rms competing with partially Transformation Index for 2022. ICT, nance and or fully state-owned enterprises underscores the agriculture are examples of sectors where more need to ensure a level playing eld. Progress in pro-competitive regulation could support sector refocusing the role of the state in the economy to development (see section 2.6.6, Box 2.5 and crowd in private investment has been slow, while section 5.4.1, respectively). Vision 2050’s priority opportunities to improve allocative e ciency by of attracting and sustaining high private investment removing direct or indirect advantages to SOEs for economic transformation requires competitive remain—for example in ICT monopoly rights and contestable markets where enterprises can for 4G spectrum were granted to Korea Telekom enter and compete on a level playing eld. e Rwanda Networks, it took ten years to eliminate Rwanda Inspectorate, Competition and Consumer the monopoly and now pro-competitive spectrum Protection Authority (RICA) established in 2017 regulations are still pending. Internationally, (Law no. 31/2017) initiated operations only in empirical evidence points to potential risks to 2020, and implementation of the competition law business dynamism (i.e., entry, exit, investment, has been almost inexistent. e new Competition and growth) when the State intervenes in the market and Consumer Protection Policy 2023 provides (Box 2.1), especially in markets that generally have direction to enforce competition law more limited market failures. e ectively, integrate competition principles in government regulations and policies, and recognize Rwanda’s State-Owned Enterprises (SOE) the importance of allocating appropriate resources landscape comprises enterprises with full for operationalization. Nonetheless, technical government ownership (State-Owned Companies, resources for e ective implementation and e ective SOCs, as de ned by Rwanda’s legal framework) as interinstitutional collaboration are needed. well as those with partial (majority and minority) government ownership. Based on an analysis of a Second, a complex and not fully implemented sample of 76 Rwandan SOEs, 71 percent of SOEs in insolvency framework impairs the willingness of Rwanda operate in sectors classi ed as competitive investors, banks, companies, and entrepreneurs to based on industry characteristics, where now take risks and invest in growth. e 2020 Doing private sector operates and the rationale for SOEs is Rwanda CEM | 2024 CHAPTER 2 37 less obvious (Figure 2.13). An additional one fth Activities in sectors classi ed as competitive are of SOEs operate in partially contestable sectors. largely concentrated in agribusiness, followed ese sectors di er from natural monopoly sectors by the ICT sector, both of which face regulatory (such as electricity distribution and transmission) challenges. Relative to regional comparators, in that it is viable for more than one rm to Rwanda stands out with proportion of SOEs in operate although externalities and market power competitive sectors (71 percent) exceeding the LIC issues need to be addressed through appropriate average of 58 percent as well as Kenya’s (60 percent) regulation (Dall’Olio, et al., 2023). Together, and Tanzania (54 percent). On the other hand, SOEs in competitive and partially contestable SOE activities are concentrated in fewer sectors, sectors account for over 90 percent of state business compared to other countries such as Tanzania where activity, when measured by number of rms. SOEs operate across 76 percent of competitive Although the presence of enterprises with state sectors. Agri-business SOEs (SOCs and enterprises shareholdings might have been justi ed at the time with majority or minority state shareholdings) span of their creation, there has not been a systematic a number of stages in the value chain, including and periodic reassessment of the need to retain inputs, processing, milling, and machinery supply. these SOEs neither a clear framework to assess ere are concerns about distortions to the level the expansion or creation of SOEs vis-à-vis other playing eld or weak enabling regulations in alternative government interventions. e presence agriculture input markets as well as in mobile in competitive sectors – such as manufacturing and communications, a ecting technology adoption construction – can pose risks for private sector and productivity.10 Evaluating the role of the state development, especially if the market conditions, in speci c sectors—such as agri-business and SOE governance, and regulations do not ensure a ICT—and considering complementary regulatory level playing eld between them and private peers. reforms to ensure competitive neutrality, improved erefore, a thorough assessment is advisable governance of SOEs, and enablers for private sector considering the particular characteristics of the participation would be most e ective to achieve Rwandan economy. public policy objectives. Figure 2.13: Composition of SOEs in Rwanda by sector typology Rwanda SOEs (cound) by Sector Typology Partially contesable, 16 Competitive, 5 21% 8% Natural 71% monopoly, 6 Source: Ministry of Public Investments and Privatization (July 2023) and World Bank desk research. Note: SOE presence and rm count based on information collected using Orbis, information provided by MININVEST and publicly available data as of 22 September 2023.SOE list includes funds, namely Agaciro Development Fund Corporate Trust Ltd, Africa 50 Project Development, and Africa 50 Project Finance. 38 CHAPTER 2 Rwanda CEM | 2024 Figure 2.14: Comparison of Business of the State (BOS) in private enterprises, and attract FDI, particularly presence in Rwanda and other countries in ICT, tourism, banking, and agriculture; however, a more comprehensive strategy is still needed. A more detailed assessment of the role of the commercial role of the State and the competitive neutrality of SOEs in di erent sectors will be needed to accelerate the implementation of a reform agenda that includes crowding in private sector through di erent mechanisms (Box 2.1), rules on the creation of SOEs, improving the governance of SOEs where the government retains ownership (see section 7.4.3), and creating a legal framework Source: Calculations based World Bank, Business of the State (BOS) database; Ministry of Public Investments and Privatization (July 2023) and oversight mechanisms that secure transparency Note: Figure does not report BOS operating in unknown sectors. For Rwanda, BOS presence and rm count considers information shared by MININVEST in July 2023 and e ectiveness of SOEs. e Presidential Order and additional information collected using Orbis and publicly available data as of 22 September 2023. Information for other countries is as of December 2019. The that sets rules on the creation and management Business of the State dataset tracks all corporations where national or subnational governments have an ownership stake of at least 10 percent, either directly or of SOEs with full state ownership is a rst step, indirectly. SOE list includes funds, namely Agaciro Development Fund Corporate Trust but more detailed guidelines and implementation Ltd, Africa 50 Project Development, and Africa 50 Project Finance. is needed. ese reforms are expected to boost Since 2006, the Government of Rwanda has worked private sector investment and business dynamism to privatize SOEs, reduce its non-controlling shares and productivity as well (Box 2.1). BOX 2.1: Reforming SOEs to crowd in private sector and achieve development impact State ownership can impact rms’ dynamism, which can restrain productivity in the longer term. New evidence from the World Bank’ Business of the State report (World Bank (a), 2023) for Ecuador, Brazil, Vietnam, Türkiye, and Romania shows that state ownership can hinder private entry, impair the reallocation of resources across rms, and hasten exit of private rms, with larger e ects for competitive sectors where the economic rationale of state ownership is less clear. Furthermore, higher state presence in a sector is associated with higher market concentration and lower rates of entry, while there is no systematic association between greater state presence as catalyst for new private investment. Reducing the state footprint in markets can take di erent forms beyond privatization to promote private sector-led growth and requires complementary actions. Options for reform should be tailored to the type of sector where SOEs operate, their nancial performance, and the need to ensure proper market incentives and discipline. Ownership changes are neither necessary nor a su cient solution to achieve more dynamic private sector-led growth (World Bank, 2023 (b)). It is critical to ensure the pre-conditions are in place for achieving impactful results of the reforms, such as i) open markets for private sector participation and enabling conditions to entry, ii) level playing eld by removing potential rules that provide subsidies or below-market prices for inputs or services compared to private peers, and iii) market discipline by making SOEs subject to the same rules and enforcement as private counterparts. Furthermore, international experience indicates that SOE reforms are most likely to gain traction and yield tangible outcomes when packaged with other reforms. ese include scal rules to limit direct o lending of funds to SOEs, credit guarantees, and other special concessions and privileges to SOEs, as well as rules to ensure social safety nets for employees of SOEs. Multiple policy instruments can be deployed to prioritize sectors for reform and foster growth in markets where the state is present. Reform options can range from a diverse set of instruments such as corporate governance and restructuring, management and service contracts, regulatory reforms to embed competitive neutrality, to PPPs and full divestiture that can change the ownership structure (Figure 2.15). Loss-making SOEs in competitive sectors can be suitable for liquidation, while nancially healthy SOEs in competitive sectors can be viable for divestiture. PPPs and management contracts are another solution for SOEs in partially contestable sectors, in which there are some market failures that justify state ownership (e.g., air transport services), while improving performance, investment, and service delivery transferring the management to the private sector. Furthermore, when SOEs in natural monopoly sectors such as utilities remain under state ownership, sectors can improve by bringing discipline through an independent regulator that enforces price controls and monitors service delivery. Rwanda CEM | 2024 CHAPTER 2 39 Figure 2.15: Policy instruments and mechanisms for reforms with state footprint Source: World Bank Group (2023) SOE reforms can deliver bene ts in terms of investments as well as productivity. Ethiopia, Pakistan, Korea, and Uzbekistan created varying forms of central oversight bodies and performance monitoring systems for SOEs. Positive outcomes from these measures include boosting foreign investment in Uzbekistan (test privatizations such as the sale of Coca Cola Ichimligi Uzbekistan Ltd. attracted substantial foreign investor interest), dampening scal risks posed by SOE debt in Pakistan and Ethiopia (transfer of ETB$400 billion in SOE debts to Liabilities and Asset Management Corporation (LAMC)), and enhanced SOE performance in Korea. In China, privatization in the 2000’s led to increased economic e ciency through improved labor and capital productivity. In the power sector, for example, labor productivity increased by 21 percent and net pro t margin rate increased by 7.1 percentage points (AIIB AIF, 2022). More broadly, SOE reforms between 1998 and 2007 are estimated to account for 20 percent of total factor productivity growth (AIIB AIF, 2002). In Indonesia, recent changes to centralizing SOEs into holding companies have shown mixed results, however a 2012 study on Indonesia’s partial privatization between 1991–2007 found positive long-term impacts on productivity and pro tability, despite a short term dip (Nahadi and Suzuki, 2012). e SOE monitoring system developed in Korea played a role in selection of rms for privatization, yielding positive scal results through buttressing government revenues (24.3 trillion South Korean Won) and foreign reserves (10.7 billion USD) resulting from the privatization of eight SOEs (World Bank (c), 2023). Sources: Asian Infrastructure Investment Bank (2022) AIIB AIF Report—Moonshots for the Emerging World- Building State Capacity and Mobilizing the Private Sector Toward Net Zero.; World Bank (a) (2023, forthcoming). Businesses of the State (BOS) and private sector development: A policy toolkit for practitioners; World Bank (b) (2023, forthcoming). Businesses of the State (BOS); World Bank (c) (2023) Soh, Hoon Sahib, Youngsun Koh, and Anwar Aridi, eds. Innovative Korea: Leveraging Innovation and Technology for Development. World Bank Publications, 2023; Nahadi, Bin, and Yasushi Suzuki. “Partial privatization and performance of privatized SOES: The evidence from Indonesia.” Journal of Economics and Sustainable Development 3.14 (2012): 98-109; Graham, Edward M. “World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (Book Reviews).” Transnational Corporations 10.1 (2001): 139-146. 2.3.3. Access to nance: Boosting savings to serving largely the rural population and the ease access to nance agriculture sector—playing a complementary role e nancial system in Rwanda has grown to banks in the provision of nancial services. considerably, is relatively diversi ed, but remains Although still nascent, the pension sector reform concentrated. As of December 2022, the nancial led to emergence of private pensions since 2015. sector assets were equivalent to 64.9 percent of e rapid growth of mobile money is a notable GDP, up from 33.8 percent in 2010, compared development, which is positively contributing to to an average of 58 percent in Sub-Saharan Africa closing the gap in nancial inclusion. In addition (European Investment Bank (EIB), 2018). Banks to formal institutions, informal savings groups accounted for 67.3 percent of total nancial (unregulated) play a signi cant role in rural areas sector assets, while non-bank nancial institutions (Access to Finance Rwanda, 2020). (NBFIs) constituted 32.7 percent of total assets of the nancial sector. e pension sector represented Despite signi cant improvements in the depth of 16.6 percent of assets, 95 percent of which in the nancial system, credit penetration remains the public scheme (RSSB), 9.3 percent in the relatively shallow, with local rms heavily insurance sector, and 5.7 percent for micro nance under nanced. According to a 2021 report by institutions (MFIs) and SACCOs.11 MFIs and the World Bank, only 17 percent of Rwandan SACCOs displayed a broad-based expansion, rms have access to formal credit, and the average 40 CHAPTER 2 Rwanda CEM | 2024 interest rate on loans is 20 percent. irty percent developing countries like Rwanda should use of informal enterprises and 16 percent of formal foreign as well as domestic savings to nance rms, respectively, consider access to nance their investment, and Chapter 3 in particular delves into biggest challenge. ere are only a few commercial greeter detail on foreign direct investment. Rwanda banks in Rwanda, and they are relatively small has important strengths in savings mobilization, as and rely on short-term resources. is signi cant well as signi cant opportunities for improvement. reliance on short-term deposits limits the ability of both banks and MFIs to provide longer-term Paying the largest price of the underdeveloped nancing, which is critical to nance growth. e nancial sector in Rwanda, micro, small, and lack of competition results in high cost of credit, medium enterprises (MSME) fare very badly in with an average lending rate of 16 percent, re ecting terms of access to nance. According to a survey low domestic savings, public sector demand for conducted as part of the 2021 Financial Sector credit, the banking sector’s fragmentation and Assessment Program, MSMEs received only 15 ine ciencies, as well as the small size of the market percent of total lending by banks in 2019, with that makes it di cult for banks to obtain gains micro- rms receiving only 1 percent. Yet, MSMEs from economies of scale. Rwanda’s shallow capital represent over 99 percent of total establishments markets further limit access to long-term nance and employ 71 percent of establishment workers and raises its cost. is lack of nancing limits the in Rwanda. Agriculture, a national priority sector ability of businesses to expand operations through accounting for 25 of GDP in 2022, received only strategic investments. Robust nancial systems 1 percent of total bank loans over the same period boost productivity in an economy as they increase (National Bank of Rwanda (NBR), 2023). In fact, the e ciency of resource allocation by enhancing banks tend to focus on speci c segments and sectors the quality of information about rms, exerting that are considered less risky, mostly retail and sound corporate governance over the rms to which larger rms, and in urban areas, while the majority they mobilized their resources, providing e ective of MSMEs are micro and informal rms in rural mechanisms to manage, pool, and diversify risks, areas. Fortunately, MFIs and SACCOs have been mobilizing savings to the most promising projects fundamental in enhancing access to nance for in the economy, and facilitating trade. MSMEs in Rwanda. However, these institutions are limited to further advance nancial inclusion e low level of savings in Rwanda constrains for MSMEs due to their scale, fragmentation, development. In 2021, gross domestic savings governance, funding constraints, and lack of equaled 10.5 percent of GDP, the lowest level in digitalization. a group of SSA comparators (Figure 2.16). e low level of domestic savings reduces the pool of e challenges of nancing MSMEs emerge from nancial resources available to rms, an important both the demand side and the supply side. e reason that many rms, particularly SMEs, cite engagement of nancial institutions with MSMEs limited access to nance as a major constraint faces a wide range of challenges emerging from on their operations (see above). However, small the demand side, including: (i) higher credit risk than larger rms; (ii) poor quality of nancial Figure 2.16: Gross domestic savings as percent of GDP. country comparison statements (when available); (iii) high degree of 35.0 informality in their business operations; (iv) lack of 30.0 hard collateral required by lenders; (v) de ciencies in business planning capacity that limits their 25.0 ability to manage risks; and (vi) limited nancial 20.0 literacy. ere are also several inter-related supply- 15.0 11.2 side challenges that limit the provision of credit to MSMEs, including the low degree of automation of 10.5 10.0 8.7 9.1 5.0 5.5 processes in nancial institutions’ credit decisions. 0.0 In fact, the lack of automation, and digitalization 2013 2015 2017 2019 2021 Ethiopia Ghana India Kenya Mauritius Rwanda Tanzania Uganda Vietnam South Africa may hinder the pricing of risk across nancial institutions. One of the possible reasons behind Source: Calculations based on WDI datasets. Rwanda CEM | 2024 CHAPTER 2 41 lenders’ lack of automation of processes in credit do, more rely on informal savings vehicles than rely decisions includes persistent data availability and on banks. data quality issues. Importantly, despite a solid foundation for the credit information system, Formal, long-term savings vehicles are little used some de ciencies remain and pose a challenge for in Rwanda: lenders. ese de ciencies in the supply side hinder Pensions. According to Finscope data, only 13 the capacity of nancial institutions to serve riskier percent of Rwandans had a private pension in segments, such as MSMEs. 2020, up only 2 ppts from 2016. e pension system in Rwanda, as in many countries in Financial inclusion has increased. In order to SSA, is characterized by low assets under mobilize savings, populations must be nancially management, investment in short-term assets included. e recent data in Rwanda shows that (mainly government securities), low returns there is strong progress on this front. Speci cally, on investment, and a restrictive regulatory the rate of nancial inclusion rose to 93 percent in framework. Based on these conditions, 2020, with the rate of access only through informal Rwanda will need to move towards a targeted mechanisms falling from 21 percent to 16 percent universal pension system nanced through of those included. e number of bank accounts public resources, although the shift to such a and mobile money accounts has also been steadily system should be gradual so as not to lead to increasing (see Figure 2.17). scal strain. Figure 2.17: Number of bank accounts and active mobile Insurance. Insurance uptake almost doubled money accounts from 507,220 in 2016 to 927 937 in 2020 but 6,000,000 equaled only 17 percent of the population. 5,000,000 e main barriers to uptake, according to a nationally representative study in Rwanda, 4,000,000 are a ordability and lack of awareness. 3,000,000 e main growth is in life insurance and 2,000,000 household insurance, while the main decline is in medical insurance. Rwanda’s insurance 1,000,000 sector is not very developed. Total premiums 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 paid equal 1.6 percent of GDP, compared to Bank accounts Active mobile money accounts a global average of 6.1 percent in 2019. e Source: Calculations based on BNR database markets for both life and non-life insurance are highly concentrated (Her ndahl- Recent developments in savings behavior in Rwanda Hirschman Indices much higher than in have been mixed. Rising nancial inclusion has Ghana, Nigeria and Kenya, 45 percent been accompanied by an increased share of adults higher than natural levels for life, and double using banks as savings vehicles (from 13 percent in 2016 to 21 percent in 2020), while the percentage the natural level for non-life), indicating of adults who save at home as opposed to in formal limited competition. Moreover, an index of or informal nancial institutions dropped from 10 pro tability and nancial health (referred to percent in 2016 to 2 percent in 2020. However, a combined ratio), which should be 75-90 29 percent use informal savings products, and a percent, exceeds 100 percent, indicating low third lack savings products from a commercial pro tability. bank but rely on other formal, non-bank savings Retail bonds. Retail bonds increased steadily products (they may also have/use informal savings from 2016–20 in terms of value and as a share mechanisms and/or save at home), or considerably of government securities, reaching 37.1 billion more than use banks. e share that do not save at Rwf and 8.9 percent, respectively, in 2020 all remained at 14 percent in 2020, or equal to the (Figure 2.18). However, both measurements share in 2016. In short, a signi cant share of the fell during the COVID-19 epidemic. population does not save at all, and of those that 42 CHAPTER 2 Rwanda CEM | 2024 Figure 2.18: Retail bonds as a percentage of government Figure 2.19: Ejo Heza participation, 2018–22 securities 30 13.9% 2,500,000 15.0% 12.5% 25 2,000,000 20 10.0% 8.9% 1,500,000 Rwf, billion 6.0% 15 6.0% 4.8% 1,000,000 10 5.0% 3.2% 5 500,000 1.9 5.5 10.0 12.0 27.1 18.8 13.1 0 0.0% 2016 2017 2018 2019 2020 2021 2022 0 2018 2019 2020 2021 As of April 2022 Value of RTB issued (LSH) RTB as % of govt securities Male active savers Female active savers Total subscribers (dormant + active) Source: Calculations based on BNR, World Bank, International Debt Management Source: Calculations based on Ejo Heza Policy Reports Symposium, 2022. Ejo Heza long-term savings scheme. Ejo training equipment, and expanding opportunities Heza, a government de ned contribution for practical based learning, including structured savings plan, has achieved coverage of 27 internships and apprenticeships. percent of the working age population in the four years since establishment in Only a small share of the labor force has completed 2017. Many participants are from low- more than primary education. Around 47.1 percent income households, informal sector workers of Rwandan workers have not completed any comprise 87 percent of savers, and 49 percent formal education and 30.3 percent have completed of the subscribers are females, compared to only primary education. us, only 22.6 percent only 32 percent of total contributors in the of workers have graduated from secondary school RSSB formal sector scheme. or above, one of the lowest levels of education seen in the region. As per 2021 data from the United 2.3.4. Development of skills Nations Educational, Scienti c and Cultural An inadequately educated workforce is a key Organization (UNESCO), gross tertiary school obstacle faced by rms in Rwanda. In the World enrollment in Rwanda was 7 percent, below the Bank Enterprise Survey (WBES) conducted in regional and income group averages of 10 percent 2020, 34 percent of surveyed rms (360 in total) for SSA and 9 percent for low-income countries. mentioned inadequate education as a challenge. Skills gaps noted in the survey include: i) technical, ere may be some misalignment between vocational, job speci c skills, ii) foreign languages, education levels and the demand for skills. While iii) interpersonal and communication, iv) problem university graduates have the lowest unemployment solving and critical thinking, v) management and rate across educational groups (12.9 percent), leadership, and vi) IT and computer skills. e unemployment rates are higher among individuals level of education is lower than in most other with a lower/upper secondary education (20.4 countries in the region. E orts are underway by percent and 25.6 percent, respectively) than for tRwanda, World Bank, and other development individuals with lower levels of education (Table partners to expand the capacity of the post- 2.1). is suggests that either the economy is secondary and tertiary education ecosystem creating more low skill jobs that are better served by to respond to these gaps, including through those with no/limited education, or that secondary curriculum revisions targeting priority economic school achievement makes these individuals less sectors and competence based training, retooling of willing to be under-employed and willing to wait faculty and trainers, enhancing industry-academia for jobs more closely aligned with their sense of linkages, expanding critical infrastructure including acceptable work. Rwanda CEM | 2024 CHAPTER 2 43 TABLE 2.1: Population 16 years old and over by labor force status and level of educational attainment February-23 (Q1). Labor force status Labor force Unemployment Level of education Total participation Outside rate (%) Labor force Employed Unemployed rate (%) labor force Population above 16 7,976,250 4,596,057 3,803,942 792,115 3,380,182 57.6 17.2 None 3,754,028 2,147,531 1,817,896 329,635 1,606,498 57.2 15.3 Primary 2,600,758 1,478,724 1,219,254 259,470 1122034 56.9 17.5 Lower secondary 715,797 286,348 227,849 58,499 429,449 40.0 20.4 Upper secondary 635,721 444,783 331,106 113,677 190,938 70.0 25.6 University 269,945 238,671 207,837 30,834 31,274 88.4 12.9 Source: Calculations based on NISR: Labor Force Survey Trends, 2023 (Q1), Feb. 2023. ere is evidence of considerable employer interns not interested or get tired easily; interns dissatisfaction with graduates of public universities. don’t respect regulations; management of interns is Evidence from tracer studies suggests that hard; low capacity of interns to manage equipment; employment rates for post-graduation are around interns do not bring protective clothes; interns 40-60 percent for tertiary education in public want to be placed in Kigali city; no insurance institutions and vary by institution and program. for damage caused by interns; and insu cient For instance, a 2021 graduate employment survey materials, equipment, infrastructure. of 363 students across the 8 public polytechnics showed an employment rate of 52.3 percent, Skills development needs to adjust to changes in of which 39.5 percent were in a permanent job. the demand for skills. Audits from across sectors According to the National Skills Development in Rwanda (agriculture, energy, manufacturing, and Employment Promotion Strategy (NSDEPS), mining, urbanization, and meetings, incentives, employer satisfaction with regards to the relevance conferences, and exhibitions, known as MICE) of the skills of TVET graduates is estimated at have indicated the need for major skills upgrading. only 60 percent. In contrast, a private university Selection of priority economic sectors will be such as Carnegie Mellon University in Kigali has key to driving growth and employment in the 90-95 percent employment rates for graduates in medium to long run. An analysis of quantitative technical roles. Analysis done by Carnegie Mellon data along with a qualitative assessment of University in Rwanda showed that the reasons the strategic importance of speci c economic employers hired their students included good sectors suggests that sectoral priorities for skills communication, teamwork, and branding skills in development include agriculture, forestry and addition to technical competencies. shing; manufacturing; transportation, logistics and storage; accommodation and food service; ICT, Internships and work study arrangements face nance and insurance, and professional, scienti c obstacles. Evidence from recent Rwanda Polytechnic and technology related services; and health and (RP) tracer studies (Graduate Employment Survey, education. 2021) suggests such programs (also referred to as ‘industrial attachments’) are highly valued, 2.4. Firm innovation and ICT services but opportunities are limited and employers face Only a small and rapidly declining share of implementation challenges. Only 9.5 percent of rms undertake innovation in Rwanda. Firms’ workers surveyed had completed an industrial managerial and technological capabilities are poor, attachment. Of the 80 companies surveyed for and indicators of innovation are not that di erent industrial attachments, 55 percent accommodated from the average for low-income countries. students for workplace learning but 33.8 percent Rwanda performance in indicators of access to and faced the following challenges: interns do not e ciency of Internet service are mixed. e national understand workplace learning requirements; Internet network covers most of the country, a 44 CHAPTER 2 Rwanda CEM | 2024 diverse set of approaches are used to access the the average number of years of experience of top global Internet, many rms own an e-commerce managers, is lower in Rwanda than the average website, and broadband speeds are the highest on for low-income countries (Figure 2.20a), while the Continent. On the other hand, broadband lagging behind many comparators in rm’s adoption lags regional peers and Internet usage in innovation indicators in 2010–20 (Figure 2.20b). rural areas lags far behind that in urban areas. In 2019, R&D spending as a share of GDP was only slightly above the average for low-income 2.4.1. Innovation indicators countries. Since spending on R&D is essential Rwanda’s performance on innovation indicators is to introducing a new product (service) or a new poor. e percentage of establishments in Rwanda process innovation, Rwanda’s rms reported that engage in product innovation, process levels for both indicators similar to those for low- innovation, and ISO certi cation declined from 58, income countries. e COVID-19 pandemic has 83, and 11 percent in 2011 to 15, 7, and 3 percent highlighted the urgent need for digital and other in 2019, respectively. Given the rapid deterioration innovations to build more resilient systems for a in technological progress, Rwanda compares healthier society and more sustainable economy. poorly regionally and globally. For example, in More investments from public and private and 2019, only 15 percent of rms had introduced a institutional investors, and an appropriate legal/ new or signi cantly improved product or service regulatory framework, are needed to stimulate during the last three years, which places Rwanda this innovation. e October 2022 legislation on in the 14th percentile of countries with a rank of the Protection of Personal Data and Privacy is an 103 out of 120 (World Bank, 2022). While the essential step in developing an innovation-driven Government of Rwanda has provided substantial economy that preserves the trust and privacy of its nancial support to help rms enhance the skills citizens. of their workers, it will require further e orts to incentivize innovation through R&D and address 2.4.2. ICT services persisting skill gaps. Increasing access to ICT services powered by digital technologies is critical to long-term economic Managerial and technology adoption capabilities growth and job creation.12 In its Digital Africa are poor, which limits the overall potential of rms agship report, the World Bank nds that internet to reach their optimal scale. Good management availability has a positive impact on creating jobs, practices can help businesses navigate sourcing including for lower-skilled labor. For example, constraints which in uence production decisions in Nigeria, labor force participation and wage and productivity outcomes. Di erences in employment increased by 3 and 1 ppts, respectively, management practices account for about 30 after three or more years of exposure in areas with percent of total factor productivity di erences internet availability. In Tanzania, working-age both between countries and within countries individuals living in areas with internet availability (Bloom et al., 2020). One indicator of innovation, witnessed increases of 8 ppts in labor force Figure 2.20: Rwanda ‘s innovation and management practices to make further progress a) Rwanda Vs comparators: years of top manager’s experience 2019–20. b) Rwanda Vs comparators: Firm’s Innovation Indicators 2010–20. 30 100 80 25 60 20 40 Number of years 20 15 0 10 5 Introduced a new product/service New product/service is also new to the main market 0 Introduced a process innovation Spend on R&D Rwanda High income Low income Lower middle income with an internationally- recognized quality certification Source: Calculations based on WBES Rwanda CEM | 2024 CHAPTER 2 45 participation and 4 ppts in wage employment, Rwanda fares well in terms of network coverage. after three years of exposure. However, to unlock e Government of Rwanda made large-scale these economic gains there needs to be a focus on backbone network investments 15 years ago productive usage (Tania, Blimpo, & Dutz, 2023). through a public private partnership (PPP) to support the deployment of 3,000 kilometers of Data play a central role in the digital economy ber with Korea Telecom. is open access national and have the potential to significantly impact backbone infrastructure (NBI) is based on a Rwanda’s development by generating economic resilient network typology, covering all 30 districts, and social value. Data collected by governments and consists of some nine cross-border links to to serve the public good (public intent data) neighboring countries’ terrestrial networks, as well hold great potential for designing, executing, as a metro ber ring in Kigali (UN-OHRLLS, and evaluating public programs and policy, 2017).13 Given Rwanda’s high population density whereas data collected and curated by the and compact size, most of the population now private sector for commercial purposes also lives within closer proximity of the backbone hold great potential to spur development. transmission network than those in many other Innovations in the use and application of East African nations, which is a distinct advantage data by businesses are creating tremendous (International Telecommunication Union, ITU, economic value by enhancing data-driven 2024). ese investments have facilitated the decision-making and reducing transaction deployment of access networks that connect end- costs. Increasing access to more users through users, ensuring near universal mobile broadband strengthening data governance, open data, network coverage in Rwanda and improvements interoperability standards and data sharing to network speeds (see below). Today, 3G and 4G initiatives, for example, increases the potential broadband network coverage rates stand at 93 and of using data for positive development impacts 97 percent respectively, compared with a regional (World Bank, 2021). average of just 76 percent (Map 2.1). Map 2.1: Network coverage for mobile broadband versus adoption (2020) Source: GSMA analysis of data sourced from mobile operators, GSMA Intelligence, UN, World Pop, CIESIN, Gallup World Poll, Integrated Household Living Conditions Survey 5 and Earth Observations Group (VIIRS Nighttime Lights). Adoption is calculated based on the number of unique mobile (internet) users relative to total population. The model also presents adoption relative to populations aged 10 and above and 15 and above. However, given that some mobile users can be under these ages, total population is used as a basis for analysis. 46 CHAPTER 2 Rwanda CEM | 2024 Rwanda has several means of accessing the global Conversely, Rwanda lags on broadband adoption Internet. Rwanda is connected to multiple by both individual consumers and businesses. international submarine cables such as EASSy Most users in Rwanda connect via a mobile and TEAMS, landing on Africa’s coastline, that broadband subscription. However, the overall provide high-capacity internet connectivity, broadband adoption rate remains low. As of accessible through the terrestrial transmission early 2023, there were only 49,501 active xed networks of neighboring countries. Rwanda has broadband subscribers (equivalent to a 0.37 established cross-border ber connections with percent penetration rate). 3G and 4G mobile several neighboring countries, including Uganda, broadband subscriptions were 2,756,978 and Tanzania, and the Democratic Republic of Congo 347,715, respectively equivalent to a 23.3 percent (DRC), which enhance its access and regional mobile broadband penetration rate (RURA, connectivity. In addition to submarine cables and 2023). Benchmarking, based on GSMA data ber optic networks, Rwanda also utilizes satellite from 2022, puts Rwanda’s mobile broadband connectivity to enhance direct access, particularly subscription rate at a slightly higher gure, in remote or underserved areas where terrestrial yet shows that Rwanda is falling far behind infrastructure may be limited. At the end of its neighbors and peers in the region such as 2022, the total equipped international internet Kenya, Tanzania, Uganda, Malawi, Ethiopia, bandwidth available in the country was 187,954 etc. (Figure 2.22). e key challenge in Rwanda Mbps, whereas the average used internet bandwidth is therefore to address the ‘usage gap’—namely, was 108,273 Mbps. connecting populations already covered. Weak digital adoption also extends to government, Rwanda has witnessed notable improvements where many Ministries, Department and in Internet speed over the years. Initiatives like Agencies beyond Kigali and sector level still lack the National backbone initiative (NBI) as well as reliable access to broadband. e World Bank is infrastructure development by the mobile network currently looking to support development of the operators (MNOs) and some internet service providers Government internal network, connecting more (ISPs), have enabled faster data transmission. As a local government o ces, hospitals, and schools. result, the average internet speeds have increased, particularly in urban areas, allowing for smoother Rwandan rms rank fairly high in website browsing, faster downloads, and improved online ownership compared to other SSA countries, experiences. According to cable.co.uk, Rwanda although the increase in website ownership ranked 1st in Africa in 2022 in terms of average has slowed. In 2019, 42.6 percent of Rwandan broadband download speeds. Rwanda registered establishments had their own website, 7th in speeds of 52.2 Mbps, well ahead of second-place the sample of 33 SSA countries with available South Africa’s 28.6 Mbps.14 (Figure 2.21). is helps WBES data (Figure 2.23). Note, however, that explain why Rwanda ranks 11th in Africa and 101st in many of the countries, data are not available out of 131 countries globally, in the 2022 Network for the latter half of the 2010s, which may Readiness Index that measures the degree of readiness lead to an overstatement of Rwanda’s relative of countries to exploit opportunities o ered by ICT.15 position. Website ownership in Rwanda increased Figure 2.21: Average broadband download speed (Mbps), Figure 2.22: Benchmarking of regional mobile broadband AFE, 2022 adoption Rwanda 52.2 Mauritius 66.1% South Africa 28.6 South Africa 64.6% Madagascar 19.3 Seychelles 61.6% Seychelles 14.9 Kenya 41.9% Mauritius 13.4 Zimbabwe 36.4% Kenya 12.4 Tanzania 35.5% Uganda 11.0 São Tomé and Principe 35.6% Lesotho 10.7 Botswana 35.2% Tanzania 10.5 Angola 32.6% Botswana 9.4 Namibia 34.6% Namibia 9.3 Ethiopia 33.4% Zimbabwe 8.9 Zambia 32.1% Uganda 31.9% Malawi 8.5 Malawi 31.5% Mozambique 8.4 Lesotho 30.9% Zambia 8.4 Rwanda 28.9% Angola 6.7 Eswatini 28.2% Congo, Dem. Rep. 4.9 Mozambique 26.7% Eswatini 4.8 Sudan 26.4% South Sudan 3.7 Madagascar 25.2% Burundi 3.4 Comoros 23.7% São Tomé and … 2.8 Burundi 17.8% Sudan 2.6 South Sudan 16.4% Eritrea 1.9 Congo, Dem. Rep. 15.1% Ethiopia 1.7 Somalia 14.2% Somalia 1.6 Eritrea 3.0% Source: Cable.co.uk (https://www.cable.co.uk/broadband/speed/worldwide-speed-league/). Source: Mobile Broadband Capable Connections (GSMA) / SIMs Per Unique Subscriber (GSMA) / Total population. Graph below has been condensed and as a result excludes some countries. Rwanda CEM | 2024 CHAPTER 2 47 substantially in all sectors from 2006 to 2011, e new industrial policy (2023–33) focuses but expansion slowed from 2011 to 2019 for most on high-value goods and services and requires industries, with the exception of retailers. coordinated e orts across multiple ministries. Figure 2.23: Own website in Sub-Saharan Africa Enhancing Rwanda’s Industrial Policy (IP) involves 80 integrating green growth, aligning cross-cutting 80 70 65 62 regulations with sector-speci c strategies, and 60 59 reducing export tari s. Expanding the IP beyond 47 50 40 45 43 42 41 40 39 39 38 35 35 33 33 priority sectors and tailoring interventions through 30 30 26 26 25 23 23 22 22 strategic segmentation will improve e ectiveness. Smooth implementation requires strengthened 19 19 18 17 15 20 13 10 7 10 0 governance, prioritized interventions, and detailed resource allocation. Firm-level support should South Africa 2020 Sudan 2014 Eswatini 2016 Zambia 2019 Kenya 2018 Malawi 2014 Rwanda 2019 Mali 2016 Mauritania 2014 Mozambique 2018 Namibia 2014 Zimbabwe 2016 Benin 2016 Ethiopia 2015 Senegal 2014 Ghana 2013 Niger 2017 Togo 2016 Burundi 2014 South Sudan 2014 Madagascar 2022 Cameroon 2016 Tanzania 2013 Gambia 2018 Nigeria 2014 Uganda 2013 Guinea 2016 Côte d'Ivoire 2016 DRC 2013 Lesotho 2016 Liberia 2017 Chad 2018 Sierra Leone 2017 address sector-speci c challenges, with government interventions focusing on productivity drivers and continuous industry analysis. Increasing access to Source: Calculations based on most recent WBES based on availability. Median sample weights for subpopulation used. serviced land and investing in shared infrastructure can reduce production costs and attract FDI, jobs, e 2022 Census in Rwanda reveals that there and exports. are very stark disparities in access to the Internet and usage of digital technologies between urban Rwanda’s food processing sector is set for growth, and rural areas. Urban areas in Rwanda, where with domestic food demand expected to double to networks are more developed, generally have better US$13 billion by 2040. e African Continental access and quality of services compared to rural Free Trade Area (AfCFTA) o ers signi cant areas. Internet service providers often prioritize market opportunities for processed foods, which urban centers due to higher population density and made up 23 percent of Rwanda’s merchandise commercial viability. As a result, rural communities trade in 2022. e services sector, now almost 50 may have more limited or unreliable access to the percent of Rwanda’s total value added, is vital for internet, hindering their ability to access digital manufacturing productivity and industrialization. services. e Census also showed that 32.8 percent Successful integration of service sectors with of the population in urban areas (aged 10 years and manufacturing in countries like Indonesia, the above) use the Internet, compared with only 6.2 Philippines, and Singapore provides a model for percent in rural areas. 44.4 percent of residents in Rwanda. Key manufacturing sectors include food Kigali use the Internet—a much higher gure than and beverages, textiles, and industrial goods, with in all other provinces, where usage ranged between recent FDI in light manufacturing indicating 23-28 percent. Moreover, 83.9 percent of residents potential for export growth and job creation. of Kigali owned a feature phone, compared with 51-56 percent in all the other provinces. Rwanda sees its manufacturing sector as essential for boosting productivity, creating quality jobs, 2.5. Boosting manufacturing to foster growth and achieving development goals. Historically, and employment in Rwanda manufacturing has driven productivity in developed Rwanda’s manufacturing sector is essential countries through trade and technological for productivity, job creation, and economic advancements (Ha-Joon Chang, 2014). In the diversi cation, contributing around 10 percent USA and the UK, it accounts for 60 to 70 percent of GDP and 5.5 percent of total employment in of R&D, while in Germany, Japan, and Korea, it is 2023. Despite high production costs and a small 80 to 90 percent. In Rwanda, manufacturing is ve domestic market, initiatives like the Kigali Special times more productive than agriculture. Despite Economic Zone and Made in Rwanda aim to a shift towards the services sector, manufacturing support the sector, though results have been still plays a signi cant role, contributing around mixed. e Manufacture and Build to Recover 10 percent of GDP and 5.5 percent of total Program (MBRP) launched in 2020 aims to attract employment in 2023. It also promotes export investments and create over 42,000 jobs by 2025. growth and economic diversi cation, with exports 48 CHAPTER 2 Rwanda CEM | 2024 driven by food, beverage, and textiles, remaining Manufacture and Build to Recover Program around 10 percent of total goods exports in 2022 (MBRP). KSEZ provides quality infrastructure, (Figure 2.24, Figure 2.25). reliable utilities, and better collaboration with government agencies. It has improved the business Manufacturing development in Rwanda faces environment and access to industrial land and challenges due to its small domestic market and inputs. However, its results have been mixed, as landlocked geography, leading to high production many slots are occupied by existing businesses costs. While manufacturing is crucial for relocating within Kigali and used as warehouses productivity, employment, and economic output, (Box 2.3). e Domestic Market Recapturing Rwanda and Sub-Saharan Africa encounter Strategy (DMRS), launched in 2015, aimed unique obstacles. Technological advancements to reduce the trade de cit and was followed by have made manufacturing more skill- and capital- the Made in Rwanda initiative in 2017. MiR intensive, reducing its capacity to create jobs, focused on reducing production costs, developing which undermines industrialization as a sole sector-speci c strategies, improving quality, growth strategy. Many countries experience promoting backward linkages, and encouraging economic growth with low industrialization local consumption. Despite these e orts, MiR’s and face premature deindustrialization, where goal of reducing the trade de cit by US$450 manufacturing’s GDP contribution declines million annually has not been achieved, partly earlier than expected (Rodrik, 2016). Rwanda’s due to overlapping policies and confusion among high production costs, limited land access, and stakeholders (Annex 2.4). e collapse of the competition from regional neighbors further services sector during the COVID-19 pandemic hinder manufacturing growth. Enhancing regional led to renewed e orts in Rwanda to diversify the integration is essential to increase trade and economy through the manufacturing and building investment. better initiative (MBRP), which was introduced in 2020 to attract private sector investments and e Government of Rwanda is committed to boost economic recovery. e program, which runs supporting a thriving manufacturing ecosystem until 2025, has attracted 130 projects with a total through initiatives like the Kigali Special Economic investment of US$2.3 billion, expecting to create Zone (KSEZ), Made in Rwanda (MiR), and the over 42,000 jobs (Box 2.2).16 Figure 2.24: Food, beverages and textiles are the main Figure 2.25: Manufactured exports in Rwanda drivers of manufacturing growth US$ current prices millions, 2002–25 2111 1531 1408 1241 1122 1037 703 723 682 731 591 464 268 235 297 177 65 63 98 125 147 2008 2006 2005 2009 2004 2003 2002 2020 2007 2010 2018 2022 2016 2015 2019 2014 2013 2012 2021 2017 2011 Source: Calculations through the WITS platform from the Comtrade database maintained by the United Nations Statistics Division and World Trade Organization via World Development Indicators. BOX 2.2: Overview of manufacture and build to recovery program e Manufacture and Build to Recovery Program (MBRP) will not be extended beyond December 2024. It provides tax incentives (import duty and VAT) to boost production in agro-processing, construction materials, light manufacturing, and cross-cutting enablers like paper and plastic packaging. e program has attracted 130 projects, totaling US$2.3 billion in investment. ese include 52 manufacturing projects, 43 construction projects (46,000 housing units), and 35 agro- processing projects, expecting to create over 42,000 jobs. So far, 89 projects have received RWF 21.9 billion in tax incentives. No new projects will be added to the scheme after 2024. Source: Rwanda 2023 IMF Article IV Consultation Rwanda CEM | 2024 CHAPTER 2 49 BOX 2.3: An assessment of SEZ on rm behavior in Rwanda Special Economic Zones (SEZs) aim to boost private investment, industry, and exports by providing quality infrastructure, streamlined regulations, and incentives. While SEZs in Asia have been successful, those in Sub-Saharan Africa face challenges such as high transport and labor costs, and a lack of skilled workers, limiting labor-intensive manufacturing. e Kigali SEZ (KSEZ), established in 2013, has diversi ed export products but relies heavily on imports. It o ers quality infrastructure, reliable utilities, and government collaboration. Improvements include better business environments and increased access to industrial land and inputs. Future Recommendations for KSEZ include: 1) Developing a modern KSEZ; 2) Extending projects to mining and tourism; 3) Supporting service sector trade ( nancial services, ICT, etc.). e traditional EPZ model, focused on the assembly of imported components (e.g., the garment sector), may not be ideal for Rwanda due to high transport costs and fragile export conditions like African Growth and Opportunity Act (AGOA). SEZs can signi cantly boost domestic industries by fostering agglomeration, helping them achieve economies of scale, and enhancing their competitiveness in regional and global markets (Farole, 2011). Expanding SEZs into natural resource sectors such as mining and tourism could be bene cial. Rwanda excels in business regulation, ranking as the second-highest African country on the World Bank Doing Business Index. Introducing competition from EAC service-sector providers in nancial services, accountancy, law, ICT, and engineering could be advantageous. Service sector trade is crucial for manufacturing in the EAC (Hoekman and Shepherd, 2015). is focus is planned through the new ICT Park in KSEZ Phase 2, o ering opportunities for services trade in tertiary education and ICT. However, further analysis is needed to determine how SEZs can best support other forms of services trade. Source: Steenbergen V. and Beata Javorcik. “Analysing the Impact of the Kigali Special Economic Zone on Firm Behavior.” International Growth Centre Working Paper. F-38419-RWA-1. August, 2017. Rwanda’s new industrial policy (2023–33) aims To enhance Rwanda’s Industrial Policy (IP), to accelerate economic transformation and several key improvements are needed.17 First, manufacturing development. Key goals from the mainstreaming green growth and environmental National Strategy for Transformation (NST1) sustainability throughout all pillars would create a include creating over 200,000 jobs annually “Green Industrial Policy.” Second, better integrating (Priority 1), establishing a globally competitive cross-cutting regulations with sector-speci c knowledge-based economy (Priority 3), and strategies would ensure a holistic approach to private promoting industrialization with a shift to high- sector development, aligning with other policies value goods and services (Priority 4). Focus areas like the National Investment Policy 2023 and the are agro-processing, construction, meat and Competition and Consumer Protection Policy dairy, leather, textiles, horticulture, tourism, 2023. ird, strengthening competitive neutrality knowledge-based services, mining, creative by reducing export tari s would promote fair arts, aviation, and transportation. The policy competition and green growth. Fourth, broadening requires an inclusive growth strategy to boost the IP to include more than just priority sectors and job creation and improve welfare. It involves conducting strategic segmentation within sectors, multiple ministries and uses instruments such as such as di erent types of tourism, would tailor export and investment promotion, technology interventions more e ectively. Fifth, enhancing policy, special economic zones, tax incentives, governance and cross-agency collaboration tariff policy, regional agreements, services through objective criteria and transparent selection exports, and public investment. Although processes would promote value addition and led by the Ministry of Trade and Industry diversi cation. Sixth, prioritizing and sequencing (MINICOM), full participation from other the IP’s 110 interventions across 34 strategies and ministries and agencies is essential (Newfarmer 8 pillars would make it more actionable. Finally, & Twum, 2018). the institutional delivery framework should detail 50 CHAPTER 2 Rwanda CEM | 2024 the resources, budget allocations, and roles needed capacity utilization and vertical integration. to implement the IP, ensuring e ective monitoring Increasing access to serviced land has demonstrated and evaluation for continuous improvement.18 that it can help SMEs reduce the elevated costs of production in a landlocked country like Rwanda Designing rm-level support mechanisms requires and to access regional and global markets. e understanding the distinct challenges of di erent increased FDI, jobs and exports generated economic sectors. A detailed, current assessment through Rwanda’s Special Economic Zone of competitive pressures on providers, buyers, (SEZ) program are comparable to levels achieved intermediate rms, and institutions within each during the initial years of those in countries such sector can inform targeted industrial policies as Bangladesh, Kenya, Ethiopia (Box 2.4) and and e ective rm-level programs. Government Vietnam. e government’s e orts should focus interventions should identify local positive on closing infrastructure gaps in existing IPs externalities that drive productivity growth, such (e.g., housing, utilities) and improving capacity as knowledge spillovers, input-output linkages, utilization, productivity, and investor retention and labor pooling. Continuous industry analysis, while scaling up the program in viable locations combined with global market trend examination, across the country leveraging innovative nancing can pinpoint constraints and failures. Integrating solutions, including increased private sector this analysis with inclusive Public-Private Dialogue investment and PPPs. (PPD) can catalyze strategic change, incentivize alliances, and enhance sector collaboration. An Going forward, food processing presents a e ective approach involves producing analytical signi cant growth opportunity for Rwanda’s outputs and disseminating them through manufacturing sector (see Chapter 6). e value workshops, supported by a parallel stakeholder of domestic food demand is projected to double facilitation process. from US$6.5 billion in 2020 to US$13 billion by 2040, driven by demographic trends (see Chapter Expanded access to serviced land can reduce 5). is increase re ects a shift in diet from cereals production costs among rms. Public and private and beans to more livestock-sourced products, investment in shared infrastructure can boost horticulture, and processed foods and beverages, as BOX 2.4: Learning from Ethiopia’s industrial parks strategy e Government of Ethiopia formulated its industrial policy in the Growth and Transformation Plan (GTP 2010–15) to address the manufacturing sector’s contribution to GDP, which was less than 5 percent, and the high unemployment among youth. Challenges included access to land, infrastructure, nance, logistics, and bureaucracy. In 2015, Ethiopia established industrial parks (IPs) as a key implementation tool, with goals to create jobs, generate exports, establish industrial linkages, and transfer technology. By the end of 2022, Ethiopia’s IPs had created 90,000 jobs, accounting for one in seven new formal private sector jobs, though less than 5 percent of the annual labor force growth. Net exports from IPs grew rapidly, reaching US$163 million in 2019/20, nearly half of Ethiopia’s total manufactured exports. IPs attracted 66 investors with US$740 million in inward investment, and net exports from publicly owned IPs grew by 50 percent annually since 2014/15. However, IPs’ impact on the broader economy remains limited. ey rely heavily on imported inputs, with local sourcing below 5 percent. ere is little evidence of technology transfer beyond basic training for Ethiopian sta . e strategy has struggled to recover from COVID-19, internal con ict, and the suspension of African Growth and Opportunity Act (AGOA) trade preferences, crucial for IP exports to the U.S. Key issues include weak linkages with the domestic economy, low skill levels, lack of SME support, broader investment climate challenges, and insu cient sector-speci c policies. Other problems are poor technology transfer, inadequate urban planning, and a lack of long-term vision for transitioning to high-value manufacturing. Ethiopia’s experience highlights the need for an integrated industrialization strategy balancing sectoral competitiveness, SME development, FDI attraction, and robust planning. Note: “Special Economic Zones” are a policy-enabled type of industrial parks, where liberalized and often experimental business policies and reforms are introduced to complement the park’s infrastructure o ering. (UNIDO) Rwanda CEM | 2024 CHAPTER 2 51 well as more meals consumed outside the home. manufacturing is a necessary strategic direction ese shifts o er immense opportunities for for the country. Creating an “Integrated Value job creation, higher value-added activities, and Chain Development” component will be crucial the development of new food services, provided to achieving this goal (United Nations Industrial the right environment and public services are Development Organization (UNIDO), 2020). established. Food and beverages, textiles, and industrial e African Continental Free Trade Area (AfCFTA) and consumer goods are the most prominent also o ers a signi cant market opportunity for subsectors in the light manufacturing sector processed foods. In 2022, processed food imports in Rwanda. Private investment in the light accounted for 23 percent of Rwanda’s merchandise manufacturing sector (outside of agribusiness) trade, the highest among the six EAC countries in Rwanda is small, but the country has received (Figure 2.26 A). While processed food imports some new FDI in the sector of late, including have been increasing in Rwanda in recent years, in apparel, footwear, handbags, electronics, and, they have been consistently declining in other EAC most recently, automotive. ese subsectors are countries like Burundi. In terms of current price considered important for Rwanda’s future growth values, Kenya is the leading importer of processed and would have important implications for export foods among EAC countries, with imports totaling performance and inclusion through low-skill job US$3.315 billion in 2022 (B). creation (World Bank Group, 2018). A 2020 Industrial Diagnostic Study for Rwanda e increasing servici cation of Rwanda’s economy by UNIDO identi es priority sectors in presents an opportunity to foster industrialization, manufacturing, including food and beverages, as manufacturing productivity depends on the textiles, wearing apparel, paper, chemicals, non- e ciency and growth of the services sector. e metallic minerals, basic metals, motor vehicles, services sector now accounts for almost 50 percent and other transport equipment (Figure 2.27). of Rwanda’s total value added, up from 35 percent in e NST-1 highlights agro-processing, meat the mid-1990s (see Chapter 5). Baccini et al. (2021) and dairy, and textiles and garments as key found a positive association between economic sectors deserving the highest attention. Rwanda growth and the share of “high-skill” services in possesses many prerequisites for these industries, employment, using census data for thirteen African such as natural resources, human skills, and economies. is is because manufactured goods are technologies. However, the development of value increasingly bundled with essential services like chains linking primary activities like agriculture nance, design, engineering, telecommunications, and livestock farming with downstream consulting, and digital services, which are critical activities remains incomplete. Strengthening for further industrialization and enhancing value addition and transformation activities in productivity and trade potential. Figure 2.26: Processed foods imports in 6 EAC countries in 2019, 2021 and 2022 a) In percent of merchandise trade b) In US$ current prices millions 3500 3000 2500 2000 1500 1000 500 0 Burundi Congo, Dem. Kenya Rwanda Tanzania Uganda Burundi Congo, Dem. Kenya Rwanda Tanzania Uganda Rep. Rep. 2019 2021 2022 2019 2021 2022 Source: Calculations based on UNCTAD database Note: Data available for latest year of 2022 for most countries, except for Uganda, which is as of 2021. 52 CHAPTER 2 Rwanda CEM | 2024 Figure 2.27: Strategic map for program for Country Partnership (PCP) for Rwanda Source: Adapted from United Nations Industrial Development Organization, (2020) Manufacturing now requires services as integral the scope of state-owned enterprises would help to components of the value chain, particularly logistics strengthen competition, enable private investment and transportation, vital for the export capabilities and reduce resource misallocation. A revamping of landlocked countries like Rwanda. Countries of educational and skills programs is necessary like Indonesia (2020) and the Philippines (2019) to support job market insertion and rms’ labor (See Annex 2.5. ), which recently achieved Upper demand. E orts to raise Rwandan’s propensity to Middle-Income Country status, demonstrate the save through formal institutions should focus on successful integration of strong service sectors with improving nancial literacy, encouraging provision their manufacturing bases. ese nations reformed of nancial services that are more focused on critical service areas, especially nance and customer needs, supporting greater innovation transportation, creating a conducive environment in nancial products, and improving the highly for manufacturing. Similarly, Singapore developed successful Ejo Heza program to increase coverage its service sectors, such as nance, logistics, and nancial contributions. Finally, the chapter and information technology, alongside its outlines an agenda for strengthening the use of ICT manufacturing industry, exemplifying a successful services in Rwanda. Key areas include bridging the integration model. digital usage gap of consumers and rms, creating a data ecosystem conducive to service innovation 2.6. Conclusions and recommendations and e-commerce, upgrading and introducing Given the limits on public sector expenditures, digital public infrastructure, and translating continued rapid economic growth will depend the enabling framework into wider adoption of critically on the private sector. Without attempting emerging technology. to be comprehensive, this section recommends policies in a few key areas that would help to boost e performance of the private sector has not activities by private rms. Renewed e orts at the advanced at the pace required to achieve key micro and meso levels of policy can support rm development objectives. e country’s record of and sector-level growth. Economy-wide reforms good economic governance, policy coherence, can be coupled with targeted industrial policies and strong implementation focus has propelled to enhance competitiveness and productivity in Rwanda’s development trajectory, but the road to economic sectors where Rwanda can harness its higher productivity and competitiveness will require unique comparative advantages for sustainable key reforms to e ectively encourage specialization development. Strengthening the regulatory and scale economies across the business fabric. framework governing anti-competitive behavior, Private sector rms are overwhelmingly small and improving the insolvency regime, and rationalizing informal and thus lack the scale economies critical Rwanda CEM | 2024 CHAPTER 2 53 for competitiveness. Strengthening the links to entrepreneurs so that they are aware of the between investment, trade and innovation through insolvency framework’s bene ts. coordinated, productivity-enhancing policies will be central to meeting Rwanda’s ambitious Continuing to rede ne the role of the State in development goals. the economy is essential for the creation of a level playing eld. e Government of Rwandais e ongoing preparation of Rwanda’s Industrial determined to improve governance across all policy for 2023–2033 and the NST2 provides enterprises with public shareholdings, for this it an opportunity to renew policy strategies to fuel is essential to analyze the portfolio of enterprises private sector investment. e new industrial and evaluate the competitive neutrality of SOEs, policy will span 10 years, overlapping for the most especially in partially contestable and competitive part and aligning target indicators with the NST2, sectors. Rich rm-level data can enable the analysis expected to be approved by 2024. ese will require of the e ects of SOEs on sector performance, e orts to remove key barriers in di erent drivers of investments and job creation to inform decisions productivity-led growth discussed in this chapter. on whether SOEs are the most appropriate and cost-e ective government policy intervention 2.6.1. Advancing regulatory reform to in a sector. e privatization framework from increase competition and private sector 1996 needs to be updated in line with the partnerships Privatization Policy and Strategy 2020 to support A regulatory framework that protects consumers government’s e orts to refocus ownership and and prevents anti-competitive practices can ensure that procedures for selection of enterprises empower private businesses to bring productive for divestiture, due diligence on issues related to activities to scale. Open and contestable markets labor, competition and environment, identi cation are critical in stimulating private investment, as of appropriate method of privatization that favor they create a level playing eld that provides rms competition, privatization transactions and post- and entrepreneurs with legal certainty and reward privatization monitoring are transparent, e ective for their investments. Evidence shows that reforms and well-governed. For the enterprises where the to facilitate a competitive environment increase state decides to retain shareholdings, stronger productivity, growth, jobs, and inclusion (Dauda SOE governance and oversight, and competitive 2020; OECD 2017). Enforcement of competition neutrality are essential. rules is incipient in Rwanda and some regulations (or lack of e ective implementation) still restrict 2.6.2. Supporting rm growth through competition in key sectors. improved capabilities e institutional portfolio of rm-level support Strengthening Rwanda’s insolvency legislation, mechanisms is fragmented and does not cater to the regulation of insolvency administrators and di erent stages in a rm’s growth cycle. Major institutional capacity would promote access government institutions supporting SMEs, such to nance and growth. Rwanda’s insolvency as National Industrial Research and Development framework could be signi cantly strengthened. e Agency (NIRDA),19 Banque Rwandaise de Rwandan Insolvency Law 2021 should be updated Développement (BRD),20 MINICOM, National to streamline the procedures, enhance coherence Agricultural Export Board (NAEB),21 or RDB,22 and add a simpli ed procedure for micro and small deploy instruments that are mainly subsidy-based, enterprises. Insolvency practitioners (IPs) should be rather than service-oriented. Historically, MDIs e ectively trained, licensed and monitored. IPs are including the World Bank23 and bilateral donors have central to the success of the insolvency system— put in place dedicated Funds with direct support for example, they assist the court with most to SMEs, while some NGOs also provide business insolvency procedures, are normally given control support.24 e impact and performance of SME over assets, support e ective reorganizations and support schemes across the Government of Rwanda facilitate communication between the parties. is poorly monitored and generally assessed through Lastly, advanced training opportunities should be ex-post impact evaluations at the output level. ese provided to the judiciary to increase quality as well schemes are for the most part nancial instruments as predictability, and awareness raising sessions and tend to target the agriculture sector. 54 CHAPTER 2 Rwanda CEM | 2024 ere is additional scope to upgrade and streamline establishments that set both short-term and long- institutional support to improve the productive term production targets in Rwanda ranks very capabilities of rms. SMEs need technical support low both regionally and globally.24 Returns on in addition to nancial support. Properly designed these types of public investments in high-income and implemented, service-based support schemes countries have been as high as 10 to 30 times the can provide rms with technical assistance to original investment, and governments in Latin accelerate progress on core competence areas. In America are piloting interventions which provide Rwanda, the number of rms assisted through SMEs with access to individualized consulting tool rooms and technology institutions to raise services, as well as more novel approaches of awareness on manufacturing trends and facilitate providing group consulting services, which can be intellectual property or quality standardization delivered at lower cost and leverage group learning is very small. e ongoing preparation of dynamics. Stimulating and nurturing innovative the new industrial policy 2023–33 and the projects through grant-matching consortia can National Strategy for Transformation (NST2) spur knowledge spillovers and spread the bene ts can open opportunities to improve inter-agency of innovation. Since individual rms are too coordination around upgrading SME capabilities. small to undertake innovation-intensive projects e EquIP (Enhancing the Quality of Industrial by themselves, they need both incentives and a Policy) long-term capacity building project will platform to create these alliances. improve the capabilities for industrial diagnosis, implementation and monitoring. Coordinated e upgrading of the SME support mechanisms policy action to stimulate innovation and should be preceded by an impact evaluation of encourage technology adoption should combine a the current SME policy mix. e rationalization renewed portfolio of support schemes with e orts of support mechanisms should be informed by a to strengthen the delivery capacity of ministries and functional and e ectiveness analysis of the existing agencies and the creation of markets for Business portfolio to assess whether expenditures across Development Services (BDS). Implemented schemes and subsidies supporting SME growth together, these interventions can have tangible (e.g., entrepreneurship ecosystems, managerial impact on entrepreneurship and SME growth capabilities, supplier development, quality- in Rwanda. e Government of Rwanda might upgrading, export promotion), are having the also consider the implementation of monitored intended impact on science, technology and SME Growth Acceleration programs to identify innovation (STI) outcomes. Recommendations high potential SMEs, with a special emphasis on to add, scale or drop SME programs should be women-owned/led SMEs. Incentives need to be done in alignment with NST-2, currently under more clearly linked to the productivity performance preparation. An assessment of the underlying of bene ciary rms, with e ective monitoring, and causes for the underutilization of several central should be focused on export promotion where and state schemes supporting manufacturing rms the opportunities for productivity gains through by MSMEs should inform the design of a new suite scale economies and specialization, and the market of instruments that tailor to MSME challenges, discipline to punish poor performers, are greater. including those speci c to certain industries. e assessment should determine whether the overall Programs to improve management practices have framework addresses the most important market shown results in other countries and could be failures currently faced by MSMEs. scaled up in Rwanda. ese programs can support the capacity building of local SME through BDS, Greening of SMEs is equally crucial. SMEs in advisory networks and mentors. Businesses get Rwanda are particularly vulnerable to climate a ordable access to technical assistance on issues change shocks such as unpredictable weather that can range from how to improve operations patterns a ecting agricultural production and (e.g., sourcing decisions), organize sales, adopt water resources, increasing temperature that a ects new technologies or design export strategies, which labor productivity and energy consumption and can have direct e ects on business performance expedited deterioration of infrastructure. While and productivity outcomes. e percentage of it is critical to build resilience and adaptability Rwanda CEM | 2024 CHAPTER 2 55 across the business fabric, promoting widespread relevant to labor market needs. is development sustainable business practices can also enable blueprint covers all sectors in education, aiming Rwandan companies gain competitiveness in other to equip the more than 200,000 youth entering markets. Emerging regulations particularly from the labor market annually with critical productive advanced economies such as the European Union skills for access to good quality jobs. e National pose challenges and opportunities for SMEs to Skills Development and Employment Promotion export products and to integrate into global trade. Strategy (NSDEPS, 2019–24) centers around While these compliance requirements may add Skills Development, Employment Promotion, and cost of production and export, they can also be better Labor Market Matching. used as a competitive advantage by serving high value markets. Youth will remain the priority bene ciaries of skills development in Rwanda, to build the 2.6.4. Development of skills foundations for a highly quali ed labor force in e next generation of skills in Rwanda will the long term. Over the past years, the government have to focus more on preparing the working age has implemented a critical skills program for population to perfectly match the requirements youth at various educational levels, as part of its of rms. e challenges point to the need for NST development plan. Various development skills development and employment promotion partners, including the World Bank, are priority strategies that can: support skills upgrading in the skills development targets in the NST. Currently, informal sector to improve enterprise productivity the World Bank supports these e orts through and worker mobility; enable job seekers, notably a comprehensive approach, re ected in two youth, to acquire the higher level skills demanded programs: e Rwanda Priority Skills for Growth by the formal sector where better paying jobs can (PSG) and the Africa Higher Education Centers be found; support the growth of non-traditional of Excellence (ACE II). e PSG Program was economic sectors by ensuring that employers designed to build the foundations for quality long in these sectors have an adequate supply of term training programs in the country (selected workers with the required skills; prepare for self- TVET and University programs), as well as for employment as an element of skills training. In provision of short-term training opportunities, addition, there is a need to strengthen career through expanded pathways, to Rwandans seeking centers at TVET and higher education institutions to upgrade their skills. to improve job matching for students. Personal networks (32 percent) are the leading mechanism e provision of skills development programs for TVET graduates to access their rst source of will be tailored to respond to the needs of priority employment, while for higher education graduates, economic sectors with strong job creating potential. responding to a job advertisement (27 percent) is In doing so, it will be important to build on these the most popular. foundations in order to make further progress on support to employment-intensive growth of Skill development and job creation remain strong priority economic sectors, and the un nished government priorities in Rwanda, and key to the agenda for the three priority economic sectors country’s ambition of reaching middle income (energy, agro-processing, and transport/logistics) status by 2035. e TVET program will be a center under the PSG; scale up promising interventions piece of the government strategy, particularly given such as the SDF to bene t a critical mass of youths, the need to make employment creation more including young females and out of school youths, inclusive (See Chapter 4 for a more detailed analysis as well as upskilling of existing workers in micro and of the distributional dimensions of structural small enterprises; accelerate digital development to transformation in Rwanda). Among other facilitate large scale quality expansion of digital objectives, Rwanda’s NST-1 focuses on the need for integration in delivery of TVET and degree human capital development and includes a target training programs; and strengthen capacity gaps in to increase the proportion of students pursuing the institutional framework for skills development TVET from 31.1 percent in 2017 to 60 percent (notably, digital development for ICT integration by 2024, and the need to make TVET training in program delivery, and system capacity building 56 CHAPTER 2 Rwanda CEM | 2024 to strengthen engagement of the private sector development. Cross-cutting skills such as work in skills development). In addition, speci c skills readiness, English pro ciency, communication, are associated with climate change adaptation and social-emotional skills, and functional literacy decarbonization, for example skills related to value should be integrated into regular training. chains in solar power, climate smart agriculture, Improved information ow between jobseekers and e-mobility, will require a special focus. and employers is also needed, supported by stronger career services at training institutions. Sustaining e orts in innovative research will be Additional measures include rolling out soft essential to maintain a high quality and productive skills and work-readiness curricula in TVET labor force in Rwanda. Notably, growing and higher education, expanding STEM economies also need innovative post graduate outreach at the secondary level, o ering professionals and researchers to drive transformative mentorship programs, and promoting blended economic development. To that end, ACE II, is learning and green skills training, including strengthening four centers of excellence at the climate-sensitive agriculture. University of Rwanda. ese centers deliver quality b. Quality: while access to TVET and tertiary post-graduate education and build collaborative education is improving, the quality of the programs research capacity in energy, ICT, data science, and remains a concern. While access to TVET and education. Cumulatively the Rwandan ACEs have tertiary education in Rwanda is improving, enrolled almost 900 master’s and PhD students the quality of programs remains a concern. of which 20 percent are regional students; o ered Delivery is hampered by a shortage of quali ed more than 35 nationally accredited programs; have instructors, poor curriculum design, weak signed 45 MoUs with private sector and industry; industry-academia linkages, limited internship and have published 450 research publications in opportunities, and inadequate facilities. To peer-reviewed journals. address these barriers, the government should conduct a mapping study to identify capacity A structurally transformed Rwanda through skills and quality gaps across institutions, including and science will entail continued e orts to address faculty quality, infrastructure, instructional gender equalities in research activities. Stronger materials, and student outcomes. Expanding e orts are needed to increase the number of capacity in under-o ered programs, increasing public sector investment, and attracting more girls enrolled in STEM subjects in secondary PPPs like Carnegie Mellon University (CMU) education. Despite the government’s goal of are crucial steps. Institutional di erentiation is gender parity in STEM by 2024/25, females also needed to enhance the teaching-learning make up only 32 percent of students in STEM environment and improve curriculum delivery programs at the tertiary level. A structured pre- and assessment. Establishing Centers of university, or bridge, academic support program Excellence (CoEs) in priority sectors can drive could address pre-entry gaps for young women this e ort, partnering with a network of related transitioning to tertiary levels. training institutions to optimize resources and facilities. Additionally, the lack of sustainable Along with enablers on the labor demand side (such funding for internships limits students’ access to as job creation), there are clear areas for additional practical training. A costed operational plan is interventions on the labor supply side: essential for implementing the existing Rwanda Work-Based Learning (WBL) policy, ensuring a. Relevance: evidence from tracer studies in that students can gain practical experience, Rwanda highlights skills mismatches and gaps in develop work-based skills, secure jobs, and tertiary education infrastructure and teaching. expand their networks. To address these challenges, training programs c. Access and equity. Application volumes at public must align more closely with labor market needs, TVET institutions, especially the IPRCs, are with the private sector playing a key role in skills extremely high. Due to limited capacity, many audits and curriculum reviews to ensure core quali ed students are turned away from technical industry competencies are met. Establishing and vocational programs. Student nancing is Sector Skills Councils (SSCs) in priority sectors inadequate, with gaps in a ordable on-campus can further institutionalize employer-led skills or o -campus accommodation. To address this, Rwanda CEM | 2024 CHAPTER 2 57 Agence Française de Développement (AFD) f. Enhancing governance of the skills development is conducting a feasibility study for a PPP system. (Capacity constraints on regulation, framework to build and manage a ordable external and internal quality assurance student hostels. Enrollment fees and a lack of mechanism, and use of data, and measurement- scholarships or nancial support also create for employment outcomes and program/ barriers to accessing tertiary education, intervention objectives). Without systematic internships, and apprenticeships, raising governance of the skills developments sector, equity concerns. Increasing nancial assistance including data collection and use, many of the and incentives for students to pursue tertiary proposed recommendations above may not be education, especially in priority programs e ectively implemented and measured. ere is aligned with labor market needs, is critical. a large number of development partners working d. Inadequate support for entrepreneurship, with the Government of Rwanda bridging business development, and upskilling programs. skills gaps in the country. E orts should be Establish integrated entrepreneurship and coordinated for better delivery and scale up. business development support as part of the g. Strengthening of initiatives facilitation school- TVET curriculum, and for non-formal skills to-work transition including help to young development including apprenticeship training people to start their own business. In addition (work experience in-build), additional scope to basic business (entrepreneurship) training, of integrate entrepreneurship curriculum incubators, business advisory services, soft is required, with comprehensive business loans, and networking have proved to be useful development services, including incentives for instruments for this purpose. Along the same a ordable capital, toolkits, and incubators. line, there is an urgent need to improve the skills In addition, there is a need to fund on the level of the informal sector. SDF has successfully job training/upskilling programs for existing piloted an initiative aiming at this. employees in the labor force through better targeting and greater involvement of the host 2.6.5. Increase access to nance company. Establish enforceable agreements with Rwanda will achieve adequate and inclusive the host company on retention of employees nancial service delivery to the private sector post training and a clear understanding of the through a holistic approaching addressing objectives of the training. challenges undermining both savings mobilization e. Appropriation and use of digital resources, and capabilities and rms’ readiness to fully tap on development of digital skills. e development available nancial products across the country. of digital skills requires a combination of In this regard, more emphasis should be put on training, access to technology and opportunities MSMEs, as they are the most deprived of nancial to practice and consolidate the learnings. It is services in Rwanda. critical to establish a Digital Skills framework to guide the capacity building activities for 2.6.5.1. Scaling up access to nance for MSMEs Instructors/teachers, to provide a broadly an MSMEs urgently need support to close the nance easily accessible high quality internet service, access gap. Lending rates remain high, and credit access or ownership of digital devices and digital is primarily short-term due to both demand- and content and learning experiences that allows the supply-side constraints. While credit guarantee users to employ their digital skills. As digital schemes help address collateral mismatches skills acquisition is a gradual process, there is faced by MSMEs, they are not widely used in also a need to provide continuous learning and Rwanda. Limited availability and access to data practice opportunities and assess and validate the make it di cult for lenders to assess borrowers’ progression in digital competencies throughout creditworthiness, especially farmers, which hampers time. e development of digital skills should lending to MSMEs. ese challenges highlight the be supported by a well-articulated policy that potential for rapid and visible improvements in establishes a vision and timebound targets and lending terms and conditions. To achieve this, the the roles of the di erent stakeholders. following reforms must be implemented vigorously: 58 CHAPTER 2 Rwanda CEM | 2024 Invest in nancial literacy and business to these segments, including MSMEs. e management skills of MSMEs. Promote NBR can facilitate centralized and easy access programs that support the development of to such databases, creating, for example an business and nancial skills of entrepreneurs. online data portal that would allow access to Speci cally, develop a broad training and detailed historical data for the public. awareness agenda targeted to the MSME Improve the information infrastructure to segment to develop the management mitigate information asymmetries associated capabilities (including accounting skills, with MSME nancing. Policymakers should market research, project implementation, continue to strengthen the credit reporting among others) of these entrepreneurs, while system by expanding the coverage and depth fostering nancial literacy. e agenda should of credit information to address the existing promote the understanding of nancial data gaps—from increasing e orts to expand products and how they can be used to support data collection to improve the availability, business operations. scope, and frequency of data on potential Increase support to the digitalization and borrowers. In doing so, policymakers consolidation of SACCOs to address the would address two objectives: (i) reduce the fragmentation and lack of scale of individual degree of information asymmetries between SACCOs. e Government of Rwanda borrowers and lenders; and (ii) foster the use has embarked on a reform agenda to foster of data analytics among nancial institutions, automation and the consolidation of so that they can identify and assess the Umurenge SACCOs (U-SACCOs). e rst creditworthiness of potential borrowers in a phase of the program focuses on automation cost-e ective manner, thus allowing them to of operations, migrating out of legacy systems; more e ectively price risk, improve the quality the second phase focuses on the consolidation of nancial service provision, and expand U-SACCOs into District-SACCOs to create their outreach to the MSME segment. E orts interoperability and improve e ciency and should concentrate on two fronts, as follows: quality of service delivery (U-SACCOs would operate as branches of the District SACCOs); i. Expand the coverage and depth of credit the third phase entails the establishment of a information on individual borrowers. e cooperative bank to foster synergies within the development of data analytical tools is critical system, helping achieve gains from economies for greater outreach to under-served segments of scale. e program thus proposes a 3-tier such as MSMEs. But the range of information structure comprising individual U-SACCOs currently available to lenders or potential at the bottom, District SACCOs as a middle borrowers is limited, especially positive layer, and a cooperative bank at the top. data, thereby hindering the development Address signi cant data gaps on MSMEs. of such tools. Policymakers should step Financial institutions should adopt a up e orts to expand the data coverage to harmonized de nition of MSMEs for include additional sources26 of information reporting purposes. e adoption of such beyond regulated nancial institutions, with harmonized measure should be enforced for mandatory reporting of both positive and regular reporting of data to the National Bank negative information. Policymakers should of Rwanda (NBR) by nancial institutions to also ensure that nancial institutions have facilitate the data gathering process as well as access to the data.27 data analytics and dissemination. In addition, ii. Movable assets need to better serve as policymakers should: (i) expand the data collateral. Although they typically account collection e orts, especially for under-served for most MSMEs’ assets, banks are typically segments such as MSMEs; (ii) regularly reluctant to accept movable assets due to publish summary reports; and (iii) maintain shortcomings in the legal and regulatory an updated online database with detailed environment, the lack of consistency of statistics on the provision of nancial services collateral enforcement, and the under- Rwanda CEM | 2024 CHAPTER 2 59 utilization and/or lack of a collateral registries (that is, nancial-literacy events, training sessions, (that are centralized, electronic) for such seminars, workshops, and classroom-based lectures) assets. Priority measures to modernize the are mostly unsuccessful in sustaining behavioral secured transactions framework could address change (Gradstein, Bint Abbas, & Tomilova, some of these issues. 2021). Emerging evidence suggests that key behavioral tools and practices, such as simplifying 2.6.5.2. Boosting savings to increase access to nance nancial education into concrete, actionable steps, ere is considerable scope to increase Rwandans’ personalizing education, providing short, timely propensity to save, particularly through formal messages, and making education convenient and institutions, thus increasing the nancial resources easy to access, have successfully changed consumer available to rms. One promising approach is to knowledge, decision-making, and nancial strengthen BNR programs on improving nancial behaviors. Implementing the required nancial literacy. BNR has developed a National Financial capability initiatives to improve savings behavior, Education Strategy and has several nancial using the most e ective methods, is a high priority, literacy initiatives programmed each year.28 and should have a high level of feasibility especially What is lacking, however, is targeted education if coordinated with other nancial inclusion to improve digital nancial literacy, particularly and stability initiatives. Creating an appropriate in light of the emerging consumer risks that environment for digital nancial services could are evolving along with the growth of ntech. help to increase savings through formal nancial Conventional approaches to nancial education institutions (Box 2.5). BOX 2.5: Strengthening the enabling environment for digital nancial services (DFS) Digital Financial Services (DFS), enabled by ntech, has the potential to lower costs, increase speed, security and transparency and allow for more tailored nancial services that serve the poor at scale. DFS are characterized by low marginal costs and greater transparency. ey can respond to both the supply-side and the demand-side barriers of uptake of savings products. DFS require a robust set of enabling factors to be in place to ensure nancial integrity, stability and competition. ese policy enablers can be divided into three categories: conducive legal and regulatory frameworks; enabling nancial and digital infrastructure; and ancillary government support systems. Addressing these three areas requires policymakers to look at a wide range of critical issues. ese include: 1. How to enable basic digital connectivity and mobile phone penetration. 2. Whether and how to permit non-banks to have access to national payment infrastructure and to issue electronic money. 3. How to enable and regulate widespread ‘agent networks’ that meet the need for the cashing-in and cashing-out of digital accounts because most economies remain cash based. 4. Rolling out digital and biometric ID systems. 5. How to enable access to government data platforms. 6. How to ensure competition for DFS, considering dominant platforms which engage in DFS; and 7. How to regulate non-traditional players that o er nancial services. Using the framework of the G20 High-Level Principles (HLPs) for Digital Financial Inclusion, the following are policy recommendations to stimulate digital savings: 1) HLP 1: Promote a digital approach to nancial inclusion: Incorporate saving elements in national nancial inclusion strategies. Highlight the importance of a ordability, exibility, accessibility, and customization in digital savings account o erings. Facilitate the integration of digital savings account options with government-to-person payments and encourage providers to o er options for earmarking portions of salaries for digital savings accounts. 2) HLP 2: Balance innovation and risk to achieve digital nancial inclusion: Establish policy practices for enabling digital savings competition while facilitating cooperation and e ective partnerships. Support a “multispeed” approach to digital savings inclusion, as some consumers may be ready to move beyond digital savings accounts to digitally enabled, market- based wealth-building products. 3) HLP 3: Provide an enabling and proportionate legal and regulatory framework for digital nancial inclusion: Develop a legal and regulatory framework that allows banking institutions to pursue digital savings partnerships with nonbank entities and conduct limited purpose banking services through retail agent networks. Where appropriate, consider regulatory sandboxes for limited purpose, technology-driven digital savings account deployments. Harmonize, where prudent, the application of a risk-based approach to customer due diligence for e-money wallets and bank deposits, as imbalances can hinder the acquisition of digital savings customers. 60 CHAPTER 2 Rwanda CEM | 2024 4) HLP 4: Expand the DFS infrastructure ecosystem: Support the development of nonbank e-money issuer-to-bank interoperability, which serves as the technological backbone for digital savings partnerships and distribution strategies. 5) HLP 5: Establish responsible digital nancial practices to protect consumers: Ensure customer funds protection standards are robust for bank deposits and e-money accounts. Ensure customers are a orded critical information about digital savings accounts at point of opening, noting that information sharing may occur unconventionally, such as directly on a mobile phone or through an agent-facilitated document collection process. 6) HLP 6: Strengthen digital and nancial literacy and awareness: Incorporate saving elements in nancial education strategies. 7) HLP 7: Facilitate customer identi cation for DFS: Continue to implement, re ne, and expand national identi cation systems, and align know-your-customer requirements for basic transaction accounts and savings accounts. 8) HLP 8: Track digital nancial inclusion progress: In cooperation with digital savings providers, gather and publish data on deposits facilitated through digital channels, as such information is critical for understanding digital savings opportunities and risks. Moral suasion and the licensing process can be now represent 4 percent of GDP, and are projected used to encourage nancial institutions to provide to continue growing (Box 2.6). Worldwide, they low-income households with nancial services represent a signi cant source of nance and that are focused on meeting customer needs (see have helped lift households out of poverty while the CGAP Customer-Centric Guide), in order to improving education and health services. ere is encourage greater nancial savings. As part of the strong evidence that the growth of remittances in product licensing process, Rwandan authorities Rwanda has been due to the increased formalization may consider requiring providers to prove that of these ows. As such, they represent a new source their savings, pension and insurance products of capital for investment through the formal have been developed using a customer centric nancial system. approach and that they also respond to the needs of lower income and marginalized segments. is e successful Ejo Heza program could be is a relatively low priority, because it will require strengthened to further boost the growth of changes in management practices and the results coverage and increase the contributions made may be di cult to assess in the short term. by subscribers. Improvements in the incentives framework could include allowing short-term Authorities could encourage savings through access to 30-40 percent of funds to encourage a nancial institutions by supporting greater new class of savers, increasing the minimum savings innovation in nancial products. A review of level to be eligible for government incentives research and feedback received from a small sample (70 percent of respondents to a survey on Ejo of FSPs in Rwanda point to a lack of innovation Heza reported they would likely save more if the in nancial products. Steps could involve easing matching threshold were increased, [World Bank regulatory barriers to innovation (for example Group, 2023]), divert collected VAT revenues providing greater regulatory discretion to directly into individual Ejo Heza accounts as a encourage innovation, strengthening the product contribution (60 percent of respondents said this approval process, improving regulatory certainty would encourage them to save, 27 percent said and establishing enabling infrastructure, such they might save in this case), and requiring more as national databases); facilitating innovative well-o individuals (in categories U3 and U4) to businesses (introducing greater regulatory contribute to Ejo Heza. In addition, the design of exibility, informing market players, and using tax the program could be improved by xing the rate incentives or subsidies); and designing regulation of return on contributions, indexing contributions to incentivize innovation rather than fragmentation to in ation, using a single fund management and irrational competition, e.g., risk-based approach to avoid incentive incompatibility supervision, and separating old or disallowing new (ideally using a govt. fund manager such as composites (insurers that provide both life and the Rwanda National Investment Trust), and non-life insurance). imposing mandates concerning a minimum level of nancing of domestic capital formation Remittances represent an alternative (and, to from fund resources. Annex 4.2 provides a list of date, underutilized) source of nance. Remittance technical changes that could improve performance in ows have increased considerably since 2016, of the program. Rwanda CEM | 2024 CHAPTER 2 61 BOX 2.6: Remittances are growing and can be an important source of nance Patterns of recent remittance growth Remittance in ows to Rwanda have grown steadily since 2016. From about US$107 million in 2010, remittances grew to about US$175 million the following year and stayed at for a few years, increasing sharply beginning in 2016 to about 391 million dollars in 2021 (World Bank, 2022, Figure 2.28). ey are estimated to have increased further to 469 million dollars in 2022, equivalent to nearly 4 percent of GDP. 29 rough the rst half of 2022, the large in ow of remittances, together with o cial transfers, has helped curb the widening trade de cit (IMF, 2022). Remittances are projected by the IMF to continue to grow through the next few years. e growth in Rwanda’s remittances far exceeds the growth Figure 2.28: Rwanda: Remittance In ows, 2010–27 worldwide—and the drivers are unclear. e increase in remittances (In millions of US dollars; projections after 2023) began prior to the pandemic and the county has experienced a particularly rapid increase since 2020. In part, this is consistent with 700 the “surge” of remittances worldwide in 2021—equivalent to about 600 10 percent growth, driven by easing covid restrictions, a post-covid global economic reopening and recovery, among other reasons (Ratha, 500 et al., 2022). is is also consistent with the economic recovery in 400 2021 of the known country sources of Rwanda’s remittance in ows, 300 led by Kenya and the United Kingdom. However, the growth of remittances in Rwanda, equivalent to nearly 40 percent growth, 200 far outstrips the global surge and the growth rate of remittance 100 source countries. And though worldwide the growth in remittances 0 is estimated to have slowed in 2022, down to about 4.9 percent— 2020 2010 2018 2022 2023e 2016 2015 2019 2014 2013 2012 2021 2026p 2025p 2017 2024p 2011 2027p amidst global economic turmoil and con ict—remittances to Inflows Estimates Rwanda are estimated to have continued to grow by 20 percent. Source: Calculations based on World Bank (2010–23 data) and IMF (2024–27). In part, the growth of remittance in ows likely re ects the increasing The World Bank data are the most recent estimates from KNOMAD, December 2022. The IMF data are from the June 2022 sta report. formalization of remittances. Informal or unrecorded remittances worldwide are thought to be large, at least half as large as o cial ows (Ratha, Mohapatra, & Scheja, 2011).30 Beginning around 2020 and driven by constrained mobility, many parts of the world experienced an increasing “formalization” of remittances, as remittances previously sent through informal channels— hand-carried by the migrant workers themselves, or sent through personal intermediaries—were sent electronically for the rst time (Caron & Erwin, 2020; Dinarte Diaz, et al,, 2021; Dinarte Diaz, et al., 2022; Mughogho, 2021). In Rwanda, digital transfers were estimated to have expanded by 400 percent in 2021.31 e promise of remittances as a source of nance e rapid growth in remittances represents the growth of a critical nancial resource for development. Robust microeconomic evidence worldwide has shown that remittances have helped lift countless people out of poverty and have helped improve education and health outcomes (Adams, 2011; Andersson & Siegel, 2020). Because remittances tend to be countercyclical, they have provided a valuable safety net to numerous migrant households. In Rwanda, there is evidence to suggest that international remittances can help reduce poverty by half (Kadozi, 2018). e formalization of remittances also represents a growing resource for investment and nancial inclusion through the formal nancial system. Policy measures to help attract more remittances Easing the cost of sending remittances to Rwanda can help facilitate more in ows. Between Tanzania and Rwanda, the cost of sending remittances is among the world’s most expensive corridors. e cost of sending about US$200, in particular, is equal to about 20 percent. e global average, in contrast, is about 6 percent (Ratha, et al., 2022). Regulatory constraints and the limited entry of new remittance transfer operators all serve to push the cost of sending remittances. Finally, bolstering interoperability with other in the organized segment of the informal economy government systems and integration with private (earnings that go through a centralized professional sector should have signi cant bene ts for Ejo organization, such as a cooperative, or digital Heza. e high costs of signing up new members platform). It also requires the product to be good (cost of agents and telco marketing costs) could be to start with (low administrative fees, good returns, reduced by promoting contributions (on an ‘opt etc.), otherwise loss of trust could ensue. out’ basis) from informal and self-employed earners 62 CHAPTER 2 Rwanda CEM | 2024 2.6.6. ICT innovation agenda the 2022 rankings, behind only Kenya in Africa Rwanda’s new policies already include measures to that scored 90 percent. However, the World address many of the challenges to achieving e ective Bank’s Regulatory Watch initiative noted that and e cient ICT services. In October 2022, the RURA is yet to publish any decision on signi cant Ministry of ICT and Innovation (MINICT) market power (SPM), which could point to weak spearheaded Government’s adoption of a new enforcement of existing competition regulation. National Broadband Policy and Strategy, which Market data published by the regulator suggest looks to promote further competition and address that MTN Rwanda has gained a growing market the broadband adoption challenge (Ministry of share of mobile communication in recent years. ICT, 2013). For example, the new policy liberalizes Competition could also improve through the technology deployments and wireless access introduction of a reference interconnection o ers spectrum assignments. is is set to change the (RIO), which is yet to be published, as well as market structure, particularly for 4G, which has improvements to spectrum management, covering held back the development of this market segment next generation technology such as 5G. ere is to date. e policy also points to areas where more also room to improve infrastructure sharing to regulatory action is needed. reduce service costs. Improving services quality and a ordability will be key to boosting further uptake. Priority 1: Bridging the digital access and usage gap Boosting uptake and bridging the usage gap will for consumers and rms also require scaling current initiatives that address demand-side constraints. Several factors explain Continued investment in network upgrades and why roughly three-quarters of the population is densi cation will be needed to keep pace with still o ine. ese include a ordability of data next generation technology development. 4G plans and broadband-compatible devices, gaps in infrastructure deployment will not be adequate digital literacy, awareness, and lack of attractive to accommodate future tra c volumes, requiring content that boosts the value proposition of being further investment in network densi cation connected. Notably, the 2022 Census found that and deployment of LTE Advanced 4G and 5G only 24.3 percent of the population above the aged networks, and xed lined broadband networks. of 16 years own a smart phone, which would allow Ensuring that related networks deployed are them to connect to existing broadband networks. climate smart will also be important to build e Government has sought to address this through resilience, given Rwanda’s vulnerability to adverse a blanket tax exemption for digital devices, covering climate events such as ooding and landslides, to import duties and VAT and local manufacturing prevent network disruptions and costly repairs. initiatives; however, there is a need to also scale Greening older and newer networks deployed to access to consumer nancing, via subsidies and minimize the emissions stemming from digital de-risking guarantees. Meanwhile, digital literacy infrastructure by using the latest climate smart stands at only 20 percent nationally. Government and energy e cient network technology will also is looking to address this by scaling initiatives like be imperative. is investment will need to come the Digital Ambassador Program and increasing mainly from the private sector. Further support for digital skills training in the basic education system. parallel infrastructure deployment should also be Related e orts will need to go hand-in-hand with encouraged to reduce the investment cost required supporting the development of attractive and and ensure both electricity and connectivity access. locally relevant public and private digital services e country will also need to diversify and boost and solutions. access to international capacity to accommodate future tra c volumes. Priority 2: Creating a data ecosystem conducive to Regulatory benchmarking suggests that Rwanda service innovation and e-commerce has scope to increase its regulatory action in A well-designed data governance framework would several areas, including competition and spectrum enable Rwanda to capture the full economic and management, to achieve greater market e ciency. social value of both public intent and private intent Rwanda already ranks very high on the ITU’s ICT data and leverage synergies between them. is Regulatory Tracker. Rwanda scored 88 percent in involves creating trust in the integrity of the data Rwanda CEM | 2024 CHAPTER 2 63 system, while ensuring that the bene ts of data (for instance Cape Verde, Kenya, Benin, and are equitably shared (World Bank Group, 2023). Nigeria), but overall Rwanda has adopted more Rwanda has made strides in developing its data good practices for safeguards compared to the governance in recent years. Key developments regional averages (with a score of 46 compared to include the adoption of a comprehensive law on the regional average of 30). personal data protection in 2021, which came into e ect on October 15, 2021 (Law no. 058/2021 Non-personal data and cross-border data ows of 13 October 2021 Relating to the Protection of dimensions are particularly underdeveloped in Personal Data and Privacy), and the establishment Rwanda. To date, Rwanda has not implemented of an independent Data Protection O ce. regulatory good practices to facilitate the portability of non-personal data and guarantee net neutrality Rwanda has relatively strong regulatory frameworks (under the non-personal data dimension). While for both data safeguards and enablers compared to the law on the protection of personal data and global averages. Today, Rwanda has an advanced privacy (Law no. 058/2021) includes provisions on framework for enablers (with a score of 75 compared cross-border personal data transfers, this dimension to the global average of 56) and an evolving remains signi cantly underdeveloped. For instance, framework for safeguards (with a score just above the Rwanda lacks arrangements with other countries global average: 46 compared to 45, see Figure 2.29). to facilitate cross-border data ows and has not With scores of 85 for personal data protection, 81 published model data transfer agreements or for cybercrime and cybersecurity, and 100 for binding corporate rules to facilitate compliance for e-transactions, Rwanda scores higher compared cross-border data transfers (Figure 2.30). Moreover, to global, regional, and income-group averages on the personal data protection law features data enablers. Only two other countries in the region have localization requirements that limit the extent to more advanced regulatory frameworks for enablers which data can be shared across borders. Rwanda (Burkina Faso and Cape Verde), where the regional requires data processors and controllers to store average score is 42. Nevertheless, Rwanda can still data within the country’s borders unless they obtain strengthen its personal data protection legislation authorization from the data protection authority to and cybercrime and cybersecurity framework to store data internationally. Addressing this will be close the gap to the global frontier (World Bank, key to supporting further digital market integration 2023). In terms of safeguards, several countries in in the region and beyond and encouraging cross- the region do have more advanced frameworks border e-commerce (World Bank, 2023). Figure 2.29: Benchmarking Rwanda on data governance, 2023 Source: Unpublished data collected in 2022 for the Global Data Regulation Diagnostic, World Bank 64 CHAPTER 2 Rwanda CEM | 2024 Figure 2.30: Rwanda’s performance on key dimensions of computing services. Rwanda introduced a tier-3 data governance National Data Center in 2010, nanced through bilateral assistance from the Korean Government.32 e National Data Center has allowed for the expansion of cloud-based services, including the roll-out of a government cloud (G-Cloud), which has in turn enabled Ministries, Departments, and Agencies (MDAs) to share more data and host services in a shared environment. However, there is scope to streamline and expand the use of cloud- based ICT infrastructure to improve services delivery among Government MDAs. Consultations Source: Unpublished data collected in 2022 for the Global Data Regulation Diagnostic, World Bank indicate that there is also a need to upgrade and expand the National Data Center, following ten plus years of service, in line with growing and Priority 3: Upgrading and introducing digital public projected demand, as well as global e ciency infrastructure standards for greening data centers. However, there While the Government of Rwanda will continue to is scope to crowd in more private sector funding to ensure a robust and enabling regulatory framework improve data hosting. Several operators, including to expand access and usage of digital technology, Liquid Telecom and MTN, already have data some public investment will also be required to centers o ering commercial services. Rwanda also ensure that digital public infrastructure (DPI) is in launched an Internet Exchange (RINEX) in mid- place. While DPI is a new and evolving concept, 2004, allowing more tra c to be exchanged locally it broadly refers to the shared and cross-cutting by ISPs, reducing latency and improving quality platforms used by both the public and private of services.33 Government launched an Enterprise sectors to scale digital services, including (i) trusted Service Bus (ESB) to connect di erent public sector data exchange; (ii) payments infrastructure; and (iii) IT systems in 2019, allowing them to exchange digital identi cation and authentication. ese are data. However, the system still does not collect all commonly also referred to as the “technology stack”, MDAs and needs to be upgraded further to ensure which have been used by countries such as India full interoperability. and Singapore to accelerate access to and adoption of digital services. ese are building blocks for Rwanda’s data governance framework will need to be data driven service that are often less suited for fully operationalized and keep pace with emerging 100 percent private sector nancing but are critical risks posed by an increasingly digital economy in the public goods that can be re-used by public and years ahead. Rwanda is still setting up a functioning commercial services providers to generate new Data Protection O ce. e country will also services, e ciency gains and economic value (Desai, need to continue to build operational capacity to Marskell, & Marin, 2023). anticipate, prevent and respond to growing cyber security risks, inter alia increasing cybersecurity 1. Trusted data sharing awareness in the public sector and among businesses Foundational data infrastructure will need to and consumers. Data breaches and cyber-attacks be upgraded and extended to create an enabling can cause enormous economic harm and erode environment for data-driven services. Many trust in digital technology, thwarting further digital countries in Africa lack the data infrastructure adoption. Rwanda introduced a Rwanda National needed to speedily exchange their own data tra c Computer Security and Incident Response Team over the internet and secure cost-e ective access (Rw-CSIRT) in 2014 and in 2017 a National Cyber to modern data storage and cloud computing Security Authority (NCSA) was legally established, facilities. However, Rwanda already does have some which was later operationalized in 2020. e domestic infrastructure to exchange, store, and NCSA, which is home to Rw-CSIRT, will need to process data locally, which the country will need to continue to mature. Rwanda scored 79.95/100 in continue to build on. ere are several data centers the 2020 ITU Cybersecurity Index (International in the country providing data storage and cloud Telecommunication Union (ITU), 2021). Rwanda CEM | 2024 CHAPTER 2 65 2. Digital identi cation and authentication e Kigali Innovation City project was launched Rwanda bene ts from a robust foundational as a technology hub to stimulate innovation. In identity (ID) ecosystem, which Government is set 2020, Government also launched the Rwanda to upgrade to a single digital ID system, which Space Agency (RSA) to regulate and coordinate will introduce a digital credential and increase the all space activities in the country, while creating accuracy of ID data. A new ID law was published an environment that encourages entrepreneurial in the o cial gazette in June 2023 to support this and industrial development of space technologies initiative. Robust and trusted ID is an essential to enable the creation of products that are globally enabler for service provision and innovation. competitive for local consumption and export Rwanda has rolled out a nascent e-signature system, markets. anks to these initiatives Rwanda can based on public key infrastructure, but there is scope showcase a handful of successful use-cases of to develop this system further to enable seamless emerging technology—for example, Rwanda was online transactions. Uptake is still limited among an early adopter of drone technology. A few start- MDAs and industry. ups have also emerged, including Circular, using blockchain technology to trace and ensure ethical Priority 4: Translating the enabling framework into sourcing of minerals. wider adoption of emerging technology However, business adoption of emerging technology e Government of Rwandais an active proponent is yet to scale to the extent that it can translate of using emerging technologies to drive services into economy-wide productivity gains. Several innovation, launching several enabling policy and factors explain this, including the large gaps in capacity building initiatives, as well as partnerships basic digital adoption among Rwanda’s SMEs and to drive innovation in this area. In April 2023, traditional industries noted above but also the skills the Cabinet of Rwanda approved the National gaps in supporting the development of relevant Arti cial Intelligence (AI) Policy, becoming the rst applications in business. For example, further country in Africa to do so. Rwanda is also home development of the advanced and highly specialized to Africa’s rst World Economic Forum (WEF) digital skills base will be needed to drive further Center for the Fourth Industrial Revolution (C4IR) adoption. e Government of Rwanda has already in Africa—a global network of centers focused on taken steps to support capacity building, education, shaping policies and governance frameworks for and training initiatives to address this gap e.g., in emerging technologies, including AI, blockchain, areas such as data science, which will need to be and the Internet of ings (IoT). e Centre scaled and accessible to more students. Examples is Rwanda focuses on data governance, AI and include the African Centre of Excellence in Data machine learning. e Government of Rwanda Science (ACE-DS) initiative at the University of has also partnered with a private rm called Cenfri, Rwanda, supported by the World Bank’s ACE II as part of the Rwanda Economy Digitalization Project; the Big Data for Development project by Program, nancially supported by the Mastercard African Institute for Mathematical Science Next Foundation, which seeks to harness the power Einstein Initiative (AIMS-NEI); and Carnegie of data analysis to enhance policymaking, foster Mellon University Africa’s data analytics program. innovation, and ultimately uplift livelihoods across However, there is also a need to develop regulation agriculture, MSMEs, tourism, and education. for emerging technology further. 66 CHAPTER 2 Rwanda CEM | 2024 Annex 2.1. Matrix of key policy recommendations: MSME development NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 2.2.1 Policy Area 1: Advancing Cross-cutting Business Environment Regulatory Reforms. Priority Area 1: Strengthen Rwanda’s insolvency legislation, the regulation of insolvency administrators and institutional capacity. Reforming the insolvency regime to support job preservation through business reorganization, stimulate investment through better recovery rates and return to creditors and promote entrepreneurship. Regulate and improve the insolvency ecosystem through (i) new legislation RDB MP ST HF to expand the outreach and e cacy of the 2021 Law, as well as (ii) upgraded capabilities across the array of Insolvency Practitioners (IP). Priority Area 2: Enhance the implementation of policies to reduce risks of distortions to the level playing eld Strengthen privatization legislation, regulations and procedures to support MINECOFIN HP ST HF successful divestiture or liquidation of SOEs and enterprises with direct or indirect shareholdings when needed, as well as develop a consistent framework to decide on the creation of SOEs Categorize and rationalize the SOE landscape. Sector-based analysis of the MINECOFIN HP MT HF economic rationale for government participation, SOE performance and achievement of policy goals, and competitive neutrality. Together with e orts towards improving SOE management (See below) and improving the PPP process ow and regulatory framework (see recommendation in Chapter 7, Section 4.7.4), this will contribute to crowd-in private investment and secure the optimal use of public funds, thus building scal bu ers that support the state’s nancial capacity. Strengthen competition policy implementation by updating and MINICOM MP MT MF enhancing the current legal framework, reinforcing the institutional capacity of RICA, and prioritizing actions to unlock barriers to entry and fair competition. 2.2.2 Policy Area 2: Supporting Firm Competitiveness rough Improved Capabilities. Priority Area 1: Facilitate Sector Competitiveness policies. Sector Screening and Prioritization exercise, including cluster mapping MNICOM, and the identi cation of priority sectors for proactive FDI promotion. RDB Pilot Sector Competitiveness Initiatives at the sector or cluster level. ese MINICOM HP MT HF initiatives combine competitive strategy analysis with a participatory (DG process with sector stakeholders, including rms, as well as private and INDUSTRY), public associated institutions. RDB, MINAGRI Building institutional capabilities necessary to systematically conduct MINICOM HP MT MF sector competitiveness policies in Rwanda. Creation of a coordination (DG mechanism or institution to facilitate the development of competitive INDUSTRY), clusters in Rwanda and channel nancial resources and public goods RDB, supporting the implementation of cluster action plans. MINAGRI Priority Area 2: Upgrade and rationalize the portfolio of SME support schemes across the GoR. Institutional mapping exercise of rm-level support mechanisms across MINECOFIN, HP ST HF government agencies. e activity would map all programs and service- RDB, oriented instruments rms in Rwanda can currently access MINICOM, others Functional analysis of the schemes and impact evaluation of the MINECOFIN HP MT HF current SME policy mix. e WB’s Public E ectiveness Review (PER) methodology could be used to evaluate the e ectiveness of the Government of Rwanda’s portfolio of rm-level support mechanisms and inform recommendations to improve it. Rwanda CEM | 2024 CHAPTER 2 67 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 2.2.3 Policy Area 3: MSME Access to nance. Priority Area 1: Invest in Financial Literacy and Business Management Skills of MSMEs. Promote programs that support the development of business and nancial skills of entrepreneurs. Develop a broad training program targeted to the MSME entrepreneurs MINECOFIN, MP MT MF to strengthen their management capabilities, alongside accounting skills, MINICOM, market research, project implementation, etc. RDB, BDF CMA Foster nancial literacy in the MSME segment. Establish an awareness agenda targeted to the MSME to promote their understanding of nancial products and how they can be used to support business operations. Priority Area 2: Increase the Support to the Digitalization and Consolidation of SACCOs. Address the fragmentation and lack of scale of individual SACCOs through automation. Accelerate the digitalization of Umurenge SACCOS (U-SACCOs). NBR, RCA, HP ST HF MINECOFIN Consolidate U-SACCOs to create interoperability and improve NBR, RCA MP MT MF e ciency and quality of service delivery. MINECOFIN, Adapt the process of digitalization, automation in processes, and adoption of data analytics to agricultural sector. Strengthen the engagement with the agriculture sector. MINAGRI, HP ST HF NBR, BRD, BDF Develop and deepen the capacity of U-SACCOs, to acquire signi cant agriculture sector-speci c knowledge. Priority Area 3: Address data gaps on MSMEs. Adopt and enforce the use of a harmonized de nition for regular NBR, RDB HP MT MF reporting of data to the National Bank of Rwanda (NBR) by nancial institutions. Facilitate the deepening of the MSME data gathering process as well as data analytics and dissemination. Priority Area 4: Develop accountability mechanisms on the nancial services delivered to MSMEs and Improve the Information Infrastructure. Address data management and access on MSME nancial services. Maintain an updated online database with detailed statistics on the NBR HP MT MF provision of nancial services to MSME segments of private businesses. Strengthen the capacity of the NBR to centralize e ciently data NBR collection e orts on the nancial services o ered to MSMEs. Improve the information infrastructure to mitigate information asymmetries associated with MSME nancing Strengthen the credit reporting system by expanding data collection NBR, RDB HP MT MF e orts to improve the availability, scope, and frequency of data on potential borrowers, 68 CHAPTER 2 Rwanda CEM | 2024 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 2.2.4 Policy Area 4: ICT, Innovation, and Productivity. MINICT/ RISA/ RURA/NCSA Priority Area 1: Improve Digital Access and Usage in Rwanda Fully liberalizing the 4G and 5G market, implementing related provision in HP ST HF the new Broadband Policy (RURA) Ensure e ective implementation of broadband market competition regulation HP ST HF to drive down prices and encourage infrastructure investments Scale digital literacy programs for consumers and SMEs HP MT HF Scale digital skilling programs in the formal education system at all levels HP MT/LT MF Institute nancing mechanisms aimed at ensuring a ordability of smart HP ST/MT HF devices Priority Area 2: Strengthen Data Infrastructure and Frameworks Adopt regulatory best practice practices to facilitate regional data sharing that HP MT MF allows for e-commerce Invest in the data infrastructure needed to expand digital public services and HP MT HF open data initiatives Engage with private sector to ensure productive re-use of DPIs, open data and HP ST/MT HF relevant training Strengthen operational capacity for managing data risks – cybersecurity and HP ST/MT MF data protection Priority Area 3: Support Interoperable Systems, Innovation, and Start-ups. Develop and scale up interoperable digital payment system HP MT Improve access and quality of digital innovation and entrepreneurship MP MT MF ecosystem support services to encourage innovation and start-ups Priority Area 4: Promote and Support the Expansion of Online Business – Website-based Commerce. Support the conditions for rapid development and e ective usage of digital infrastructure in districts. Improve digital infrastructure in provinces outside of Kigali Provide nancial incentives in provinces outside of Kigali Foster digital skills development in the retail and other services sectors Promote cross-province and cross-sector collaboration Improve the regulatory framework for secure Website-based commerce. Establish secure and e cient online payment systems Strengthen business support services. Streamline regulatory frameworks Provide awareness campaigns on the impact of Website-based commerce. Conduct targeted marketing and awareness campaigns Conduct research and monitoring Encourage market access and trade facilitation Priority Area 5: Develop Innovative Activities – Innovation and ISO Certi cation. Create nancial and technical opportunities targeted to innovation. Provide nancial incentives for innovation HF LT HF Enhance access to nance for innovation activities HF LT HF Improve quality certi cation for tangible market access. Raise awareness and provide training on quality certi cation HF LT HF Streamline certi cation processes HF LT HF Rwanda CEM | 2024 CHAPTER 2 69 Annex 2.2. Detailed modi cations to Ejo Heza program Ejo Heza is a pension scheme launched by the this success, more can be done, most notably Rwandan government and is intended to improve on increasing the numbers of participants in the the welfare of workers in the formal or informal scheme, improving savings adequacy and managing sector, whether they be self-employed or otherwise. expectations. If saving levels fail to increase, there is As of December 2022, the scheme had registered 2.9 a risk of unmet expectations and low pensions when million individuals, or 22 percent of the Rwandan people retire. population, representing 37 percent of the working age population, many of whom are from low-income Based on engagement with Ejo Heza subscribers, households. Eighty-seven percent of those in the authorities should consider the following more scheme are from the informal economy and over detailed actions recommendations to further 80 percent of registrants are active savers. Despite catalyze Ejo Heza (World Bank Group, 2023): A. Several activities around communication and mobilization will have a positive impact on Ejo Heza coverage and persistency in savings. IMPACT Persistency Coverage # Recommendation in saving growth Reshape the narrative on why people should save in Ejo Heza—steering away from 1 incentives to highlighting prospects of a pension, and competitive and safe returns as in the X formal sector. Recognize and develop different targeting and communication strategies for urban/rural; 2 X USSD/smartphone users; women/men, individuals with/without phones Create <1min ‘how to’ videos that can be shared on WhatsApp/YouTube and show how to 3 X X register, contribute, check balance, and get enrollment information Engage with other aggregators who might have an ‘observe and auto-deduct’ capability 4 X X especially in urban areas. Adopt a ‘Tech with touch’ motto to avoid excluding those with limited digital access 5 (women, children, low-income members) and in vulnerable situations (after death or X disability of a member). Create ‘digital contracts’ using information at registration stage that can be accessed by 6 X members with a #text and can serve as proof of membership 70 CHAPTER 2 Rwanda CEM | 2024 B. Experimenting with new business models and customer acquisition approaches should further expand the scheme IMPACT Persistency Coverage # Recommendation in saving growth Revisit targets for district using objective criteria to reflect socio-economic differences by 1 X district Assess and manage expectations of members on expected fund balance in old age given 2 X their saving levels Highlight the above inflation, competitive and stable returns in the communication material 3 X and in-person visits Explore potential for ‘auto deduction’ in partnership with Mobile Money operators and 4 X X Banks 5 Promote the registration of spouses and children of existing members X X Pilot other short-term incentives to members, for example, accident insurance, maternity 6 benefits to savers in Ejo Heza or points in a grocery store/mobile money top-ups/chances X to win a lottery if one saves persistently C. ere is also clear need for investment in human capital development and data collection. IMPACT Persistency Coverage # Recommendation in saving growth 1 Organize study tours with countries that have relevant experience to share X Adapt systems and build capacity to allow ‘intermediary logins’ to be generated at the 2 X district level Hire a PR firm to work with the communications team to craft tailored and creative messag- 3 X X es targeting children, urban workers, women, and youth (age 16-30) 4 Building a ‘richer data set’ by pulling variables from other government databases as relevant X 5 Adding a question at time of registration such as ‘Who helped you register’? Ensure that the drop down under ‘Occupation’ at the time of registration includes the same 6 X categories as Rwanda’s household survey data to allow for easier mapping 7 Analyze panel data of participants with policy relevant questions in mind X Rwanda CEM | 2024 CHAPTER 2 71 Annex 2.3. Domestic Market Recapturing Strategy (DMRS) and Made in Rwanda (MiR) Policy e DMRS aims to boost domestic production increases by stimulating local production and for local consumption, promote structural consumption of competitive Rwandan products. transformation, and enhance international competitiveness (MINICOM, 2015). It focuses e TBI evaluation found that overlapping agendas on construction materials, light manufacturing, between the Industrial Policy and MiR Policy have and agro-processing, selecting 21 speci c caused confusion among stakeholders, hindering sectors based on potential for import reduction, the MiR’s implementation. is lack of clarity has planned projects, market size, export potential, slowed progress and undermined accountability. raw material availability, and strong domestic Although some MiR outcomes have been achieved linkages. Priority sectors include cement, textiles, through the broader Industrial Policy, speci c and garments due to their high potential for MiR initiatives, such as quality improvements by recapturing the domestic market. Rwanda Bureau of Standards (RBS) and the RDB’s Supplier Development Program, have made notable Launched in 2017, the MiR Policy seeks economic contributions. e TBI evaluation team rated the transformation through enhanced competitiveness MiR interventions with a B Score—Partially Meets and industrial growth in partnership with the Expectations—due to the limited presence of private sector. Its goals are to address the trade speci c MiR initiatives. de cit and increase job creation by promoting exports, boosting local production, and improving Source: Tony Blair Institute for Global Change. the quality and competitiveness of Rwandan “Evaluation of the Made in Rwanda Policy: Mid- products. e policy aims for a US$450 million Term Review”. By Neil Spooner (Consultant for annual reduction in the trade de cit, representing TBI). TBI Industrialization Practice. TBI Rwanda. 17.8 percent of the import bill at launch (Pritish July, 2022. Behuria, 2018), and targets signi cant employment 72 CHAPTER 2 Rwanda CEM | 2024 Annex 2.4: Servici cation in Indonesia and the Philippines A 2018 ian Development Bank Institute (ADBI) Figure Own Services, Other Domestic Services, Study on Servici cation of Manufacturing in Asia and Foreign Services Value-added Contribution to examines data from Asian Development Bank Value Added of Exports by Economy, 2017. (ADB) Multiregional Input-Output Tables, covering 24 Asian economies, including Indonesia and the Philippines, over nine years (2000, 2010–17). It categorizes economies into 35 sectors, including 14 manufacturing and 17 service sectors. “Manuservice” refers to the increasing reliance of manufacturing rms on services, evident in several ways: 1. Production Intensity: More services are used as intermediate inputs by manufacturers (Low 2013). 2. Job Orientation: e number of service-related jobs within manufacturing has grown, while core production jobs have declined (Miroudot and Cadestin 2017; Miroudot 2016). 3. Value Addition: Services are increasingly embedded in or bundled with goods. Trends and Patterns of Servici cation Using the updated MRIO 2017, the study shows consistent trends in Asia. Services exports as a share of total exports remained steady at roughly 17 percent from 2000 to 2017, but excluding Japan, it Note: Own service sector value added refers to value added originating from within declined from 18 percent to 16 percent. However, the service sector to produce its own exports. Other domestic services value added refers to value added contributed by other domestic services sectors used to produce the value added by services increased. From 2000 to exports. Foreign value added from other economies’ services sector refers to value added contributed by foreign services sectors to produce exports. The Republic of Korea is in both 2017, the services value added contribution to total OECD and developing Asia. exports of goods and services rose from 27.7 percent Source: Authors, using ADB MRIOT 2017 data; Mercer-Blackman, V. and C. Ablaza. 2018. ‘The Servici cation of Manufacturing in Asia: Rede ning the Sources of Labor Productivity.’ to 34.4 percent. In 2017, the share of services value ADBI Working Paper 902. Tokyo: Asian Development Bank Institute. added in exports was about the same in Asia and non-Asia, though it varied signi cantly across economies (see gure below). Rwanda CEM | 2024 CHAPTER 2 73 References Access to Finance Rwanda. (2020). FinScope Rwanda 2020. Kigali: Access to Finance Rwanda. Adams, R. (2011). 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Retrieved from https://openknowledge. worldbank.org/handle/10986/30732 75 Notes 1 e number of establishments in rural areas grew by 66 percent, exceeding expansion in urban zones of 39 percent (although some of the newly registered establishments may have previously existed in the informal sector). 2 is estimate of 73,037 is equal to 539,243 (in 2017) minus 466,206 (in 2020). 3 See the series of “Rwanda Labor Force Survey” from 2016 to 2022. 4 is refers to “business enterprises”, as de ned in the 2019–21 Rwanda Integrated Business Enterprise Survey Report (March 2023). 5 is includes the sector of agriculture, forestry and shing, which created about 827,770 jobs in 2017–22, cumulatively. 6 Oxford Economics estimates are focused on air and road transport only, Rwanda’s own medium-term plan is comprehensive and covered all subsectors of transport, including air, rail, road, water, pipeline, boarder post weigh bridge, and Urban Transport and Multi-Modal Facilities (See. African Development Bank (2013). Rwanda Transport Sector Review and Action Plan. Tunis. 7 Oxford Economics’ Global Infrastructure Hub. https://outlook.gihub.org/countries/Rwanda. 8 World Bank analysis based on Economic Intelligence Unit Risk Tracker as of August 2023. 9 See the Archived 2020 Doing Business Report for more information on the methodology: https://www.doingbusiness.org/en/data/ exploretopics/resolving-insolvency 10 See section 2.6.6 on constraints to mobile technology upgrade and section 5.3 and 5.4.1 on government involvement in the seeds and fertilizers markets coupled with regulatory challenges to register seeds and agro-chemicals and for seed multiplication by the private sector. 11 Other NBFIs that include Forex bureaus, payment services providers and non-deposit taking lending only institutions remain relatively small and accounted for about 1.1 percent of the total assets of the nancial sector. 12 Digital technologies are de ned broadly to include not only digital and data infrastructure, broadband internet, smartphones, tablets, and computers, but also a wide range of more specialized productivity-enhancing digital solutions ranging from communications to procurement, production, marketing, logistics, and nancing (Tania, Blimpo, & Dutz, 2023). 13 US$40 million was invested, nanced by the sale of the historical operator Rwandatel. UNOHRLLS: United Nations O ce of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States 14 https://www.cable.co.uk/broadband/speed/worldwide-speed-league/#speed 15 https://networkreadinessindex.org/ 16 Source: Rwanda Development Board. https://rdb.rw/gor-launches-manufacture-and-build-to-recover-program-extension-to-attract- more-private-sector-investments/ 17 Source: World Bank. May 2024. Assessment of Rwanda’s Industrial Policy 2024–34. 18 As part of this, the pool of institutions should also include RICA not only on consumer protection and product qualify, but also on competition to evaluate business support initiatives that can distort competition. Regulations on the evaluation of business support to rms in line with the EAC Competition Act and the 2023 Competition and Consumer Protection Policy would be needed. 19 NIRDA has also been supporting the industrial sector’s productive capabilities with rm-level programs for technology adoption, development, and transfer, so loans for equipment acquisition, technical support and training of sta . 20 e Business Development Fund was established in 2011 as a subsidiary of the Development Bank of Rwanda (BRD) to expand nancing avenues to access to credit for small businesses through credit guarantees, Quasi-Equity support to start-ups, matching grants, SACCO Re nancing, and business development advisory services (BDS). 21 Established in 2017, the National Agricultural Export Development Board (NAEB) provides timely and cost-e ective support services and nancial facilities to enhance the international competitiveness of businesses engaged in agricultural and livestock exports. 22 e Rwanda Development Board (RDB) o ers business registration and a ercare services to investors, as well as an array of schemes for SME support, including capacity building and skills development in priority value chains with high export potential, nancial linkages, standards certi cation and market linkages. 23 World Bank nanced Access to Finance for Recovery and Resilience (AFIRR) project implemented by the Development Bank of Rwanda (BRD) and the Business Development Fund (BDF). 24 For example, Inkomoko Rwanda and Business Professional Network. 25 See the World Bank’s Technological Capabilities and Firm Performance in Rwanda. 26 Additional sources of important credit-related information on potential borrowers include, but are not limited to the court system, tax authorities, utility companies, telecoms, retailers, business registries, and digital nancial service providers (such as FinTech companies). Including data on mobile money accounts can be particularly important. 27 Especially in bulk format, rather than access only to the value-added services such as credit scoring, to increase the degree of automation in the decision-making process of credit provision. 28 Examples include Financial Service Consumer Protection Law sensitization (Access to Finance Forums and all Umurenge SACCOs), programs for empowering Rwandan youth with nancial skills (school Quiz Challenge for secondary schools with economic clubs and Zala Smart nancial literacy programs for teenagers), credit information system awareness and micro insurance awareness campaigns. 29 e IMF estimate for 2022 is 392 million dollars, equivalent to 3.2 percent of GDP (IMF, 2022). 30 An earlier study suggest that it could be as large as 2.5 times the size of o cial ows (Freund & Spatafora, 2008). 31 is is based on a couple of interviews with the Rwanda Country Manager for WorldRemit, a leading money transfer operator responsible for about 10 billion dollars of global remittances. See for example: https://taarifa.rw/electronic-payments-in-rwanda- increased-by-400/ 32 Under NICI II (2006 – 2010): e Development of ICT infrastructure. 33 https://rinex.org.rw/spip.php?page=aggregate_tra c 76 CHAPTER 3 GROWTH AND RESILIENCE THROUGH TRADE: NEW POST-PANDEMIC POLICIES TO DRIVE EXPORTS 3.1. Introduction from rich countries to cope with worldwide Openness to international trade is vital for Rwanda. in ation. Add to this the increasing frequency and Sales to international and regional markets allow impact of climate related shocks, and the need Rwandan rms to transcend the limitation of the to build resilience into its productive structure country’s small market to realize economies of and exports is urgent. On the eve of preparing scale, to increase productivity, and to strengthen for the second National Transformation Strategy competitiveness. Strong export growth will be key (NST2), it is appropriate to review progress in for Rwanda’s sustainable economic development trade performance and policies that could drive that will continuously reduce the importance export growth, and to highlight new challenges and of nancial development assistance as well as opportunities that have emerged in recent years to remittances. Indeed, Rwanda’s past remarkable reshape policy priorities. growth performance was predicated upon a steady expansion of its international trade. Exports were is chapter focuses on ve broad objectives the life blood of the economy. Rwanda has seen touched upon in the earlier study, but that have impressive growth of its exports over the decade since taken on new dimensions since 2018: the great nancial crisis of 2008–10, with an average • Build resilience through diversi cation annual growth rate of 14 percent in 2010–19 (Twum, and increased product complexity. e 2022), substantially higher than the 3.7 percent for serial shocks underscore the importance of world exports and even better than the average of 4.5 diversifying both product and markets to cope for SSA between 2010–19. Furthermore, Rwanda’s with the inevitable shocks that will continue export growth, both in goods and services, outpaced to emanate from the global economy. In that of Ethiopia, Ghana, Kenya, Tanzania, and addition, it is now apparent that an on-going Uganda, which share similar export structures (Figure ineluctable shock—climate change—is adding 3.1). Export growth slowed somewhat in the second a new urgency to the quest for diversi cation. half of the decade, and then plunged in 2020 with the pandemic. Export growth has picked up since then • Promote services exports and foster digital but remains well below the rates needed (according trade. Services are key to increasing to the Future Drivers of Growth study) to achieve productivity and diversifying exports. Already Rwanda’s aspiration of becoming an upper-middle services are an increasing share of Rwanda’s class country by 2035 and a high-income country exports. Services exports worldwide are by 2050. outpacing merchandise trade and hence o er new opportunities for Rwanda—more so if Moreover, Rwanda along with the rest of Africa production and trade of goods and services experienced a series of external shocks in recent are considered jointly in a servici cation years. e pandemic recession was soon followed agenda. E-commerce and digital trade have by the food prices surges associated with the war become even more important than they were in Ukraine, and then interest rate surges emanating in 2018. Figure 3.1: Annual export growth a) Goods and services export annual growth, % b) Goods export annual growth, % 50 70 60 40 50 30 40 20 30 20 10 10 0 0 -10 - -10 - -20 - -20 - -30 -30 - -40 - 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Rwanda World -Saharan Africa Sub - Rwanda World -Saharan Africa Sub - Source: Calculations based on WDIs Rwanda CEM | 2024 CHAPTER 3 77 • Advance regional integration through Rwanda’s exports face substantial challenges that coordination and trade liberalization. Regional will limit growth going forward: trade has always provided an opportunity to test • Products similarity with key regional partners: new product and service exports, but with the Rwanda’s exports to regional partners, where recent advent of the AfCFTA and an expansion proximity and connections would otherwise of the EAC, realizing the promise of regional support exports, are limited by the similarity opportunities is essential to export growth—and of the main export products in the region, such to building resilience through diversi cation. as tea and co ee. Rwanda’s complementarity • Consolidate Rwanda’s position as a regional with regional economies (except for Uganda) logistics hub. Rwanda is uniquely positioned at is low and is further declining. the heart of Africa to become a center of transit • Limited products and markets diversi cation: and trade. Progress on developing rail and air While the number of Rwanda’s export goods linkages has accelerated. Reducing the costs and markets (for large exports) increased of trading across borders—through reducing between two and four times over 2010–19 non-tari barriers, improving administration (Twum, 2020), recently the concentration at borders, and infrastructure—remain central of goods and markets has stagnated, or even to realizing potential export growth. risen (Figure 3.3). is has been driven • Leverage foreign investment to access primarily by the high export values of gold to international markets and promote green one major market, the UAE. High levels of growth. Slowing worldwide ows of FDI concentration increase vulnerability to market since about 2015 have made it more di cult disruptions, as demonstrated by recent supply to tap into their potential to link up to chain disruptions. Gold carries inherent global value chains, import technology and political risks that have the potential to disrupt skills, and improve access to markets. FDI trade ows, as exempli ed by a recent policy can bring climate-adaptive technologies and initiative in the United States (Box 3.1.). drive green investment. Expanding Rwanda’s • Reliance on products with low complexity: SEZs and integrating them into the logistics Most of Rwanda’s export growth has occurred infrastructure can be a key step to attracting through stronger performance in products with FDI in modern, tradable sectors. lower product complexity, including primary e study reviews progress in these ve areas in light commodities such as gold, metals, agricultural of recent global trade developments and Rwandan commodities, various food products, and performance. To lay the contextual foundation mineral oils. ese goods are exposed to large for those discussions, the chapter begins with an price uctuations in international markets and analysis of the main structural challenges to exports, provide limited opportunities for increasing highlighting both the strengths and remaining value added and productivity growth. structural weaknesses in the pre-shock decade • Low export survival rates continue to pose a to 2019 and the post-shock period after 2020. challenge: e World Bank (2017) estimates Subsequent sections then review the ve priority that on average only 30 percent of new areas, pointing to progress, remaining problems exporters in a year survive in the export market and possible new policies to drive export growth. A concluding section succinctly compiles the into the next year; the entry and exit rate of recommendations. Annex 3.2 summarizes the main exporters is highest in Rwanda compared to policy initiatives in each area since the Drivers of regional peers within the EAC. Between 2010 Growth study. and 2019, approximately 18.2 percent of Rwanda’s potential export growth was lost due 3.2. Structural challenges to exports to a decrease in exports of existing products Structural issues limiting Rwanda’s exports include to established markets (6.7 percent) and the similarity with regional trade partners, limited complete cessation of exports to established diversi cation, low product complexity, low survival markets (11.5 percent, Twum, 2022). rates and vulnerability to climate shocks. 78 CHAPTER 3 Rwanda CEM | 2024 • Vulnerability to climate related shocks: Some of these weaknesses are associated with high Rwanda’s strong reliance on agriculture makes input costs. Despite gains in trade facilitation, it particularly vulnerable to the e ects of transport costs remain high. e shipping costs for climate-related shocks. In particular, low use a 20-foot container from Shanghai to Mombasa of fertilizers and strong reliance on rain-fed is around US$500-1,000 while it costs around cultivation (Kondylis, Jones, Magruder, & US$3,000-4,000 to transport it from Mombasa Loeser, 2018) increase the impact of climate to Kigali (GIZ, 2020; World Bank, 2022b). High shocks and adverse climate conditions. ese tari s further raise input costs. e agricultural risks are rising, as the frequency of damaging sector, for instance, faces import tari s of between global climate-related disasters has increased 14 percent and 22 percent on some imported goods (UNECE, 2020; UNDRR, 2020), particularly that are then subject to further processing and a ecting small, agriculture-dependent exporting.17 High tari s also re ect ine ciencies in the EAC’s Common External Tari (CET), which economies such as Rwanda. applies tari s up to 100 percent on certain imports. ese challenges in part re ect low sophistication of Rwandan rms and products. Firms in Rwanda 3.3. Build resilience through diversi cation and have low levels of ISO certi cation, undertake product complexity limited innovation and face constraints on Diversi cation and increased product complexity participation in e-commerce (see Chapter 2), would reduce the vulnerability of Rwanda’s all of which are important for exporting. In exports. Policies to support rms’ innovation 2019, only 3 percent of rms had obtained and productivity growth would help to boost ISO certi cation, compared to an average of diversi cation and complexity. 13 percent in other EAC countries, while rms with ISO certi cation are 36 percent more likely Diversi cation of products and markets can lead to to be exporters. Firms in Rwanda lag behind in a substantial reduction in the propagation of shocks, product innovation compared to those in most particularly through global value chains (GVCs) other countries (World Bank, 2022a). In 2019, (Schwellnus, Haramboure, & Lea, 2023; Jansen, only 15 percent of rms had introduced a new or Lennon, & Piermartini, 2009; AIIB, 2021). On a signi cantly improved product or service during the macroeconomic level, higher diversi cation or lower last three years, which places Rwanda in the 14th concentration of economic activity is associated percentile of countries with a rank of 103 out of 120. with greater stability in terms of output and terms- While the adoption of e-commerce is a signi cant of-trade (Papageorgiou & Spatafora, 2012). is determinant of participation in international highlights the importance of diversi cation and trade in Rwanda, 43 percent of rms engaged in increasing product complexity to boost export ecommerce in 2019, which places Rwanda in the growth and reduce the impact of external shocks on 33rd percentile of countries. Rwandan trade. Figure 3.2: Product concentration Her ndahl-Hirschman Figure 3.3: Market concentration Her ndahl-Hirschman index index 0.25 0.35 0.3 0.2 0.25 0.15 0.2 0.10 0.15 0.1 0.05 0.05 0 0 2020 2020 2010 2010 2018 2018 2022 2022 2016 2016 2015 2019 2015 2019 2014 2014 2013 2013 2012 2021 2012 2021 2017 2017 2011 2011 Source: Calculations based on TBA Source: Calculations based on TBA Rwanda CEM | 2024 CHAPTER 3 79 A coordinated approach is proposed that employs a strategy, industrial policy, Made-in-Rwanda wide scope of instruments to support rms‘ product strategy, and other related policy documents, would innovation and market access. is includes the help to ensure policy coherence and prioritize formulation of a trade strategy in consultation feasible export diversi cation. While the expansion with private sector representatives to identify and and diversi cation of the tourism sector has the support high-potential exports sectors and markets. potential to continue to be a major export driver, is should be supported by innovative marketing Rwanda could conduct a study of nascent service strategies, provision of information and appropriate export sectors and products with high growth subsidies to rms to increase innovation and potential, such as transport, government, education, productivity and e orts to improve the skills of and healthcare services, building on an earlier the Rwandan workforce. e section also discusses International Growth Center (IGC) study using coordination with regional and global partners South Africa’s Decision Support model (Twum, to enhance the e ectiveness of trade policy in 2022; Viviers & Cameron, 2018). facilitating adaptation to climate change. Enhancing the quality and scope of high value- Policy area 1: Support exporting rms with new added sectors would contribute to diversi cation. strategies to diversify products and markets. Rwanda would greatly bene t from the design Leverage Rwanda’s comparative advantage to and implementation of a national export market identify promising industries for export growth access strategy that coordinates collaboration by and import substitution. By acknowledging the Ministry of Trade and Industry (MINICOM), other countries advantage in certain industries, Ministry of Foreign A airs and International such as through established economies of scale Cooperation (MINAFFET)’s Economic or geographic conditions, Rwanda can identify Diplomacy, and Rwanda Development Board what industries are promising candidates to drive (RDB) with sector-speci c exporter associations Rwanda’s future economic growth. Products from aimed at helping exporters identify, enter, and other industries, in particular for intermediate expand their export markets. e strategy could inputs into Rwanda’s production, should be include the following concrete policies to increase imported to guarantee low production costs and diversi cation discussed below. hence international competitiveness. is refers to the general bene ts of international trade that foster Use traditional and non-traditional promotion international specialization important for industrial to reach new markets and establish new products productivity and cost advantages. To promote as suggested in NTS-2. is could include Rwanda’s high promising industries, the country a combination of traditional strategies with should concentrate on market-friendly instruments innovative digital marketing approaches involving to reduce market failure through the reduction of trade shows and marketing campaigns together with market barriers, the strengthening of its business online marketing, including the use of social media environment and to ensure access to high-quality channels (Twum, 2022). In addition, Rwanda and cheap inputs. While some subsidies can be should assess the e cacy and e ectiveness of trade justi ed for example to support infant industries, o ces and embassies in foreign export markets, market-based instruments will help to avoid while looking for ways to use online information. retaliation from import supplier countries. Streamline business regulation to create an Identify and communicate high-potential export incentivizing framework for diversi cation. Chapter products in existing and newly developed strategies. 2 puts forward actionable recommendations on Rwanda’s new National Trade Policy II describes the advancing regulatory reform to increase competition country’s ambition for more focused and aggressive and private sector development. A stronger campaign to identify and target high value regulatory environment can increase diversi cation manufactured products based on several measures1 by facilitating the movement of resources supported by measures to foster innovation. In from declining sectors to more dynamic ones. addition, a review of available studies of priority Additionally, clear antitrust and competition laws, export sectors, prepared as part of Rwanda’s export along with their e ective enforcement, encourage 80 CHAPTER 3 Rwanda CEM | 2024 rms to innovate and diversify. Competition highest share of skilled labor and are R&D-intensive policy reforms in various countries have led to (See Chapter 2 for a more detailed discussion on the increased competition in input markets, resulting in educational pro le of workers across sectors). At the downstream diversi cation, improved services, and same time, innovating industries are signi cantly enhanced e ciency (OECD/WTO, 2019).2 more productive than other low-skilled tradable sectors and more productive than the manufacturing Focus on the removal of entry barriers, particularly sector. Expansion of these sectors, hence, will not information barriers, which hinder innovation only allow access to new markets as these sectors are and market penetration. To translate government highly tradeable, but o er to be a major driver of strategies into concrete action, expanding the scope economic productivity. In this light, Rwanda could of information sessions for the private sector on high- pursue initiatives to i) strengthen programs to foster potential exporting activities could encourage new and enable innovation and ii) identify the skills gap exports, build knowledge of market requirements, to design targeted education and training programs. and help identify market access issues and non- • Evaluate public innovation programs and implementation of trade agreements. In addition scale up successful ones. Targeted incentives to initiatives that o er direct support for market access and product development, diversi cation will can help exporters in high-priority sectors bene t from a strengthening of trade facilitation in overcome barriers such as lack of access a more integrated regional market and the removal to nance and di culties in obtaining of persisting trade frictions. Policies to reduce trade certi cation for international standards. In costs and foster trade integration are discussed in this regard, the Government of Rwanda could separate sections below. scale up the National Industrial Research and Development Agency (NIRDA) program, Policy area 2: Increase product complexity by which has been successfully implementing incentivizing value addition and innovation. upgrading programs for six major value Increasing product complexity can improve chains since 2013 (Twum, 2022) and diversi cation, expand trade to regional partners strengthen monitoring of existing export by overcoming the current limitation of strong support programs such as the Export Growth product similarity in regional trade, and reduce the Fund (EGF) and existing export strategies volatility of export prices. is requires increasing by the RDB, to ensure the targeting of the support for business R&D and knowledge most productive and innovative rms and to sharing and continued investment in programs to facilitate integration into GVCs cross priority improve the innovation environment (for example sectors. the Kigali Innovation City (KIC) technology • Align skill development programs with private innovation hub). is could be complemented by sector demand through dialogue and fostered tailored public education and training courses (for engagement with universities and TVET example, extension of university programs and institutions. ese include Rwanda’s TVET other educational initiatives such as technical and vocational education and training (TVET) programs Board, MINEDUC’s Workforce Development to boost skills—see Annex 1.4 and Chapter 2 for an Project, Skills Development Fund (SDF) in-depth discussion on building Rwanda’s human and policies such as the Enhancing the capital to facilitate growth). Quality of Industrial Policy (EQUIP). e Government of Rwanda should leverage the Upgrade existing value chains while developing Occupation on Demand List, updated in modern productive sectors. Recent successes in 2022, and the Sector Skills Councils (SSC) value-addition in the co ee value-chain through under the National Skills Development and co ee washing stations show the potential for Employment Promotion Strategy (NSDEPS) improving and upgrading in conventional industries. to understand persisting skills gap. Innovation ese e orts need to be accompanied by support e orts should be integrated between research/ for modern tradeable industries. Global innovator innovation institutions, the private sector and service industries, such as the ICT sector, employ the society coordinated by public institutions Rwanda CEM | 2024 CHAPTER 3 81 such as the National Council for Science Policy area 3: Use trade policy to facilitate climate and Technology and the National Research adaptation. Development Agency (Yongabo & Göransson, Trade can strengthen resilience to climate-related 2022). A key step towards this is an expansion shocks by harnessing the opportunities for market of international partnerships with innovation substitution and enhancing access to essential inputs and research institutions to learn from such as fertilizers, capital, and technology (Brenton international experience such as the Carnegie & Chemutai, 2021; World Trade Organization Mellon University Africa or the establishment (WTO), 2021). Establishing a consistent and of four World Bank East-Africa Centers of stable policy environment to promote cross-border Excellence, which provides training programs trade and regional fertilizer markets would involve in the higher education sector. harmonizing regulations and eliminating trade • e consultation of the key skills development barriers, while strengthening institutions involved resources needs to be strongly aligned in standardization, quality control, and certi cation (For a broader discussion of climate resilience, with Rwanda’s main sectoral development please see Chapter 6). strategies. ese strategies lay out the pathway for Rwanda’s future development through a 3.4. Promote services exports and foster range of modern industries such as Rwanda’s digital trade growing nancial sector whose skill-intensity Supporting rms’ e orts to undertake digital is higher compared to traditional industries. To transactions could increase productivity. Key steps address this need, it is key to invest in universal include reducing restrictions on services trade, and skills, such as numerical skills and critical particularly digital trade, and strengthening the thinking as well as more specialized while legal framework for cross-border data transfers. transferable skills, in particular digital skills, which all are pivotal for modern, often service- Services play a signi cant role in exports. Exports based industries that are directly or indirectly of services increased by about 9 percent per year needed for exports of goods and services. At the between 2010 and 2019, reaching over US$2 billion. same time, the growth of modern industries In 2019 (before the pandemic), the tourism sector, will require a set of highly specialized, and in particular nature-based tourism, accounted potentially non-transferable skills that for nearly 45 percent of service exports and air are key to their respective employment. transport services around 20 percent. Nature-based Examples include skills in business tourism attracts a large share of Rwanda’s foreign process services (BPS) or required in jobs visitors, generates signi cant government revenues in the electric-vehicle manufacturing and and tourism receipts, increases demand in other repair supply chain. Given the delay between sectors and boosts formal job creation. While skills development and eventual skills chapter 6 assesses extensively nature-based tourism, availability, Rwanda needs to act anticipatory this section discusses policies to promote other and invest in skills programs today to equip critical services for Rwanda’s exports. the future industrial drivers of Rwanda’s growth tomorrow with the required skilled As Rwanda plans its transition to middle- income status, it needs to be thinking ahead to labor force. A key step would be to build an eventually achieving high-income status—that is, integrated system between the public-private transitioning to a knowledge-based, digital services- dialogue, as described above, and Rwanda’s led economy.3 Currently, Rwanda predominantly industrial strategies that informs the above focuses on low skill-intensive services, such as skills-related resources and which could construction and transport services (see Chapter be leveraged through existing institutions, 4 for worker distribution across sectors), and lacks such as Rwanda’s Labor Market Information specialization in high-value and skill-intensive System (LMIS) to develop targeted active services found further upstream, such as business labor market programs. and technical services. Modern services can facilitate scale economies through increasing market access (for example, through opportunities to sell 82 CHAPTER 3 Rwanda CEM | 2024 remotely), are characterized by innovation-driven (WTO) members on e-commerce, domestic improvements in labor productivity through regulation of services, and investment facilitation the di usion of digital technology and play an would help to learn from best practices. Rwanda important role in providing intermediate inputs to might also want to explore the prospects for other sectors (Nayyar et al., 2021). us, services unifying the WTO’s Trade Facilitation Agreement could play a role similar to manufacturing in the (TFA) e orts with African Union trade facilitation growth miracles of countries in the 1990s, making discussions—at present each EAC country has an services key for Rwanda’s export and growth model inconsistent TFA commitment proposal (Twum, (Newfarmer & Twum, 2022)4 2022). To maximize the bene ts of the AfCFTA, Rwanda must implement its commitments to More broadly, policies that promote services exports reduce remaining barriers to services trade. include improving market access, strengthening the legal framework, and promoting digital trade. Rwanda faces fewer restrictions on average compared E orts to reduce barriers to services trade could to neighboring EAC countries, but signi cant trade involve further progress in trade agreements to barriers still persist.5 Table 3.1 presents the results ease restrictions on the entry of foreign workers from the Services Trade Restrictiveness Index (STRI)6 and facilitating recognition of foreign professional and Rwanda’s commitments for liberalization made quali cations to improve Rwandan rms’ access to the AfCFTA secretariat. An index value of 50 is to skilled workers and providing for cross-border indicative of major restrictions on services trade. digital payments interoperability. Complementary Rwanda’s STRI scores vary across sectors. Tourism administrative e orts could involve simplifying and distribution services experience relatively low government procedures, supplying information restrictions, while transport, business services, and on services trade opportunities, and evaluating particularly nancial services encounter signi cant the impact of government programs. An easing barriers that exceed the EAC average. of restrictions on data transfer while maintaining privacy and cybersecurity protections will be Rwanda imposes signi cant restrictions on Mode 4 necessary to enable Rwandan rms to engage in trade, which refers to the presence of foreign workers trade in services that involve cross-border data ows. in the country. Easing limits on permits for foreign And the expansion of Rwandan rms’ participation workers7 would help to supply key skills required in digital transactions will require developing for the development of modern services. In contrast, infrastructure and an appropriate legal/regulatory recent commitments submitted by Rwanda and the framework, in coordination with trade partners. EAC toward service trade liberalization within the AfCFTA propose further restrictions on foreign Policy area 1: Reduce remaining restrictions on workers. Recognizing the signi cant skills gap in services trade. the service sector,8 Rwanda needs to take key actions Lowering restrictions on services trade will play to facilitate cross-border movement. a pivotal role in driving Rwanda’s export growth and resilience. Strengthening physical and digital e cross-border movement of skilled labor could connectivity through reduced restrictions enables be supported through expansion of international greater diversi cation through expanded market agreements and liberalization of visa conditions. access, it strengthens cross-border supply chains, Rwanda could consider recognizing regional promotes productivity through access to inputs, professional quali cations within the EAC and raises competition and attracts FDI (Arnold et introducing more liberal visa and work permit al,, 2011; Arnold et al, 2016; Duggan et al, 2013; conditions aligned with the tourism and MICE Fernandes et al, 2021; Nordås, 2011). Rwanda strategy and the AfCFTA’s service commitment has actively pursued international agreements schedules. is could be coupled with requirements to liberalize the services sector. Additionally, that employers have a plan for developing local Rwanda should consider including services in the sta and capturing foreign knowledge. A more Preferential Trade Agreement (PTA) with the India- liberal work permit regime could also incentivize Gulf Cooperation Council (GCC) to gain access short-term assignments in services, enhancing to a higher-end services sector. Participation in rm exibility. Within the EAC, facilitation of discussions initiated by World Trade Organization movements would bene t from a recognition of Rwanda CEM | 2024 CHAPTER 3 83 M1 (cross-border M3 (Commercial M4 (Foreign workers) supply presence/FDI) AfCFTA sector Detailed sector STRI STRI STRI AfCFTA O er AfCFTA O er score score score AfCFTA O er Business services Accounting services 0 Fully open 0 Fully open 63 Partially open Architecture services 100 Fully open 0 Fully open 100 Partially open Computer and related services 0 Fully open 25 Fully open 50 Partially open Engineering services 100 Fully open 0 Fully open 100 Partially open Legal services (Host country advisory) 31.5 Fully open 81.2 Fully open 56.4 Partially open Communication Fixed-line telecommunication 96.3 Fully open 42.7 Fully open 53.9 Partially open Mobile telecommunication 85.9 Fully open 39.7 Fully open 53.9 Partially open Postal and courier services 75.1 Partially open 32.8 Partially open 50.3 Partially open Financial services Auditing services 0 Fully open 0 Fully open 63 Partially open Commercial banking 100 Partially open 55.8 Fully open 62.2 Partially open Life insurances 77.7 No change 36.6 No change 50 Partially open Non-life insurances 77.7 No change 36.6 No change 50 Partially open Reinsurances and retrocession 76.9 Partially open 32.1 Fully open 50 Partially open Transport Air freight international 38.9 No change 45.5 No change 50 Partially open Air passenger international 77.8 No change 45.5 No change 50 Partially open Road: freight transport 0 Partially open 25 Fully open 50 Partially open Tourism Hotel and lodging services 0 Fully open 25 Fully open 50 Partially open Travel and agencies/tour operators 75 Fully open 25 Fully open 50 Partially open Distribution Wholesale trade services 0 No change 25 No change 50 Partially open Retail services 0 No change 25 No change 50 Partially open licenses and standards obtained in other EAC with the degree of commitment remaining small. countries, adoption of common quali cation criteria Addressing this, Rwanda could promote the and a further expansion of mutual recognition establishment of a regional mechanism to support agreements (MRAs) to include a broader range cross-border digital payments (leveraging East of services, such as nancial services, health, and African Payment System (EAPS) and on its version education (World Bank Group; Government of 2 – EAPS2), address governance, settlement, fees, Rwanda, 2020). A more immediate step would currencies and standards. be a unilateral recognition of quali cations for EAC-professionals through a liberalization of work Administrative procedures and requirements for permits in the absence of an EAC-wide MRA. service trade should be reduced and simpli ed, with regular evaluations of progress. Firms report a lack Rwanda should also focus on removing restrictions of transparency regarding regulations or government on Mode 1, referring to cross-border trade of decisions, contract issues, unpredictable or unfair services. Table 3.1 indicates strong commitments to treatment by government o cials, discrimination, full liberalization, primarily in professional services. currency restrictions and issues with appropriation Concrete actions aligned with these commitments (World Bank, 2022a). Simplifying procedures and need to be taken, and the level of commitment documentation of administrative procedures and should be strengthened. Notably, the nancial documentation requirements related to services sector faces substantial restrictions, primarily trade would pose a signi cant step to improving the driven by limitations in commercial banking, business environment. is includes implementing 84 CHAPTER 3 Rwanda CEM | 2024 streamlined processes for obtaining permits and Figure 3.4: DTRI and its components, available ECCAS licenses, as well as harmonizing standards and countries regulations. is could be accompanied rst by Overall DTRI e orts to monitor and evaluate progress by tracking Online sales and transactions Standards trade ows, collecting data on services exports and Quantitative Trade Restrictions imports, and assessing the impact of policies and Intermediary liability & Content access Domestic Data policies initiatives. And secondly by raising awareness and Cross-border data policies providing information among service providers, Telecom infrastructure & competition IPRs through workshops, seminars and training Foreign investment in sectors relevant for digital trade programs, about the bene ts and opportunities Public procurement on digital goods and services Tari s and Trade Defence measures applied of services trade, market access requirements, and and ICT imports from other UN-ECA countries 0.0 0.2 0.4 0.6 0.8 1.0 1.2 available support mechanisms. RWA UGA TZA KEN BDI Source: Calculations based on UNECA (2022) Policy area 2: Develop a legal framework to facilitate cross-border data transfers and data integration with For Rwandan companies to bene t from economies major trading partners. of scale, the government has to develop a legal Digital trade policies play a crucial role in framework to facilitate cross-border transfers of determining a country’s access to export non-critical data while addressing cybersecurity. opportunities. Firms engaged in digital trade must To ensure a centralized and coordinated approach comply with foreign data protection norms to access for streamlining data regulation, the government and process data required for providing services to could expand and empower the Rwanda National clients. Restrictions on cross-border data ows can Cybersecurity Authority (NCSA) to monitor take various forms, including screening of inward- the implementation of data protection laws and FDI and data localization requirements (Ferracane establish implementing regulations and guidelines et al., 2018). Regulatory regimes, both domestic at the national level. and international, that hinder domestic rms from participating in cross-border data ows and digital To strengthen coordination, Rwanda should transactions are particularly signi cant in sectors promote regional data integration by participating prioritized by Rwanda, such as nancial services. in the adoption of common policy principles, as well as regulatory guidelines and interoperability Rwanda’s data laws create a relatively restrictive standards for data treatment and cybersecurity regime for cross-border data transfers and domestic regulation, within regional networks such as EAC data processing. e government’s National Data and AfCFTA. To further strengthen regional trade, Revolution Policy (NDRP) mandates that the government could promote regional cross- data must be stored, processed locally, and border data ow instruments such as a regional accessible to relevant government authorities. voluntary mechanism (e.g., APEC, Privacy Shield), Data collected by United Nations Economic standard contractual clauses (SCCs), and common Commission for Africa (UNECA, 2022) adequacy standards. In line with MRA regarding indicates that Rwanda has relatively restrictive cross-border movement of people, Rwanda should data management regulations for both cross- advance the recognition of MRAs on regulatory border and domestic data, which contributes regimes governing data privacy and protection to an increased Digital Trade Restrictiveness within the AfCFTA context, as well as seek bilateral Index (DTRI) for the country (Figure 3.4). agreements with the European Union (EU) to give While the adopted data protection regulations domestic regulators con dence that data ows will provide an opportunity to attract data-intensive not a ect their regulatory goals (Meltzer, 2019). services investment, several measures governing cross-border data flows are more restrictive than Policy area 3: Reduce barriers to digital trade and those in advanced economies (World Bank, empower digital trade platforms. 2022a). Regulations related to data transfers and Rwanda’s restrictive DTRI score underscores the processing can impede the ability of Rwandan potential for the country to enhance its digital firms to engage in trade in services that involve infrastructure and promote digital trade in cross-border data ows. services, crucial for integration within the EAC Rwanda CEM | 2024 CHAPTER 3 85 and AfCFTA frameworks. e technical issues Implementing technical innovations has the involved in digital trade will require Rwanda to potential to facilitate trade, reduce costs and strengthen institutional capacity for digital services strengthen regional integration. Digital platforms and, crucially, harmonize standards and regulations present a signi cant opportunity to drive cross- with trading partners. One step towards this could border trade under AfCFTA, particularly by be to consider joining the WTO Services Domestic facilitating e-commerce of goods and services Regulation Agreement to learn from best practices, and streamlining payments for SMEs. Rwanda signal a business-friendly environment, and foster can leverage its strong ICT infrastructure and conditions conducive to regional trade. collaborate with regional partners to develop digital trade platforms that enhance access to regional Rwanda could increase its e orts to promote the markets. e government can play a key role in this regional integration of the digital infrastructure process by fostering partnerships between ntech and digital market by initiating discussions with companies and e-commerce platforms, while also AfCFTA, EAC, and ECCAS on harmonizing, ensuring that regulatory frameworks support mutually recognizing, and cooperating on digital seamless cross-border transactions. One concrete regulations to facilitate digital trade. is should example is Kenya’s M-Pesa, which has successfully include discussion around the taxation of digital enabled cross-border payments across the EAC and services without physical rm presence (Nayyar, partnered with platforms like Jumia to expand SME Hallward-Driemeier, & Davies, 2021). e market reach. is model could be integrated with Government of Rwanda could also promote Rwanda’s existing mobile money solutions provided discussions on the development of a single digital by MTN Mobile Money and Airtel Money. By market within the EAC, which involves fostering facilitating such collaborations, the government regional connectivity to avoid redundancies in can provide targeted support to rms, particularly network and data infrastructure investments. As SMEs, ensuring they have the tools to scale and described in the previous Future Drivers report, compete in the regional market. Further best- digital integration would be strengthened by practice examples show that modern, data-based a further expansion of the One Network Area technologies o er vast opportunities to foster and (ONA) to allow others to join when ready and the enable trade (see Box 3.1). To make use of these, preparation of rmer instruments on reporting, Rwanda could explore the following infrastructure monitoring and dispute resolution. and technology investments: BOX 3.1: India’s e-invoice system India’s e-Invoice system is a digital platform that authenticates business-to-business (B2B) invoices electronically. e system involves reporting B2B and Export invoices issued by taxpayers to their customers on the government of India portal, which generates a unique invoice reference number (IRN). It is a faceless system with a heavy emphasis on Application Programming Interface (API) integration, allowing for the exchange of data electronically. e e-Invoice Portal returns the signed QR code and signed invoice back to the taxpayers. e standardized e-invoice format, based on the international standard (UBL/ PEPPOL), has led to machine readability, enhanced interoperability, and uniform interpretation in the eco-system. E-invoice also allows the use of deep learning, machine learning, and arti cial intelligence. Information such as the type of good (HS code), addresses, value, and tax information are collected in real-time. By utilizing AI intelligence tools, India can collect more taxes, reduce administrative costs, and minimize tax evasion*. is platform o ers the potential to scale up digital payments and innovations necessary for a strong logistics hub, including identifying credible suppliers for supply chain nancing. * Tsai, CH. (2023). “Supply chain nancing scheme based on blockchain technology from a business application perspective.” Annals of Operations Research, 320, 441–472. https:// doi.org/10.1007/s10479-022-05033-3 * R. Kumar, R. K. Malholtra, R. Singh, S. Kathuria, R. Balyan and P. Pal, (2023) “Arti cial Intelligence Role in Electronic Invoice Under Goods and Services Tax,” International Conference on Computational Intelligence, Communication Technology and Networking (CICTN), Ghaziabad, India, 2023, pp. 140-143, doi: 10.1109/CICTN57981.2023.10140870. 86 CHAPTER 3 Rwanda CEM | 2024 • Develop data centers and online market As a small economy, regional integration is critical infrastructure, including investments in cloud for Rwanda to reap the gains from trade. Integration infrastructure, to increase regional data market into the EAC was important in supporting Rwanda’s connectivity. export success in the decade before the pandemic. • Implement mutual recognition of national e bene ts from EAC membership have now digital identi cation systems. is involves been improved with the entry of the DRC into coordination of policy making and legislation the agreement. is section considers how regional on digital nancial services, electronic money integration with the EAC and the AfCFTA can issuer and payment licensing, prudential contribute to Rwanda’s market access. measures, and fraud and anti-money laundering and countering the nancing of Rwanda can improve the role of regional integration terrorism (AML/CFT) systems. in supporting exports through a more intensive discussion with the DRC and helping to shape • Ensure a domestic and regional competition the rules supporting the AfCFTA. Strengthening framework, including merger control, regional coordination with the DRC on trade regulations, coordination, information sharing and complementing DRC e orts to implement trade enforcement measures. reforms and promoting information exchanges • Facilitate digital transactions through the could improve Rwanda’s access to this critical expansion of electronic invoicing and the market. Rwanda could cooperate with the DRC recognition of foreign e-invoices, aiming to in expanding the infrastructure required to reduce reduce reliance on paper-based systems. trade costs and facilitate transit trade. Harnessing the • Encourage the adoption of digital signatures bene ts of the AfCFTA will require strengthening in the private sector, particularly for cross- the capacity of relevant actors, engaging with African border contracts and transactions. e current countries and regional economic communities, and system could be expanded to o er a more supporting potential Rwandan exporters. Rwanda exible and cost-e ective digital signature also can play an active role in shaping the AfCFTA option for private use. An implementing to protect its interests and ensure transparent and agency could be identi ed to issue licenses e cient trade rules. to private “trust providers” (such as Adobe) that can issue digital signatures for private use Background and recognize foreign digital signatures issued Stronger integration into trade with the EAC was under equivalent levels of security. a key factor supporting Rwanda’s exports. Exports • Encourage greater use of e-commerce (see of goods to EAC partners more than doubled in Chapter 2) by strengthening consumer the three years following Rwanda’s entry into the protection measures and clarifying rules EAC customs union in 2009 (World Bank, 2022a), for e-commerce and content platforms, driven by lower tari s, harmonization of trade particularly regarding products and content policies and reduced non-tari barriers (NTBs). In generated by users. Updating the 2020 law 2022, the DRC joined the EAC. Figure 3.5 shows relating to electronic messages and transactions that while a large share of exports went to the EAC, to expand safe harbor provisions related to Rwanda’s single most important export market is intellectual property rights can be one way to the DRC. achieve this. e inclusion of the DRC in the EAC presents a signi cant opportunity to boost Rwandan exports. 3.4. Advance regional integration through In 2018, the DRC, alongside Ghana, imposed the coordination and trade liberalization highest tari s on imports from Rwanda across Strengthening regional integration would make African countries (Table 3.2, [Kamutando et an important contribution to increasing trade. al, 2024 2024]), which will now be reduced Policies should focus on building closer trade links signi cantly. Trade between the DRC and Rwanda, to the DRC, including coordinated investments in mainly through Rwanda’s Northern trade corridor, logistics and transport systems, and implementing faces additional NTBs, implicitly imposing measures to bene t from the African Continental further tari s on Rwanda’s exports. Inadequate Free Trade Agreement (AfCFTA). trade infrastructure, limitations in trade-related Rwanda CEM | 2024 CHAPTER 3 87 Figure 3.5: Rwanda’s exports market is increasingly concentrated on DRC 2005 2022 Source: Calculations based on COMTRADE TABLE 3.2: Average applied statutory tari s imposed by Figure 3.6: Cost to export African countries on Rwanda exports, 2018 US$ Share Rwanda Single Weighted in country average average imports (%) SACU 8.0 0.6 0.00 Ghana 12.4 12.5 0.01 Importer Congo, Dem. Rep 12.9 11.6 7.86 Rest EAC 0.0 0.0 0.26 Rest Africa 3.2 1.3 0.00 EAC preference margin 18.6 16.6 Source: Calculations based on WDIs Source: Calculations based on tari data at the HS6-digit level obtained from TRAINS for 2018. Rest of Africa includes COMESA countries that provide preferential access to Rwanda. With the exception of DRC, imports from Uganda declared by each country or region are used to calculate the weighted average tari rates. In the case of DRC, Uganda declared exports are used as weights services and complex border procedures mean Further regional integration within Africa o ers an that trade costs with the DRC exceed those of important opportunity to improve diversi cation. all other regional partners by far (Figure 3.6). A As described above, new policies to foster swift alignment of the DRC’s trade instruments diversi cation of export markets need to be paired and measures to increase trade facilitation would to actions to diversify Rwanda’s export basket by help Rwanda reap the full bene ts from DRC’s creating an enabling environment for more value- integration. addition and thereby increased scope of integration into global value chains beyond nal consumer Informal cross-border trade emerged as a notable goods. e EAC agreement had a smaller impact component of Rwanda’s export trade, accounting on regional trade than other free trade agreements for 9.7 percent of total goods exports with (Figure 3.8), largely due to similarity of products neighboring countries (Burundi, DRC, Tanzania, exported by partners, but also due to ine ciencies and Uganda). e DRC constituted 82 percent of of the Common External Tari that a ect adversely Rwanda’s informal exports to the four countries the competitiveness of local rms. is would be between 2012 and 2020, primarily consisting of addressed by increased product diversi cation agricultural commodities such as livestock and via the creation of new higher value-added goods our. Border closures in 2020 stalled this trade (left and services industries. Also, the vulnerability of panel of Figure 3.7), but it has started to pick up goods trade within the EAC was demonstrated by again recently (right panel of Figure 3.7). trade restrictions imposed during the COVID-19 88 CHAPTER 3 Rwanda CEM | 2024 Figure 3.7: Informal cross-border trade 16 140 14 120 12 100 10 Million US$ 80 Million US$ 8 60 6 40 4 20 2 0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Uganda Burundi Total DRC Source: Calculations based on NBR dataset pandemic. Simulations indicate that the an estimated 180,000 to 320,000 individuals would implementation of a free trade agreement between be lifted out of poverty using the poverty lines of Southern African Customs Union (SACU), Ghana, US$1.90 purchasing power parity and US$3.20 Nigeria, the DRC, and the EAC could increase purchasing power parity a day, respectively (Figure Rwanda’s exports to these partners by 30 percent 3.11),9 and wage gaps would fall between skilled (Kamutando et al., 2024). And even with a moderate and non-skilled workers, as well as between males implementation of AfCFTA, Rwanda’s real income and females. could increase by 3.3 percent by 2035 (Figure 3.8), Figure 3.8: Intra-bloc goods imports before and after Figure 3.9: Impact of COVID-19 on merchandises exports joining the bloc (Share of GDP) (Change in exports value in 2020 compared to 2019) 18 60 15.8 16 14 13.2 40 12 20 10 8.7 8 0 6.5 WORLD EAC RDC 6 5.1 4 3 -20 2.2 2 2.1 2 -40 0 2 years before 5 years after 10 yers after EAC SADC ASEAN -60 Source: World Bank (2020) Source: Calculations based on COMTRADE data Figure 3.10: Real income Figure 3.11: People lifted from poverty (% change w.r.t. baseline by 2035) (Thousands, changes by 2035) 500 400 300 200 100 181 320 217 379 248 430 3.3 3.8 4.3 0 AfCFTA Trade AfCFTA Broad AfCFTA Deep AfCFTA Trade AfCFTA Broad AfCFTA Deep $1.90/day 3.20$/day Source: Calculations using ENVISGE-GIDD model Source: Calculations using ENVISGE-GIDD model Rwanda CEM | 2024 CHAPTER 3 89 Border closures have been an important challenge Addressing high trade costs at Rwanda’s border for regional integration in recent years. e Rwanda- with the DRC o ers a huge potential to increase Uganda border closure a ected rms di erently Rwanda’s export volume. e e ect of this will be depending on their size.10 Large rms that survived widespread. Especially at the Petite-Barriere border the closure swiftly found alternative international crossing between Rwanda and the DRC in Goma, suppliers for their inputs, without adverse e ects one of the busiest borders in Africa, over 40,000 on their bottom line. On the other hand, not small-scale traders, predominantly young women, all rms were able to weather the closure, with cross on a regular day (Echandi, Maliszewska, & those importing from Uganda before the closure Steenbergen, 2022). An immediate step towards experiencing a 2.5 times higher probability of going reduction of trade cost would be to develop a out of business compared to rms importing from strategy which is in line with the best-practice other countries. guide outlined in the WTO TFA, which would facilitate procedures to simplify and harmonize Policy area 1: Increase export potential with the trade procedures, implement risk-based customs DRC by aligning DRC trade instruments to EAC controls, and establish single-window systems for instruments standards and achieving further trade documentation. reductions in trade costs Rwanda should actively promote for the DRC to Investing in cross-border trade infrastructure would harmonize its trade rules under the EAC. ese increase the gains from trade with the DRC. is should include a comprehensive review of the DRC’s could involve investing in temporary storage and trade instruments such as examining its external tari repackaging facilities, which is a crucial step toward structure, regulatory systems concerning product capturing a larger share of the transit services and technical standards, and customs procedures market (World Bank, 2022a); and the expansion and documentation. is could be supported by of investments in trade logistics such as a maritime the establishment of mechanisms for information highway between Rwanda and the DRC as well exchange on trade practices and trade-related as the construction of modern border facilities information, market data and border management exempli ed by the World Bank supported project at between the DRC and the EAC member countries work at Bunagana, Kasindi and Ruzizi. Rwanda has to enhance transparency and enable monitoring and already invested in a local logistics hub at the DRC evaluation of progress in alignment. Strengthening border, particularly concerning oil storage facilities diplomatic dialogue and negotiations between the operated by companies like Rubis, Vivo, and DRC and the EAC member countries, for example Sociéte Pétrolière (SP). ere is further potential to through high-level meetings and trade forums, to expand these e orts to cover a wider range of goods. discuss the bene ts of trade alignment and foster e building of a local logistics hub, along with mutual understanding, would add to an e ective improvements in trucking services, will be discussed and e cient implementation. in a separate section below. To support this agenda, the World Bank’s Great Policy area 3: Implement measures to bene t from Lakes Trade Facilitation Project provides nancial AfCFTA support for initiatives aligned with the objectives Implementing AfCFTA will require signi cant of regional and continental trade agreements, political e ort and a coordinated approach between re ecting the DRC’s commitment to improving government stakeholders within the AfCFTA. trade relationships with neighboring countries and Coordinated integration among member states creating a clear, transparent, and predictable trade requires the adoption of relevant legislative changes environment for cross-border traders (World Bank aligned with the commitments and protocols. is Group, 2015). includes areas such as investment, competition policy, e-commerce, and trade-related intellectual Policy area 2: To reduce trade and time costs and property rights. Clear, ambitious, and enforceable increase revenue from border, Rwanda together with rules and disciplines should be incorporated into the DRC should invest in improved logistics services these policies. Implementation of the AfCFTA’s and transport systems annex on trade facilitation will be important 90 CHAPTER 3 Rwanda CEM | 2024 to harness the full potential bene ts of the To maximize the bene ts from AfCFTA, Rwanda AfCFTA. Successful implementation will require should promote rules that facilitate trade and reduce strengthening the capacity of institutions involved costs in line the domestic export environment. In in negotiations and of other public and private this regard, Rwanda should negotiate for a tari stakeholders. system that considers key inputs for Rwanda’s economy and hence prevents unilateral deviation, Improvements in domestic coordination would as in experiences with CET deviations within the support an e ective implementation and reduction EAC. ese should include norms and disciplines of trade barriers. Domestically the Government of that enable, rather than hinder, the integration of Rwanda could develop a separate national trade African countries into global and regional value facilitation strategy for the AfCFTA, based on chains, learning from historical experiences in studies of the scope and nature of barriers to trade Africa and other parts of the world. In the same with the continent (Twum, 2022) and supported by way, Rwanda should establish and streamline capacity building of relevant government o cials Rules-of-Origin that are neither too lax nor too and non-state actors. is can include training restrictive to prohibit inputs for key sectors such as courses, seminars, provision of information through automotives and textiles. In addition, as outlined an online trade portal and establishing enquiry above, Rwanda could actively engage in discussion points in accordance with the TFA. around trade integration using modern technologies and in particular digital trade platforms as e ective is should be complemented by providing matchmaking tools to accelerate trade in the region information, credit, and technical support to and amongst AfCFTA countries. potential exporters under the AfCFTA, including market intelligence and monitoring reports on Regulations should facilitate trade through NTBs from Rwandan traders (Twum, 2022). reduction of bureaucratic hurdles. Domestically, the Existing government programs, such as the EGF, Government of Rwanda should actively promote the could be used to manage these projects. Further elimination of all unnecessary export applications, action could include establishing trade promotion licenses, and permits except when required for agencies and initiatives to promote Rwandan market access or to ensure health, safety, products and services in the AfCFTA market such and security. As a significant step to reduce as organizing trade fairs, exhibitions, and business NTBs, Rwanda should advance the further matchmaking events. e Government of Rwanda streamlining of customs procedures, waiving also should support workers that initially lose of pre-shipment inspection requirements, and from tari changes and introduce programs to facilitate expedited clearance for food products facilitate the reallocation of workers between sectors and farming inputs. (Kaminchia, 2020). Implementation could be improved through Regionally, Rwanda could engage actively with coordination mechanisms among the AfCFTA other African countries and regional economic member states. is includes the swift communities, such as the EAC, ECCAS and implementation of dispute prevention COMESA, to foster cooperation, exchange best mechanisms and the establishment of a national practices, and explore joint initiatives. is can focal point through appropriate regulations or involve participating in regional projects, sharing noti cations. Implementation would further knowledge and expertise, and collaborating on bene t from mechanisms to monitor and infrastructure development and cross-border trade evaluate the impact of Rwanda’s integration facilitation. Rwanda can play an active role in e orts into the AfCFTA. is involves tracking AfCFTA policy discussions and negotiations to trade ows, investment patterns, persisting and ensure that its interests and priorities are adequately emerging NTBs and the overall economic impact represented, political tensions are addressed, of the agreement, and using the ndings to make and decisions promote inclusive and sustainable informed decisions and adjustments in strategies economic growth. Reducing NTBs, in particular, and policies. has shown to foster export growth substantially. Rwanda CEM | 2024 CHAPTER 3 91 As further discussed in the next section, addressing to enforce them, Rwanda could strengthen policy barriers that impact transport routes will its position as a reliable and cost-e ective help reduce the cost of transporting goods on transit point in the region. Rwanda’s major trade routes and will reduce trade • Addressing Technical and Infrastructure barriers towards within the AfCFTA. Rwanda could Gaps: Rwanda can help close technical take an active position with regional partners and and infrastructure gaps hindering trade by at the AfCFTA level to promote concrete steps upgrading transport systems (roads, railways, for accelerated trade integration and reduction of air cargo) and expanding digital customs persisting barriers. ese could include: platforms like electronic data interchange • Simplifying Customs Procedures: Streamline (EDI) and automated customs clearance. customs by expanding the regional scope of While Rwanda has made progress with the single customs territory (SCT) outside systems like Electronic Cargo Tracking System of EAC countries, which will allow AfCFTA (eCTS), scaling these e orts across AfCFTA countries to collect duties at the rst point of countries is crucial. Harmonizing digital entry and reducing repeated customs checks platforms and improving infrastructure on key across borders, speeding up trade and lowering trade corridors will reduce delays, lower costs, costs. Actively pursued by Rwanda at the and enhance Rwanda’s position as a regional AfCFTA level, main issues with the SCT could logistics hub, particularly for transit trade to be addressed including partial implementation the DRC. across trade routes, inconsistent application by di erent countries, limited integration 3.5. Consolidate Rwanda’s position as a regional with countries like the DRC, and technical logistics hub or infrastructure gaps that hinder e cient Rwanda could reap considerable bene ts from customs clearance. By addressing such issues, strengthening its role as a regional hub for transit Rwanda could position itself as a more trade. is would require increasing the e ciency e cient hub for transit trade, attracting more of road transport, integrating multimodal transport business and investment through streamlined into the national logistics infrastructure, and trade processes, making it easier for businesses, increased infrastructure investment. especially SMEs, to engage in regional trade and hence enhance Rwanda’s competitiveness Trade agreements with neighbors coupled with in regional markets under AfCFTA. improvements in trade facilitation o er the potential for Rwanda to expand the bene ts from • Harmonizing Axle Load Limits: Align axle trade by operating as a trade hub. Operating as a load regulations across AfCFTA countries regional logistic hub could signi cantly expand to ensure consistent weight limits for trucks, Rwanda’s goods exports and services revenues. which will prevent delays and additional costs Despite considerable progress in reducing costs, associated with o oading or load adjustments Rwanda continues to face high trade costs in several at border crossings. Currently, inconsistent respects. Substantial investments in infrastructure to axle load limits between countries create create a multimodal trade system that is integrated bottlenecks along major trade corridors, as into regional trade links could signi cantly reduce trucks often need to meet di erent weight costs, improve the resilience of trade and enhance standards in each country. Rwanda can take Rwanda’s role as a transit hub. an active role by advocating for uniform axle load standards within regional forums, while Background also working with neighboring countries e potential market for Rwanda as a regional to develop enforcement mechanisms that logistic hub is large. In 2018, the latest year for ensure compliance, thereby supporting which consistent trade data is available across the smoother and more predictable trade across region, the size of the market for potential capture AfCFTA. By advocating for these standards by Rwandan transport and logistics operators, which and working with neighboring countries includes all goods either transiting or originating in 92 CHAPTER 3 Rwanda CEM | 2024 Rwanda, totaled 4.22 million tons, including: (i) uctuations in costs impact the predictability, 1.788 million tons in trade between Rwanda and con dence and competitiveness necessary for the regional partners; (ii) 1.846 million tons of seaborne development of regional value chains (World Bank trade either from or transiting through Rwanda; 2022). Rwanda’s export transport costs account and (iii) 0.582 million tons transiting Rwanda for 40 percent of the value of imports and exports, between regional partners. Data available from a which is higher compared to other countries in recently completed study for Afrieximbank on the the region (for example 12 percent for Kenya and Southern Africa Development Community (SADC) 36 percent for Uganda). In addition, uctuations region provides a useful benchmark. Regional in costs impact the predictability, con dence and exports from any of the landlocked countries (i.e., competitiveness necessary for the development of Botswana, Malawi, Zambia, Zimbabwe, and DRC regional value chains (World Bank 2022). While Copperbelt—as a landlocked region within DRC), the distance to the maritime ports in Kenya and to any other SADC state only surpasses 0. 5 million Tanzania are certainly a driver of higher costs, key tons in three cases.11 If South Africa, as a coastal investments, public, private and through public- state with a relatively large and diversi ed economy, private partnerships in transport infrastructure and is removed from this analysis, it is only the exports technology will be vital to further reduce costs and to/from the DRC Copperbelt and Zambia that hence increase the competitiveness of Rwanda’s rival the 0.5 million tons of regional exports from products on international markets. Rwanda to the eastern DRC.12 Policy area 1: Improve the e ciency of road cargo e most important target market around which through increased road quality, upgrading the to build a regional logistics hub in Rwanda is trucking system and incentivizing containerization eastern DRC. e market involved is about 1.17 ere is considerable potential to enhance trade million tons. A sizeable portion of Rwanda’s through improving the road network. Currently, approximately half a million tons in exports to approximately 90 percent of Rwanda’s cargo the eastern DRC are re-exports, which indicates heavily relies on road transport, primarily along the that the country is already performing some Northern and Central trade corridors. However, functions of a regional logistics hub. The benefits only half of the national roads and a fraction of the would be particularly significant if the capacity district roads are paved. Kaminchia (2020) nds and capability of such a hub can be integrated that transit road upgrading projects in the EAC over time with multi-modal hubs at Kisangani between 2004–10 reduced bilateral trade costs by and Kindu in the deep interior of DRC. Transit 18 percent, equivalent to a one-third reduction tra c is likely to be dominated by eets from in bilateral distance and a 75 percent increase in the country of origin. However, as the eastern bilateral trade volumes. ese ndings suggest DRC market becomes more accessible through immense potential for Rwanda to extend, upgrade, infrastructure improvements and trade facilitation and maintain its road system to enhance road reform, a segment of the transit market may be connectivity. For this it will be crucial to develop attracted to a regional logistics hub in Rwanda high-standard national, district, and feeder road because the distances from Uganda, Tanzania and networks that meet both regional and national Kenya to eastern DRC, and the associated cost of sealed bitumen standards. A signi cant step in this these trips, may prove increasingly burdensome. direction is the ongoing preparation of the National Feeder Road Master Plan (NFRMP), which will Rwanda has achieved remarkable improvements assess the condition of Rwanda’s feeder road in regional and global connectivity, leading to network, evaluate construction market dynamics, reduced trade time and costs as well as increased and provide insights into transport demand factors. trade reliability, through key investments such as an Electronic Cargo Tracking System (eCTS). Declining To complement this, Rwanda needs to incentivize costs have translated into annual transport savings of improvements in transport e ciency. e country’s over US$35 million for Rwanda, equivalent to 3-4 trucking services face challenges in competing percent of total import costs (Kunaka et al., 2018). with rms operating on regional corridors. Trucks However, certain costs remain high, particularly for registered in Rwanda account for only 20 percent raw materials and intermediate inputs. In addition, of the ows, though the proportion is higher on the Rwanda CEM | 2024 CHAPTER 3 93 Central Corridor where the Rwanda registered eet capacity of 20,000m2 and a container yard. Existing accounts for more than 40 percent of lifting capacity. logistics operators like Dubai Port World, Bolloré World Bank Group; Government of Rwanda, Logistics and MAGERWA have continued their (2020) estimate the value of transport services expansion, and shipping lines such as MAERSK from Kenya to Rwanda to be approximately US$50 and GCM have commenced operations in Rwanda. million per annum. is compares with the total value of trade between the two countries in 2019 Policy area 2: Integrate multimodal transport into the of US$290 million, o ering an untapped revenue national and regional logistics infrastructure source and the potential to provide diversi ed Establishing an e cient multimodal freight services (World Bank, 2022a). Enhancing the transport system that integrates roads, planned e ciency of trucking rms and capitalizing on the railway lines, and air cargo, along with competitive potential for increased transit trade with the DRC logistics services, would improve the movement could further improve trucking services and enable of goods, reduce costs, and enhance reliability. rms to provide more advanced services. Rwanda’s current trade connectivity is heavily reliant on air and road transport, as it is not yet E orts to address disadvantages faced by Rwanda’s connected to regional railway networks. Figure trucking services include: 3.12 shows that signi cant reductions in trade costs • Use targeted incentives to attract further can be achieved through integration of road and collective truck investment groups. is rail systems, which would enhance the country’s would help to lower the average truck age and access to the Indian Ocean and international increase the eet sizes. markets. However, the scal implications of railway • Regionally coordinate to allow more freedom investments will have to be carefully assessed, as for operators registered in all EAC countries. the examples of Ethiopia and Kenya (despite much is would address an e ciency advantage larger volumes that could sustain the line) show that of foreign trucks, as Rwanda’s higher imports nancing such investments purely on the basis of relative to exports mean that foreign trucks tra c is challenging (World Bank, 2022a). In the can charge for outbound cargo as well as for medium term, Rwanda could connect to these new empty returns (World Bank, 2022a). systems through dry ports in neighboring countries, particularly Isaka in Tanzania. • Leverage Rwanda’s location to carry more of Figure 3.12: Rwanda: transit time between Dar-es-Salaam the cargo that is moving in and out of Eastern and Kigali DRC. A larger volume of export tra c from (Transit time in days) DRC would provide a larger demand for 9 outbound tra c passing through Rwanda, 8 providing greater opportunities for Rwandan 7 trucking rms. Transit time in days 6 5 Rwanda should attract more partners for increased 4 3 containerization and make further investments 2 in inland facilities for handling containers, 1 including the development of a well-integrated 0 warehouse system to enhance logistics performance. 2015 2016 2017 Road 2018 Rail + road 2019 2020 e bene ts of inland containerization can be Source: Calculations based on CCFA data substantial. Coşar & Demir, (2018) estimate that, based on data from Turkey and the United Rwanda has made signi cant progress in liberalizing States, using containers reduced variable shipping air cargo through the open skies arrangement. e costs by 16-22 percent for the median shipping partnership with key players to build the Bugesera distance, signi cantly impacting trade volumes. Airport and the expansion of RwandAir’s network Rwanda has made signi cant progress in attracting are crucial for connecting Rwanda and other logistics facilities such as MAGERWA and the African countries with the rest of the world.13 Kigali Logistics Platform (KLP), which includes an is growth in the airline transport sector will not inland container terminal with a modern warehouse only enhance regional and international trade in 94 CHAPTER 3 Rwanda CEM | 2024 perishable products but also unlock opportunities enabling the free ow of tra c among road, for the export of high-value, low-volume/low-weight rail, and air transport. commodities. However, the nancial viability of • Actively promote discussions with regional RwandAir remains a challenge, particularly as the partners on the harmonization of regulatory cargo market is still relatively small (Bo nger, 2018). laws, rules, and practices, as well as the design Previous years saw heavy subsidies for air cargo, and maintenance of intermodal transport which were not deemed competitive without such systems. support. Rwanda should seek strategic partnerships with other airlines to expand the market and create • Eliminate all roadblocks, taxes, and fees opportunities for the export of new products. (including VAT) on the transit of goods. • Expand the one-stop border post and Looking ahead, Rwanda should prioritize e cient electronic cargo tracking system (eCTS) to and integrated logistics, seamless distribution further reduce delays and lower costs for cross- channels, and competitively priced services to border trade. sustain the trend of increased connectivity. Several • Harmonize taxes, fees, and charges that hinder international examples showcase the successful traditional air transport, such as landing integration of the domestic logistics infrastructure in rights or visa regimes beyond open skies a holistic approach. ese include the development arrangements. of an enabling regulatory framework and targeted capacity building (Box 3.2), investments in Reducing cross-border taxes, such as transit fees connecting roads and an e cient management and VAT, would signi cantly lower the cost system (see Box 3.3) and the institutionalized of moving goods across borders, making trade sharing of key information (Box 3.4). more a ordable for Rwandan businesses. By actively negotiating with regional partners under e White Paper on logistics prepared in 2012 the AfCFTA framework to lower or eliminate in collaboration with the World Bank outlined these taxes and address remaining issues such Rwanda’s strategy to become a regional logistics as the taxation of informal cross-border trade hub. Key steps towards this include: and institutionalizing a dispute resolution • Ensure an e cient integration of the new mechanism, Rwanda could help streamline trade, Bugesera industrial park, the Bugesera airport, reduce administrative burdens, and increase and the KLP to road, air, and potentially rail competitiveness for its exports. is would transport. e envisioned extension of the directly bene t Rwandan rms, particularly standard gauge railway networks to Kigali will SMEs, by making it easier and cheaper to access further complement this multimodal platform, regional markets. BOX 3.2: Improving trade and logistics in Togo e World Bank and Togo developed the Togo Trade and Logistics Services Competitiveness Project. e project aims to improve the country’s e ciency of trade logistics services by adopting updated legislation on road transport. ere are two main components to the project. e rst component focuses on strengthening the legal and regulatory framework, as well as the formalization and professionalization of the road transport sub-sector. is component also aims to develop practical guides and training materials, capacity building for government o cials, and delivery of equipment. e second component, “Improving Trade Facilitation,” includes support for implementing measures and commitments under the World Trade Organization Trade Facilitation Agreement, as well as support for customs reform and road and transport committees. See: https://projects.worldbank.org/en/projects-operations/project-detail/P158982?lang=en Rwanda CEM | 2024 CHAPTER 3 95 BOX 3.3: The Xiaogan logistics infrastructure project in Hubei, China e Xiaogan Logistics Port in Hubei Province* aimed to enhance its connectivity and e ciency through a project that had two key indicators: average travel time to improve connectivity and empty running to improve e ciency. e project also included additional 10 intermediate indicators. To achieve these goals, the project nanced the construction of three new road connections and underground facilities to improve the connectivity of the logistics port. Additionally, a logistics information management center was constructed to host management and business service o ces and community facilities, and a public logistics information platform was developed to address the e ciency element. Technical assistance and project management support were provided through training, capacity building, and research on logistics development, travel safety, among others. Source: Hamedoun, Reda. China - CN-Hubei Xiaogan Logistics Infrastructure: P132562 - Implementation Status Results Report : Sequence 01 (English). Washington, D.C. : World Bank. http://documents.worldbank.org/curated/en/778411481957392056/China-CN-Hubei-Xiaogan-Logistics-Infrastructure-P132562-Implementation-Status-Results-Report- Sequence-01 BOX 3.4: Vietnam logistics statistical system is grant project aims to strengthen the logistics statistical system in Vietnam by supporting activities related to strategic planning, evidence-based policymaking, and monitoring of logistics-related policies. e project creates a national system that collects, processes, and publishes logistics statistics annually in accordance with the country’s National Logistics Action Plan. is initiative will de ne indicators and guidelines for collecting and reporting annual trade logistics data, conduct a comprehensive logistics survey report with processed data, publish an annual report on logistics statistics based on the survey results, and enhance the capacity of the Ministry of Transport for collecting and reporting trade logistics data. By establishing this system, Vietnam can make informed decisions that will help improve the country’s logistics infrastructure and ultimately contribute to its economic growth. Source: See Pham, Duc Minh. Implementation Completion and Results Report (ICR) Document - Vietnam Logistics Statistical System - P158817 (English). Washington, D.C.: World Bank. http://documents.worldbank.org/curated/en/955051617119480564/Implementation-Completion-and-Results-Report-ICR-Document-Vietnam-Logistics-Statistical- System-P158817 Box 3.5: Assessing logistics skills, competencies and training in the Dominican Republic e World Bank conducted an in-depth qualitative logistics assessment in the Dominican Republic*. is study conducts interviews with key stakeholders including business organizations, educational institutions, government institutions, logistic service providers, shippers, professional associations, and recruitment agencies. e functional boundary of logistics was widely drawn around activities related to the movement, storage, and handling of goods and related information and communication technology (ICT). e study assessed the demand for personnel and their required skill levels, as well as the supply of trained individuals and the skills they possess upon entering the sector. e nal report provides a thorough report of perceived constraints of the logistics sector in the country, an assessment of current skills, availability of recruitment centers, certi cations, and establishes reasons for current shortages. e logistics assessment speci ed short to medium-term recommendations tailored to the Dominican logistics sector. * The assessment is based on the toolkit developed by Jean-Francois Arvis and Christina Wiederer in cooperation with researchers at the Kuhne Logistics University Hamburg, Germany (Alan McKinnon, Kai Hoberg, and Christoph Flothmann). Source: World Bank. Dominican Republic: Assessment of logistics skills, competencies, and training - Final Report (English). Washington, D.C.: World Bank. http://documents.worldbank.org/curated/en/099062823125531766/P1785030ce87760eb08d43077ace597fbb0 96 CHAPTER 3 Rwanda CEM | 2024 Policy area 3: Invest in hub infrastructure e ects according to the National Export Strategy. Future Drivers highlighted the advantages of Potential choices include serving as a logistics center Rwanda establishing itself as a regional logistics to manage all the activities involved in freight hub, which would not only reduce trade costs movement, providing a network junction to transfer but also generate signi cant revenue streams. goods from road to rail or vice versa, establishing an is would serve to enable Rwanda to act as a inland port to supply all the services of a port except land bridge for goods in particular entering the for the loading of cargo to and from seagoing ships, eastern DRC. Transport service rms in East Africa and provision of air cargo services. have expanded their range of services to include clearing, forwarding, and storage, in addition to Infrastructure and support capacity could be transportation (Kunaka, et al., 2018). For Rwanda, enhanced. To ensure e ective connectivity between the emergence of third- and fourth-party logistics di erent logistics centers, such as industrial parks services indicates how improvements in logistics can and the Bugesera airport, Rwanda should invest enhance export competitiveness and diversi cation further in infrastructure that ensures an e ective and of services. Ongoing investments include the e cient integration of logistic centers and transport logistics and distribution centers like KLP, and systems. Infrastructural investments need to be construction of the Bugesera Airport, through complemented by regulatory clarity and su cient advances in the Single African Air Transport Market human resources. As such, the expansion should be (SAATM) and new prime economic zones.14 is coordinated with neighboring countries, addressing could be complemented by further investment factors such as vehicle speci cations, axle load increasing the capacity of storage facilities, including limits, and cross-border taxes. Moreover, Rwandan cold chain systems, to minimize the scope for post- rms should broaden the logistics services they harvest losses. o er. To ensure the functionality of a hub requires investment in supporting managerial skills. Rwanda Establishing an e cient Northern Corridor is crucial should develop degree programs and practical for Rwanda’s logistics hub agenda, as a signi cant curricula for transport and logistics management portion of the DRC tra c passing through Rwanda training. Partnerships can also be established with relies on this corridor. Rwanda has already positioned programs such as the UNCTAD Port Management itself as a regional logistics hub for Congo and and Logistics Training Programs. Burundi, with the DRC market alone accounting for approximately 1.17 million tons as indicated 3.6. Leverage foreign investment to access above. e development of the Northern Corridor international markets and promote green also would reduce the dominance of the lower-cost growth Central Corridor, ensuring alternative routes in case Increasing foreign direct investment (FDI) to of tra c disruptions. As outlined above, building a support export expansion will require investments regional hub with the DRC would yield substantial and international agreements to attract FDI in bene ts, especially if the capacity and capabilities of modern sectors, and the use of incentives and such a hub can be integrated with multimodal hubs stronger environmental regulation to attract at Kisangani and Kindu in the DRC. green FDI. To advance the plans for a regional hub, the Increased FDI could play an important role Government of Rwanda should leverage existing in expanding Rwanda’s exports. Rwanda has logistic strategies and clarify details of the hub. implemented various policies and initiatives aimed In this regard, Rwanda should consult Rwanda’s at fostering a favorable climate for FDI. ese National Logistics and Distribution Services e orts include the establishment of the RDB and Strategy as a framework for developing an e cient the implementation of robust investor facilitation logistics system, aligning logistics and distribution, mechanisms. Additionally, Rwanda has enacted an and enabling Rwanda to export logistics services investment code that includes provisions designed (World Bank, 2022a). To streamline the planning to incentivize FDI. Nevertheless, while the stock of of the hub, the Government of Rwanda should FDI has increased substantially as a share of GDP, improve clarity about the hub’s form, as logistics new FDI ows have declined relative to output clusters can exhibit various types of connectivity since 2014 (Figure 3.13). Rwanda CEM | 2024 CHAPTER 3 97 Figure 3.13: FDI stock (LHS) and net in ows (RHS) (Share of GDP) 45 7.0 40 6.0 35 5.0 30 25 4.0 20 3.0 15 2.0 10 1.0 5 0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Ethiopia Kenya Rwanda Tanzania Uganda Ethiopia Kenya Rwanda Tanzania Uganda Source: Calculations based on UNCTADSTAT Policy area 1: Attract FDI in modern priority sectors incentives can vary across di erent sectors and through investment and international cooperation rm types. Conducting a cost-bene t analysis Attracting FDI in modern sectors will allow to will enable the identi cation of investors expand Rwanda’s product portfolio towards more who are most likely to be in uenced by such complex products that can be exported digitally incentives to make investment decisions. and hence increase diversi cation. FDI in global When implementing incentives, insights from innovator industries often is linked with positive this analysis can support in re ning these spillovers to the local economy through technology programs, ensuring they o er the best possible transfers (Newman, et al., 2019). An expanded return on investment. Supplier Development Unit, managed by RDB, • Develop an e ective FDI tracking system should target rms with the potential to be to evaluate the e ectiveness of existing and integrated in these sectors to exploit these e ects. planned FDI projects to increase value for Steps to attract priority FDI and to counteract the money of promotion e orts, including tax recent slowdown in FDI could involve: incentives (Twum, 2022). Actual investment • Evaluate the e ectiveness of the current ows from foreign rms have consistently fallen tax-incentive scheme to attract FDI. Tax well below commitments made at the time of incentives for FDI cause signi cant tax losses application for project approval. To support while the bene ts are not clearly established. the above outlined cost-bene t analysis of tax In turn, studies on Rwanda and further incentives, Rwanda could develop an e cient countries in the region indicate that tax investment tracking system at the rm level incentives might be an ine cient tool to to improve monitoring and transparency of attract FDI (Kronfol & Steenbergen, 2020) promised investment, with adequate internal – while other factors such as the stability of reporting to Minicom and RDB management. the country and its infrastructure are more • Leveraging regional and global partnerships important drivers of decisions about FDI to attract more FDI. On a regional and global (Khachoo & Khan, 2012). To establish a level, Rwanda should ensure that committed continuous evaluation that contrast costs investment treaties enter into full force. ese with bene ts of tax incentives to attract FDI, include the Economic Partnership Agreement Kronfol & Steenbergen (2020) suggest to i) between the EAC and several EU and bi-lateral systematically evaluate forgone revenue from partnerships, such as with Turkey, South tax incentives to increase transparency of Africa and Mauritius (World Bank, 2022b). public resources, ii) compare those costs with Rwanda could further explore options to use associated bene ts (e.g. levels of investment the AfCFTA’s investment potential for greater and employment creation) to understand the integration in investment policy, competition opportunity costs and iii) analyze the targeting policy and intellectual property rights as and design of incentives as the e ectiveness of drivers for FDI (Adams, 2010). 98 CHAPTER 3 Rwanda CEM | 2024 • Expanding investments in SEZs and integration Strengthening environmental regulation in light of SEZs into a national logistics infrastructure. of the rise of global carbon border polices could Domestic initiatives coordinated by the improve Rwanda’s agenda on green growth while Special Economic Zone Authority of Rwanda simultaneously attracting FDI. ere is no systematic has the potential to attract more investment evidence supporting the idea that di erences in and leverage export potential (Steenbergen environmental standards and regulations in uence & Javorcik, 2017). Investments can include investors’ location decisions (Saurav & Viney, upgrading of existing SEZs and the expansion 2021) and the investment and production choices of further industrial zones. E orts to integrate of most multinational enterprises (MNEs) are SEZs will be particularly important in light of generally una ected by environmental regulations Rwanda’s major infrastructure projects such as (Koźluk & Timiliotis, 2016). e implementation the Bugesera Airport. of new initiatives, such as the EU’s Carbon Border Adjustment Mechanism, results in higher costs for importing goods from countries with weak Policy area 2: Use direct incentives and strengthened regulatory environments. is development environmental regulation to attract green FDI undermines the intended goal of preventing Rwanda’s commitment to a Green Economy is carbon leakage (Brenton & Chemutai, 2021). As evident in its policy framework, National Fund a consequence, the relevance of weak regulation as for Climate and Environment, and focus on a measure of FDI-competitiveness is diminishing, private sector engagement, climate risk mitigation, even for the most polluting industries (Steenbergen and improved public procurement. Globally, FDI and Saurav, 2023). In contrast, emerging evidence announcements in green sectors increased by 700 suggests that having robust and stable environmental percent between 2003 and 2021. Multinational regulations might attract and retain FDI ows. Enterprise (MNEs) thus o er an important source Countries adopting regulations that support of nance for the climate transition. Approaches climate goals can create a level playing eld for to attract green FDI and control MNEs’ impact foreign investments in low-carbon technologies, on climate change include patrolling (monitoring services, and infrastructure (OECD (Organisation emissions), prescription (laws and regulations), for Economic Co-operation and Development), penalties (taxes), persuasion (corporate commitments 2022). Some MNEs with strong corporate social and information) and payments (incentives and scal responsibility mandates tend to avoid investing support) (Steenbergen and Saurav, 2023). in countries with weak environmental regulations (Dam & Scholtens, 2008; Poelhekke & van der Rwanda has utilized tax incentives as a means Ploeg, 2015), leading to ndings of a positive to attract FDI, which can be justi ed when e ect of environmental regulation on inward FDI investments bring positive spillover e ects, ows in speci c cases (Kim & Rhee, 2019; Rivera particularly in reducing carbon emissions & Oh, 2013). through green technology transfers (Harrison & Rodríguez-Clare, 2010; Margalioth, 2003, In addition to direct subsidies, Rwanda should Wade, 1990). However, the impact of incentives explore further options to attract green FDI. ese on FDI has been mixed, sometimes resulting include: in minimal or no new investments (IMF et al. • Use investment promotion agencies (IPAs) 2015). Nonetheless, incentives can play a role in to bridge information gaps that hinder the the nal negotiation stage between investors and attraction of FDI. governments when selecting investment locations • Strengthen environmental regulation in the (Freund & Moran, 2017). Rwanda’s favorable light of the rise of global carbon border polices, business environment plays a crucial role in the such as the EU’s Carbon Border Adjustment e ectiveness of rm subsidies. James (2013) Mechanism, to reduce incentives for rms to demonstrates that tax incentives are eight times engage in carbon leakage. more e ective in attracting FDI for countries • Employ international best practices to attract with favorable investment climates. green FDI included in: Rwanda CEM | 2024 CHAPTER 3 99 • UNCTAD’s World Investment Reports that e partnership between Rwanda’s National includes important new analysis on sustainable Agricultural Export Board (NAEB), investment dynamics (United Nations Enveritas, and JDE Peet’s to monitor Conference on Trade and Development, deforestation risks using AI and satellite 2022), imagery is a positive step. However, this • WTO’s investment facilitation agreement, initiative is focused mainly on coffee, leaving other commodities like cocoa and • e Columbia Center on Sustainable wood, which may also be affected by the Investment’s toolkit on investment facilitation regulation, vulnerable to non-compliance. for sustainable investment (Berger, Kagan, & As Rwanda’s coffee exports heavily rely Sauvant, 2022), on the EU market, ensuring compliance • World Investment for Development Alliance is critical. Going forward, Rwanda should (WIDA) which is a new global platform extend deforestation monitoring e orts to dedicated to promoting investment for other commodities covered by the EUDR to sustainable development. safeguard broader market access. • EU Packaging and Packaging Waste Regulation Policy area 3: Implementing actions to address (PPWR): Rwanda’s proactive approach with its emerging risks from international trade regulations 2022–27 Packaging Strategy, which promotes together with the private sector and NGOs. sustainable packaging, aligns well with the Rwanda’s exporters are increasingly facing new trade upcoming EU PPWR. Rwanda has already compliance challenges as key export markets adopt banned plastic bags and single-use plastics, stringent climate mitigation and sustainability giving it a head start in complying with these policies. ese emerging regulations, particularly regulations. However, for full compliance, in the EU and the US, are aimed at minimizing Rwanda needs to scale up its production environmental impacts and ensuring sustainability capacity for recyclable and reusable packaging across supply chains. Failure to comply with these materials to meet EU standards. e likely regulations could reduce Rwanda’s market access, especially for major export products like co ee. impact on Rwanda’s fast-moving consumer However, by taking proactive measures to address goods (FMCG) exports will be signi cant, these challenges, Rwanda has the opportunity but with continued investment in sustainable to enhance its competitiveness and secure its packaging production, Rwanda’s exports position in these vital markets. Below are key could not only meet EU requirements but regulations that Rwanda needs to address and the also position itself as a supplier of sustainable current state of readiness, potential impacts, and packaging solutions to neighboring countries. recommended actions. • EU Corporate Sustainability Due Diligence • EU Deforestation Regulation (EUDR): It Directive (CSDDD): e CSDDD states that all entities placing commodities on requires businesses in EU supply chains to the EU market, or exporting them from the demonstrate due diligence in human rights EU, must ensure that they are deforestation- and environmental sustainability. Rwanda’s free and produced in accordance with involvement in key supply chains puts its the relevant legislation of the country of exporters at risk if compliance with this production. Currently, the commodities directive is not met. For example, while covered by the regulation are cattle, cocoa, Rwanda has an enormous potential to export co ee, palm oil, rubber, soy and wood, as critical raw materials to the EU, the failure well as derivatives such as leather, chocolate, to demonstrate sustainable production under tires and printed paper. Rwanda’s co ee sector the CSDDD might dampen this potential. is already taking steps to comply with the To mitigate the risk of losing access to EU EUDR, which came into force in June 2023, markets, Rwanda needs to build capacity while its implementation has been delayed to among producers and exporters to monitor, 30 December 2025 for large companies and report, and improve sustainability practices 30 June 2026 for micro- and small enterprises. across the supply chain. 100 CHAPTER 3 Rwanda CEM | 2024 • US In ation Reduction Act (IRA): While begin assessing the carbon intensity of its the IRA’s immediate impact on Rwanda industrial sectors and take steps to reduce is minimal, as the regulation prioritizes emissions, positioning itself for compliance as US domestic manufacturing, there is an the list of covered goods grows. opportunity for Rwanda to become a supplier of critical raw materials for green technologies. 3.7. Conclusion Currently, about 60% of Rwanda’s EV Rwanda relies on strong export growth to achieve component exports go to the US, and as the its ambitious development goals. e pandemic IRA stimulates demand for these components, recession and subsequent serial shocks have Rwanda could increase its role as a key supplier. underscored the additional importance of not only To capitalize on this, Rwanda should develop increasing export growth but building resilience into strategic partnerships with US manufacturers the export portfolio through diversi cation. is and invest in improving the extraction and review of performance and policy developments sustainability of its raw materials to meet the since 2018 has con rmed enormous progress. growing demand for green technologies. e challenges facing Rwanda today focus on • EU Carbon Border Adjustment Mechanism “second and third generation” reforms, which can (CBAM): CBAM targets emissions-intensive be quite detailed and place a substantial burden goods, requiring exporters to the EU to buy on institutional e ectiveness. e numerous ideas carbon certi cates equivalent to the EU’s discussed in this report illustrate the challenge carbon price. At present, Rwanda’s main involved. Individually, they would probably have export sectors—such as co ee and tea—are not minor impact but implemented collectively as part a ected by CBAM, as the regulation focuses of a bold and coordinated strategy, they could make on sectors like steel, aluminum, and fertilizers. a substantial di erence in export performance over However, as Rwanda looks to diversify its the next decade. e good news is that Rwanda, exports into manufacturing and processed perhaps uniquely in Africa, has the capacity in goods, it will need to be ready for potential government to implement such a complicated, future expansions of CBAM. Rwanda should forward-looking agenda. Rwanda CEM | 2024 CHAPTER 3 101 Annex 3.1. Matrix of key policy recommendations: Growth and resilience through trade NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 2.3.1 Policy Area 1: Build Resilience rough Diversi cation of Products and Markets, as well as Increased Product Complexity. Priority Area 1: Develop Products and Markets rough Targeted Traditional and Non-traditional Market Strategies as well as Identi cation and Support of High Priority Sectors Combine traditional marketing strategies, along with innovative digital MINICOM, HP MP HF marketing approaches. RDB, PSF Combine traditional marketing strategies such as trade shows and through the targeted use of foreign embassies, along with innovative digital marketing approaches such as through the use of social media and trough further online marketing platforms Assess the e cacy and e ectiveness of trade o ces and embassies in foreign export markets. Strengthen the e cacy of Rwandas trade and FDI promotion agency Assess the e cacy and e ectiveness of trade o ces and embassies in foreign MINICOM, HP MP HF export markets. RDB, PSF Combine traditional marketing strategies, along with Review existing export product and market priorities across various government strategies. Conduct a study on nascent service export sectors and products with high growth potential. Priority Area 2: Leverage Skills Development and Partnerships to Support the Supply of Skilled Labor. Align public skills development programs with private sector demand by creating public-private dialogue with strategic partners and engaging universities and TVETs. Align e orts of public skills development programs with industrial demand. Leverage the Occupation on Demand List and the Sector Skills Councils (SSC) to identify skill gaps. Expand partnerships with leading innovation and research institutions to learn from best international practice. Priority Area 3: Foster Innovation and R&D. Evaluate public innovation programs and scale up successful ones MINICOM HP LT MF Scale up the National Industrial Research and Development Agency RDB (NIRDA) program. Strengthen monitoring of existing innovation and R&D support programs 102 CHAPTER 3 Rwanda CEM | 2024 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Priority Area 3: Use Trade Policy to Facilitate Climate Mitigation and Adaptation. Develop country platforms for promoting policy dialogue, accountability and MINICOM, HP MT MF collective action MINAGRI Facilitate agricultural climate change adaptation by reducing tari and non-tari costs on key inputs, promote smart agriculture through water and fertilizer/ pesticide reduction technological adoption and expanded agricultural trade Reduce tari s and NTBs on key agricultural inputs and current technologies Facilitate access to new agricultural technologies through expedited seed release procedures + facilitated temporary entry of agricultural specialists. Renew e orts to reduce barriers to agricultural trade Use direct nancial support to rms integrated in supply chains and a ected by climate change to enhance resilience 2.3.2 Policy Area 2: Promote Services Exports and Foster Digital Trade. Priority Area 1: Facilitate the Cross-Border Entry of Skilled Labor rough Mutual Recognition Agreements and Relax Visa Conditions. Consider recognizing regional professional quali cations and introducing MINICOM HP MT HF more intentional visa and work permit conditions for quali ed professionals in the context of commitment to AfCFTA trade liberalization Recognize licenses and standards obtained in other EAC countries, adopt common quali cation criteria, expand MRAs Priority Area 2: Reduce Remaining Services Trade Restrictions by Lowering Administrative Burdens, Information Provision and Enhanced Regional Cooperation. Reduce and simplify administrative procedures and requirements to simplify MINICOM, HP MT MF services trade and evaluate these e orts regularly. EAC, AfCFTA Address the remaining red tape and bureaucratic hurdles that a ect the ease of doing business across services sectors (e.g., simplify procedures and documentation of administrative procedures and documentation requirements and facilitate obtaining permits and licenses) Raise awareness and provide information among service providers about the bene ts and opportunities of international trade Establish a regional mechanism to support cross-border digital payments interoperability Priority Area 3: Strengthen Regional Cooperation and Coordination of Digital Trade by Considering International Best Practice and Extended Regional Integration. Join the WTO Joint Statement Initiatives on Services Domestic Regulation, MINICOM, MP LT MF Investment facilitation for Development and E-commerce EAC, AfCFTA, Promote the adoption of regional standards the adoption of regional standards ECCAS for digital trade, digital market integration and the creation of the One Network Area. Initiate discussions with the AfCFTA, EAC, and ECCAS on harmonizing, mutually recognizing, and/or promoting trade facilitating convergence in digital regulations Rwanda CEM | 2024 CHAPTER 3 103 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Promote discussions on the development of a single digital market within the EAC. Expand the One Network Area (ONA) to allow others to join when ready. Priority Area 4: Foster E-Commerce rough Trade Promotion Agencies and Streamlined Laws and Regulations. Use Trade Promotion Organizations to encourage e-commerce and digital MINICOM, HP MT MF services EAC, AfCFTA, Strengthen consumer protection measures and clarify rules for e-commerce MINICT and content platforms Update the 2022 law on electronic messages and transactions. Priority Area 5: Strengthen Rwanda’s Domestic Digital Infrastructure rough Investments and Regional Cooperation. Develop a modern digital and data infrastructure and digitize processes and MINICOM, MP LT MF transactions to increase regional market connectivity such as through an MINICT, expansion of the One Network Area and expansion of access to reliable high- RURA, EAC, speed internet AfCFTA Advance and coordinate regulation and legislation of digital identi cation and digital nancial services and establish competition enforcement institutions. 2.3.3 Policy Area 3: Advance Regional Integration rough Cooperation and Trade Liberalization. Priority Area 1: Foster Trade with the DRC rough Alignment of DRC Trade Instruments to EAC Instrument Standards and Reduction of Trade Costs. Strengthen the dialogue between the DRC and the EAC member states to MINICOM, HP MT MF share best practice examples and data and to improve coordination of trade EAC polices Leverage the dialogue with the DRC to promote alignment between DRC and EAC trade instruments through improved capacity of reform implementation as well as monitoring and reviewing e orts to align the DRC s trade instruments, such as its tari system, to the EAC. Promote measures aligned with the WTOs Trade Facilitation Agreement MINICOM, HP LT LF (TFA) to apply internationally best-practice measures MININFRA, Invest in cross-border trade infrastructure to facilitate trade and increase EAC gains from trade with DRC Improve the e ciency of trucking rms such as through investments in border facilities Priority Area 2: Realize the Bene ts of the AfCFTA rough Strengthened Regional Cooperation and Negotiation, Reduction of Trade and Investment Barriers and Build Greater National Capacity. Improve domestic and regional cooperation towards an e ective MINICOM, MP MT HF implementation and trade barrier reduction through strategy and EAC, AfCFTA, capacity development including the development of a separate national trade facilitation strategy and an institutionalization of an of exchange of information. Facilitate trade through reduction of bureaucratic hurdles such as a MINICOM, HP MT MF streamlining of the process of obtaining export permission and limiting their EAC, AfCFTA, cases where necessary to ensure health, safety, and security. Foster implementation of AfCFTA protocols with particular attention to rules of origin in goods trade and services commitments. 104 CHAPTER 3 Rwanda CEM | 2024 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Promote a tari system that considers key inputs for Rwandas economy Establish mechanisms to monitor and evaluate the impact of Rwandas integration e orts into the AfCFTA Priority Area 3: Further actions. Establish a trade promotion agency and initiatives to actively promote its products and services Manage exchange rate with focus on regional macroeconomic developments to ensure competitiveness of exports Provide support to workers initially losing from tari changes and facilitate relocation of workers between sectors 2.3.4 Policy Area 4: Consolidate Rwanda’s Position as a Regional Logistics Hub. Priority Area 1: Integrate Multimodal Transport into the National Logistics Infrastructure. Promote domestic integration of trade infrastructure and regional MININFRA, MP LT LF harmonization of transport regulation. MINICOM Ensure e cient integration of the Bugesera industrial park, Bugesera airport, and KLP to road, air, potentially rail transport. Promote discussions around the harmonization/convergence of regulatory laws, rules, practices, and the design & maintenance of intermodal transport systems with regional partners Harmonize taxes, fees, and charges that hinder traditional air transport Invest in both the central and southern trade corridor to increase resilience and facilitate transport through reduction of remaining barriers Eliminate all roadblocks, taxes, and fees on the transit of goods. Continue to invest in the Northern corridor as an alternative to the Central one. Priority Area 2: Invest in Regional Logistics Hub Infrastructure. Invest in infrastructure to ensure the e ective integration of logistic centers MININFRA, MP LT LF and transport systems. MINICOM Leverage existing logistics strategies and advance the creation of a regional logistics hub through nalization of details and managerial capacity building Consult Rwandas existing National Logistics and Distribution Services Strategy Gaining clarity about the hubs form and enhance support capacity and coordination Ensure the functionality of a hub by scaling up logistics-related managerial skills. Rwanda CEM | 2024 CHAPTER 3 105 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 2.3.5 Policy Area 5: Leverage Foreign Investment to Access International Markets and Promote Green Growth. Priority Area 1: Attract FDI in Priority Sectors rough Investment, International Cooperation and Infrastructure Integration. Promote the e ectiveness of investment partnerships such as with the EU and MINICOM, MP LT MF promote regional policy integration. RDB, Ensure that investment treaties enter into full force. MININFRA Explore options to use the AfCFTAs investment potential for greater policy integration Streamline investment promotion and transparency by establishing a rm level investment tracking system. Evaluate existing and planned investment promotion e orts. Use an e cient investment tracking system to improve monitoring and transparency of promised and realized investments; develop a dispute prevention mechanism. Integrate SEZs into national logistic infrastructure Priority Area 2: Use Direct Incentives and Strengthened Environmental Regulation to Attract Green FDI. Use tax incentives to attract green FDI. MINICOM, HP MT MF Learn from international best practice examples and strengthen RDB environmental regulation that attracts green FDI. Use the Rwandan investment promotion agency (IPA) to promote and attract low-carbon FDI. 106 CHAPTER 3 Rwanda CEM | 2024 Annex 3.2. Export performance: Pre-shock structural trends and post-shock recovery challenges Strong export performance in the rst half of the markets over the past decade. Re-exports, primarily last decade to the Democratic Republic of the Congo (DRC), Rwanda experienced robust export growth in both made a signi cant contribution to export growth: goods and services over 2010–19, surpassing global the share of re-exports in total exports increased and SSA growth rates. Furthermore, Rwanda’s export from 5 percent in 2010 to 16.9 percent in 2019. growth, both in goods and services, outpaced that Nevertheless, an analysis of export shares reveals of Ethiopia, Ghana, Kenya, Tanzania, and Uganda, a decline in product and market diversi cation, which share similar export structures (Figure A3.1). primarily driven by high export values of gold to e growth of merchandise trade was primarily one major market, the UAE. driven by an expansion in commodities trade. Key exported goods included gold, metals, agricultural ere was also a shift in primary export commodities commodities, various food products, and mineral favoring non-traditional exports. Co ee and tea, oils. Metals and mineral commodities, notably the two primary export products, accounted for 6.9 tantalum, tin, tungsten, and gold, accounted for percent of exports in 2019, less than half the share more than half of Rwanda’s goods exports in 2019. in 2010. Over the decade, mining and mineral Services played a signi cant role in exports, with processing played an increasingly signi cant role in an annual growth rate of approximately 9 percent exports, driven by the surge in gold exports. between 2010 and 2019, reaching over US$2 billion. is growth re ects the government’s e stock of foreign direct investment (FDI) has strategic emphasis on the service sector outlined in seen a long-term steady growth as a share of GDP. Vision 2020 and the NST-1. Prior to the pandemic, FDI surpassed several regional economies (Figure the tourism sector was the leading foreign exchange A3.3). e top investors in Rwanda are African earner, contributing nearly 45 percent of service countries, including Mauritius (40 percent), Kenya exports in 2019. Additionally, air transport exports, (9.5 percent) and South Africa (7.1 percent). e comprising around 20 percent of services exports in leading sectors attracting FDI in 2021 were Financial 2019, played a vital role in connecting landlocked and insurance activities (26.2 percent) followed by Rwanda with the rest of the world. Tourism (16.1 percent) and Manufacturing (13.6 percent). e increase in FDI stock has been slowing Alongside export growth, Rwanda witnessed a shift down, as new FDI ows have declined steadily since in export composition, improved products and an 2014 (Figure A3.4). increase in the number of markets (Figure A3.2). e number of export products and markets for Growth has been slowing down in time of global Rwanda increased two to fourfold between 2010 trade disruptions and 2019 for exports exceeding $10,000 and US$1 Rwanda’s export performance slowed in the second million (Twum, 2022). Notably, the agriculture half of the decade, and export receipts remain sector, including export crops, experienced the vulnerable to commodity price volatility. Exports highest increase in the range of products and increased by around 17 percent per year in the Figure A3.1: Goods and services export, annual growth Figure A3.2: Export product composition has evolved over the past decade 50 1,800 40 1,600 Non-travel services 30 1,400 Other good exports 20 1,200 US$ million 10 1,000 Rexports 0 800 - -10 600 Minerals, metal, ores -20 400 Co ee +Tea -30 200 Manufactured -40 exports 0 1999 2002 2005 2008 2011 2014 2017 2020 2023 2020 2010 2018 2022 2015 2016 2019 2014 2013 2012 2021 2017 2011 Rwanda -Saharan Africa Sub - World Source: Calculations based on WDIs Source: Calculations based on data from the Government of Rwanda Rwanda CEM | 2024 CHAPTER 3 107 Figure A3.3: FDI stock, percent of GDP Figure A3.4: Net FDI in ows, percent of GDP 45 7 40 6 35 5 30 25 4 20 3 15 2 10 1 5 0 0 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Ethiopia Kenya Uganda Tanzania Rwanda Kenya Ethiopia Rwanda Tanzania Uganda Source: World Bank sta estimates based on (TBA) Source: World Bank sta estimates based on (TBA) rst half of the decade, underpinned by impressive Another major global shock arises from the war performance in minerals, co ee, tea and tourism. in Ukraine. In addition to the in ationary e ects But export growth fell to around 12 percent per caused by supply chain disruptions stemming year in the second half of the decade. In addition, from the pandemic, export restrictions on Rwanda’s growth performance has been driven commodities, particularly wheat and fertilizers, by increasing global market prices of Rwanda’s have led to a surge in prices. In January 2023, food commodities exports. e 2022 drop in co ee price in ation reached 26 percent, down from its prices highlights the vulnerability of a commodity- peak of 62.6 percent in March of 2002, following driven export sector.15 an increase in interest rates to 7 percent (BNR, 2023) as reported by the World Bank (2023). In recent years, the world has experienced a number of global shocks disrupting local production and e convergence of these shocks introduces international trade. e COVID-19 pandemic had signi cant downside risks to any economic a profound impact on global supply chains and forecast. ese risks include a prolonged the movement of people. Figure A3.6 illustrates challenging global environment characterized by the severe decline in Rwanda’s tourism sector, resulting from travel restrictions imposed during higher in ation, tightening policy rates, nancial the pandemic. While these restrictions are gradually stress, and deeper weaknesses in major economies being lifted, the sector continues to lag signi cantly leading to reduced external demand, along with behind its pre-COVID-19 levels, and this trend the potential for severe climate- and weather- is expected to persist in the near future due to related shocks (World Bank REU, 2023). lingering uncertainties. Figure A3.6 provides a more optimistic outlook, comparing cumulative monthly Persistent Structural Weaknesses export volumes over the recent year. Encouragingly, Rwanda became a more competitive exporter export volumes have rebounded and surpassed pre- between 2010 and 2019, both in goods and pandemic levels, indicating a positive development services exports.16 However, gains in service-sector for Rwanda’s economy. competitiveness slowed down in the second half Figure A3.5: Total Goods exports Figure A3.6: Accumulated monthly export volumes 600 1,600 1,400 2023 500 2022 1,200 400 2021 1,000 2019 300 800 2020 200 600 400 100 200 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Export value index Export volume index 2019 2020 2021 2022 2023 Source: Calculations based on NBR database Source: World Bank sta estimates based on (TBA) 108 CHAPTER 3 Rwanda CEM | 2024 of the decade (Figure A3.7). is was partially While the adoption of e-commerce is a signi cant symptomatic of persistent structural weakness, determinant of participation in international trade including over-reliance on just a few products and in Rwanda, its use is still limited among Rwandan markets in merchandise trade, a lack of complexity in rms. Manufacturers engaged in ecommerce are product exports, and a low survival rate for exports. 27 percent more likely to be exporters. However, rms in Rwanda use ecommerce at a much lower Some of these weaknesses are associated rate than the majority of countries. In 2019, 43 with high input costs. Despite gains in trade percent of rms engaged in ecommerce, which facilitation, imported production inputs su er places Rwanda in the 33rd percentile of countries from high costs of transportation. e shipping with a rank of 82 out of 121. costs for a 20-foot container from Shanghai to Mombasa is around US$500-1,000 while it costs Most of Rwanda’s export growth has occurred around US$3,000-4,000 to transport it from through stronger performance in products with Mombasa to Kigali (GIZ, 2020; World Bank, lower product complexity, such as agricultural 2022b). High tari s further raise input costs. commodities which are exposed to large e agricultural sector, for instance, faces import uctuations of international market prices. One tari s of between 14 percent and 22 percent on reason is that rms in Rwanda lag behind in some imported goods that are then subject to product innovation compared to those in most further processing and exporting.17 High tari s other countries (World Bank 2022). In 2019, also re ect ine ciencies in the EAC’s Common only 15 percent of firms had introduced a new External Tari s (CET), which applies tari s up to or significantly improved product or service 100 percent on certain imports. during the last three years, which places Rwanda in the 14th percentile of countries with a rank of Another issue is the similarity of traded products 103 out of 120. in the region. e trade complementarity index (TCI), ranging from 0 to 100, shows that Rwanda’s Low export survival rates continue to pose a complementarity with regional economies is low challenge. Between 2010 and 2019, approximately and is further declining (with the exception of 18.2 percent of Rwanda’s potential export growth Uganda) (see Figure A3.8). was lost due to a decrease in exports of existing products to established markets (6.7 percent) and Low rates of ISO certi cation in Rwanda may the complete cessation of exports to established constrain exports. Firms with ISO certi cation markets (11.5 percent). Rwanda should are 36 percent more likely to be exporters. In commission a study to examine the reasons 2019, only 3 percent of rms had obtained ISO behind the low survival rates, which could inform certi cation, which places Rwanda in the 9th a support program for exporters struggling to percentile with a rank of 108 out of 119 (World maintain their export markets. Bank 2022). Other EAC countries perform 10 ppts higher, on average, at 13 percent. Figure A3.7: Probability of exporting by rm activity in 2019 Figure A3.8: Rwanda’s trade complementarity with selected countries 50 ISO Certification Ecommerce 40 Additional Credit Product 30 Product Innovation Process Innovation 20 Formal Training 10 -30 - - -20 - -10 0 10 20 30 40 50 60 2015 2016 2017 2018 2019 2020 All Firms Manufacturing Services (excluding Retail) Burundi DRC Kenya Tanzania Uganda EAC Source: WBG sta calculations Source: WBG sta calculations Rwanda CEM | 2024 CHAPTER 3 109 Annex 3.3. Policy developments since future drivers of growth Export growth and diversi cation sectors. Notably, in 2021, the German rm Since 2018, Rwanda has taken several steps BioNTech signed an agreement with the Rwandan to increase export growth and diversi cation. government to start vaccine production using Launched in 2016 and later redesigned, the mRNA-messenger technology for the rst time in Export Growth Fund (EGF) under Rwanda’s Africa. Furthermore, the Aldango gold re nery, Development Bank (BRD) provides subsidized operational since March 2019, has the capacity to loans and matching grants to exporters and process signi cant quantities of gold not only from o ers direct export support, including access to Rwanda but also from other countries in Africa. information on potential export markets targeted ese investments contribute to the expansion at high-potential rms. e Export Development of Rwanda’s export capabilities in technologically Program, managed by Rwanda Development advanced sectors. Still, more can be done. Board (RDB) and the National Agricultural Export Board (NAEB), provides further support and Services exports export market information. As part of Rwanda’s Rwanda has made signi cant strides to enhance import substitution strategy, Made-in-Rwanda, the institutional capacity of tourism promotion. the RDB manages a Supplier Development Unit In 2022, RDB developed National Guidelines for (SDU) aimed at promoting the growth and Community-Based Tourism Enterprises (CBTEs) competitiveness of local businesses. e SDU to govern the activities of various tourism facilitates the integration into domestic and global enterprises and support product diversi cation. value chains, provides capacity-building e orts e introduction of the Visit Rwanda brand has and facilitates access to nance. also played a pivotal role in promoting tourism abroad, in particular Nature-Based Tourism Rwanda has built institutions that contribute (NBT), and new sectors such as religious, wellness, to the development of new markets, including and cultural tourism experience. services. Rwanda launched the Kigali International Financial Centre (KIFC) aiming to transform Other e orts to promote high-skilled services Kigali into an international nancial destination are in initial stages. To address the skills gap that for investors seeking opportunities across the restricts services export development, Rwanda African continent. Rwanda Finance Limited, a has initiated programs to leverage private sector company promoting Rwanda’s nancial sector, knowledge and nancing, but the results are yet to has established strategic partnerships with local be fully realized, particularly in terms of engaging and international partners to promote the KIFC the private sector in skills development. To further through investment promotion, policy advocacy, promote the growth of high-skilled service sectors and industry upskilling. Additionally, Rwanda and foster competition in services, Future Drivers is developing the Kigali Innovation City (KIC) recommended the implementation of direct within the special economic zone of Kigali, industrial policies, such as VAT exemptions on envisioned as a technology innovation hub to services exports. However, while this has been develop and attract the necessary skills to meet the discussed on a case-by-case basis, there is currently future demands of the tech industry in Rwanda no existing policy or law in place regarding this and the wider African region. matter. Rwanda has successfully attracted investments Regional integration in modern and high-tech sectors, thereby Since 2018, Rwanda has made signi cant strides improving its product portfolio with high- in addressing barriers that hinder Rwanda’s ability complexity products and expanding Rwanda’s to fully bene t from regional integration. One export capabilities in technologically advanced notable achievement has been the harmonization 110 CHAPTER 3 Rwanda CEM | 2024 of standards within the EAC. Coordinated e orts both corridors and initiating discussions with between national standard boards have played a the European Investment Bank for potential crucial role in aligning fees, charges, and levies nancing. e establishment of the National across EAC states. e implementation of the Trade Facilitation Committee (NTFC) in 2016 updated product list through the Catalogue of by Minicom is a signi cant milestone in ensuring East African Standards (CEAS) has been an transparent planning and execution processes important element in this process. Domestically, and standardizing cross-border operations. the Zamukana Ubuziranege program has been Institutional innovations like the NTFC, as well as instrumental in supporting SMEs to comply with the East African Electronic Single Window, have standard requirements. proven highly e ective in reducing transport time and costs by improving coordination in cargo Further e orts are needed to harmonize internal clearance and tracking. standards and fees, and to improve coordination between di erent agencies. In the past, unilateral Rwanda has made notable progress in its ambition deviations from the EAC’s CET by member states to become a regional logistics hub, particularly in signaled a departure from the customs union improving institutional infrastructure for regional (Rauschendorfer and Twum, 2020). Rwanda air cargo freight through pursuing open skies has frequently utilized the Stays of Application arrangements. Partnerships with Qatar Airways mechanism to reduce input tari s. In light of for the new Bugesera Airport and expansion this, Future Drivers recommended establishing a of the Rwandair’s network are steps in this coordinated system with improved transparency direction. Additionally, Rwanda has signed the and consistency. In 2022, a reform was Yamoussoukro Decision (DC) within the African implemented to enhance exibility, particularly Union to liberalize air transport services and has for products susceptible to global economic been piloting the Single African Air Transport disruptions. Notably, a fourth tari band of 35 Market (SAATM) since 2018. Key logistics percent was introduced, primarily targeting infrastructure projects in Rwanda include the sensitive products related to locally produced opening of the KLP by DP World in 2019, the nished goods and speci c industrial inputs for development of the Bugesera International Airport which Rwanda sought deviations through the Cargo Center, and the ongoing construction Stays of Application mechanism. Rwanda stands of the Bugesera Special Economic Zone since to bene t if this reform successfully strengthens 2022. ese developments play a crucial role in regional integration by reinforcing the customs enhancing Rwanda’s logistics capabilities and union. Regarding the harmonization of standards, supporting its position as a regional hub. a crucial next step will be extending the bene ts of the CET. Foreign investment Rwanda has undertaken various initiatives Trade logistics to focus FDI on priority sectors defined in Some progress has been made in integrating the National Investment Policy (NIP). e regional transport links, although Rwanda’s establishment of a Deal Accelerator and Re- heavy reliance on the road network continues Investment team within the RDB, for instance, to contribute to high trade costs. Future Drivers provides sector-speci c expertise, investment highlighted the potential bene ts of a regionally facilitation, and promotes domestic re- integrated rail network, while the planning and investment. e Government of Rwanda also implementation of such a large-scale infrastructure extended the Manufacturing and Build to project should consider the associated risks to Recover Program (MBRP), which aims to attract public nances. Rwanda has taken steps in this private sector investments in speci c sectors such direction by conducting feasibility studies along as manufacturing and agro-processing. Rwanda CEM | 2024 CHAPTER 3 111 Actual investment ows from foreign rms have the EGF and the MBRP. The newly enacted consistently fallen well below commitments made Investment Code in 2021 further supports at the time of application for project approval. 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Similarly, in Honduras, competition policy reforms facilitated the entry of new rms in agricultural input markets, speci cally fertilizers and pesticides. e reforms streamlined procedures, reducing registration time from three years to ninety days. As a result, three hundred new products were registered, and the price of certain pesticides decreased by 9 percent (OECD/WTO, 2019). 3 ese goals are articulated in Vision 2020 and the National Strategy of Transformation (NST1). 4 See a detailed discussion of the literature on service sector-led growth models and evidence in Rwanda in Chapter 4. 5 e average STRI for the EAC, including Rwanda, is 48, while for Rwanda it is approximately 40 (OECD, 2023).. 6 e index includes ve categories: completely open (0), virtually open but with minor restrictions (25), major restrictions (50), virtually closed with limited opportunities to enter and operate (75), and completely closed (100). 7 See the World Bank and WTO Service Services Trade Restrictions Index (STRI) 8 A skills assessment estimated that Rwanda has only 6 percent of the number of accountants needed to meet demand from the public and nancial sectors (ICPAR (Institute of Certi ed Public Accountants of Rwanda), 2017). Rwanda is lagging behind the rest of the EAC in the number of professionals and is far behind African leaders in services exports such as Mauritius and South Africa (World Bank, 2022a). 9 Relative to a baseline that does not contemplate the implementation of the AfCFTA, the scenario assumes reductions in tari s and non- tari barriers, as well as the implementation of trade facilitation measures that reduce transport costs across the continent (World Bank, 2022c). e results re ect Rwandan exporters’ reduced tari advantage in EAC markets vis-à-vis non-EAC countries, a fall in trade barriers on Rwandan exports to Africa outside of Rwanda’s current trade agreements, and increased access to Rwanda’s domestic market for more e cient producers from outside the EAC, potentially reducing Rwanda’s import costs (de Melo & Regolo, 2014).. 10 In March 2019, Rwanda unilaterally closed its border with Uganda. Prior to the closure, Ugandan imports accounted for a signi cant portion of Rwandan imports, totaling US$230 million in 2018 (8% of all imports value). e abrupt halt in goods ow from Uganda to Rwanda can be observed in Figure 3.1. Before the closure, around 1,000 Rwandan rms were importing from Uganda each month. However, this number quickly dropped to zero a er the closure. In comparison, imports from Rwanda’s other neighboring countries remained relatively stable and even gradually increasing by January 2022 11 ese are exports from Zimbabwe to South Africa (0.67 million tons), Zambian exports to the DRC (1.38 million tons), DRC exports to Zambia (0.7 million tons) and Botswana exports to South Africa (0.63 million tons). 12 Furthermore, is it noteworthy that the nature of the exports to/from the DRC and Zambia (and vice versa) is largely driven by the demands of a minerals-based economy, particularly with respect to Zambian exports to the DRC Copperbelt. Hence, it can be reasonably concluded that the size of the current trade, estimated as 0.5 million tons, is signi cant by any objective measure in the eastern and southern African context. 13 RwandAir air cargo tra c was 5136 tons in 2019, over 20 times the tra c in 2010. Its market share increased from 5 to 24 percent, compared with the other major airlines KLM (16%), Qatar Airways (15%), Brussels Airlines (13%), and Ethiopian Airlines (10%) 14 e Kigali Logistics Platform (KLP) / DP World Kigali was inaugurated in in October 2019 and entailed a total estimated investment cost of US$35 million. e new Bugesera airport, with a 60 percent ownership of Qatar Airways, is estimated to open within the next three years and is projected to cost US$ 2 billion. 15 https://tradingeconomics.com/commodity/co ee. 16 Measured by relating its exports relative to global exports. 17 Rwanda’s live animal, meat and sh imports have around 22 percent tari rate, and fresh produce imports have around 14 percent tari rate. 116 CHAPTER 4 Rwanda CEM | 2024 PART 3: BOOSTING JOBS AND INCLUSIVENESS Structural transformation prior to the pandemic was led by the reallocation of labor away from agriculture and into services. Structural transformation contributed to economic growth and poverty reduction, though the bene ts have not been shared widely. A series of recent shocks have interrupted the transformation of Rwanda’s economy and have reversed gains in living standards. Policies to promote a more inclusive structural transformation could focus on domestic and foreign investments promotion to create o -farm jobs, reducing barriers to rural-urban migration, improving urbanization management, and modernizing further the social protection system, including stronger linkages with active labor market policies. Growth in agriculture is critical for inclusiveness, and Rwandan agriculture has high potential, including a comparative advantage in food crops, prospects for strong demand growth, and deep trade links with regional partners. However, the current approach to agricultural growth, which has involved substantial state intervention, is encountering nancial and physical constraints. Continued, rapid growth will have to rely strongly on private sector e orts to increase scale economies through specialization and trade, shift towards more high-productivity activities with greater value added, improve the uptake of available technologies, and increase the coverage of irrigation. Key government support will include providing extension services, strengthening climate resilience, improving access to markets (for example by supporting cold chain storage), increasing access to nance and creating a more inclusive agriculture sector by strengthening food security and continuing work on ensuring gender equality. Rwanda CEM | 2024 CHAPTER 4 CHAPTER 4 117 STRUCTURAL TRANSFORMATION AND INCLUSIVE PRODUCTIVITY GROWTH 4.1. Introduction Structural transformation in Rwanda accelerated Structural transformation plays an essential role in over the past two decades, with substantial labor achieving sustained economic growth and signi cant reallocation out of agriculture observed until 2019. reductions in poverty. Structural transformation is Estimates combining the Integrated Household the long-term process of reallocating resources and Survey on Living Conditions (EICV) data in shifting economic activities from traditional, lower- earlier years and the more recent Labor Force productivity sectors like subsistence agriculture, Survey (LFS) data suggest that the agriculture to more modern, higher-productivity ones, such share of employment fell by 24 ppts between 2000 as manufacturing and services. It includes the and 2022 (Figure 4.1). As workers moved out of evolution in the scale of production and innovation agriculture, employment in industry expanded to and the rise of formal sector jobs characterized by nearly 12 percent, while employment in services higher pay and expanded bene ts. All these are increased to 24 percent in 2022. In the Annex, we pathways to sustained economic growth, o -farm present summary gures suggesting an even deeper employment and decent jobs, and movements out structural transformation between 2000 and of poverty. 2021 (Figure A4.2 in Annex 4.2 using modeled ILO estimates) and in recent years (Figure A4.1 is chapter focuses on Rwanda’s structural in Annex 4.2, using LFS data from the National transformation and explores its welfare and Institute of Statistics Rwanda, NISR).1 Structural distributional dimensions. It begins by examining transformation took place within sectors as well: the patterns of structural transformation in Rwanda within the services sector, in particular, there has over the past two decades and identifying its main been a reallocation towards more modern sub- drivers. We compare Rwanda’s record with those sectors such as nance, at least up until just before of its African and Asian peers. We then analyze the pandemic. In addition, the share of those the distributional impacts of this transformation, engaged in subsistence agriculture dropped from as well as its e ects on poverty reduction, looking 57 percent in 2016 to 42 percent in 2019. speci cally at which population groups, sectors, and locations bene ted the most from new Figure 4.1: Rwanda: Share of total employment by sector (2000–21, in percent) investment and employment growth. We examine recent shocks and how they have slowed down 100 90 or reversed the rate of structural transformation, 80 and we explore their poverty and distributional 70 consequences. Finally, policy options available to 60 50 the Government of Rwanda are discussed to foster 40 a more inclusive structural transformation and put 30 forward actionable policy recommendations to 20 achieve it. 10 0 2016/17 2017 2018 2019 2020 2021 2022 1 6 1 4 /0 /0 /1 /1 00 05 10 13 20 20 20 20 4.2. Patterns of structural transformation in Agriculture Industry Services Rwanda Source: Calculations based on NISR EICV reports using LFS microdata. Note: All estimates are based on the de nition of employment that includes subsistence agriculture. is section summarizes patterns of structural transformation over the past two decades. e evidence suggests that structural transformation e speed of structural transformation in the took place until just before the pandemic, led by Rwandan labor market relative to its economic the reallocation of labor away from agriculture and growth compares favorably to its peers. Rwanda’s into services and industry. o -farm jobs-to-growth elasticity—the percentage change in o -farm employment for a one percent 118 CHAPTER 4 Rwanda CEM | 2024 change in GDP—compares well with its fast- 4.2.1. Rwanda’s services sector-led growing counterparts (World Bank, 2020). In transformation is similar to that of particular, the job elasticity of growth for Rwandan African countries and di erent from the manufacturing ranges between 1.7 and 2.5. is is Asian growth model at par with the experience of many other countries, Rwanda’s structural transformation has been led including the fastest-growing economies in East by the services sector, as intended in its national Asia. For example, the manufacturing job elasticity strategy. As described in Hoekman et al (2022), of growth in China ranges from 1.1 (1980 to 1990) the services sector now represents nearly half of to 2.0 (1970-1980). In Vietnam, the corresponding all value-added and the overwhelming majority elasticity in recent years has been about 1.5. of enterprises in Rwanda are in the services sector, increasing in both absolute and relative terms, in Rwanda’s structural transformation outpaces its keeping with Rwanda’s national plan, the Vision African comparators. None of its African peers 2020 strategy. Developed in 2000, the Vision 2020 have achieved that same rate of transformation strategy grew out of a recognition of the limits of over the past two decades—though admittedly a manufacturing export-led growth model, due to they are at di erent levels of development, with Rwanda’s landlocked economy, constrained market Botswana at the higher end of this distribution. size, and the high transport costs in the region. In Nonetheless, only Tanzania came close to this rate contrast, a services sector-led growth model could of transformation as its agriculture employment allow the country to make full use of its resource fell from 83 percent to 64 percent (Figure A4.3 endowments, led by the logistics, tourism, and in Annex 4.2). In contrast, Ethiopia, Kenya, and ICT sectors. Uganda experienced a much slower reduction in agriculture employment, while in Botswana’s Rwanda’s services sector-led transformation is case, the shift out of agriculture was reversed in similar to its African comparators yet distinct recent years. from the Asian ones. On the eve of the pandemic, as previously noted, LFS data suggest that the In addition, Rwanda’s transformation is arguably services sector’s share of employment was over 40 comparable with its Asian peers. Between 2000 percent. Unlike Asian economies that had gone and 2021, structural transformation among Asian through a discrete industrialization phase—as economies was led by China and Vietnam as these evident from industry still accounting for a large economies experienced 26 and 36 percentage-point proportion of employment, from a quarter to a reductions in agriculture employment, respectively. third of all employment, even in this later phase However, comparison with Asian economies is of their transformation—it is the services sector, constrained by these economies being at a very not the manufacturing or industrial sector, that di erent level of development relative to Rwanda has provided employment to workers outside of and because its structural transformation began agriculture in many African countries. e services much earlier. One option is to use GDP per capita sector currently accounts for at least a quarter to either in constant purchasing power parity terms over half of all employment in selected African or in constant dollar terms to determine at what economies. In fact, this services sector-oriented point they had comparable levels of development. transformation is generally true among lower- Data suggest that the economy of Rwanda now income countries worldwide—what Rodrik (2016) is more or less at the same level of development calls “premature deindustrialization”. as the economies of China and Vietnam were between 1990 and 1995.2 Compared to that point Unlike its African peers, Rwanda’s services sector- in China and Vietnam’s economic transformation, led model has been higher skill-oriented. As the current structure of Rwanda’s economy is previously described, Rwanda’s Vision 2020 strategy comparable or better: In the mid-1990s, agriculture prioritized the ICT and other modern services accounted for 52 percent of employment in China sectors, which generally require higher skills. More and 71 percent in Vietnam, compared with than half of those employed in Rwanda’s services Rwanda’s 55 percent. sector have at least secondary education, 20 ppts Rwanda CEM | 2024 CHAPTER 4 119 more than Rwanda’s labor force as a whole. is on its long-term potential for job creation and is also about 35 ppts more than the share of those productivity growth. Nonetheless, it is quite with similar educational attainment in the services possible that e orts to digitalize could one day sectors of peer African economies. More generally, drive a service sector-led growth.6 compared to its African peers excluding Botswana, Rwanda’s services sector has the highest value Rwanda recently amended its national strategy and added per worker (Figure A4.2 and Figure A4.3 in renewed its support for manufacturing and other Annex 4.2). strategic sectors. In response to the COVID-19 shock and its devastating e ects on the economy 4.2.2. e viability of a services sector-driven and the services sector in particular (described growth model is still an open question more fully below), the government increased its e services sector-led growth model has important support for the manufacturing sector and other development consequences that are still not well strategic sectors such as agriculture processing and understood. As summarized in Hoekman et al construction materials—with the goal of creating (2022), this growth strategy di ers from the East employment opportunities and supporting the Asian economic growth strategy of the 1960s economic rebound through the production of and 1970s which was manufacturing export manufacturing exports and import substitutes led. Its merits are currently being debated in the (IMF, 2021, pp. 13, 17, 52). As articulated in the literature—in particular, whether this is a viable, government’s 2021 IMF program statement, “We long-term growth strategy because the modern are ne-tuning our growth strategy under NST- services sector o ers opportunities for job creation, 1 to ensure a sustainable and inclusive recovery. scale, and innovation, or whether the productivity While continuing to see opportunities in tourism spillovers from the services sector will be markedly for growth and job creation, especially Meetings, lower than the spillovers from the manufacturing Incentives, Conventions, and Exhibitions (MICE) sector (Rodrik, 2013 2013 and 2016; Nayyar et al, tourism, we are stepping up our interventions to 2021).3 A recent study of India’s experience over support the manufacturing sector in tandem with three decades suggests that service-led growth is a the recovering global demand.” feasible alternative to manufacturing led-growth and raises living standards, but its bene ts have 4.3. Determinants of structural transformation in Rwanda favored urban middle class households (Fan, Peters, & Zilibotti, 2023).4 Rwanda’s structural transformation has been fueled by four long-term drivers: productivity e empirical evidence on Rwanda’s experience growth, formal enterprise creation, foreign with services sector-led transformation is, to direct investments, and urbanization. is date, inconclusive. Contrary to expectations of section examines the experience related to each productivity gains from increased use of services driver, including opportunities for reform and inputs, a recent analysis of rm productivity found improvement. instead a negative association between average rm-level labor productivity and the increased First, productivity changes across sectors have use of services as inputs in production (Hoekman, led to signi cant labor reallocation towards San lippo, & Ticku, 2022). However, there is employment opportunities characterized by evidence to show that trade activities can help higher value-added per worker. Figure A4.2 dampen this negative relationship and that certain (in Annex 4.2) presents data on value-added types of enterprises (agricultural rms and larger per worker by sector from 2000 to 2021. rms) seem to experience productivity gains from e charts suggest that workers have moved services intensity. Meanwhile, compared to the from agriculture, characterized by relatively manufacturing sector, the services sector has not low value-added per worker, to industry and provided as many employment opportunities.5 services, with considerably higher value-added Together, these patterns suggest that services sector- per worker, in some cases multiples of that of led transformation might not yet be delivering agriculture. Chapter 5 explores the many reasons 120 CHAPTER 4 Rwanda CEM | 2024 why productivity in agriculture is low. However, across sectors, though, informality remains although most sub-sectors within industry have pervasive, and Chapter 2 delves deeper into the value-added per worker double that of agriculture, patterns and drivers of stubbornly high enterprise many workers in the industrial sector are employed informality. While both industry and services have in construction where value-added per worker seen higher rates of formal employment (Figure is comparable to, or even lower than agriculture. 4.3), nearly all agricultural employment remains As a result, the (weighted) average industry value- informal, re ecting its persistently low productivity added per worker is only slightly larger than that of (Figure 4.4). e continued expansion of formal agriculture. In contrast, the services sector value- businesses will thus be vital for a shift towards added per worker is much higher than that of a more structured and regulated economy. By agriculture, about 50 percent more.7 reducing informality, the Government of Rwanda stands to address issues like inadequate social Second, the number of formal business protection, limited access to credit, and lack of legal establishments has been increasing in recent and regulatory frameworks. Ultimately, the growth years. Between 2017 and 2020, the total number of formal enterprises will be key to promoting of establishments rose from 190,288 to over inclusive and sustainable economic development 232,280—equivalent to an over 22 percent increase in Rwanda. (National Insitute of Statistics of Rwanda (NISR), Figure 4.4: Value added per worker, broad sectors 2021). is rapid growth was observed across the (Constant 2015US$) board, including both smaller and larger rms. In 4,500 fact, micro rms (1–3 workers) and large rms 4,000 (100+ workers) experienced the fastest growth. 3,500 As a result, the number of workers employed by 3,000 2,500 registered businesses has also increased sharply, 2,000 particularly in recent years (Figure 4.2). Looking 1,500 1,000 Figure 4.2: Number of employees in establishments 500 0 250,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture, forestry, and fishing Industry (including construction) Services Linear (Agriculture, forestry, and fishing) Poly. (Industry (including construction)) Poly. (Services) 200,000 Sources: Rwanda Labor Force Surveys, various issues; and sta calculations (left). Rwanda’s Poverty Assessment 2020 (right). 150,000 Kigali in particular has seen a concentration of 100,000 investments and formal job creation. is has especially bene ted women in the capital; other 50,000 regions of the country have not been able to attract similar levels of investment. e Kigali 0 2000 –2005 2006 –2011 2012 –2017 2018 - -2020 region’s districts, namely Gasabo, Kicukiro, and Source: Calculations based on NISR (2021) Nyarugenge, have exhibited a notable concentration Figure 4.3: Formal and informal employment by sector of economic activity. From 2016 to 2022, these (Percentage shares in 2022) districts accounted for a signi cant portion of projects (81 percent), investments (72 percent), and Services projected jobs (82 percent) (World Bank, 2023a). is, despite the most recent establishment census revealing that less than a quarter of total business Industry establishments, both formal and informal, were located within these three districts (National Insitute Agriculture of Statistics of Rwanda (NISR), 2021). Similarly, social safety net expenditures are concentrated in the 0 10 20 30 40 50 60 70 80 90 100 capital: the latest public expenditure review shows Percent Formal employment Informal employment they are lowest in poor districts and highest in the Source: Calculations based on NISR (2021) capital city (World Bank, forthcoming). Rwanda CEM | 2024 CHAPTER 4 121 ird, foreign direct investment (FDI) has been evidence indicates that compared to domestic a crucial driver of formal employment growth. rms, FDI rms in Rwanda are 11 ppts more likely Between 2010 and 2021, the stock of FDI in to o er social security (World Bank, 2023a). In Rwanda grew rapidly, creating new jobs in industry addition, the social security contributions of FDI and services. Starting from about 6 percent of GDP rms are over 300 percent larger than those of in 2010, it increased to 27 percent by 2021 (Figure domestic rms. 4.5). is expansion in FDI stock outpaces those of Burundi, Malawi, and Tanzania and is at par However, FDI ows have declined in recent years. with Ethiopia (Rogatschnig et al, forthcoming). Data suggest that FDI ows have been falling In the process, these ows have created many new steadily after peaking in 2014, with particularly jobs in industry and services. An overwhelming sharp decreases during the pandemic (Figure majority of new FDI projects are in sectors outside 4.5, [Rogatschnig et al, forthcoming]). Both of agriculture. Between 2018 and 2020, for in percent of GDP and in absolute terms, FDI example, the agriculture sector accounted for only has been falling; but there are signs of a stable 7 percent of FDI in ows. is trend continued in recovery, with net FDI in ows reaching US$ 399 2021, with the sector accounting for an even lower million in 2021 and 2022. Rwanda’s comparators, percentage of FDI in ows (5.8 percent) (National such as Uganda, have already experienced a steady Bank of Rwanda (NBR), 2023). As FDI has owed recovery of FDI in ows, and Rwanda is well into industry and services, thousands of new jobs placed to do so too. have been created. Although the number of jobs announced from registered investments tends Rwanda has struggled to attract sustainable to be overestimated, it is nonetheless clear that investments (Rogatschnig et al, forthcoming). New FDI rms employ considerably more than local investments in polluting sectors have exceeded rms—according to one estimate, for example, investments in green sectors for two decades (Figure FDI rms employ 170 percent more workers than 4.6). In fact, cumulatively, investments in green their local counterparts (see Box 4.1, and World sectors since 2007 have been small, summing up to Bank, 2023b). only about half a billion dollars. In stark contrast, globally, FDI ows in polluting sectors have seen a More than just creating more jobs, FDI ows very strong decline, plunging by 80 percent during have created higher-quality jobs. Measures of job more or less the same period. Similarly, rising from quality include the ability of rms to o er full- about 5 percent of new FDI ows, green sector time employment, contracts, higher pay, and investments have reached about a third of all recent non-remuneration bene ts, such as pensions, ows globally. Chapter 3 discusses measures to unemployment or medical insurance. Econometric attract green FDI in greater detail. Figure 4.5: FDI stock and in ows (In percent of GDP) (In percent of GDP) k % GDP k, Inward Stock, Inward ows, %GDP 45 12 40 10 35 8 30 25 6 20 4 15 2 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 -2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Rwanda Burundi Ethiopia Malawi T nzania Ta Uganda Rwanda Burundi Ethiopia Malawi T nzania Ta Uganda Source: Calculations based on UNCTAD database. 122 CHAPTER 4 Rwanda CEM | 2024 BOX 4.1: Foreign Direct Investment (FDI) and inclusiveness FDI directly creates jobs in Rwanda. FDI has helped create numerous new employment opportunities in Rwanda. ough the actual number of jobs generated by FDI falls below what was initially announced through the Rwanda Development Board (RDB), recent analysis indicates that FDI creates jobs immediately upon entry and in the years after. Overall, compared to their domestic counterparts, FDI rms are estimated to employ almost twice as many workers and generate 370 percent more sales. e manufacturing sector represents a very large share of all these jobs created directly by FDI, accounting for about 8,000 out of 12,000 jobs. FDI also creates jobs indirectly. FDI creates additional local employment opportunities, as the increase in hiring may also stimulate demand for goods and services produced by rms within a certain locality. is “multiplier e ect” is particularly strong among manufacturing rms. In addition, FDI rms are more likely to create domestic linkages in their supply chains. Econometric evidence indicates that FDI rms are more likely to have corporate buyers compared to their domestic counterparts. FDI creates higher-quality jobs. Compared to their domestic counterparts, FDI rms were more likely to o er bene ts, such as social security contributions. In particular, there is evidence indicating that FDI rms are more likely to provide social contributions and contribute over 300 percent more than domestic rms. FDI creates relatively less inclusive jobs. Despite manufacturing FDI having a signi cant potential for both direct and indirect employment creation, FDI in ows have generally been concentrated among other sectors with more limited potential for sustained job creation, such as construction, real estate, and utilities. FDI ows have also tended to be concentrated in Kigali and in richer districts, though the potential for more inclusive job creation could be larger in areas outside the capital, including in poorer districts. Sources: World Bank (2023b) Figure 4.6: Rwanda: green eld investment announced in polluting and green sectors (Estimated capex, US$ millions), 2007–21 Annual realization Cumulative 1,800 5,000 1,600 1,400 4,000 1,200 3,000 1,000 800 2,000 600 400 1,000 200 - 0 2007 2009 2011 2013 2015 2017 2019 2021 2007 2009 2011 2013 2015 2017 2019 2021 Polluting sectors Green sectors Polluting sectors Green sectors Source: Calculation based on (TBA). Fourth, urbanization, particularly internal with requisite skills, and allows specialization and migration ows from rural areas to Kigali, have economies of scale. Although up until recently also driven structural transformation in Rwanda. the movement within rural areas represented the In fact, urbanization is a key driver of economic largest ow, ows into rural and urban Kigali have growth and could propel the country to middle- been rising in recent years. Movement from rural to income status (see Box 4.2). As explained in the urban areas remains lower compared to Rwanda’s most recent poverty assessment, migration raises African peers—in no small part due to low levels productivity as workers move to cities. e density of agricultural productivity and education—which of economic activities in cities promotes the spillover renders the realization of potential agglomeration of ideas, facilitates the recruitment of workers bene ts di cult. Rwanda CEM | 2024 CHAPTER 4 123 BOX 4.2: The bene ts and challenges of agglomeration in Rwanda Urbanization and agglomeration are key priorities for the Government of Rwanda. e Government of Rwanda is committed to inclusive and sustained growth, and its key strategic document, Vision 2050, acknowledges the role that urbanization and agglomeration will play in ful lling its ambition to reach upper middle-income status by 2035 and high-income status by 2050. Successful urbanization will be key to achieving agglomeration economies and spurring economic growth. e proximity of individuals and businesses creates signi cant opportunities for productivity growth and allows rms to leverage specialized labor clusters, tailored institutions, and more e cient input procurement, resulting in increased e ciency. Due to these agglomeration economies, urban Rwandan workers have enjoyed higher wage rates compared to their rural counterparts. Few countries have graduated to middle-income status without at least half of their population living in dense urban spaces. However, agglomeration bene ts have not been realized to their full potential. e challenges related to urban sprawl, ine cient use of land, informality, and high costs of infrastructure serving a small share of the population make agglomeration bene ts di cult to capture. ese bene ts will remain unrealized as long as the surrounding areas are not su ciently closely linked to the urban center, forming a single economy under a ‘system of cities’ approach. Even within Kigali, the labor market and the enterprise sector have not enjoyed the full bene ts of agglomeration. e majority of employment in the city is informal, concentrated largely in non-tradable activities like retail, personal services, and construction. Informal workers in these sectors have few to no incentives for skill development, which greatly limits their productivity. e prevalence of informality also restricts the ow of knowledge and ideas, inhibits the potential for economies of scale and specialization, and hinders rms’ access to essential services and a diverse pool of skilled labor. In addition, peripheral settlements surrounding the main urban centers are not well connected to the cities, further impeding the realization of any potential agglomeration bene ts. Sources: World Bank (2023b) e concentration of economic activity and the lack of a ordable housing, directly a ects labor formal employment in Kigali has drawn in more conditions and the draw of urban environments. In workers, at the expense of other cities. Investment addition, local governments often face limitations opportunities are primarily centered around the in their authority and responsibilities, relying capital, and economic activity in the city accounts heavily on the central government for support, for almost half of the national GDP (World Bank, with the exception of the City of Kigali. e 2023b). e economy is thus heavily dependent reliance on public funds hinders the ability of on Kigali, potentially diverting investments local governments to incentivize private sector for balanced development from other cities. investment in infrastructure, resulting in limited Secondary cities and smaller district towns across development opportunities (World Bank, 2023b). the country remain largely underdeveloped. Yet they already contribute about 13 percent to the Several other factors could potentially be limiting national GDP, with a little more than half a million rural–urban migration in Rwanda. First is residents (World Bank, 2022). To grow and a ordability. As seen in many other countries, the become competitive, these cities will require the cost of moving prevents many of the lowest-income right set of measures promoting urban planning households from taking advantage of economic and investment. opportunities in urban areas. ese could include non-monetary dimensions such as the lack of labor In addition to Kigali’s dominance, broader market networks among such households. Second, urbanization remains constrained by a number because formal jobs created by foreign investment of interrelated challenges that contribute to low ows often require higher educational credentials, economic vibrancy in other Rwandan cities. An then these jobs are less accessible to less-educated important issue is the prevalence of informal labor workers from rural areas. ird, many o -farm sectors, which encompass nearly 38 percent of jobs that have been created in recent years have the total workforce in urban areas. Moreover, the been in rural areas—pre-covid, for example, nearly quality of services provided within cities, as well as a quarter of rural employment was in construction, 124 CHAPTER 4 Rwanda CEM | 2024 wholesale, and retail—thus likely encouraging Structural transformation has translated into rural-rural migration rather than rural-urban substantial gains for the Rwandan economy, migration. Finally, strict regulations against street creating quality jobs and trimming poverty rates. vendors in Kigali might limit the informal job Data since 2017 show that decent and productive opportunities available to rural workers and thus jobs—proxied by the NISR as o -farm or non- discourage rural–urban migration. agricultural work—increased steadily during the pre-pandemic period, but still far from the NST-1 Nevertheless, urbanization can help the goal of 215,000 decent and productive jobs per Government of Rwanda achieve sustainable and year. By 2019, decent jobs had reached nearly inclusive economic growth. To complement two-thirds of total employment, a broad-based the Government of Rwanda’s ambitious plan increase across all age groups, for younger and older of achieving 70 percent urbanization by 2050, workers alike, and for both men and women. e a comprehensive understanding of the current population has been able to successfully diversify policies and state of cities is crucial. Progress has its sources of income outside of agriculture in been made in the development of policy documents response to increasing economic opportunities. like the National Urbanization Policy (NUP) that Similarly, the country saw substantial reductions was developed under the TA component of the in poverty, as well as a dramatic increase in the Second Rwanda Urban Development Project standards of living for its population. From 2000 (RUDP II), which emphasizes the importance of to 2016, the poverty rate dropped from 59 percent fostering secondary and satellite cities for balanced to approximately 38 percent, re ecting improved and equitable development. Furthermore, creating opportunities and substantial progress in poverty an enabling environment that promotes a system reduction e orts. of cities’ approach will be vital for enhancing productivity, facilitating labor mobility, and Structural transformation has bene ted both men expanding market access, thereby maximizing the and women. Up until 2019, the agriculture’s share bene ts of the urbanization process (World Bank, of employment fell for both male and female 2023b). workers to about 35 percent and 50 percent, respectively (Figure 4.7). In the case of female 4.4. Poverty and distributional implications of workers, in fact, the drop was substantial, down structural transformation about 10 ppts since 2016. Meanwhile, the industry is section explores the welfare dimensions of share of employment increased for women, while structural transformation. Rwanda’s transformation attening for men. Services sector employment contributed to economic growth and poverty increased for both. Together these suggest that both reduction, though the bene ts have not been shared male and female workers—and female workers, in widely. A series of recent shocks have interrupted particular, in a number of cases—have managed to the transformation of Rwanda’s economy and have move to sectors that have higher value-added and reversed gains in living standards. higher rates of formal employment. Figure 4.7: Sector of employment: male and female (In percent of total employment; Q1 data by year as indicated) Male Female 50 70 60 40 50 30 40 20 30 20 10 10 0 2016 2017 2018 2019 2020 2021 2022 2023 0 2016 2017 2018 2019 2020 2021 2022 2023 Agriculture Industry Services Agriculture Industry Services Sources: Calculations based on various Rwanda Labor Force Surveys Rwanda CEM | 2024 CHAPTER 4 125 However, the bene ts of structural transformation education signi cantly boosts this likelihood, have tended to accrue to more educated workers, making it three times more probable for them exacerbating inequality of opportunity in the to work o the farm, compared to having no country. Although for Rwanda as a whole, those education (Bizoza, Jäger, & Simons, 2018).8 with upper secondary or university education represent only about 15 percent of all employed 4.4.1. e manufacturing sector has played a workers, they represent about a third to over signi cant role in inclusive job creation half of those who have found employment in Manufacturing rms employ more workers, industry and services (Figure 4.8). Nearly all and these jobs tend to be more accessible to all, agriculture workers have primary education or irrespective of location, educational attainment, none, while only 40 percent of services sector workers share this education pro le. Of the sub- and gender. As described by Hoekman et al sectors in services with the highest value-added per (2022), manufacturing rms employ more worker, for example, the majority of employment workers than services sector rms and tend to opportunities have bene ted those with a university be less concentrated in urban areas. In addition, education (70 percent in the case of the information data from the LFS suggest that the bene ts of and communications sector). is, despite the manufacturing jobs have been more widely university-educated accounting for only about 7 distributed in contrast to other sectors (Figure percent of all employed workers. e analysis in 4.8). Nearly 75 percent of manufacturing the latest poverty assessment lends support to this workers have primary education or less, trend, highlighting that higher levels of education dramatically increase individuals’ access to o -farm mirroring the overall educational pro le of employment opportunities. Speci cally, having the labor force in Rwanda. In addition, nearly some primary schooling increases the probability half of those employed in manufacturing are that a household head primarily works o the women, re ecting the gender distribution in farm by 20 percent. However, completing tertiary agriculture (Figure 4.9). In contrast, only 20 to Figure 4.8: Educational attainment by sector 2022 All employed Agriculture Industry 1.8 0.3 6.9 3.7 8.9 20.8 31.0 6.2 45.5 31.9 13.3 62.4 32.5 5.0 29.9 None Primary Lower secondary Upper secondary University Services Information and communication Manufacturing 0.0 0.7 3.8 18.0 6.4 8.5 30.0 31.6 13.5 22.4 22.4 70.5 44.1 21.5 6.4 None Primary Lower secondary Upper secondary University Sources: Calculations based on various Rwanda Labor Force Surveys 126 CHAPTER 4 Rwanda CEM | 2024 Figure 4.9: Male and female shares of employment by selected sectors Industry (In percent of total) Manufacturing Male Female Male Female Services Agriculture Male Female Male Female Sources: Calculations based on various Rwanda Labor Force Surveys. 40 percent of workers for industry and services non-manufacturing products, particularly as a whole are female. In the information and services, a key source of employment (World communications sector—the leading sub- Bank, 2023a).9 is emphasizes the crucial sector in services in terms of value-added role played by the manufacturing sector as a per worker—only a little over a fraction of catalyst for local job creation.10 workers are women (not shown). All of these together suggest that the manufacturing sector However, FDI ows to manufacturing have been represents a signi cant potential for boosting limited. Despite the substantial employment- inclusive structural transformation. generating e ects of manufacturing projects, investment ows have primarily been In addition, manufacturing jobs help generate concentrated in a handful of sectors within additional employment in the domestic services industry and services, speci cally construction, sector. For example, the rise in employment real estate, utilities, and nancial services resulting from foreign direct investment within (World Bank, 2023a). Between 2019–2021, a district can lead to an increased demand for the nancial sector absorbed almost a third of goods and services provided by local rms, FDI in ows, followed by ICT (19 percent). consequently fostering additional hiring by Manufacturing attracted a much smaller share these businesses. is multiplier e ect is driven of in ows over the same period, receiving only by the in ux of domestic migrant workers around 10 percent. is, despite empirical and those with higher levels of education, evidence that manufacturing has a much larger and it is particularly evident in the context of potential to drive job growth that is inclusive. manufacturing FDI. Every new job created Manufacturing investment projects in sectors by manufacturing FDI has a signi cant such as textiles, for instance, have the potential potential to stimulate the demand for local to deliver inclusive impact through signi cant Rwanda CEM | 2024 CHAPTER 4 127 investment size by generating exports and However, the poverty elasticity of growth creating employment opportunities for slowed down in recent years. As discussed in underrepresented groups, especially low-skilled Chapter 1, the relationship between poverty women (Rogatschnig, Obadia, & Steenbergen, and growth began to weaken between forthcoming). 2014–2017, re ecting the lower job-creating potential of growth driven by capital-intensive Furthermore, though manufacturing has sectors (World Bank, Forthcoming). While provided inclusive employment to date, its the poverty headcount rate fell by around scale is limited by Rwanda’s domestic market. 2.4 ppts each year in the early 2000s, at a Manufacturing is currently concentrated on time when Rwanda’s economy expanded food and beverage processing, together with at a rate of 6.2 percent per year, the pace of tobacco manufacturing and, to a lesser extent, poverty reduction decelerated after 2010, textiles, chemicals, non-metallic mineral as did economic growth. Rwanda’s poverty products. In addition, currently, only a small rate remains somewhat higher than expected, fraction of manufacturing output is exported— given its income levels per capita. It is also about 15 percent, according to the Rwanda approximately 8 ppts higher than what would Association of Manufacturers. Data from the be expected relative to mean consumption per latest enterprise survey also suggest that, of the capita within SSA (World Bank, 2020). In manufacturing enterprises in the sample, less part, the weakened rate of poverty reduction than 30 percent export (i.e., exports account for is due to the slowdown in growth in 2016/17 a non-zero portion of sales). As the exporting and the weather shocks, with almost a quarter potential of Rwanda improves, as explored of households reporting either droughts or in Chapter 3 in the report, manufacturing rainfall shocks (World Bank, 2020). employment could be even more inclusive. Structural transformation was unfortunately 4.4.2. Rwanda’s structural transformation was reversed during the COVID-19 pandemic. interrupted by the covid crisis e reversal is more or less pronounced O -farm jobs have been the primary driver depending on the data source. Agriculture of poverty reduction in Rwanda. In a study employment rose during the pandemic period, analyzing factors in uencing household likely re ecting coping strategies during a consumption in 2016–2017, controlling for period of economic hardship, while industry household characteristics, it was found that for employment fell or attened. As of 2021– each percentage point increase in the average 2022, the agriculture share of employment was daily wage, household consumption increased about 50 percent while the industry share of by 0.30 percent. Moreover, according to the employment was about 15 percent (using Q1 latest poverty assessment, workers who shifted LFS data). In fact, among male workers, while from agriculture to non-agricultural sectors industrial employment exceeded agricultural experienced a signi cant increase of 12 percent employment in the pre-pandemic period, in their consumption levels, while those moving that was reversed from 2020 on. In contrast, in the opposite direction witnessed a decline using modeled ILO estimates, the reversal is of more than 9 percent in their consumption. less pronounced, with the agriculture share of e promotion of o -farm employment employment attening during the pandemic opportunities and income growth thus remains period and the industry share of employment crucial for sustained poverty reduction and continuing to increase (see Figure A4.1 and improved well-being in Rwanda. Figure A4.4 in Annex 4.2). 128 CHAPTER 4 Rwanda CEM | 2024 In fact, some slowdown in structural an important safety net during the pandemic transformation could already be seen even prior and will continue to employ a large proportion to the pandemic. is is re ected in the atter of Rwanda’s workers for the foreseeable future. movement of workers out of the agriculture (Chapter 5 explores the reforms necessary to sector beginning around 2013 (Figure 4.1). modernize and improve the productivity of the Part of the pattern might re ect the break in sector). data series, as the gure combines data from two di erent sources. In part, it also likely More generally, there has been an increase re ects the slowdown in FDI ows described in dependent workers and a rising share of earlier. Because FDI ows have been driving temporary contracts (World Bank, 2023c). o -farm job creation, their slowdown would Dependent workers are employees and paid have meant fewer employment opportunities apprentices, in contrast to employers, who outside of the agriculture sector. either hire other workers or largely work on their own. e data suggest that dependent During the pandemic, the Rwandan economy workers increased from 67 percent to 73 moved away from its target number of decent percent. Alongside the rising measures of and productive jobs (World Bank, 2023c). A dependent workers, the quality of jobs has recent analysis of job creation by sector suggests decreased. e share of dependent workers that only the agriculture sector consistently with temporary contracts has increased to created employment opportunities during 80 percent in 2021, up from 70 percent just the pandemic (Figure 4.10).11 Construction before COVID-19. contributed to job creation at the beginning of the pandemic but contracted between Overall, the distribution of covid-induced 2021 and 2022. Commerce experienced losses mirrored the distribution of employment large job losses early in the pandemic and gains before the pandemic. Both men and then recovered slightly after. As such, since women, rural and urban areas saw substantial only the agricultural sector contributed reductions in employment (Figure 4.11), with consistently to job creation during the entire women and youth particularly a ected. Youth pandemic period, both the number and share largely drove the covid-induced drop in labor of decent jobs have fallen since the eve of the force participation in 2021, representing more pandemic. In particular, the share of decent than 170,000 individuals exiting the labor jobs plunged nearly 10 ppts, from nearly force. However, the labor market is beginning 63 percent in 2019 to 53 percent in 2022. to show signs of recovery. Nonetheless, this suggests that agriculture was Figure 4.10: Decomposition of changes in employment by sector and sex II semester (2019 – 2022) 2019 – 2020 Male 1.0 -1.0 1.3 -1.3 -1.1 1.1 0.8 -0.8 3.8 7.4 0.9 Female 0.3 -1.0 -0.3 1.0 0.0 5.1 3.2 1.2 0.0 -6 -4 -2 0 2 4 6 8 10 12 14 2020 – 2021 Male Female -15 -10 -5 0 5 10 2021 – 2022 Male Female -2 0 2 4 6 8 10 Percentage points Agriculture, forestry, fishing Industry Construction Commerce Hotels and restaurants Transport and communications Professional, administrative, financial services and real state Public administration, education, and social services Activities of households as employers, culture and other services Source: Calculations based on Rwanda labor force surveys. Rwanda CEM | 2024 CHAPTER 4 129 Figure 4.11: Change in employment rate: urban-rural, male-female II semester (2019 – 2022) 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 Feb Aug Feb - Aug - Feb - Aug - Feb - Aug - Feb - Aug - Feb Aug Feb - Aug - Feb - Aug - Feb - Aug - Feb - Aug - May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Total Rural Urban Total Female Male Source: Calculations based on Rwanda labor force surveys. e pandemic-induced crisis has had serious had a disproportionate impact on women in implications on poverty and threatens to reverse Rwanda, partly due to their higher likelihood the gains from structural transformation. to undertake seasonal work and care for sick Rural areas have been particularly a ected: relatives (Box 4.3). Some of the impacts on while urban areas saw a greater rise in poverty, poverty can be o set by social protection the number of new poor rural households in measures—but not completely. Without 2021 was triple that of urban areas (World signi cant interventions, the lasting e ects Bank, 2021). is disparity can be attributed of the pandemic and the anticipated lower to the fact that initially, rural areas had a higher post-pandemic growth trajectory threaten to concentration of impoverished individuals, decrease Rwanda’s GDP by over 20 percent by with more than 90 percent of the poor residing 2030, compared to a scenario una ected by in those areas. In addition, COVID-19 has covid (World Bank, 2021). BOX 4.3: E ect of COVID-19 on the labor market A recent note analyzes developments in Rwanda’s labor market from 2017 to 2022, including the adverse e ects of COVID-19. e analysis uses data from both the repeated cross-sections and the panel component of the Rwanda Labor Force Survey (RLFS). Below are some of the main ndings: Unemployment increased and job quality worsened after 2019. Unemployment started increasing in the second half of 2019, with the number of unemployed growing without interruption since then, and the rate of unemployment decreasing only slightly in 2022. ere was a shift to temporary contracts, with more than half of all Rwandan workers under a daily contract agreement. e increase in temporary contracts was especially pronounced for men and workers in urban areas. e higher prevalence of temporary work arrangements was accompanied by a reduction in real labor earnings. ese two changes point to lower quality of jobs. Not only the availability of jobs decreased since 2019, but people who nd jobs are now more likely to have more temporary arrangements (as opposed to longer more stable contracts) and lower pay (in real terms) than in 2019. Agriculture has sustained job creation. e creation of jobs outside agriculture was cut in half in 2019 and plummeted in 2020 (8,000 jobs created) and 2021 (340,000 jobs lost). Unexpectedly large job creation in agriculture in 2020 and 2021 prevented larger economy-wide job losses. Compared to more than 400,000 jobs created in agriculture, a total of 150,000 jobs were created outside agriculture in the 5 years between 2017 and 2022, compared to a goal of more than 1 million outside agriculture for that period according to the National Strategy for Transformation. Women and youth have worse employment outcomes. Despite much lower labor force participation rates, women and youth have higher unemployment rates than men and other age groups. ey also have much lower employment rates, with a large decline in the youth employment rate in 2021. Using the panel component of the RFLS we nd that women are more likely to drop out of the labor force and youth are more likely to be and stay out of the labor force. It has also become increasingly di cult for youth to enter the labor market and there are signs of discouragement with a lower share of youth wanting to work after 2020. According to econometric estimations, during the rst phase of the pandemic (second half of 2020), married women in households with children under 5 were disproportionately a ected in terms of employment, and unemployment rates for women increased more than for men in the second half of 2020 and the rst half of 2021. Source: Reproduced verbatim from World Bank (2023e). 130 CHAPTER 4 Rwanda CEM | 2024 4.4.3. External and domestic shocks threaten approximately 12 percent of pre-disaster water to reverse the gains from structural and waste management GDP) could exert transformation and exacerbate poverty signi cant in ationary pressures due to their e war in Ukraine has sent food and crucial role in agricultural production. Health- energy prices soaring. Despite having limited related losses, resulting in a 3.18 percent direct trade and nancial connections with contraction in human health and social work Russia and Ukraine, Rwanda has su ered activities, may further add to these in ationary substantially due to a broader decline in global pressures (World Bank, 2023a). demand and in ationary pressures through rising commodity prices and ongoing supply Taken together, weather shocks and the war disruptions. In particular, Rwanda’s economy in Ukraine have put upward pressure on food has been a ected by higher oil prices, resulting prices, with potentially devastating e ects in elevated import costs for energy products on poverty. Estimates indicate that in ation and increased transportation costs for all other has been highly regressive: since the poor imported goods, including food items. If the allocate a larger proportion of their income war in Ukraine continues for an extended towards food purchases, food price in ation period, it could aggravate the pressures on has had disproportionate e ects on this energy, fertilizer, and food prices, posing a group. e recent food price increases thus serious threat to food security. Furthermore, pose an important threat to food security external tourism demand may weaken further, and the human capital of the most vulnerable and there could be potential disruptions in the segments of Rwandan society. High in ation supply chain. Taken together, the e ects of the is anticipated to exacerbate geographical war in Ukraine on prices in Rwanda will have inequality as well, with the poorest districts a particularly detrimental e ect on the poor being disproportionately a ected. Estimates (World Bank, 2023d).12 indicate that out of the 19 surveyed districts, 11 districts, which have a poverty rate e increasing frequency and severity of exceeding the national average of 38.2 percent, weather shocks are harming Rwanda’s experienced food in ation rates higher than agricultural output, decreasing production and the national average. is disparity in in ation raising food prices. Adverse weather conditions rates among districts underscores the potential in 2022 negatively impacted Rwanda’s food for increased inequality and challenges in production. In addition, higher prices caused by addressing the impact of in ation on the most disruptions in the global supply chain lowered vulnerable populations (World Bank, 2023d). the utilization of key inputs, such as fertilizer, to the detriment of agricultural productivity. e Government of Rwanda has been able to More recently, the ooding in Rwanda in early wield an e ective response to tame the crisis, May 2023 led to a decline in the estimated thanks to Rwanda’s comprehensive social gross domestic product due to the associated protection system. Notably, the Government losses, with the services sector su ering over of Rwanda expanded the coverage of existing half of all losses. As the disaster had a limited social safety nets and deployed emergency cash e ect on food crops (0.5 percent of planted transfers for those working in the informal area and 0.19 percent of pre-disaster food crop sector in urban areas who were a ected by GDP), the related in ationary e ects will be mobility restrictions.13 Social protection has similarly muted. However, the losses in the signi cant poverty-reducing potential in environment and water resources (representing Rwanda. For example, simulations indicate that Rwanda CEM | 2024 CHAPTER 4 131 the scaling up of social protection initiatives be prioritized. It is worth noting that the move since 2016, coupled with additional expansions is aligned with the 2020 Social Protection implemented between March and September Policy for which one of the policy priority 2020, contributed to a poverty reduction of objectives is to ensure that all a ected or approximately 1.43 ppts in 2020 (compared likely to be a ected populations are supported to a scenario without the expansions). is to cope with and recover from disasters and indicates that moving to universal lifecycle shocks. Fully implementing the dynamic social protection coverage, would have an even social registry, including activating its on- higher poverty-reducing e ect. demand registration feature is among others an important element of ASP in addition to ere is ample room for improvement in the its expected role on improving e ectiveness social protection system to mitigate the e ect of poverty targeting. To create a continuum of future shocks. Beside the need for universal of social protection and reduce the “missing and categorical lifecycle social protection, it middle,” it is critical to continue innovating is critical that the social protection bene ts to nd ways (including incentives) through remain adequate and keep up pace with which more people can join the schemes in ationary trends. Likewise, the e ectiveness such as the Long-Term Savings Scheme of social protection will be dependent on (LTSS) Ejo Heza, including the poorest who how exible programs allow for mitigation, are Social Safety Net (SSN) bene ciaries. adaptation, and response to shocks and hence In addition, social protection will require the need for a well-functioning adaptive innovative solutions for urban vulnerable social protection (ASP) including at policy, groups, especially women and youth. To programs and institutional level. is ensure social protection’s contribution to becomes increasingly important considering the poverty graduation agenda, the approved the escalating frequency and intensity of multi-sectoral graduation strategy will natural disasters caused by climate change. have to be implemented through a multi- Rwanda, in particular, faces signi cant sector graduation plan. Finally, owing to challenges related to droughts, ooding, and the importance of the community-based landslides, underscoring the need for the workforce in the delivery of social protection social protection system to be well-prepared and other social services, streamlining their and responsive in mitigating the impacts of work is critical, including harmonizing their these events (World Bank, 2020). A recent capacity building. e main social protection move by the Government of Rwanda to challenges are discussed in greater detail in introduce shock responsive cash transfer is Box 4.4, while Section 4.5 o ers concrete commendable and its implementation should recommendations. 132 CHAPTER 4 Rwanda CEM | 2024 BOX 4.4: Main social protection challenges in Rwanda e Vision Umurenge Program (VUP) is the agship social protection program. Launched in 2008, the VUP includes several transfer programs and supports nearly 500,000 households or about 2 million individuals. e Ministry of Local Government (MINALOC) oversees the social protection policy and strategy while a specialized agency, the Local Administrative Entities Development Agency (LODA), carries out the implementation of VUP together with local decentralized units (Districts, Sectors, Cells, Villages) and other stakeholders. Notwithstanding the signi cant improvement of social protection system since the introduction of the VUP, several key challenges remain: Coverage gap. Although the VUP has been gradually expanding coverage since 2018, signi cant gaps remain. Overall, the VUP covers 13 percent of the population: in particular, 35 percent of those in the poorest quintile and about 14 percent of those in the second quintile live in a household that receives at least one VUP transfer. It also covers only 27 percent of households considered extremely poor and 23 percent of households considered poor. In addition, the per capita social safety net expenditures are highest in the districts of Kigali city. is might be due to the higher cost per capita for the Government of Rwanda Genocide Survivors Assistance Fund (FARG), which has more bene ciaries in the city of Kigali and which includes activities such as providing housing and shelter, education grants, medical fees, which are not part of the VUP package. Adequacy gap. Overall, VUP transfers are equivalent to just 5 percent of consumption; in particular, transfers are equal to 9 percent and 5 percent of consumption among those in the poorest two quintiles, respectively. Across VUP transfer programs, the unconditional cash transfer (DS) performs best, though still accounting for only 11 percent of consumption overall and 13 and 10 percent of consumption in the poorest two quintiles, respectively. Financing gap. Between 2016/17 and 2020/21, social safety net expenditures increased slightly from 1.36 percent of GDP to 1.61 percent of GDP. e analysis of funding sources indicates that the share of expenditures funded by external sources nearly doubled, from 17.4 percent to 30.5 percent during this period. In addition, recent analyses led by UNICEF suggest that the budgetary allocation to social protection is falling in nominal terms, equivalent to a 21 percent reduction in 2023/24—including reduced budgetary allocations for disability inclusion and programs to reduce stunting. Together, these trends suggest inadequate domestic nancing for social protection. Flexibility gap. Recent shocks due to the COVID-19 pandemic, food in ation, and climate change emphasize the importance of having ASP. A exible social protection system can help promote mitigation, adaptation, and a timely and e ective response to a shock. Source: Elaborated based on World Bank Group (2022) 4.5. Conclusion and policy recommendations for economic transformation over the past two a more inclusive structural transformation decades, we observe a signi cant shift away is section concludes the chapter and from agriculture towards services, up until discusses policy options available to the the onset of the pandemic. Indeed, Rwanda Government of Rwanda to promote a more has succeeded where many other comparator inclusive structural transformation. It focuses countries have failed in moving labor out of on three policy levers—investment promotion, agriculture and into higher productivity jobs Rwanda’s urbanization policy, and Rwanda’s in both manufacturing and services. Four social protection system, including public key drivers—productivity growth, formal employment services. enterprise creation, foreign direct investments, and urbanization—have been pivotal in is chapter has thoroughly investigated propelling and sustaining Rwanda’s structural Rwanda’s structural transformation, examining transformation. However, each driver holds its impact on welfare and distribution. rough potential opportunities for reform and our analysis of the patterns and drivers of this enhancement, which are discussed in detail. Rwanda CEM | 2024 CHAPTER 4 133 Moreover, we delve into the welfare dimensions 3 outline policy reforms critical to o -farm job of this transformation, acknowledging its creation through improved competitiveness contributions to economic growth and poverty of the enterprise sector (Including through reduction, albeit with limited shared bene ts. increased access to nance and more public- Recent shocks risk disrupting and reversing private partnerships and skills upgrading Rwanda’s economic transformation, eroding echoing the earlier discussion of human the progress made in living standards. As such, capital investments) and trade openness this nal section puts forward a set of policy (including through increased digital and recommendations for a continued and more service exports and by setting up Rwanda as a inclusive economic transformation. regional logistics hub). Below we discuss broadly two sets of policy 4.5.1. Sustained poverty reduction depends recommendations–one to reinvigorate and on revitalized structural transformation promote structural transformation and the and new opportunities for o -farm employment, particularly in the other to ensure that the transformation is manufacturing sector inclusive. First, economic policy can help foster structural transformation, to make up Structural transformation in Rwanda for the reversal of the pandemic period. is reallocated labor away from agriculture into includes, for example, invest promotion to more productive, better-paid sectors, spurring attract more foreign direct investment. It signi cant poverty reduction in the process. As also includes e orts to remove barriers to the the most recent poverty assessment concluded, free ow of the factors of production, such as “a shift in the mix of jobs to more productive urbanization policy to facilitate the sustainable work propelled increases in incomes and migration of labor, from rural to urban welfare,” and in particular, becoming employed areas, including to Kigali and secondary and o -farm was associated with a 12 percent satellite cities. Second, social policy and other increase in consumption. And the results of related measures to promote inclusiveness policy simulations suggest that rapid structural can help ensure that the bene ts of structural transformation—more o -farm employment transformation are shared widely. opportunities and associated wage increases— is a key driver of consumption growth and Beyond the policy recommendations outlined poverty reduction (World Bank, 2020, p. 98). below, other policy measures to promote Employment in the manufacturing sector has structural transformation are described played a critical role in inclusive structural more fully in the other chapters. Chapter 1 transformation by creating jobs for women, for describes the investment in human capital– those living outside Kigali and for both skilled that is improvements in education and health and unskilled workers. As documented in the services–necessary to support long-term 2020 poverty assessment, the elasticity of o - economic growth. In addition, because the farm manufacturing jobs to economic growth agriculture sector will remain a major driver of in Rwanda has been strong, larger than the economic activity and employment, Chapter 5 services sector elasticity, and comparable with explores the policy measures needed to support the earlier record of Asian economies. Value- the sector, including expanding market access added per worker in manufacturing is higher among farmers, facilitating investments in than other industrial sector jobs, including new technology, and promoting private sector construction. In addition, recent analyses investments in general. It also discusses the suggest that the bene ts of manufacturing jobs role of agriculture insurance. Chapters 2 and are shared widely—these opportunities are 134 CHAPTER 4 Rwanda CEM | 2024 available to both men and women, outside of investment treaties and selected investments in the capital city, and for all workers regardless of transport infrastructure. educational attainment—in contrast to other sectors that have primarily bene ted men, the Where feasible and economically viable, more educated workers, or those in Kigali. policy can help attract investments that bene t women, young workers, and poorer Manufacturing FDI has created jobs directly as districts. At the same time, it can help develop well as indirectly. Manufacturing FDI created more local content and economic linkages. 8,000 of the estimated 12,000 jobs due to As recommended by World Bank ( 2023a), foreign investments. In addition to playing a providing incentives to nudge investors key role in direct formal job creation, there is towards activities that bene t women and strong evidence indicating that manufacturing young workers and that are located in poorer FDI creates jobs both directly and indirectly, communities would help spur more inclusive by spurring increased local demand for non- foreign investments. In addition, consistent manufacturing goods and services. As such with the critical role of manufacturing in the recalibration of Rwanda’s growth model inclusive job creation, investment promotion in 2021 and the renewed support for the strategies could prioritize manufacturing to manufacturing sector and other strategic, add to the accumulated investments in the tradable sectors is welcome. construction, real estate, and utilities sectors. Finally, policy can create incentives for foreign 4.5.2. Given the substantial employment investors to work more with domestic suppliers. generating e ects of FDI, policy should focus on attracting more of such 4.5.3. e Rwanda Development Board investments (RDB) can help promote more strategic More generally, FDI has been a key driver of investments formal job creation—it generates high-quality In general, Investment Promotion Agencies jobs immediately and over time, directly and (IPAs) all over the world help attract signi cantly indirectly. Foreign investment projects have more FDI, including in manufacturing and contributed strongly to both capital formation other strategic sectors (Rogatschnig, Obadia, and job creation in Rwanda. FDI projects & Steenbergen, forthcoming). e literature create jobs as soon as they are initiated, as suggests, for example, that every $1 dollar of well as in subsequent years. ey create jobs investment promotion can help generate nearly directly as well as indirectly, through the $190 more of new investments. e literature additional demand for goods and services that also provides evidence that IPAs can increase they stimulate. FDI ows by over 150 percent, with numerous new jobs created in strategic or selected sectors. However, FDI ows have slowed down in In Rwanda’s case, a targeted sector could be recent years and policy should attract more manufacturing, which the previous section FDI. e in ow of FDI slowed down even showed could help generate many more jobs, prior to the beginning of the pandemic. ere in particular jobs that require educational has been a recovery of FDI after covid, with quali cations that the Rwandan workforce the amounts of FDI in ows above the pre- currently possesses and generate second- pandemic level but below the peak of 2014. round employment opportunities. is is also Programs to attract more foreign investment consistent with the government’s increased projects should be enhanced, as explained support for the manufacturing sector in the in the latest Rwanda Economic Update— post-covid period, along with other strategic including through the full use of trade and sectors like agro-processing and construction Rwanda CEM | 2024 CHAPTER 4 135 materials (IMF, 2021). Nonetheless, IPAs do e RDB can play a role in attracting more green vary worldwide in terms of their structure and investments. As documented in the previous their actual performance, and four elements section, green investments have been dwarfed have been identi ed as helping explain why by investments in polluting sectors over the past some IPAs perform better than others, namely: two decades. e recent assessment of RDB institutional arrangements, strategic alignment concluded, however, that RDB can improve and focus, organizational framework and its green development outcomes along several resourcing, and investor service delivery. dimensions. ese include ensuring that RDB’s vision and strategy are consistent with green On the one hand, RDB has characteristics and sustainable objectives; actively seeking consistent with the best-performing IPAs in FDI projects that promote green objectives; the world. A recent assessment concluded preserving existing green investments and that RDB has elements similar to those of enlarging them; identifying key performance the best IPAs worldwide, such as a Board of indicators that are consistent with green and Directors led overwhelmingly by private sector sustainable objectives; and monitoring progress representatives (equivalent to nearly 90 percent accordingly. of board membership). Its investor service delivery system includes databases and tools that 4.5.4. Well-managed urbanization can help are comparable with the world’s best systems— promote a more balanced approach to including a customer relationship management structural transformation (CRM) system; standard operating procedures Rwanda needs an investment program that (SOPs) to manage institutional relationships; advances a more balanced approach across an information system that documents critical cities. is begins with a recognition of the general and sectoral data; and many others. diverse roles and resources of Kigali as well as the satellite and secondary cities to establish On the other hand, RDB has room to enhance economic growth poles to build Rwanda’s overall its autonomy, institutional arrangements, competitiveness. In addition, this investment and internal coordination. In particular, program needs to account for climate change supervision by the O ce of the President and environmental challenges as urbanization constrains the independence of RDB, increases impervious surface area and creates including regarding sta appointments and new challenges e.g., urban oods. To support compensation. e assessment also found Rwanda’s ambitious urbanization goals, a that information sharing and integration hierarchy of recommendations is proposed across departments could be improved with going from the national to regional to city the view to avoiding potential duplication level approaches and recommendations. e of the mandates of departments and clearly speci c policy options identi ed by a recent indicating the contact points for each type assessment of urbanization in Rwanda include of service. e recommendations proposed the following: to promote the e ectiveness of RDB include facilitating more private sector perspectives First, Rwanda needs to roll out and implement in the decision-making process, setting its Spatial Data Framework (SDF) and create a compensation levels that are comparable to Spatial Data Information System (SDIS) at the those of the private sector and recruiting national level. Rwanda currently lacks real-time more sta with private sector experience, and urban data and statistics to fully understand enhancing the sharing of information and cities and trends in urban expansion. coordination across departments. Comprehensive geospatial data at the city 136 CHAPTER 4 Rwanda CEM | 2024 level can help policymakers understand urban creation of City Management O ces will help growth—in particular, urban population and accelerate the development of satellite and built-up area, land use, housing and property secondary cities and spur economic growth as ownership, transport, and infrastructure —and cities become better equipped to predict and can help forecast trends, facilitate planning, respond to local level needs and opportunities. and serve as a powerful tool to engage local communities to help prioritize investments ird, at the city level, densi cation can help based on local needs. and to potentially attract leverage more fully the bene ts created by private investment that can complement public urban growth. As Kigali has experienced rapid investment in infrastructure. An important growth, along with some of the secondary step toward the creation of the Rwanda SDIS cities, some cities are seeing rapid urbanization include the ongoing initiative to implement alongside low-density development in outlying the existing SDF by providing secondary and areas. Densi cation and more compact urban satellite cities with Decision Rooms equipped growth could help maximize the bene ts with Urban Dynamic Maps. is will enable of urbanization, enhance agglomeration District Councils to access real-time spatial (and economies, promote e ciency in resource use, non-spatial) data for planning, implementation, and improve the quality of life by lowering and M&E purposes. e initiative is at the the cost-of-service delivery. In addition, it can development, testing, and user acceptance create environmental bene ts by requiring less phase after having recently completed the transport use, improving air quality, preserving software and hardware delivery phase. wetlands and biodiversity, and creating more room for green spaces, to name a few. All Second, to support regional development, of these together suggest the urgency of Rwanda needs to strengthen the ‘system of promoting dense communities in urban areas. cities’ approach by developing satellite and Investing in a ordable housing and upgrading secondary cities. Considering the geographic of unplanned settlements, adopting a national concentration of structural transformation and strategy for sites and services to improve job creation to date, Rwanda needs a more access to services, and looking at international geographically balanced and more equitable examples of upgrading to lower the cost of approach to urban planning. As described in the process will all be critical for Rwanda. the National Urbanization Policy, it would be Additional, Rwanda should complement important to develop secondary and satellite its densi cation e orts with disaster risk cities. Towards this end, policies that promote identi cation and reduction to ensure sites a ‘system of cities’ approach will be essential, selected for densi cation are not prone to ood/ including policies that enhance connections landslide and other risks to prevent any loss of between cities, including cross-border linkages life and damage to infrastructure. for border cities (e.g., Rubavu and Nyagatare) to facilitate better access to markets and Finally, to complement the point on improved mobility. Identifying investments densi cation, Rwanda needs to upgrade based on city-level economic transformation settlements, as well as invest in new strategies in the updated masterplans could infrastructure to improve economic align urbanization policy with the National opportunities and quality of life. In the Industrialization Policy. Labor markets in cities city of Kigali, a majority of its residents live should also be strengthened with targeted skill in unplanned settlements that are often building in sectors of comparative advantage. constructed in hazard-prone areas. In addition, Strengthening local governments through the such settlements typically lack access to basic Rwanda CEM | 2024 CHAPTER 4 137 services and infrastructure. e Government 4.5.4. Rwanda’s social protection system will be of Rwanda currently has several policies and critical in promoting inclusive structural strategies aimed at reducing the share of urban transformation residents in unplanned settlements. However, In recent years, the Government of Rwanda given the number of unplanned settlements in has made considerable e orts to improve the Kigali as well as satellite and secondary cities, it social protection system. In particular, it has is critical to develop a list of priority settlements been promoting greater equity and expanding so the upgrading e orts can ensure access to coverage, introducing shock-responsive cash jobs and markets as well as improved service transfers, and strengthening delivery systems, delivery as investments in water, sanitation, among other reforms. education, and health can help improve productivity. In situ upgrading can support Of these recent e orts, social protection for densi cation and ensure that people remain the informal sector will be critical, as many close to their jobs and vital social networks. workers remain informally employed despite Access to a ordable housing also needs to be structural transformation. Until signi cant prioritized so that residents are not pushed to structural transformation takes place, and unplanned settlements, particularly those in until considerably more workers move to hazard-prone areas that tend to be built on higher value-added sectors characterized by cheaper land. Urban upgrading investments greater formal employment, the overwhelming need to be implemented together with new majority of workers in Rwanda will remain investments in infrastructure, including informally employed. In fact, though industry strategic infrastructure that complements and services sector employment are more likely the speci c drivers of growth in a city and to be formal than agriculture, currently the transport infrastructure that promotes greater majority of jobs in these sectors are informal. connection among cities. As such, both workers and members of their households will be vulnerable to two economic Overall, it is crucial to ensure climate risks—health shocks in the absence of health compatibility alongside rapid urbanization. insurance and the risk of falling into poverty Since migration to cities increases impervious during old age in the absence of social security. surfaces and raises the risk of ash oods, Two informal sector programs are important: the Government of Rwanda should prioritize the community-based health insurance program zoning to avoid settlements in ood-prone and a new social insurance scheme. First, areas and invest in resilient infrastructure, community-based health insurance (CBHI), including drainage, nature-based solutions for otherwise known as Mutuelle de Santé, provides ood-attenuation, and e ective solid waste health coverage to informal sector workers and management to prevent drain blockage. In their households. In this system, all household addition, to minimize the growth of unplanned members are required to pay contributions in settlements and increase the resilience of order to access health care, with the exception urban households to climate change hazards, of household members already insured under the Government of Rwanda should promote an existing medical insurance program. e land readjustment, which involves dividing Government of Rwanda provides generous peripheral urban land into well-connected subsidies to help defray the contributions of grids before settlement. ese measures will the poorest households (equivalent to Ubudehe promote inclusivity and boost economic category 1). First introduced in 2007, the participation among a broader population coverage of CBHI has grown to 86.6 percent (World Bank Group, 2022). of the population as of 2022. Second, the Ejo 138 CHAPTER 4 Rwanda CEM | 2024 Heza Long Term Savings Scheme (Ejo Heza a dynamic social registry that can be used for LTSS), a social insurance scheme, promotes various targeting purposes; under data and savings for retirement. It is a voluntary saving information systems, the dynamic social registry scheme available to all—including both formal is being integrated with other information and informal workers, self-employed and wage- systems; under nance, the Government of employed, currently employed, as well as those Rwanda is putting together a disaster risk fund; who are not, and both children and adults. e and under institutional arrangements and Government of Rwanda pays for the operating partnerships, the Government of Rwanda has cost of the scheme and provides matching an ongoing dialogue with various stakeholders. contributions for the poorest households Social protection coverage gap will need (equivalent to Ubudehe categories 1 and 2) who to be addressed for it to play its goals of meet eligibility conditions. First introduced building resilience, creating opportunities and in 2018, Ejo Heza covers 22 percent of the promoting equity. It I very well documented population, or about 37 percent of the working- that investment in social protection can be age population as of 2022. e two programs extremely e ective in reducing poverty and have signi cantly contributed to improving vulnerabilities, as well as poverty persistence access to healthcare and promoting retirement across time and generations. Countries with savings for both formal and informal sector stronger SP system with good coverage show workers in Rwanda. Continuing innovation lower rates of poverty and vulnerabilities and specially to ensure long term sustainability for are more resilient to economic and social these programs and their improved accessibility shocks. e right to social protection is clearly by the poor and vulnerable households and established within the 2015 Constitution of the their members will be paramount. Republic of Rwanda and social protection has various instruments like the ones contributing In addition, and as is clear from the reversals to economic inclusion through job creation (for and job losses of the pandemic years and the those able to work) but also those providing vulnerability to various shocks, there is an urgent social assistance to those unable to work such need for ASP. In general, a social protection as vulnerable children, people with disabilities system for the future will have to be exible— (PWDs), elderly, etc. Without stronger SP one that can be expanded horizontally (to cover system and good coverage, the principle of “leave more people as needed) and increased vertically no one behind” would be a myth. e objective (to provide more support as warranted) in should be to gradually achieve universal social response to crises and shocks. e recent food protection following the lifecycle approach in ation and the vulnerability to climate shocks that aims at protecting the income security of in the foreseeable future emphasize the need every individual when they require it during for an adaptive system and to build resilience key lifecycle and labor market contingencies. among households and to prevent them from e recent move by the Government of adopting negative coping strategies such as Rwanda in approving individual lifecycle sell of a productive asset. e speci c features grants (child grant, disability grant and old age of ASP will vary by country but investment in grant) design and guidelines documents is in four areas will be important: (i) programs and the right direction and commendable. eir their delivery systems; (ii) data and information implementation should follow suit. systems; (iii) nance; and (iv) institutional arrangements and partnerships. Rwanda has Quality implementation of the recently been advancing new initiatives in all four approved National Strategy for Sustainable areas: under programs and delivery systems, for Graduation can contribute to addressing the example, the Government of Rwanda is building stagnation in poverty reduction observed over Rwanda CEM | 2024 CHAPTER 4 139 the last years. Not only the objective would be redeployment of jobseekers and by enhancing to deliver a complete package of interventions labor market mobility and adjustment. (contrary to previous graduation attempts) Internationally, Active Labor Market Policies are informed by the household assessment but normally classi ed into ve groups namely, a) also to learn and course correct along the way. employment services, b) labor market training, To allow this, building a robust monitoring c) entrepreneurship and self-employment, and evaluation system for the graduation d) employment subsidies and e) direct job agenda is a must. e success of the graduation creation through employment programs. eir agenda will also hinge on how wider enabling importance is recognized in the revised National environment constraints are addressed. e Employment Policy (2019) as well as in the multisectoral nature of the graduation agenda National Skills Development and Employment requires a coordinated e orts across sectors and Promotion Strategy (2019–2024). Challenges this could be facilitated through multisectoral and opportunities about training and skills graduation action plan which would clearly set programs, entrepreneurship development and out roles and responsibilities of each sector and employment programs have already been raised respective entities. in the previous sectors. Another key goal is to promote the use of cashless Public Employment Services (PES) can modes of payment, advance digitalization of facilitate the employment of opportunity in government to persons (G2P) payments and the country by providing critical labor market support the poorest to realize the bene ts of support. PES programs include job search these improvements in service delivery. e use assistance, career counseling, and employment of mobile money has increased substantially in training. However, few PES programs exist Rwanda over the last few years. However, access in Rwanda. Currently, there are employment lags behind in rural areas and among the poorest service centers (ESC) only in Huye, Kigali, households. As the government improves and Musanze. Less than 5 percent of all digital services, it would be important to also unemployed workers use employment services ensure that extra e orts are made to include and less than 2 percent of new graduates nd rural areas and those in the poorer segments of employment through PES. In a labor market the population. where the majority of workers are informally employed and unskilled, job search support Addressing the social protection gaps is arguably even more critical. In the absence highlighted would be inconceivable without of recognized credentials, unskilled workers commensurate and predictable nancing. have particular needs, and the employment Current nancing arrangement skewed opportunities that best match their towards unpredictable external nancing is not quali cations will not be obvious. Neither is it sustainable and would not deliver envisaged clear how best to provide training to those with social protection reforms, hence the need very little or no education. As documented in to explore other nancing modalities that the ILO assessment, for example, the existing prioritize predictable domestic nancing. online job platform in Rwanda is in English and accessible only to more educated workers. 4.5.6. Stronger linkages across active labor Improving the accessibility of PES programs market policies can facilitate integration including through stronger linkages with into the labor market employment focal points at district and lower Active Labor Market Policies (ALMPs) help levels could enhance the job search capabilities improve the functioning of the labor market by of less educated workers and promote their facilitating smooth and faster deployment and integration into the labor market. 140 PES should be strengthened to facilitate access used by other well performing countries, to labor market information and e ective such as: (i) undertaking serological surveys to referral to appropriate support and training study infection rates in di erent population/ services A recent assessment by the ILO outlines occupation groups and get a better handle on the trajectory of the pandemic; (ii) introducing the policy options for strengthening the role of blood observatories to routinely track evolving PES in Rwanda, including through the creation infections by testing blood donations; (iii) of its legal and policy frameworks, by building leveraging molecular diagnostics such as the the capacity of existing ESCs, and by ensuring GeneXpert for COVID-19 testing in remote the accessibility and inclusiveness of programs areas which have lower volumes of tests; and (including by making it more geographically (iv) modifying the COVID-19 Preparedness accessible and useful to less educated workers and Response Plan to include explicit measures and by strengthening linkages with employment to protect essential health and nutrition support services at local level). However, before services and target the most vulnerable groups making large investments in PES, these services (i.e. individuals with co-morbidities). would bene t from an assessment, potentially • Ensure optimal allocation for pandemic on a pilot basis, to evaluate the extent of their preparedness. Rwandese authorities recognize impact and ensure their integration into the that investing in health security both depends larger employment ecosystem. on and complements broader e orts to strengthen the health system. Rwanda’s JEE score highlighted important persistent gaps in 4.5.6. Improve the country readiness for future the prevention, detection and rapid response health crises to public health threats. e government Rwanda was reasonably well prepared and has prepared a costed National Action Plan managed the response to the COVID-19 for Health Security based on the JEE with pandemic much better than many other countries a set of prioritized interventions and a One with greater capacities, while minimizing the Health, whole of government approach. adverse impact on essential health services. e costed plan is estimated at US$61.5 But Rwanda can be even better prepared for million (US$12.3 million/year or roughly the next outbreak, take steps to strengthen the US$1 per person), not a huge amount health care system, and advance critical reforms compared to the costs associated with the loss of lives and livelihoods associated with in the national community health insurance pandemics. e main priority at this stage scheme and in human resources for health, part is to ensure that the plan is fully funded of the longer-term agenda to bolster human and e ectively implemented. To enhance capital. e main policy recommendations are prospects for sustainability, it is preferable summarized below. to prioritize domestic nancing. To this end, • Strengthen health security to further enhance the government needs to consider several pandemic preparedness. Rwanda needs to ‘stay options: (i) explore feasibility of expanding on course’ with the ongoing management of the scal space (i.e., through e ciency gains the COVID-19 pandemic in the short term, in taxation and/or earmarked taxes); (ii) the government needs to have systems in engage private sector rms through their place to promptly identify new infections and corporate social responsibility spending on contain localized surges without disrupting pandemic preparedness; and (iii) incorporate essential health services and impeding metrics of country readiness to deal with livelihoods. In addition to continuing with pandemics in national plans to attract foreign mass testing and tracing, Rwanda may investors, making Rwanda an even more consider a number of additional strategies attractive destination for investors. 141 Annex 4.1. Matrix of key policy recommendations: growth and resilience through trade NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 3.5.1 Policy Area 1: Attract More Strategic Investments with Proven Substantial Employment-Generating E ects. Priority Area 1: Focus on Attracting More Inclusive Foreign Direct Investments (FDI), Bene ting Women and Young Workers, as Well as Poorer Districts. Develop investment promotion strategies that prioritize the RDB HP LT manufacturing sector over construction, real estate, and utilities, given the inclusive job creation e ects of manufacturing. Maximize the full use of trade and investment treaties and selected RDB HP LT investments in transport infrastructure. Priority Area 2: Promote More Strategic Investments Via the Rwanda Development Board (RDB). Attract more inclusive and green investments by prioritizing the following activities: Ensure that RDB’s vision and strategy are consistent with green and RDB HP LT sustainable objectives. Seek more actively FDI projects that promote inclusive and green RDB HP LT objectives. Preserve existing inclusive and green investments and enlarge them. RDB HP LT Identify key performance indicators that are consistent with green RDB HP LT and sustainable objectives. Monitoring progress accordingly. RDB HP LT 3.5.2 Policy Area 2: Promote a More Balanced Approach to Structural Transformation rough Spatial and Territorial Planning. Priority Area 1: Roll out and implement the Spatial Development Framework (SDF) for an in-depth understanding of Urban Expansion Develop in all satellite and secondary cities an integrated and shared MININFRA, HP MT HF spatial data platform to analyze trends in growth in urban population National Land and built-up area, land use, housing and property ownership, transport, Authority and infrastructure. (NLA), NISR Forecast trends and facilitate planning using the SDF in development MININFRA, HP MT MF of key urban infrastructure e.g., housing, transport routes, urban Local upgrading, extending access to services etc. Authorities Share spatial data in a manner that supports citizen engagement MININFRA, HP MT MF and community participation on the development of priority urban Local infrastructure and services Authorities with the involvement of community leaders Priority Area 2: Strengthen the System of Cities Approach by Developing Secondary and Satellite Cities. Support decentralization e orts and the empowerment of local authorities MININFRA, HP ST HF in terms of roles, responsibilities, management capabilities through the MINALOC establishment of City Management O ces as well as generation and utilization of own-source revenues Enhance inter-city connections and cross-border linkages for border cities MININFRA, HP LT MF to facilitate market access and mobility RTDA 142 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Strengthen the labor market in Kigali as well as satellite and secondary MININFRA, MP LT MF cities by focusing on skill building in sectors of comparative advantage Local based on economic transformation strategies noted in city masterplans Authorities, MINFOTRA Priority Area 3: Pursue Densi cation (i.e., dense communities in urban areas) and More Compact and Inclusive Urban Growth to Maximize the Bene ts of Urbanization. Undertake climate- and disaster-risk sensitive planning to identify MININFRA HP ST HF parts of the city where in situ upgrading would be feasible to increase densi cation Adopt a national strategy for sites & services to promote access to MININFRA HP ST HF service delivery in brown eld and green eld sites to improve livability in cities Study successful international examples of city planning, infrastructure MININFRA MP MT HF development, and nancing to promote densi cation, lower the cost of upgrading, and attract private sector nancing Priority Area 4: Upgrade Settlements and Invest in New Infrastructure. Invest in the upgrading of priority settlements identi ed based on MININFRA HP MT MF population density, proximity to other dense settlements, transport routes, and/or jobs to support densi cation Provide adequate housing to prevent expansion of unplanned MININFRA, HP MT/LT LF settlements. RHA Identify and invest in strategic infrastructure that complements the MININFRA MP MT MF speci c drivers of growth in a city. Prioritize transport infrastructure that promotes greater connection MININFRA MP MT MF between and within cities. 3.5.3 Policy Area 3: Improving the Role of the Social Protection System in Promoting Inclusive Structural Transformation. Priority Area 1: Boost Inclusiveness. Have a time-bound plan to achieve a universal SP coverage15 following MINALOC/ HP MT MF a lifecycle approach16 MINECOFIN Work on a purposely designed urban social safety net including a LODA MP MT HF diversi ed implementation model adapted to household mobility Devise / update strategies to facilitate poor households and broadly the RSSB / HP ST HF informal sector workers to uninterrupted access to contributory social MINECOFIN insurance schemes such as Ejo Heza. Long term commitment to school feeding program17- Budget MINEDUC / HP MT MF commitments enforced through increase in capitation grants to lessen MINECOFIN burden of parental contributions. Priority Area 2: Address Financing Gaps. Work on a social protection nancing strategy that would ensure MINALOC / HP MT HF adequate and predictable nancing for the social protection sector MINECOFIN Priority Area 3: Address Flexibility Gaps to Cement an Adaptive Social Protection in Rwanda. Fully implement the “dynamic” features of the social registry, including MINALOC HP ST HF allowing “on demand” registration Full digitization of cash transfers which allows multiple payment LODA / RISA HP ST HF options for bene ciaries Operationalize shock responsive cash transfers LODA HP ST HF Operationalization of a Disaster Risk Fund MINECOFIN HP MT MF 143 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Priority Area 4: Address Adequacy Gaps. Setting adequate and regular review of bene t levels for all social MINALOC/ HP ST MF protection components, especially taking into account household size RSSB? and number of children Priority Area 5: Address Opportunity Gaps. Work and implement a Multi-sectoral Graduation Plan LODA HP ST HF Streamline the work of proximity advisors and develop a roadmap for MINALOC HP ST HF harmonized capacity building of the community workforce (Para social Workers, Community Health Workers, Farmer Promoters and Friends of Family) 3.5.4 Policy Area 4: Public Employment Services (PES) in Rwanda – General Observations and Recommendations. Priority Area 1: Strengthen PES and Institutions Promoting Job creation. Create a legal and policy framework for PES within the broader MIFOTRA HP MT MF framework of ALMP HP MT MF HP ST MF MP MT HF Strengthen the national PES structure including the further RDB MP ST LF development of the KORA job portal in collaboration with the private sector Policy Area 2: Address the Challenges Toward Building an Inclusive Labor Market in Rwanda. Ensure inclusiveness of ALMP and especially job promotion services MIFOTRA/ HP ST HF provided services. RDB Take into consideration the needs of unskilled job seekers. HP ST MF Decentralize availability of PES. MIFOTRA/ HP ST HF LODA Strengthen social dialogue and collaboration with the private sector. MIFOTRA/ HP ST HF PSF/ Trade Unions/ National Labor Council 3.5.5 Policy Area 5: Making Rwanda’s Investment Promotion More Inclusive and Green. Priority Area 1: Improving RDB’s Overall Effectiveness in Attracting Foreign Direct Investment. Institutional arrangement Further examine RDB’s current institutional structure to determine how it can be more agile and allow more private sector inputs in terms of decision-making. Improve internal coordination and information sharing and minimize Strategy overlap between departments. Department / Board of Directors / CEO Strategy Department 144 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Strategic alignment and focus Consider prioritizing the development of an FDI strategy with clearly indicated priority sectors for investment promotion and retention. Ensure the investment promotion mandate receives sufficient attention, including focusing additional resources on FDI promotion. Organizational framework and resourcing Consider increasing staff compensation levels to be competitive with Board of the private sector. Directors / CEO / Strategy Department Allow for the recruitment of qualified staff with private sector Board of experience. Directors / CEO / Strategy Department Allocate a greater number of staff dedicated to investment promotion. Board of Directors / CEO / Strategy Department Investor service delivery Improve sectoral research and marketing. Marketing Department/ Strategy Department Utilize more fully the existing CRM to enhance data collection and Marketing information sharing. Department/ Strategy Department Priority Area 2: Improving RDB’s Impact to Achieve Inclusive and Green Development Outcomes. Develop a Vision and a Strategy. Undertake FDI sector scan diagnostics to identify priority sectors for Strategy inclusive and sustainable FDI attraction and expansion. Department Increase attraction and promotion. Identify leads for foreign investment in priority sectors that can contribute to inclusive and green goals. Identify investment opportunities within and outside of Kigali Department MP MT/LT MF through a formalized process and aggregate this information within of the Chief RDB to support targeted lead generation focused on Kigali as well as Investment satellite and secondary cities. Office, MININFRA, MINALOC P Improve retention and expansion. Conduct proactive investor expansion and reinvestment outreach to existing investors in priority inclusive and green sectors. Develop an investor dispute prevention mechanism with a legal basis Investor that prioritizes expediting and anticipating solutions for inclusive and Aftercare green investors. Department Undertake data collection and sharing. Collect employment outcome data on a more granular level (e.g., Investment amounts (RRA – CIT annexes), Employment by age/ gender (RSSB), Employment of persons with disability (potential source: RSSB social insurance schemes data). 145 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Systematically integrate data from One Stop Centre on investor characteristics into the CRM. Track data on the green vs. polluting classification of FDI projects in Strategy order to develop targets aimed at greening investment attraction. Department / One Stop Centre / Aftercare Department Encourage target setting. Develop specific targets, KPIs or Imihigo focused on inclusive and Strategy sustainable objectives to ensure that these dimensions are prioritized Department in its activities. 146 Annex 4.2. Supplementary data and gures Figure A4.1, Figure A4.2, and Figure A4.3 present are “modeled,” they are not consistent with RLFS summary information on employment and value data from the NISR and total employment from the added per worker by sector for selected countries. ILO tends to be much larger than NISR data. Employment by sector. ere are two main data Value added per worker by sector. Value added per sources on employment by sector in this annex: worker by sector is calculated using national accounts data on value added by sector from the WDI divided First, “modeled” International Labor Organization by the modeled ILO estimates of employment by (ILO) estimates from the World Development sector, described above. For a select number of Indicators (WDI) span the longest time period years, WDI directly provides data on value added for the purposes of our comparison, from 2000 to per worker by sector. ese have many missing 2021. e data are also comparable with the African observations, and they appear to be calculated based and Asian peers included in the benchmarking on national estimates of employment by sector. exercise. In the case of Rwanda, this ILO series As such, they are di erent in absolute terms from combines di erent data sources—Rwanda’s Labor our estimates of value-added per worker by sector, Force Survey (RLFS) in recent years, the Integrated though the two series are very strongly correlated Household Survey on Living Conditions (IHSLC) (about 0.99 correlation coe cient, for the years in in earlier years—and, according to the metadata, which we have both sets of estimates). is suggests uses imputation and projection methods. that the di erence is due to the employment numbers used in the denominator and the relative Second, RLFS data from the NISR either using rankings and the cross-country comparisons should quarterly data18 or annual data. Because the ILO data still be consistent. Figure A4.1: Agriculture and services share of employment by data source Agriculture (percent) Service (percent) 70 25 60 20 50 15 40 30 10 20 5 10 0 0 2016 2017 2018 2019 2020 2021 2022 2023 2016 2017 2018 2019 2020 2021 2022 2023 NISR (Annual) NISR (Q1) ILO (Modeled) NISR (Annual) NISR (Q1) ILO (Modeled) Sources: Calculations based on Rwanda labor force surveys and WDIs. Figure A4.2: Structural transformation: Rwanda 2000, 2010, and 2021 (Value-added per worker in 2015 US$; employment share in percent) 2000 2010 2021 7,000 8,000 8,000 Industry Services 6,000 7,000 7,000 Services Services 6,000 6,000 5,000 Industry 5,000 5,000 4,000 4,000 4,000 Industry 3,000 3,000 3,000 2,000 2,000 2,000 Agriculture 1,000 1,000 Agriculture 1,000 Agriculture 0 0 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Source: Calculations based on WDI, National Accounts and Modeled ILO Estimates and sta calculations. 147 Figure A4.3: Structural transformation: Selected African peers 2000, 2010 and 2021 (Value-added per worker in 2015 US$; employment share in percent; Y-axis scales are comparable within countries) Botswana 2000 2010 2021 50,000.0 50,000.0 50,000.0 45,000.0 45,000.0 45,000.0 Industry Industry 40,000.0 Industry 40,000.0 40,000.0 35,000.0 35,000.0 35,000.0 30,000.0 30,000.0 30,000.0 25,000.0 25,000.0 25,000.0 20,000.0 Services 20,000.0 Services 20,000.0 15,000.0 Services 15,000.0 15,000.0 10,000.0 10,000.0 10,000.0 Agriculture 5,000.0 Agriculture Agriculture 5,000.0 5,000.0 0.0 0.0 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Ethiopia 2000 2010 2021 5,000.0 5,000.0 5,000.0 4,500.0 4,500.0 4,500.0 Industry 4,000.0 4,000.0 4,000.0 3,500.0 3,500.0 3,500.0 3,000.0 3,000.0 3,000.0 Services 2,500.0 2,500.0 2,500.0 Services 2,000.0 2,000.0 2,000.0 1,500.0 Industry Industry Services 1,500.0 1,500.0 1,000.0 Agriculture 1,000.0 1,000.0 Agriculture Agriculture 500.0 500.0 500.0 0.0 0.0 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Kenya 2006 2010 2021 6,000.0 6,000.0 6,000.0 5,000.0 Industry 5,000.0 Industry 5,000.0 Industry Services 4,000.0 Services Services 4,000.0 4,000.0 3,000.0 3,000.0 3,000.0 Agriculture 2,000.0 Agriculture 2,000.0 Agriculture 2,000.0 1,000.0 1,000.0 1,000.0 0.0 0.0 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Tanzania 2000 2010 2021 10,000.0 10,000.0 10,000.0 Industry 9,000.0 9,000.0 9,000.0 8,000.0 8,000.0 8,000.0 Industry 7,000.0 7,000.0 Industry 7,000.0 6,000.0 6,000.0 6,000.0 5,000.0 5,000.0 5,000.0 4,000.0 4,000.0 4,000.0 Services Services 3,000.0 3,000.0 Services 3,000.0 2,000.0 2,000.0 2,000.0 1,000.0 Agriculture Agriculture Agriculture 1,000.0 1,000.0 0.0 0.0 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Uganda 2010 2021 2000 9,000 9,000 9,000 Industry 8,000 8,000 Industry 8,000 7,000 7,000 7,000 6,000 6,000 6,000 5,000 5,000 Services 5,000 Industry Services 4,000 4,000 4,000 Services 3,000 3,000 3,000 2,000 2,000 2,000 Agriculture 1,000 Agriculture 1,000 Agriculture 1,000 0 0 0 Source: Calculations based on WDI, National Accounts and Modeled ILO Estimates and staff calculations. 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Charting a Course Towards Universal Social Protection: Resilience, Equity, and Opportunity for All. Washington, DC: World Bank Group. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank. 150 Notes 1 We present three di erent series drawn from di erent data sources, the rst is presented here in the main text, the others are in the Annex: First, we use the NISR Integrated Household Survey on Living Conditions (EICV) reports and World Bank estimates using LFS microdata based on the de nition of employment that includes subsistence agriculture. Second, the “modeled” International Labor Organization (ILO) estimates span the longest time period for the purposes of our comparison, from 2000 to 2021. is series combines di erent data sources—Rwanda’s Labor Force Survey (LFS) in recent years and the Integrated Household Survey on Living Conditions (EICV-IHSLC) in earlier years—and includes imputation and projection methods. ird, the LFS data from the NISR either uses 1st quarter data or annual data. e use of rst quarter data provides a slightly longer time series because annual data are not available for 2016. e use of 1st quarter data ensures that we are in e ect comparing year-on-year changes and the comparisons are not a ected by seasonal uctuations. However, because the ILO data are “modeled”, they are not fully consistent with LFS data and total employment tends to be much larger than LFS data. For an overview of data sources and assumptions, please see the Annex. 2 Rwanda’s real GDP per capita (in constant 2015 US dollars) is 890 in 2021. Vietnam’s was 906 in 1995 and China’s was 905 in 1990. In constant PPP terms (2017 international dollars), Rwanda’s GDP per capita is 2,238 in 2021, comparable to China in 1995 (2,391) and Vietnam also in 1990 (2,825). 3 An older literature on economic growth also associates service sector-led growth with slower growth due to a smaller scope for productivity gains compared to the industrial sector (Baumol, 1967). However, Nayyar et al (2021) provide evidence that scale economies, innovation and productivity growth, and productivity spillovers are all possible in the service sector though “services-led development perhaps cannot deliver rapid productivity growth and good jobs within the same activity in the way that manufacturing once did.” 4 A very recent assessment of India’s growth experience between 1987 and 2011 (Fan, Peters, & Zilibotti, 2023) provides evidence of rapid productivity growth in consumer services underpinning a third of the increase in living standards. is suggests that “low employment growth in the manufacturing sector could be less of a threat to the sustainability of future growth than economists previously thought,” according to the authors. However, they also found that the welfare impact was strongly unequal, bene ting mostly the middle class residents of urban areas. 5 “Relative to manufacturing, a much larger share of rms in services employ a very small number of workers.” (Hoekman, San lippo, & Ticku, 2022). is pattern was documented earlier by (Fox et al, 2013) 6 See for example a think piece by Baldwin & Forsli (2023). A policy brief by Newfarmer and Twum (2018) discusses the critical role played by services in industrialization. Heitzig and Newfarmer (2023) provide a nuanced view of structural transformation in several African countries including Rwanda and o er evidence that the service sector could drive both employment creation and productivity growth. 7 Ideally, we would compare value-added per worker in manufacturing sub-sectors with value-added per worker in other sectors. However, disaggregated value-added data on the manufacturing sector are not available. 8 e authors also nd that the less educated are more likely to fall into poverty. 9 e multiplier e ect is calculated in the appendix of the report and estimated to be about 4.3 for FDI as a whole and higher for manufacturing. 10 A parsimonious econometric analysis of the 2021 World Bank Enterprise Survey for Rwanda suggests that employment growth has been driven by large and medium-sized rms in the manufacturing sector, as well as rms owned by women. We did not nd any evidence that export-focused rms in manufacturing performed better in terms of employment growth, which is potentially attributable to depressed trade conditions during the global pandemic. 11 e calculation of job creation and job destruction rates in Rwanda used sectoral employment data and followed the methodology used by Mensah et al (2023). ese rates tend to be lower than those calculated from panel data on rms. Nonetheless, the direction is instructive: On the eve of the pandemic, industry and services led job creation (0.10 and 0.09, respectively) while agriculture experienced job destruction (0.03). ese were reversed the following year as the pandemic started. 12 World Bank (2023) Rwanda Economic Update No. 20: Making the Most of Nature-Based Tourism in Rwanda. (Washington: e World Bank) 13 World Bank (2023) “Social Protection of the Future” (Washington: e World Bank). 14 Unless otherwise indicated, this section is based on World Bank (2023) Urbanization Chapter (Washington: e World Bank). 15 Ensuring access to SP for all, whenever and however they need it 16 Including a progressive model introducing non-operational components of the lifecycle (aligned to SP policy), leaving no one behind. 17 Key to potential increase in household income & productivity (of parents at present and of children in their later years) – measured through increased hours of work; improve school attendance (measured through net attendance rates) and reduce malnutrition. 18 To address seasonal uctuation, we use 1st quarter data throughout. e results should then be interpreted as changes, year-on-year. Rwanda CEM | 2024 CHAPTER 5 CHAPTER 5 151 CREATING THE ENVIRONMENT FOR GROWTH, INCOMES, AND EMPLOYMENT IN THE AGRI FOOD SECTOR 5.1. Introduction For continued growth going forward, e agriculture sector is central to national income, transformation of the agriculture sector will be growth, and poverty reduction for Rwanda. It essential. Just like for growth in the industry and engages 53.4 percent of the labor force and almost service sectors, agriculture will need to build on 80 percent of the female labor force, generates a competition and innovation and achieve higher third of all new jobs, and accounts for half of total productivity rates through sector-led investment exports. 82 percent of the population live in rural and development. As laid out in the 2020 Future areas, and 69 percent of all households are engaged Drivers of Growth (FDG) report, future growth in crop or livestock production. Farming also in the sector will come from productivity- accounts for 33 percent of all new jobs created in the increasing innovations and technical and Rwandan economy and there are high expectations allocative e ciency in resource use. However, for agriculture to not just provide employment for Rwanda’s experience shows that investments in a growing rural population but also to generate the sector can’t be supply driven but that in order higher-quality jobs that will reduce poverty. for investments in the sector to be sustainable, Further, the country very much relies on domestic they need to be demand driven and in response food production for consumption. Rwanda’s vision to existing market opportunities and aligned of becoming an upper-middle-income country by with retail requirements and consumer demand. 2035 and a high-income country by 2050 will not Box 5.1. outlines international experience for be achieved without continued high growth rates economic transformation and the role of the in Rwanda’s agri-food sector (over the past 15 agri-food sector in going from an agricultural years, agricultural value-added rose more than 5 economy to a high-income economy. percent a year). Box 5.1: Agriculture is central for economic transformation Agricultural development is central for economic – or structural – transformation, i.e. the shift in the relative contribution of sectors to the overall economy, or GDP where agriculture diminishes in its contribution while the share of manufacturing and services grow. International experience shows that this transformation occurs as agricultural productivity increases and allows for a) income increases in the agriculture sector to generate demand in other sectors, and b) labor to be released from the agricultural sector into other sectors. is growth is generally driven by improved technology in a conducive production and market environment. i.e. farmers have access to improved seeds and other inputs suitable for the local context, water, and extension and advisory services, but also to markets. Investment in R&D is an important component for this to take place. Figure 5.1: 2022 food dollar per industry group (nominal) Further, even as structural transformation occurs and primary agricultural production becomes smaller as a share of GDP, the food sector remains important in the economy but a larger share of economic activity and of employment now occur in value addition, logistics, retail and food services. USDA’s Food Industry Group Dollar visualizes the share of the di erent activities in the U.S. agri-food sector for every dollar spent on food: us, the agri-food sector continues to contribute to economic growth and to be an important source of employment – in addition to a provider of nutritious food for human capital growth – but in order to optimize these opportunities, the right environment needs to be in place and strategic choices on where to focus scarce resources may have to made. Note: Other include Agribusiness and Legal and accounting. Source: USDA, accessed February, 2024 Sources: IFPRI; USDA 152 CHAPTER 5 Rwanda CEM | 2024 Rwanda’s Fourth Strategic Plan for Agriculture agri-food sector operates in. Good progress has Transformation (PSTA-4), 2018–24, articulates been made in improving agricultural extension a bold vision for the country’s agricultural services, while the country has laid and begun to development. e PSTA-4 envisages Rwanda’s implement ambitious plans for climate adaptation agriculture sector transforming “from a in the agriculture sector which needs continued subsistence sector to a knowledge-based value- nancing. Similarly, some progress has been made creating sector, that contributes to the national on access to nance and signi cant e ort has been economy and ensures food and nutrition security made to scale up agricultural insurance. However, in a sustainable and resilient manner”. e PSTA- while foundations have been laid on improving 4 aims to (i) increase productivity by promoting access to markets for actors along the value the adoption of modern technologies, improving chains, further e ort is required in order to drive access to nance, and enhancing extension investments and growth in the sector. services; (ii) promote value addition by developing agro-processing industries, improving post- e COVID-19 pandemic and the war in Ukraine harvest handling and promoting the production had a signi cant impact on agriculture. e 2020 of high-value crops; (iii) enhance market access recession reduced demand for agricultural products by improving infrastructure, reducing trade and disrupted agricultural projects. e rise in barriers, and promoting regional integration; fuel and fertilizer prices, driven in large part by (iv) develop agribusiness by promoting private the fallout from the ongoing war in Ukraine and sector investment, improving access to nance, the sanctions imposed on Russia (IFPRI, 2022), in and enhancing the business environment; (v) conjunction with a poor harvest, led to dramatic promote sustainable land management practices increases in food prices. As of May 2023, Rwanda by improving soil conservation, promoting was among seven countries with the highest food agroforestry, and enhancing land use planning; (vi) in ation in the world (NISR, 2023, p. 1) and enhance resilience to climate change by promoting between May 2022 and May 2023, the Consumer climate smart agriculture (CSA), improving Price Index (CPI) increased by 14.1 percent water management, and promoting the adoption (28.2 percent in rural areas) on an annual basis of drought-resistant crops; and (vii) promote (World Bank, 2022, p. 13), particularly a ecting gender equality by increasing women’s access the purchasing power of vulnerable groups. In to land, nance, and training, and promoting comparison with 2018, the food security situation their participation in decision-making processes. in Rwanda deteriorated by 2 percent (NISR, Despite substantial public investment, the results 2022). Box 5.2 provides more examples of impacts to date have been mixed, with low productivity from COVID-19 on investments and market growth and a slight increase in food insecurity access in the agriculture sector. from 19.5 percent in 2018 to 20.6 percent in 2021. e mid-term review of the PSTA-4 e Rwanda Economic Recovery Plan (RERP) provides an assessment of the results and gaps in was developed in 2021 to address the challenges the agricultural sector that has informed the policy presented by impacts of COVID-19 and the recommendations toward sustainable, productive, ongoing war in Ukraine. One priority of the plan and inclusive transformation going forward. is to: “Ensure Food Self-Su ciency by increasing Agricultural production.” e RERP provides e recommendations from the 2020 FDG for the among other things for concerted e orts in seasonal agriculture sector have not been fully implemented, crop intensi cation, subsidies for agricultural with a consistent challenge reportedly being nance inputs (e.g., seeds and fertilizer) and irrigation (World Bank Group; Government of Rwanda, equipment, maintenance and rehabilitation of 2020). However, in addition to outstanding marshlands, support for mechanization, and recommendations, this chapter will also emphasize increasing resources for the National Strategic the importance of market access for private sector Food Reserves (NSFR) to guarantee food security investments in improved technology, and the for the Rwandan population, targeting youth and new global context of poly risks that the Rwanda women. e plan also calls for increased national Rwanda CEM | 2024 CHAPTER 5 153 Box 5.2: Examples of impacts from COVID-19 on investments and market access in the agriculture sector Implementation of Small-Scale Irrigation Technologies (SSIT); e pandemic reduced farmers’ incomes, and this slowed down the uptake of the SSIT program because farmers’ participation requires a contribution. Additionally, there was an increase in the cost of SSIT equipment, which is mostly imported. Agricultural produce market shrinkage. e largest consumption of agriculture produce had been the urban centers, particularly hotels, restaurants and schools, followed by cross-border and extra-regional trade. e pandemic-driven decline in demand left surplus unsold produce with farmers, particularly of crops intended for export or for consumption by the above actors. Capacity building of project bene ciaries. Capacity building programs such as training and study tours were prohibited during the COVID period in order to contain the pandemic. Similarly, mobilization of international experts from to provide technical assistance to the RAB in di erent contexts was delayed. Maintenance and rehabilitation of irrigation and land husbandry infrastructures. Landslides and oods due to heavy rains in March-May 2020 damaged irrigation and land husbandry infrastructure across Sustainable Agricultural Intensi cation and Food Security Project (SAIP) sites. However, maintenance and rehabilitation through community works (Umuganda) by scheme users could not be performed as usual due to the drastic measures put in place to contain the COVID-19 pandemic. is resulted in heavy infrastructure damages that are beyond the farmer’s repairing capacity in e.g. the sites covered by the Sustainable Agricultural Intensi cation and Food Security Project (SAIP). Other sites with irrigation and land husbandry investments across the country may have faced similar challenges. Sources: IFPRI; USDA aggregation and supply capacity, subsidizing mainly exogenous risks to agriculture production airfreight for exporters as well as supporting and food security must be managed in a way that farmers to guarantee Rwanda’s horticultural provides a predictable policy environment for exports. Additionally, Rwanda has invested in a actors to operate it. At the same time, resource fuel subsidy to minimize the high transport costs constraints, especially with regards to land, will impacting food importation and distribution require that certain policy choices will have to be within the country. made in the direction and scope of Rwanda’s agri- food sector. Managing the new global context of poly risks while shaping the environment for an agri- is chapter will look at the key drivers of growth in food sector for a middle-income economy will the agri-food sector for the coming decades. Rather require balancing responses to agri-food systems than discussing broad development challenges risks with the needed investments for longer- for the agri-food sector, it will zoom in on target term development of the sector and beyond. For areas that over the past years have proven central in broad-based growth in the agriculture sector, overcoming for successful, market-oriented farmers with transformation into value chains, adding and agri-food businesses in Rwanda. e rest of value to products and moving labor from the the chapter is structured as follows: Section 5.2. farms into logistic, processing, food services, and will provide an overview of the opportunities for other rural sectors, on-farm productivity needs Rwanda’s agri-food sector over the next decade(s); to increase. However, the necessary investments Section 5.3 will go through key challenges for growth in the sector come largely from the private sector in the sector, especially as they relate to private and this will not happen without farmers being sector investments and agricultural transformation; able to access good markets. With national and Section 5.4. will provide recommendations for the regional economic growth, and many countries way forward according to their priority, timeframe, moving towards middle-income economics, food and feasibility. demand is expected to grow rapidly over the next decades, and this could provide important 5.2. Opportunities for the sector market opportunities for Rwanda’s agri-food Rwandan agriculture has high potential, including sector provided that the right incentives and a comparative advantage in food crops, prospects public and private infrastructure and services are for strong demand growth, and deep trade links in place. e current context with omnipresent, with regional partners. 154 CHAPTER 5 Rwanda CEM | 2024 e 2018 PSTA-4 identi es three main consumed outside the home. ese shifts in food opportunities for Rwanda’s agricultural sector in consumption constitute an immense opportunity terms of new markets, drivers of entrepreneurship, for increased jobs, higher and impacts on poverty reduction and food security: (i) high economic growth region that’s creating Food demand in Rwanda is set to increase sharply. domestic and regional food markets for Rwandan Based on demographic trends, the value of domestic products; (ii) that Rwanda has a relatively young food demand is projected to double, from US$6.5 population that—according to PSTA-4—will be billion in 2020 to US$13 billion by 2040 (Figure incentivized towards entrepreneurship, and; (iii) 5.2). Much of this increased demand re ects a shift that agricultural innovation can help improve food in consumption, from a diet high in cereals and security, increase farmers’ incomes, and protect beans to one consisting of more livestock-sourced natural resources. products, horticulture, and processed foods and beverages. e increase also re ects more meals e Rwanda Country Private Sector Diagnostic consumed outside the home. ese shifts in food (CPSD) showed high potential for Rwandan crop consumption constitute an immense opportunity production. e CPSD found that the country for increased jobs, higher has comparative advantage in traditional crops such as maize, cassava, Irish potatoes and beans Rwanda’s food trade has increased sharply and is (and rice at the margin). In addition, relatively dominated by regional partners. e value of food young sectors such as horticulture exhibit high imports rose from around US$400 million in 2015 international competitiveness and great potential to US$1.1 billion in 2022, or from 15.4 percent of for expansion. e CPSD concluded that these total imports to 22 percent over this period. e products would have important positive impacts value of food exports rose by less, from US$530 on employment and growth through backward and million in 2015 to US$800 million in 2022, and forward linkages, and that increased private sector the share of exports fell from 46.5 percent to 27.2 investment would help unleash these e ects and percent. e Import Dependency Ratio (IDR, contribute to youth employment. i.e. the share procured from import) for crop and animal products averaged 32.8 percent and 18 Food demand in Rwanda is set to increase sharply. percent respectively in 2017–21, with an average Based on demographic trends, the value of domestic of 32.5 percent (Table 5.1). One driver of the food demand is projected to double, from US$6.5 increased food imports has been that the increase billion in 2020 to US$13 billion by 2040 (Figure in food production did not keep pace with the 5.2). Much of this increased demand re ects a shift increase in population. Intra-African food trade in consumption, from a diet high in cereals and accounted for almost half of Rwanda’s total trade, beans to one consisting of more livestock-sourced with a sharp increase in recent years and the African products, horticulture, and processed foods and market is likely to continue growing over the beverages. e increase also re ects more meals coming decades. African countries accounted for Figure 5.2: Food demand TABLE 5.1: Share of value of Rwanda’s export and import per region Export Import Africa 30% 24% Americas 13% 17% Asia 27% 24% Europe 23% 11% Oceania 7% 23% Source: calculations based on FAO STAT, 2023 Source: Author based on De Hoyos & Lessem (2008) methodology for food expenditure calculation. African development Indicators, WDI database and the comprehensive food security and vulnerability household survey. Rwanda CEM | 2024 CHAPTER 5 155 75 percent of Rwanda’s total food exports and 39 optimum output. Less than 2 years after SAIP percent of imports in 2022, compared with 50 promoted them through demonstration lots in percent of total exports and 37 percent of total Rwamagana, Rulindo, Gatsibo, Kayonza, Nyanza imports in 2015. In 2021, the main agricultural and Karongi, the demand for these technologies and food products imported from African countries has seen a rapid increase in these areas and 132 were cassava, maize, re ned sugar, sorghum, rice, units have been acquired and installed through the soybeans and groundnuts, and the main agri-food matching grants program under the project. With products exported were co ee, tea, palm oil, wheat, greenhouse farming, farmers can minimize the livestock, chicken meat, beverages and milk (see impacts of unfavorable weather conditions such as Figure A5.3). In 2021, 70 percent of Rwanda’s strong winds, heavy rainfall, hailstorms, and better food imports came from Tanzania, and 75 percent manage crop pests and diseases, hence leading to of its food exports went to the DRC (see Figure increased yield. In general, the model has been A5.4). Many of Rwanda’s food trade partners are for these greenhouses to be placed in large-scale also members of the EAC, implying a high level of irrigation schemes so that water use e cient trade integration within this regional group. technologies like drip and sprinkler irrigation can be connected directly to the schemes. ey Irrigation programs have generated substantial allow for a much more controlled environment bene ts. Rwanda has two agship irrigation for farmers to grow horticulture products in, like programs, the Land Husbandry, Water Harvesting, tomato, bell-pepper, pumpkins, and melons, and and Hillside Irrigation (LWH) and the Rural for farmers to harvest more frequently than would Sector Support Project (RSSP). In addition, the have been possible through open- eld cultivation. Small-Scale Irrigation Technology (SSIT) program Anecdotal evidence shows relatively high revenues co- nances investments in small-scale irrigation, for the farmers investing in greenhouse technology while the SAIP project pilots investments in water- for horticulture production. According to one use e ciency technologies in large-scale irrigation tomato farmer in Rubengera, his revenue increased schemes. e World Bank’s Development Impact from little above Rwf10,000 per week with open- Evaluation (DIME) unit found that hillside eld production, to as much as Rwf 150,000 per irrigation supported by the LWH project increased week with the greenhouse technology (Ministry of smallholder yields and cash pro ts by 70 percent. Agriculture, 2022). Dry season yields are 90 percent higher for plots in the project area, compared to plots outside. With 5.3. Challenges access to irrigation, farmers are 4 times more likely Rwanda’s agricultural growth is running up against to grow horticulture crops during the dry season and nancial and physical limits. Continued, rapid 2 times more likely in the rainy season. However, growth will have to rely strongly on private despite these bene ts, adoption has not increased sector e orts to increase scale economies through over time, as labor is the principal constraint on specialization and trade, shift towards more high- horticultural production. e SSIT program has productivity activities with greater value added, enabled farmers to better manage irregular weather improve the uptake of available technologies, and events and thereby increase productivity, as well as increase the coverage of irrigation. Government gain additional harvests, beyond the regular seasons. support should focus on investments in e SAIP program has increased yields, saved labor public goods such as research and innovation, costs, and supported an expansion of areas under providing extension services, strengthening irrigation. However, without major subsidies, the climate resilience, improving access to markets demand for technologies has been low. (for example by supporting cold chain storage), increasing access to nance and creating a more Protected agriculture represents an important inclusive agriculture sector by strengthening food opportunity to attract investments from small- security and continuing work on ensuring gender scale farmers. Greenhouse is a modern farming equality. Investments in private goods should be technology that controls air temperature, humidity, based on identi ed market failures and with clear light level and ventilation that plants need for exit strategies. 156 CHAPTER 5 Rwanda CEM | 2024 e current, state-led support for agriculture of inputs (2000s). However, the scope for further will not generate the rapid growth required over expansion of agricultural land is limited. Rwanda the medium term to meet Rwanda’s ambitious is one of the most densely populated African development goals. While in the short term current countries, and access to farmland has deteriorated e orts could extend the 5 percent annual growth markedly due to demographic pressure and slow in agriculture experienced in recent years, they transition from farm to o farm livelihoods. e will soon run up against various limits, including share of households with less than 0.3 hectares of the mounting scal burden, rising unit costs land increased by about 10 percentage points from as less accessible agricultural land is exploited, 2011 to 2017 (Systematic Country Diagnostic, competition from neighboring countries in crops World Bank, 2019). Labor productivity is promoted under the crop intensi cation program signi cantly lower than in other domestic sectors, (CIP), and shifting internal and external demand such as construction, transport, manufacturing, and for animal proteins, fruits, vegetables, and highly mining, and the potential for achieving worthwhile processed foods that requires a very di erent gains from applying ever larger amounts of labor enabling environment in the agro-food sector and per hectare is diminishing.2 signi cant private investments. To produce the transformative growth rates sought by Rwanda, 5.3.2. Low uptake of improved agricultural both public and private sector expertise in technology agriculture must be leveraged. Higher agricultural e uptake of technology and innovation in growth can only be achieved by reaping the bene ts Rwandan agriculture is generally low. For instance, of scale economies and specialization through in 2023 (season A), only 37 percent of agricultural exports and the production of higher-value-added households used improved seeds, while only 34.5 goods. Such e orts will require a rapid response to percent used pesticides. In regard to fertilizer use, market signals, ready access to investment resources, 59.6 percent of farmers applied inorganic fertilizers. technical expertise, and the ability to organize While the proportion was signi cantly high at 87.9 production and provide appropriate incentives for percent for organic fertilizers, the right quantities workers, generated by the private sector. and combination with inorganic fertilizers (when used optimally for sustainable agriculture practices), 5.3.1. Low productivity—a challenge for are necessary to provide the crop with needed and further growth in the sector quicker absorption of nutrients. e government, Growth in yields has been disappointing and through subsidies and centralized procurement, productivity is low. After sharp increases in the remains heavily involved in key input markets, early 2000s, agricultural yields have plateaued especially seeds and fertilizers, even though there is or even dropped since 2013, and productivity a private fertilizer distribution network contracted levels for certain crops and livestock—are low by by the Rwanda Agriculture and Animal Resources international comparison. Current productivity Development Board (RAB). Cumbersome quality remains below regional averages and ranges between control and new product registration processes are three to six times less compared to regional countries some of the main regulatory challenges facing seeds with the best productivity levels.1 Value addition and agro-chemicals supplies. in the sector—that is, cleaning, packaging, and processing of agri-food products—remains low. Only a small share of farmland is irrigated. Despite e reasons for unexploited processing capacity the positive experience from investments in lies in lack of appropriate technologies, expertise, irrigation and the large and small-scale irrigation nancing incentives and rural infrastructure. programs under the Government, only 71,585 ha or about 10 percent of cropped land (that is, e potential for growth in agricultural production agricultural land not including pasture or forest) through increased land and labor is limited. Periods is irrigated at the present time (season 2023A), of rapid growth in agricultural production have estimated to be equivalent to 14 percent of irrigable largely re ected either expansion of land devoted potential (MINAGRI, 2020). Some 10 percent to agriculture (1960s and 1970s) or increased use of households used any irrigation in 2023, and Rwanda CEM | 2024 CHAPTER 5 157 Box 5.3: Disruptive agricultural technologies in Kenya Investment in digital solutions for agriculture value chains is vital to boost productivity, efficiency, and competitiveness, especially for small farmers. The Kenyan government developed the Agricultural Observatory Platform*, a database containing spatial data and details of 1 million farmers. This database is being utilized to provide integrated agro-weather and market information to farmers and agricultural institutions. The World Bank, The Korea-World Bank Partnership Facility, and the Government of Kenya launched the Disruptive Agricultural Technology (DAT) Challenge and Conference** in response to this development. The event provided a platform to discuss the opportunities presented by disruptive digital technologies in the agricultural sector, focusing on four themes: Advisory and Information for Agricultural Productivity, Market Linkages, Farmer Financial Inclusion, and Data Analytics and Agricultural Intelligence. The conference brought together leaders from public and private institutions, technology companies, incubators, researchers, the business community, policymakers, financial institutions, and the donor community to learn from and network with each other. Several promising digital technology innovators in agriculture shared their innovation and business plans. In a complementing effort, Kenya set in motion the Climate Smart Agriculture Project***, which aims to promote the development of climate-smart agriculture in Kenya, with a focus on increasing the productivity and resilience of smallholder farmers while also promoting the diversification of agricultural exports, the adoption of climate-smart farming practices, improving access to markets, and supporting the development of value chains for non-traditional crops. Similarly, the National Agricultural Value Chain Development Project focuses on supporting smallholders’ transition from subsistence to market- driven commercial agriculture with investment in digital solutions across agriculture value chains to commercialize small- farmer agricultural products. * https://www.kaop.co.ke ** https://www.worldbank.org/en/events/2019/04/05/disruptive-agricultural-technology-challenge-and-conference *** Source: Endo, Kenya. Kenya - Climate Smart Agriculture Project: Environmental Assessment (Vol. 2): Environment and Social Management Plan for the Rehabilitation of Kaiboche Dam, Tharaka Nithi County (English). Washington, D.C.: World Bank. http://documents.worldbank.org/curated/en/670501617786851592/Environment-and-Social-Management- Plan-for-the-Rehabilitation-of-Kaiboche-Dam-Tharaka-Nithi-County almost half of them relied on traditional methods. health), and importantly for low-income farmers, Despite ongoing investments in new irrigation drive down transaction costs (e.g., through mobile development, e.g., under Commercialization banking or other e-services). Fintech solutions and De-risking for Agricultural Transformation also have a crucial role to play in reducing risks in (CDAT) objectives for the irrigation sector, the the agriculture sector and increasing the adoption goal under PSTA-4 of reaching 100,000 ha of of insurance products and access to credit. While irrigation by June 2024 is unlikely to be achieved. the supply chains for subsidized agriculture inputs While the country has made some good progress have already been fully digitalized under the on improving the regulatory environment for Smart Nkunganire System (SNS), the adoption irrigation, irrigation development, improvements of other available solutions has been relatively in water use e ciency and other reforms need low. However, the Hanga Agritech Innovation to continue with a greater focus on leveraging Challenge, launched in December 2023, is investments and institutional changes to facilitate expected to encourage the development and increased uptake at the farm level. expansion of technology innovation products by agri-tech startups. Similar initiatives in the region Farmers’ access to information and (Box 5.2) have successfully facilitated the creation communications technology (ICT) is limited. of technology solutions in various areas such as While most of Rwanda’s geography has broadband agriculture advisory and information services, internet coverage, internet access is low (see the fintech, access to markets, and data analytics. private sector chapter). Only 17 percent of the Rwanda’s ICT infrastructure provides a good households (and 12 percent in rural areas) have foundation for diffusion of technology and internet access, primarily through mobile devices. information, but the country needs to continue Box 5.3 Disruptive agriculture technologies have improving its regulatory environment; ICT the potential to greatly bene t agriculture value is rated relatively low in the Enabling the chains and food systems by facilitating timely Business of Agriculture (2019), with Rwanda delivery of information (e.g., markets, weather), falling one rank behind both the regional and advice and extension (e.g., soil analysis, animal income group averages. 158 CHAPTER 5 Rwanda CEM | 2024 5.3.3. Transitioning to a knowledge-based agri- partners in agriculture extension activities within food sector a de ned framework. Platforms like SNS and Despite international evidence on the importance the Mobile Ordering and Processing Application of investments in research and extension for (MOPA) were designed to help manage the supply agricultural growth, public spending to these chain and link all actors in the agriculture value areas is low. Experience shows that investing chain. ese platforms could still be developed to in research and extension has some of the best generate and digitalize more extension messages. returns to agriculture, but at 2 percent of the total agriculture budget, public investments in Farmers are not the only actors that need skills agricultural research and extension services is low development. International incubation centers in Rwanda. Government support for agricultural are being set up at agriculture higher learning research and extension, particularly in food staples institutions to develop and build agricultural skills of lesser interest to the private sector, is essential to in private rms. ese centers focus on a variety boost productivity growth and poverty reduction. of higher-value products such as horticulture, e Farmer Field School (FFS) approach has been potatoes, dairy, and poultry farming. CAES will scaled up at the national level to train facilitators also develop a skills program aimed speci cally and establish schools across the country. Other for the private sector. At the same time, skills are approaches have since been introduced to needed in agriculture technology support services complement or build on the FFS approach to to e.g., maintain irrigation and solar technology, enhance already achieved results. ese include the other on-farm mechanization, and in cold chain Farmer Business Schools (FBS), which focuses on logistics. E.g., under SAIP, an e ort has been made improving farmers’ business skills to help them in to train young people in rural areas in these types taking income-oriented decisions based on cost- of skills and link them to investment nance to bene t analyses; and the Farm Service Centers, start up small workshops and provide maintenance which in addition to farmers training services, also services, but the program is small and it’s unclear if provide services of farm inputs and livestock feeds the Government has similar programs elsewhere supply. Further, in collaboration with Rwanda to meet the growing demand for such services. Youth in Agri-Business Forum (RYAF) and Finally, it should be noted that none of this can Horticulture in Reality Corporation (HORECO), take place in isolation and without improving young university graduates from agricultural general education levels in rural areas. Currently, programs have been engaged in the extension farmers in Rwanda have on average 3 years of system, especially for support to farmers irrigated schooling, which provides a weak foundation areas as a way of strengthening the extension for adding more technical skills, digitalizing the capacity and elevating the knowledge level in the sector, managing the necessary administration eld. Nevertheless, the envisaged transformation around farming as a business, marketing, of the sector necessitates signi cant technical and compliance with standards. us, for the assistance to farmers of both modern, technology agricultural sector to transform, overall rural intensive agronomic practices and in farming as a education levels need to increase. business the limited amount of resources allocated is unlikely to meet the needs of sector, unless the 5.3.4. Climate change and unsustainable private sector is able to ll the gap. natural resource management a ects agriculture negatively e groundwork has been laid to bridge together Climate change impacts, land degradation, and more stakeholders and develop an interactive groundwater management will remain core electronic network but needs to be brought to challenges for the agricultural sector for the scale in order to have impact. e Customized foreseeable future. Despite only contributing Agriculture Extension System (CAES) was adopted 0.003 percent of global greenhouse gas emissions, in 2020 as a way to connect the private sector, higher Rwanda su ers widespread damages and losses learning institutions, NGOs, and development from climate-related events, notably droughts, Rwanda CEM | 2024 CHAPTER 5 159 landslides, and ooding. Droughts have taken a Rwanda’s topology makes agriculture highly toll on agricultural producers and contributed to vulnerable to erosion, which in addition to poor land food price in ation and reduced consumption. e management practices leading to land degradation, 2018 oods resulted in damage to physical assets reduce soil fertility. is, in turn, negatively a ects valued at Rwf201 billion and economic losses of crop productivity as the soil lacks the necessary Rwf21 billion (2.4 percent and 0.3 percent of GDP, nutrients to support plant growth. Most crops are respectively, (Government of Rwanda, 2019)). grown on steep slopes that are prone to erosion during the rainy season. Since 1990, soil erosion e impact of oods on manufactured capital has increased by 54 percent (Map 5.1). Landscape and assets is likely to increase over time. Under transformation (the construction of wide terraces a pessimistic scenario for the impact of climate and agroforestry development) and conservation change (RCP8.5 scenario),3 0.362 percent of agriculture has been promoted by building the agriculture capital that is exposed will be damaged capacity of farmers to adopt best practices in land by ooding every year from 2036 to 2065. By use and soil protection. 2071-2100, this number is expected to increase to 0.74 percent a year (see Table A5.1). e government of Rwanda is committed to devoting substantial amounts to adaptation but e impacts of adverse weather events on agriculture without adequate resources available, measures and food production seemingly translate into have to be determined based on priorities. In its higher food prices. An analysis of monthly in ation NDC submitted to the United Nations Framework in Rwanda shows that since 2009, peak in ation Convention on Climate Change (UNFCCC), correlated with adverse weather events in 8 out of Rwanda presented an aspirational budget of US$5.4 11 cases and in all but one case was the in ation billion for climate change adaptation between higher than at the three times under favorable 2020 and 2030, of which 55 percent was intended weather conditions (Figure 5.3). for agriculture, and irrigation alone was allocated Figure 5.3: In ation in Rwanda correlates with adverse US$2.3 billion. Other signi cant amounts were set weather events aside for sustainable land practices, crop insurance, (percent) and other adaptation measures. Although these resource amounts indicate the scale of Rwanda’s ambition and commitment to climate change adaptation for agriculture, they are unlikely to be met. Instead, priorities need to be made based on current and potential climate-related impacts on the sector and di erent actors, Also, most of the investments in climate change adaptation will inevitably be taken on by the private sector including farmers, and there is therefore a need for the government to engage with stakeholders in the Source: Calculations based on various in ation reports sector to create synergies and leverage investments. 160 CHAPTER 5 Rwanda CEM | 2024 Map 5.1: Soil erosion 1990-2015 (tons/ha/year) 1990 2000 2010 2015 Legend Rwanda Boundary District Soil erosion T/h/y 13 - 17 17 - 25 25 - 35 35 - 50 50 - 80 80 - 120 120 - 180 Source: NISR, 2019 5.3.5. Access to organized markets is still a commodity lines corresponding to value chains— challenge for many smallholders in for example, rice, maize, potatoes, beans, co ee, Rwanda tea, horticulture, and dairy. Crop and livestock For many smallholders, aggregation is the only cooperatives account approximately 47 percent of way to access markets but the management of Rwanda’s 10,000 primary cooperatives (Rwanda producer organizations in Rwanda needs to be Cooperative Agency, 2003). Becoming a member strengthened. Many farmers face limited market of a cooperative is important for obtaining access access because their production quantity is too to government services and other support such small to be attractive for o -takers. It is also often as nance, aggregation, and marketing. Policies di cult for these small farmers to meet the quality and laws are in place to regulate cooperatives, but and timeliness of supply demanded in higher value there is a need to improve management capacity, markets, and high transportation costs often prevent business transparency, and marketing skills of farmers from independently seeking out markets. cooperatives or public directory entries, alongside As a solution, cooperative development has been a their technical and nancial capacity to e ectively key component in the state-led land consolidation use and maintain the agriculture infrastructure program to improve productivity and maximize implemented by the government through the resources. Cooperatives are organized along Ministry of Agriculture. Rwanda CEM | 2024 CHAPTER 5 161 Poor quality, management issues, and the risk e horticulture value chain has grown rapidly of drought limit sales of staple crops such as over the last years, but high post-harvest losses maize, Irish potatoes and beans. Maize is among pose signi cant challenges to the value chain. For the few value chains with organized and formal vegetables and fruits, close to 70 percent of the premium markets, which include two relatively produce is either kept for own consumption by big processing factories (Africa Improved Foods farmers or traded in open markets in Kigali or rural Limited (AIF) and MINIMEX) and several grains areas (World Bank, 2023). However, several SMEs aggregators. Quantities of locally procured maize and startup companies have begun supplying by the two main processors have been increasing fresh horticulture products to premium markets and reached about 25,000 tons in 2022. is o ered by 5-star hotels and restaurants in Kigali only meets half of their annual grains needs, and and other tourist areas. Most of them have invested they rely on imports to bridge the gap. e main in packhouses and cold chain infrastructure and constraints faced by aggregators and processors in transport equipment. But it is the supply to export local sourcing include poor postharvest handling by markets where most of the growth was observed. In farmers, poor organization of farmer cooperatives a period of 3 years to June 2022, export revenues (including lack of aggregation at farmers’ level and from horticulture products grew by 49 percent bad management by coops who side-sell despite despite the COVID-19 pandemic occurring in supply agreements), and frequent drought issues, the same period (NAEB, 2022). Further, export which lead to farmers keeping a higher-than- revenues increased by over 114 percent in the rst normal quantity of their produce at household 8 months of FY2023 compared to the same period level for consumption for fear of hunger. in the previous year (NAEB, 2023). Nevertheless, horticulture exports of US$42.9 million in FY2022 e markets for Irish potatoes and beans are remain far below the US$ 205 million targeted for dominated by unprocessed products, but that may the end of NST-1 in 2024 (NAEB, 2019). Some be changing. e few existing processors include of the challenges that are to be addressed include small-scale companies like Farm Fresh which high production and postharvest losses, which produces pre-cooked and packaged beans, and on average amount to around 20 percent but Hollanda Fair Foods (owner of Winnaz products) are as much as 49 percent for tomatoes (World which target consumer market for crisps, with Bank, 2020), largely due to the lack of cold chain plans to also produce cleaned, sorted and packaged infrastructure, non-adequate packaging and other whole ‘ware’ potatoes for hotels and supermarkets, postharvest handling issues. which will quadruple their demand. Similar to maize, these products are key food security crops To support a growing horticulture export sector, for farmers, who keep for their own consumption solutions for postharvest management are critical up to 45 percent of the produce for potatoes and but much of the infrastructure is private in nature more than 67 percent for beans. and public sector interventions should be balanced. Signi cant investment already exists into cold chain Rice is an important source of income, but the infrastructure in Rwanda; however, the majority is quality is low compared to imported rice, and public, or donor funded, and success has been mixed the latter is increasingly capturing the Rwandan (Box 5.4). Many of the facilities are underutilized market. Prices of domestically produced rice have and there is arguably a need for a “pull” e ect generally been lower than for the imported rice and formalization of the value chains; this can be from Pakistan and Tanzania, which has enabled stimulated through increased exports, consumer local producers to expand in rural markets. In demand on the domestic market, as well as through urban areas and the hospitality industry, however, regulation. A postharvest management strategy was competition with imported rice has been tough developed in 2022–23, but construction is delayed on the grounds of quality and variety, calling due to a lack of funds. e Kigali Wholesale Market for further investments in market-oriented seed for Fresh Produce (KWSMFP) was visualized rst systems and e cient and innovative production in 2010 as a modern wholesale market for local and systems to reduce the cost of production. regional sales. It was only announced in January 162 CHAPTER 5 Rwanda CEM | 2024 Box 5.4: Learning from the experience with supply side development of cold storage infrastructure The government of Rwanda financed construction in 2019 of solar powered cold storage facilities near irrigation sites. They were to be managed by the neighboring cooperatives and provide producer groups in the irrigated areas with cold storage for high-value crops, which in turn would attract traders geared towards higher-value markets. This is a perfect example of the public sector investing in much-needed infrastructure to bridge market failures in a credit-constrained sector. However, the experience with these cold-storage facilities has been mixed. Few are fully utilized even though many of them have not implemented a service fee for storage of produce. A basic problem in their design was that not all parts of Rwanda are equally well-suited for solar energy due to limited sun-hours. However, the location of the facilities was also often less than ideal from a market aspect, and there wasn’t a clear operation and management mechanism for the storage facilities. Optimal cold storage is also quite precise, and not all produce can be stored at the same temperatures. Similar conclusions were provided by a recent diagnostic study of public funded agriculture infrastructure which found that only 51 percent of established cold storage infrastructure are operational (MINAGRI, 2022). The study Energy Efficient Cold Storage in Agriculture identified several recommendations to increase utilization of these facilities, which may apply to similar investments going forward: (i) address technology gaps in the cold chain with sequential steps, including upgrades or modifications of the technology to strengthen weak design points, development of an easy-to-understand operation manual and problem-finder document, and plans for a periodic inspection and maintenance schedule; (ii) establish private sector-driven management; (iii) develop standard operating procedures for the post-harvest handling of fruits and vegetables, which would significantly reduce food losses and can be geared to food systems comprised of smallholders, emerging middle-sized farmers, or large corporations; and (iv) adapting regulation to align with existing priorities, as coordinated mechanisms between regulating agencies will be beneficial, with governmental attention to the possible implications of regulation for future investments. Source: Sustainable Cold Chain in Africa Summit (2022, p. 82) 2023 that the EU would invest US$69 million to government support is needed to share risks and fund the project. A Code of Practice for fruits and reduce export cargo barriers. At the moment, air vegetables and other regulations exist; however, cargo space is limited and competes with passenger a technical regulation for handling of fruits and tra c. To promote trust for Rwandan food vegetables on the domestic market should be put in products in regional trade, a range of initiatives in place to improve the quality of fresh commodities collaboration with regional economic communities on local markets and contribute to reducing are underway, such as the Market Access Upgrade losses. Kigali is also home to a newly established Program (MARK-UP) at EAC level and the African Center for Excellence for Cold Chain Regional Food Balance Sheet Initiative (RFBSI) Infrastructure, but the Center has not yet produced at COMESA-level. ese initiatives are designed graduates to further develop the sector. e new to enhance export competitiveness (MARK-UP) Rwandair’s Cargo facility recently bought to ease and improve transparency through real-time the export sector constitutes an important step data tracking (RFBSI). ere are also a number toward connections to regional and global markets of policies in place under PSTA 4 that promote for Rwandese horticulture produces. market-oriented agriculture for the domestic, regional, and international markets. To further Development of the horticultural sector faces promote regional trade, more progress is needed various constraints. Only about 6 percent of to harmonize standards, regulation, and credible horticulture production is exported (NAEB, certi cation in the region. 2022). e sector has grown rapidly to meet Rwanda’s target to increase horticultural exports 5.3.6 Accessing agricultural nance is a key ten-fold between 2018 and 2024 (Dahlberg 2020). challenge for the sector Despite this growth, the sector is still young and Lack of agricultural nance remains a major lacks professionalization. For example, there is no constraint on transformation of the sector. farm-to-airport logistics operator, leaving exporters Agriculture is one of the under- nanced to negotiate with airlines individually (Dalberg segments of the economy. In 2019, formal credit 2020). e sector is also bureaucratic, with to production represented only 4.1 percent of di erent documents and phytosanitary paperwork agricultural GDP, 7 percent if loans for agricultural having to be submitted at di erent o ces. Further trading and processing are added. According to the Rwanda CEM | 2024 CHAPTER 5 163 2020 Agricultural Household Survey, about 39 Most lenders, especially MFIs and SACCOs, lack percent of agricultural households had requested the expertise and products to serve the agriculture loans but less than 20 percent had submitted sector. their requests to formal lenders (banks, MFIs and SACCOs), suggesting a large gap between supply Most loans from MFIs and SACCOs for agriculture of formal agricultural nance and the potential production are short-term, and their capacity and demand in the primary sector. It is also noteworthy products seem to be limited. MFIs’ agriculture that agricultural SMEs—critical for agricultural loan portfolio4 was smaller than that of Umurenge transformation—make less use of formal nancial SACCOs from 2014 to 2018, but it increased by services through banks (as opposed to other loan- 4.5 times in 2019 to Rwf48.7 billion partially due making financial institutions such as SACCOs) to an agriculture insurance pilot. As a result, MFIs’ than other SMEs (World Bank 2016). Reasons share in total agriculture production loans jumped identified include low availability and quality of from about 17 percent in 2012 to 54 percent in data to decrease lenders’ risks; limited financial 2019. Agriculture production accounted for 37 experience of farmer and producer organizations; percent of their loan portfolio in 2019. Some MFIs limited operational capacity among formal o er tailored lending products for their target sector banks to serve the agriculture sector; agriculture commodities. Umurenge SACCOs have limited availability of medium- to long-term the smallest amount of agriculture loans among liquidity; and fiscal disincentives to borrowers the formal lender categories, with Rwf15.5 billion, (e.g., high cost of registering mortgage so land can accounting for about 17 percent of total agriculture be used as collateral). credit. However, their presence seems to be much larger in terms of the number of loans, based on Agriculture loans are viewed as highly risky. Public access to nance data. eir advantage is proximity institutions are actively promoting agriculture to farmers, but their agriculture lending products nance by providing loans directly and indirectly and capacity are largely inadequate, characterized and o ering de-risking mechanisms. However, by small loan amount and frequent repayments. for most private sector lenders, based on Some also su er from weak management and historical performance, agricultural production limited operational capacity. Farmers also complain is considered high risk and entails high about the inconsistency between the period set by transaction costs to hold a signi cant credit these banks for repayment, which is mainly on portfolio. In Rwanda, the risk of doing business a monthly basis while farmers earn their income in the agriculture sector is re ected in the high during the post-season. non-performing loan (NPL) ratio, which for agriculture as of June 2022 was7.8 percent Other lenders include traders, processors, compared to 4.3 percent in total for banks, and investment funds, and specialized lenders for 7.1 percent compared to 5 percent in total for agriculture SMEs. e members of the Council MFIs. Adverse climate events in the past, coupled on Smallholder Agricultural Finance (CSAF) with low farmer resilience, have damaged banks’ disbursed loans totaling about US$18.6 million lending portfolios. Moreover, the increase in in 2020 (Council of Smallholder Agricultural NPLs in 2016–17 to over 18 percent of total Finance, 2020) for cooperatives and traders in assets resulted in the reduction of commercial well-organized export-oriented value chains such bank lending for agriculture production. Some as co ee (the total agriculture/agribusiness loan banks and micro nance institutions (MFIs) disbursement from banks in Rwanda was about concentrate on well-organized value chains such US$88 million in 2019). Value chain actors such as as maize, rice and potatoes by tapping into the traders and processors also provide some credit to linkages with o -takers and providing loans to cooperatives and farmers, but aggregate nancing agribusinesses, especially those in processing. e data from these sources are not available. ere are growth of agriculture credit from commercial banks several investment funds that target agriculture and including agribusiness has been slower than that agribusiness. For example, the Africa Agriculture of total private sector credit for the last ve years. Development Company (AgDevCo) has invested 164 CHAPTER 5 Rwanda CEM | 2024 about US$3.5 million into three agribusiness increasing their lending portfolio to the sector. companies since 2016. e warehouse receipt Another easy approach to strengthen nancial nancing system introduced by the East African institutions’ expertise in agricultural investments Exchanges (EAX) remains limited. ere are and risk assessment is for the PFIs to recruit more several initiatives to provide digital-based services loan o cers with an agricultural background, e.g. for agricultural SMEs and farmers such as market from the agricultural universities and then train information, extension support, and payments, but them in relevant nancial skills. At the same time, lending seems to be still in a nascent stage. it will be important for the Government to assess the nature and impacts of the multiple Matching Agriculture is one of the focus sectors of the Business Grants Program around the country to ensure that Development Fund (BDF) guarantee scheme. e they don’t crowd out private sector lending by BDF, a public sector entity, provides partial credit o ering free grants for investments that normally guarantees mainly to SME and agriculture loans. would qualify for commercial borrowing. e guaranteed portfolio for the agriculture sector stood at Rwf8.9 billion for a total loan value of Some progress has been made in increasing the Rwf24.5 billion in 2019, 27.3 percent of the availability of agricultural insurance. e National total agriculture production loans. e annual Agriculture Insurance Scheme (NAIS) was guaranteed issuance declined from about Rwf3.0 approved and implemented in 2019. e scheme billion for 297 loans in 2015 to Rwf0.36 million is subsidized by 40 percent by the government of for 158 loans in 2019. As the annual expiration Rwanda. As of June 2023, the number of farmers outvalued the new issuance, the guaranteed with active insurance products had increased to portfolio has been declining in recent years. Based 136,521 (including 113,594 farmers for crop on the cumulative data for the last ve years, BRD insurance, and 22,927 farmers with livestock accounted for about 80 percent of loan guarantees products), representing slightly over 5 percent of to agriculture, although SACCOs represented 85 farming households. While major measures were percent of the total number of guaranteed loans. taken in scaling up agriculture insurance and many BDF also provides matching grants and technical of farmers have been reached with information, assistance support to agriculture SMEs. a broader uptake is needed, PFIs need to fully integrate the products in their agricultural loan risk ere is also a need to strengthen the operational assessments, and products need to be transferred to capacity of institutions involved in agricultural the private sector. nance to provide nancing packages that meet the needs of small-scale and commercial farmers. ere is still a gap in the access to quality data Programs under the Business Development Fund for agricultural nance. While initiatives such (BDF) have had some success in developing suitable as the Agriculture Management Information agriculture nancing packages, but there is still a System (AMIS), the Smart Nkunganire System strong reluctance of private nancial institutions (SNS), and the new registration platform by the (PFIs) to invest in the sector as risks are perceived Ministry of Agriculture and Animal Resources are as high and products are often not adapted to now being implemented, more work is needed to farmers’ reality of operating in seasonality rather improve the quality of data on rms to develop than with monthly revenues. CDAT is seeking to written policies and strategy on the use of data for strengthen the technical capacity of PFIs to better agricultural nance. assess actual risks of agricultural lending, thereby Rwanda CEM | 2024 CHAPTER 5 165 Box 5.5: An inclusive and equitable agri-food sector Improving the position of women is necessary to reach the agricultural sector’s growth potential. Rwanda is widely recognized for its commitment to gender equality. The government of Rwanda has put in place a strong legal and policy framework, including a legal mandate for gender-responsive planning and reporting through Gender Budget Statements, to support and advance gender equality. For the agriculture sector, efforts to address gender disparities include implementation of the 2019 Rwanda Agriculture Gender and Youth Mainstreaming Strategy; gender-sensitive land reform, with joint titling of female and male partners’ land; and gender equality in inheritance reforms. Nevertheless, gender disparities persist, and a review of the strategy shows that implementation has been slow. For example, female-managed farms are 12 percent less productive than male farms with 50 percent of the gender gap in productivity due to lower access to productive inputs and services, and fewer women than men cultivate on land that is protected against soil erosion and on irrigated land. Representation in institutions has been identified as a key constraint in accessing irrigation, but consultations during the Commercialization and De-risking for Agriculture Transformation (CDAT) preparation indicate that there is a perception that women do not produce financially viable crops that benefit from irrigation (i.e., the perception among institutional stakeholders was that men produce cash crops and women subsistence crops). There are also large discrepancies between men and women in their access to finance, partly due to lack of financial literacy and knowledge of financial services. During the preparation of CDAT, participating actors confirmed that the share of female applicants is lower than that of male applicants for loans at commercial banks. Further, female-managed farms are on average 10.5 percent smaller in land, and female farmers participate to a lesser extent in agricultural value chains, receive lower prices for their produce at markets and are less represented in off-farm employment. Table 5.2 provides an overview of discrepancies between men and women in the agricultural sector. TABLE 5.2: Discrepancies between men and women in the agricultural sector Access to/use of: Women Men Improved seeds 8% 18% Inorganic fertilizers 15% 20% Organic fertilizers 45% no data Irrigation 6.4% 11.5% Cultivating on land protected against soil erosion 62.5% 70.2% Bank account (approx.) 20% 33% Savings & Credit Cooperatives (among bank account holders) 66% 57% Commercial nancial institutions (among bank account holders) 26% 33% Loans from a formal source 3% 6% Loans in the size of < 5000 RWF* 30% 17% Loans in the size of 200,000-500,000 RWF* 18% 23% Loans for agricultural inputs 1.5% 3.3% Sources: Rwanda Agriculture Gender and Youth Mainstreaming Strategy, 2019, and Assessing the Implementation, Accountability of “Gender and Youth mainstreaming strategy in agriculture 2019-2026”, 2021 * Among those receiving a loan from a formal source 5.4. Way forward For Rwanda’s agro-food sector to continue to e chapter provides a detailed list of policy grow, private sector investments on and o farm recommendations that the government of Rwanda are necessary. e recommendations in this should consider in shifting the policy framework chapter focus on (i) how to support farmers in towards more private sector led growth. Key areas accessing markets; (ii) how to promote investments include improving market access, promoting in improved on-farm technology to increase investments in technology and promoting productivity and adapt to climate change; and (iii) inclusiveness. how to ensure an equitable agro-food sector. 166 CHAPTER 5 Rwanda CEM | 2024 5.4.1. Supporting farmers in accessing markets over the years, such as reducing dependence on Recommendation 1: Continue to strengthen farmer imported seeds for certain crops, overall agricultural groups in di erent forms and integrate “Farming as productivity has stagnated for most crops. In some a Business” in the Government Extension Model cases, it has even declined in the past decade. (Including linking farmers to o -takers for markets Furthermore, research in seed systems has been less and extension services). is already has begun driven by the market competitiveness of resulting through customized extension services, but funding crop produce, while favorable market dynamics can is needed. Experience under SAIP has shown that play a non-negligible role in boosting productivity when value chain actors engage with farmers and through increased investments in agricultural cooperatives, especially in higher value produce, production. Moreover, eliminating obstacles in and the farmers have access to good markets, they the international exchange of germplasm and are incentivized to invest on-farm. We also note in registering new agricultural input products, that these linkages facilitate access to improved and promoting knowledge exchange, together inputs and extension services, which have positive with continued deliberate e orts to promote impacts on productivity, revenues, and jobs. private sector engagement in seed multiplication, may foster a more sustainable and expeditious Strengthen on-going interventions and funds, development of local seed systems. tailored to the agricultural context. Technical assistance facilities should be available to support Recommendation 3: Enable and incentivize private ongoing public and private investments to ensure investments in agro-logistics infrastructure and that highly specialized agricultural and value chain cold chain development. To better access higher expertise is included in design and execution. value markets for perishable products and at the Concrete examples include: (i) strengthening same time reduce post-harvest losses, it will also of the business models behind technological be important to upgrade the agro-logistics systems initiatives, e.g. ensuring that, in the promotion of along the value chains. Such investments include (i) solar technologies for agriculture, management and developing skills (through training and nancing) supply systems are well developed and included in certi cation and agro-logistics, e.g., the use as criteria for grant nancing; (ii) ensuring that of crates and packing materials from the farmer technical and senior sta (decision makers) collection centers along with mobile and simple at banks and other nancing institutions are cooling solutions (like thermal boxes) and washing trained on the identi ed business models and and handling of produce; (ii) upgrading of storage other aspects of agriculture that are critical to the units to standard and with related facilities, for nancial viability of investments; (iii) promoting example, packing rooms, stable power supply and exible nancing models to stimulate innovation fork lift access for larger quantities; (iii) establishing and uptake of di erent business and technology last mile connectivity like road access to cold stores; models. (iv) In parallel, providing technical and enabling investments in cold chain solutions, support to government entities, for example from cold stores sourced by renewable energies to NAEB, to provide adequate support to the value insulated trucks and boxes. Finally, a detailed study chain and stimulate private sector development; on food losses throughout the value chains would and (v) ensuring close collaboration among all help to target interventions. relevant stakeholders for agship projects like the Kigali Wholesale Market, for example in Recommendation 4: Remove bottlenecks for developing the market management models expanding exports. Short term, concrete which are to date not well developed in Rwanda. interventions could include: (i) increasing certi cation of produce by for example training Recommendation 2: Modernizing the seeds sector local certi ers, providing, as part of matching grants with market demand driven basic research, or other investments, nancing for certi cation and private sector involvement in multiplication, and improvements of farm facilities, and strengthening international seeds variety exchanges for improved related inspection and enforcement by the regulator genetic resources in Rwanda. While research on new (Rwanda Bureau of Standards and/or RICA); seed varieties has yielded some positive outcomes (ii) dedicating shares of existing lines of credits, Rwanda CEM | 2024 CHAPTER 5 167 Box 5.6: Developing the horticulture value chain in Rwanda World Bank (2023) assesses the horticulture value chain in Rwanda. In addition to the above recommendations on general market and cold chain development, it suggests the following interventions to support the horticulture value chain: • Continued capacity building for farmers, their institutions, and other actors in the supply chain to decrease losses; • Increase storage capacity in places with larger volumes of transactions; • Upgrade logistics systems and skills development along the value chains; • Build capacity of the private sector to improve their operations and obtain relevant certification for markets; • Increase demand for high quality produce on domestic markets (hospitality industry and household consumers), by putting in place incentives to source from local markets, setting up minimum quality standards and traceability, and increasing public awareness on the benefits of consuming better-quality fruits and vegetables; • Remove bottlenecks for expanding exports, by increasing local certification capacity, including in grants and loans products that target investments in cold chain facilities and equipment, and providing business development services to startup companies to professionalize their business and marketing contracts abroad; • Provide technical assistance facilities to support ongoing public and private investments to ensure highly specialized agricultural value chain expertise in design and execution of programs; • Strengthen the regulatory environment, including RICA, to fill legislative gaps, and inform decision makers on the relevance of regulations, to ensure their importance is acknowledged, and that laws and policies are passed in a timely manner and enforced. Source: World Bank ( 2023) matching grants or other nancial instruments to the past few years. e government has made e orts horticultural exporters using, or intending to use, to address the situation by providing nancing for di erent types of cold chain (for example trucks); credit lines, aiming to facilitate a ordable lending and (iii) providing business development services by the nancial sector. Furthermore, they have to exporters to professionalize their business and subsidized agriculture insurance products as a marketing contracts abroad. is could include means of contributing to the de-risking of the sector. short courses or exchange visits. Nevertheless, the government must formulate a comprehensive agriculture nance strategy to Strengthen the regulatory environment. Technical establish coordinated and e ective mechanisms, to and nancial support should be provided to facilitate increased and sustainable private sector RICA to ll legislative gaps, as well as to decision nancing in the medium-term, ultimately fostering makers on the relevance of this regulation, to a fully private sector-led subsector. ensure that its importance is acknowledged and that legislation, laws and policies passed in a Recommendation 6: Strengthen and scale up the timely manner. is should be complemented by farmer-led irrigation development (FLID) / Small- investments in inspection and monitoring, as well Scale Irrigation technology (SSIT) programs and as the development of systems to track compliance. assess the sustainability of the nancing and adapt the model more towards that of SAIP. 5.4.2. Promoting investments in improved on- farm technology to increase productivity Recommendation 7: Evaluate support programs for Recommendation 5: Finalize and approve the small-scale farmers (e.g., grants and mechanization) Agriculture Finance Strategy, including a long-term to assess investment returns and sustainability strategy for grants vs. private nance programs. rates and adapt programs accordingly. Multiple While agriculture has consistently accounted for models of delivering support to farmers have been over 25 percent of the GDP in recent years, the implemented in parallel over the past year, either as proportion of agriculture nance in relation to regular programs or under donor nanced projects. private investment nancing in Rwanda remains At times, the same bene ciary has bene tted from remarkably low, averaging less than 5 percent over support from multiple programs and it’s not clear 168 CHAPTER 5 Rwanda CEM | 2024 if there if e-g. grants programs a ect employment across Rwanda and with limited price discrepancy beyond that of the direct bene ciary, if they lead between di erent geographical locations. Although to eventual access to private credit among grants the income pathway for farmers will be to produce bene ciaries, if these grants bene ciaries invest in high-value foods for middle-income consumers, their own businesses to further expand after the local food markets must also provide decent income initial investments, etc. Given the limited national opportunities for farmers while availing diverse productivity increase in the country, it would be foods for consumers, through local production as important to evaluate what works best and scale up well as regional and international imports. Local those models. food systems development necessitates investments in market infrastructure for local consumption and Recommendation 8: Scale up vocational training and institutional infrastructure related to regulatory develop start-up programs for agricultural support aspects of marketing and processing, e.g., for food services, including for SSIT, mechanization, cold safety, employment regulations, etc. chain infrastructure, food processing, and other agri-food services. Recommendation 12: rough PSTA-5, establish a clear policy that promotes private sector investments Recommendation 9: As part of PSTA-5, conduct that are separate from those of a social protection an agriculture and food security risk assessment nature. is would include land use management. and develop an agriculture and food security risk management framework for Rwanda and Recommendation 13: Incomes and employment establish risk management measures; accordingly. regulations (analytical work and policy). An Agriculture Sector Risk Assessment (ASRA) helps identify the most impactful risks according 5.4.3. Promoting climate-smart development to geographic region and subsector, which helps opportunities for the private sector in prioritizing risk management interventions. For agriculture some countries, such assessment has been combined Several private sector opportunities exist to increase with an analysis of the impacts on the food sector agriculture’s resilience to climate change while and food security from di erent risks, including both contributing to economic development. Some of availability and prices. Such assessments help prioritize these opportunities are given below. scarce resources where they have most impacts. e • Developing and distributing climate-resilient Government should develop a comprehensive risk livestock and seed. For instance, the Alliance management approach for the agri-food sector to for a Green Revolution in Africa (AGRA) mitigate impacts of risks and prepare for possible risk supported 15 private seed companies from events, like food prices increases. is can also help 2017 to 2019, which sold 4,513 metric tons balancing national food security concerns against of improved seeds in 2020 (AGRA, 2021). opportunities for higher-value production. Integrate screenings in public investments. • Investing in a ordable post-harvest and storage solutions. It is estimated that over 30 Recommendation 10: Promote uptake of agriculture percent of farmers’ losses in Rwanda comes insurance and collaborate with the industry to from poor post-harvest handling and storage. develop new products for di erent value chains in Drying and storage facilities can help secure the sector. income for farmers. Private investments in warehousing can provide post-harvest storage. Laying the grounds for an equitable agri-food sector Improved storage bags (like Purdue bags) can for the future be part of the solution.6 • Expanding access to irrigation to build Recommendation 11: Develop a food policy strategy resilience to droughts. Small-scale irrigation for local food sector development. e purpose of infrastructure—such as solar water pumps or such strategy is to ensure that local food markets are large-scale irrigation infrastructure—funded by well-functioning for both consumers and producers, public-private partnerships (PPPs) build resilience in order to adequate availability of healthy food (World Bank Group, 2022). e World Bank- Rwanda CEM | 2024 CHAPTER 5 169 funded Commercialization and De-risking for • Biochar production for carbon removal. Agricultural Transformation (CDAT) project Agricultural waste can be leveraged to produce will rehabilitate and develop new irrigation biochar which has substantial soil fertility schemes on over 17,500 ha and will apply bene ts, as well as the bene t of controlling the water-use e ciency technologies; the Gabiro pollution of groundwater through the reduced Agribusiness Hub Project will provide 15,000 use of chemical fertilizers. Additionally, ha of modern irrigation infrastructure. biochar sequesters carbon, which can be sold • Improving crop and livestock management on carbon markets. While largescale biochar through climate-responsive extension services production is expensive, there are several within a rainfed agricultural system. ere is small-scale biochar innovations that are being room to extend agronomic information and piloted, tested, and commercialized on a small- training to farmers to farm e ectively and scale across Africa that can be leveraged. Some e ciently in a rainfed environment (World of these are on-farm solutions and others are Bank Group, 2022). A few small-to-medium- on the community-level. Given the pace at scale private agents are starting to provide which technology, applications, and business these services. Managing soil health and water models are evolving, these technologies are carrying capacity via zero-/limited-till and likely to play an increased role in the next intercropping could be key. few years, particularly if they are successful in • Insurance innovation. E orts are currently leveraging carbon nance. underway to scale agricultural insurance for • Financing the expansion of tree crops such as all farmers under the National Agriculture co ee, avocado, and macadamia. e planting Insurance Scheme. Innovations to reduce the of trees including intercropping, provides cost of this scheme, as well as transparent and additional safety nets for farmers, such as timely payouts, are needed to increase access diversifying income, improving soil fertility and reach nancial sustainability. and preventing erosion. Box 5.7: Key recommendation: Soil-conscious conservation agriculture Deforestation and land degradation as well as the conversion of water catchments to agricultural land have resulted in reduced vegetation cover. The land area with high vegetation cover (forests, woodlands, grasslands, and shrublands) declined from 1,6 million ha in 1990 to only 914,000 ha in 2015, with croplands increasing from 614,000 ha to 1.3 million ha. This reduction in natural vegetation has led to increased runoff and river flows, which have increased water yield. However, this vegetation reduction has also led to an increase in landslides, soil erosion and, because of the reduced vegetation, to a decrease in infiltration and groundwater recharge. Districts such as Ngororero, Nyabihu and Rutsiro in the Western Province, and Gakenke and Gicumbi in the Northern Province, are most affected by soil erosion of 130t/ha/year, or more. The impact of erosion on the agrarian population of Rwanda is vast, compromising its social protection and increasing poverty. To combat further loss of soil and to enhance development as well as food and income security in the wake of climate change, it is recommended that a program on soil-conscious conservation agriculture and payment-for-ecosystem services be implemented, with the emphasis on the expansion of the network of terraces (both radical and progressive), which will increase soil carbon retention. This should be done with a strong emphasis also on crop rotation and intercropping—such as the use of bananas in coffee plantations—which will furthermore result in increased biomass production, increased yield, and the higher quality of the coffee. Another pillar of conservation agriculture is the use of no-tillage methods on most, if not all, croplands, which will result in an increase in soil organic carbon. In this context, it is important to eliminate the current subsidy on mineralized fertilizers, while enhancing the support of the production of organic and locally produced compost to promote soil fertility benefits and reduce the pollution of groundwater resources. There is thus a great opportunity and need for a country-wide educational program with respect to the principles of conservation agriculture and the implementation thereof. In addition, to encourage private sector investment in land and water infrastructure as well as related environmental interventions aiming at landscape and ecosystem restoration, payment for ecosystem services (PES) should be considered, and the proposed program could link to other PES initiatives. Supporting actions should include the development and distribution of climate-resilient seed, the investment in affordable post- harvest and storage solutions and the improvement of crop and livestock management through climate responsive extension services. There is room for growth to extend agronomic information and training to farmers. This could be supported by innovation with respect to insurance to reduce the cost thereof and to link it to climate-smart response mechanisms. Source: World Bank ( 2023) 170 CHAPTER 5 Rwanda CEM | 2024 Annex 5.1. Matrix of key policy recommendations: Modernizing agriculture productivity NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 3.4.1 Policy Area 1: Access to Markets and Farming as a Business. Priority Area 1: Encourage and Deepen Business-Oriented Farming in Rwanda. Integrate “Farming as a Business” in the Government Extension Model. MINAGRI- HP MT HF RAB-NAEB Promote development and scale-up of agri-tech innovations across MINAGRI- HP MT MF agriculture value chains (advisory and information services, ntech, RAB-NAEB- access to markets, data analytics, etc.) MINICT-RISA- BRD Priority Area 2: Promote Innovation and Generic Resources in the Seeds Sector. Modernizing the seeds sector with market demand driven basic research, MINAGRI-RAB HP MT MF private sector involvement in multiplication, and international seeds & RICA variety exchanges for improved genetic resources in Rwanda. Update related (demand driven basic research, multiplication, seeds MINAGRI-RAB HP MT MF variety exchanges, genetic resources) regulations. & RICA Priority Area 3: Support the Private Sector to Invest in Critical Infrastructure for Export Development. Enable and incentivize private investments in agri-logistics infrastructure MINAGRI, HP MT MF and cold chain development MINECOFIN, NAEB, RAB Remove bottlenecks for expanding exports MINECOFIN, MINAGRI, NAEB, RAB 3.4.2 Policy Area 2: Improve-Farm Productivity. Priority Area 1: Develop Sustainable Financing Strategies and Instruments. Finalize and approve the Agriculture Finance Strategy MINAGRI & HP ST HF MINECOFIN Finalize and approve the long-term strategy for grants vs. private nance MINAGRI & HP ST HF programs of agricultural projects. MINECOFIN Priority Area 2: Promote E cient Use of Water in Agriculture. Strengthen and scale up the FLID / SSIT and water use e cient MINAGRI-RAB HP MT LF technology programs. Test water user fee models to incentivize improved irrigation water MINAGRI-RAB HP MT LF management and adoption of sustainable water use management. Priority Area 3: Take Stock of Lessons Learnt from Support Programs to Small Scale Farmers. Evaluate support programs to small-scale farmers (e.g., grants and MINAGRI & HP ST MF mechanization) to assess investment returns and sustainability rates. MINECOFIN- BDF Adapt programs accordingly, to improve impacts. MINAGRI & HP ST MF MINECOFIN- BDF Priority Area 4: Strengthen Skills rough Vocational Training. Scale up vocational training for agricultural support services, including MINAGRI, & HP MT MF for SSIT, mechanization, cold chain infrastructure, food processing, and MINEDUC-RP other agri-food services. Develop start-up programs for agricultural support services, including MINAGRI, & HP MT MF for SSIT, mechanization, cold chain infrastructure, food processing, and MINEDUC-RP other agri-food services. Rwanda CEM | 2024 CHAPTER 5 171 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Priority Area 5: Build the Foundations for Food Security Risk Management, Relying on the PSTA-5. Conduct an agriculture and food security risk assessment. MINAGRI HP ST MF MINEMA Develop an agriculture and food security risk management framework MINAGRI HP ST MF for Rwanda. MINEMA Establish risk management measures accordingly. MINAGRI HP ST MF MINEMA Integrate screenings in public investments. MINAGRI HP ST MF MINEMA Priority Area 6: Increase Membership of Farmers to Insurance Programs. Promote uptake of agriculture insurance. MINAGRI- MP MT MF NAIS & MINECOFIN Collaborate with industry to develop new products for di erent value MINAGRI- MP MT MF chains in the sector. NAIS & MINECOFIN 3.4.3 Policy Area 3: Promote an Equitable Agro-food Sector. Priority Area 1: Establish the Foundation for Equitable Local Food Sector Development. Develop a food policy strategy for local food sector development. MINAGRI, HP MT MF MINICOM, MINALOC, NAEB, RICA, FDA, RSB Promote investments in market infrastructure for local consumption. MINAGRI, HP MT MF MINICOM, MINALOC, NAEB, RICA, FDA, RSB Promote investments in institutional infrastructure related to regulatory MINAGRI, HP MT MF aspects of marketing and processing, e.g., for food safety, employment MINICOM, regulations, etc. MINALOC, NAEB, RICA, FDA, RSB Priority Area 2: Enhance Private Sector Investments rough the PSTA-5. Establish a clear policy to promote private sector investments that is MINAGRI & MP MT MF separate from social protection policies. MINALOC Foster the commitment of private sector to practice sustainable land use MINAGRI & MP MT MF management. MINALOC Priority Area 3: Carry out Analytical Work and Policy. Analyze incomes and employment regulations (analytical work and policy). 172 CHAPTER 5 Rwanda CEM | 2024 Annex 5.2: Supplementary tables and gures Figure A5.1: Agriculture growth, 2013–22 Figure A5.2: Agriculture growth, 2013–22 (Percent changes) (Percent changes) Source: WFP Rwanda Country Brief, April 2023 Source: WFP Rwanda Country Brief, April 2023 Figure A5.3: Key agro-food imports to Rwanda in 2021 Key agri-food import Key agri-food export Source: Author based on FAO STAT database Figure A5.4: Rwanda’s food trade partners Food export partners Food import partners Source: Author based on FAO database 2021 Rwanda CEM | 2024 CHAPTER 5 173 Figure A5.5: Projected changes in Rwanda’s mean annual Figure A5.6: Projected changes in Rwanda’s mean annual temperature, by RCP temperature, by RCP Source: World Bank, 2021 Source: World Bank, 2021 TABLE A5.1: Expected annual damage to capital Type RCP Baseline 2010–2039 2020–2049 2036–2065 2071–2100 RCP4.5 0.19% 0.23% 0.26% 0.31% 0.37% Agriculture RCP8.5 0.19% 0.25% 0.28% 0.36% 0.74% RCP4.5 0.15% 0.19% 0.21% 0.25% 0.30% Built-up RCP8.5 0.15% 0.20% 0.23% 0.30% 0.62% Source: IEc (2022). 174 References AGRA. (2021). AGRA Supports the Seed System in Rwanda. Agra. Council of Smallholder Agricultural Finance. (2020). State of the Sector. CSAF. Retrieved from https:// csaf.org/wp-content/uploads/2020/07/CSAF_State_of_Sector_2020_FINAL.pdf De Hoyos, R., & Lessem, R. (2008). Food shares in consumption: New evidence using Engel curves for the developing world. Background Paper for Global Economic Prospects 2009. Washington, DC: World Bank. Government of Rwanda. (2019). Rwanda Rapid Post Disaster Needs Assessment (PDNA). Kigali: Republic of Rwanda. IFPRI. (2022). Rwanda: Impacts of the Ukraine and global crises on poverty and food security. Country Brief. Washington, DC: IFPRI. MINAGRI. (2020). Rwanda Irrigation Master Plan. Kigali: MINAGRI. MINAGRI. (2022). A Diagnostic Analysis and Proposed Management Models of Public Funded Agriculture Infrastructure in Rwanda. Kigali: MINAGRI. Ministry of Agriculture. (2022). Sustainable Agricultural Intensi cation Project Mid-Term Review Report. Unpublished. NAEB. (2019). National Agricultural Export Development Board (NAEB) Strategic Plan 2019-2024. Kigali: NAEB. NAEB. (2022). NAEB Annual report 2021-2022 - Agricultural Exports Performance. Kigali: NAEB. NAEB. (2023). February 2023 Statistics report. Kigali: NAEB. NISR. (2022). Comprehensive Food Security & Vulnerability Analysis, CFSVA. Kigali: NISR. NISR. (2023). Consumer Prices Index (CPI) - May 2023. Kigali: NISR. Rwanda Cooperative Agency. (2003). Statistics of cooperatives in Rwanda. Quarter three report FY2022-2023. Kigali: RCA. Retrieved from https://www.rca.gov.rw/index. php?eID=dumpFile&t=f&f=67416&token=19ad9a529584 e5638d7908caf9d8eb82cbb55c Sustainable Cold Chain in Africa Summit. (2022). Presentation by ESMAP: E cient, clean, cooling Program and World Bank cooling facility. Retrieved from https://united4e ciency.org/wp-content/ uploads/2022/03/Sustainable-Cold-Chain-in-Africa-Summit-presentations-20220318.pdf World Bank. (2020). Rwanda: Food Smart Country Diagnostic: Rwanda - Food Smart Country Diagnostic. Washington, DC: World Bank. World Bank. (2022). Food Secutity Updates of October 27, 2022. Washington, DC: World Bank. World Bank. (2023). World Agro Logistics and Cool Chain Investment: Technical Support to Kenya and Rwanda. Washington, DC: World Bank Group. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank. World Bank Group; Government of Rwanda. (2020). Future Drivers of Growth in Rwanda : Innovation, Integration, Agglomeration, and Competition. Washington, DC: World Bank. Notes 1 NISR agricultural seasonal surveys and FAOSTAT. 2 Rwanda Systematic Country Diagnostic 2019, World Bank. 3 Representative concentration pathways (RCPs) are utilized as examples of potential climate trajectories throughout the 21st century. 4 Includes MFIs and non-Umurenge SACCOs. 5 AgDevCo website (https://www.agdevco.com/our-investments/by-country/Rwanda) 6 Purdue bags are a triple-layer sealed plastic bag that cuts o the oxygen supply to create hermetic conditions, thereby eliminating insect damage in storage of dry grain. See https://www.purdue.edu/postharvest/purdue-improved-crop-storage-pics/. 7 One example is the use of gasi er cook stoves by farmers to produce biochar in Kenya. 8 One Acre Fund, Trees and Agroforestry, accessed in 2021. 176 CHAPTER 6 Rwanda CEM | 2024 PART 4: BOOSTING SUSTAINABILITY AND RESILIENCE Rwanda is highly vulnerable to adverse e ects of climate change. e country’s vulnerability is a function of, among others, the dominance of nature-based tourism, rainfed agriculture and other extractive industries in Rwandan economy. Compounding the challenge is the reality that the natural assets that underpin these economic sectors are also being degraded as a result of excessive exploitation. Poverty further exacerbates vulnerability—especially in rural areas, and among youth and those in female-headed households. e combined poverty-induced vulnerability and low degree of development limit the capacity of poor households and communities to be resilient to climate risk and climate-related shocks. e impact of climate change risks could be consequential for Rwanda’s economy in both the short and long- term. e 2023 oods and mudslides are estimated to require approximately US$356 million for recovery and restoration. is also resulted in the disruption of infrastructure-linked services. e CCDR estimates that if climate risks materialize, Rwanda’s GDP levels can drop by 5 to 7 percent below baseline in multiple years by 2050, with negative impact on private consumption, exports and government revenues. During years of severe oods (e.g., a 100-year ood) the extreme event could reduce GDP by an additional 4.4 percentage points below the baseline scenario for that year. Climate change is also expected to slow the pace of structural transformation in Rwanda, compromising future economic growth and poverty reduction. Climate actions, such as those speci ed in Rwanda’s Nationally Determined Contribution (NDC) could bene t the country. e Country Climate and Development Report (CCDR) for Rwanda (World Bank Group, 2022) nds that the implementation of Rwanda’s unconditional adaptation and mitigation commitments in its NDC (i.e., the actions the country plans to implement through 2030 using existing and planned domestic and external nancial resources) would substantially dampen the impacts of increased weather variability on GDP. ese NDC investments would boost industrial output and employment during project implementation compared to their baseline levels. e CCDR also concludes that conditional NDC actions (i.e., those implemented with non-domestic nancing) would boost the capital stock above the baseline by more than 4% on average in the late-2020s and by 1% towards mid-century. Boosting sustainability and resilience would bene t from addressing the threats of climate change using a multi-faceted and whole-of-economy approach. Fiscal space has deteriorated as expenditures have grown more rapidly than revenues, a trend exacerbated by the COVID-19 pandemic. Public debt has risen sharply compared to output, although sustainability risks remain moderate. Ensuring scal sustainability will require increasing public spending e ciency, mobilizing revenue, promoting a more e cient infrastructure spending system with greater private participation, and addressing the underlying challenges in human capital development. Rwanda CEM | 2024 CHAPTER 6 CHAPTER 6 177 Potential of Natural Assets and Environment To Contribute to Climate Resilient, Greener and Inclusive Growth Rwanda is expected to continue experiencing an is likely to experience future water resources increase in temperature, variability in rainfall and challenges across di erent geographical areas that increased intensity in precipitation going forward could hamper future growth and transformation in (World Bank Group, 2022). Floods and droughts the country (World Bank Group, 2022). have increased in Rwanda over a 30-year period and Rwanda’s Meteorology Agency attributes Climate change poses risks for Rwanda’s nancial the unusual rainfall patterns to climate change sector, primarily through the banks’ exposure to (World Bank, 2023). e Country Climate and disasters linked to natural hazards. As of June 2021, Development Report for Rwanda (CCDR) notes the nancial sector assets were equivalent to 69.8 that Rwanda is recognized as vulnerable to climate percent of GDP. e banks account for 66.9 percent change impacts—ranked 112 out of 185 countries in of the assets, and micro nance institutions (MFIs) the 2020 Notre Dame Global Adaptation Initiative and savings and credit cooperative organizations (ND-GAIN) Index.1 In Rwanda, the e ects of ood (SACCOs) account for 5.6 percent.2 Of the hazards have worsened as increased population nancial sector assets, mortgages for physical assets growth and land scarcity have pushed people to constituted 33 percent of total lending and are likely settle in ood-prone areas. Landslides and droughts to be exposed to physical risks from natural hazards. have resulted in increased human casualties as well e risks, however, are di cult to quantify with the as economic and environmental losses. available data. Other climate-sensitive sectors of the economy, such as agriculture, water, and energy, Climate change is likely to increase Rwanda’s are a relatively small share of the total bank lending developmental risk and vulnerability on various portfolio, and transition risks are possibly limited. fronts. e CCDR presents a detailed assessment of the impact of climate change on Rwanda’s economy. Boosting resilience against climate-related risks It nds that the impact of oods on manufactured require e orts to improve adaptive capacity in capital and assets is likely to increase over time under multiple sectors. e CCDR calls for action in all climate futures, with the impact on agriculture three priority areas, the rst of which is on people being greater than the impact on built-up capital. In and resource-oriented nature-smart development addition, the economy of Rwanda depends mainly which includes water infrastructure development on rainfed agriculture, which makes the country and management, soil-conscious conservation highly vulnerable to increased variability in rainfall agriculture, and sustainable and productive forestry frequencies and intensity, causing climatic hazards and collaborative management partnerships. Per such as droughts, oods, extreme temperatures, capita water availability in Rwanda is still low, and prolonged dry spells. However, with respect and disparities in access exist between urban to speci c crop yields, the responses to climate and rural areas. Furthermore, water resources in change are likely to vary by crop. Tourism, which Rwanda have experienced increased degradation is a signi cant contributor to foreign revenues is as well as increased demand. Water degradation is expected to be detrimentally impacted by climate increasingly due to siltation of water bodies caused change as warmer countries are likely to see a decline by land degradation, contamination through urban in tourism arrivals. Under a pessimistic climate and rural use, and poor wastewater management. scenario, Rwanda could experience a 20% decline Bolstering resilience in the water sector would in arrivals due to expected temperature increase. e bene t from ensuring water availability by increase in the intensity of the precipitation events expanding water storage through infrastructure will increase the exposure to landslides and the development. Considering the variability in vulnerability of citizens. Vulnerability to urban ood precipitation, complementing built-storage with risks will also be exacerbated by unmanaged urban natural storage (through wetland restoration and growth and the subsequent degradation of natural management) will ensure sustain bene ts from water resources and ecosystem services. e country resource management. Reducing the degradation 178 CHAPTER 6 Rwanda CEM | 2024 of water bodies from siltation and pollution will innovative nance from climate funds, the private also be important. Cost-e ective measures to sector, enhanced domestic climate nance, and reduce siltation of water storage infrastructure are other innovative nancing mechanisms crucial to key measures against degradation. Additional demonstrate impact and sustainability of climate e orts promoting sustainable waste management, action. namely through wastewater treatment, is also critical and can generate reductions in greenhouse Considering the wide-ranging nature of the gas (GHG) emissions. recommended actions for addressing climate change, these climate actions have been integrated e CCDR also recommends promotion of climate- into di erent chapters in the report. More compatible urbanization and embarking on a low- speci cally, there is a discussion on climate change carbon energy and transport pathway. e aim is and resilience, including on trade (chapter 3), to reduce the vulnerability of the average urban urbanization (chapter 4), and agriculture (chapter 5). household to climate hazards by ensuring key sectors Box 6.1 highlights the key climate actions proposed in urban planning, zoning, and building codes in other chapters in this report. avoid unintended lock-in impacts in the energy and transport system. Climate-compatible urbanization Land and nature play an important role in Rwanda’s also requires the capability to conduct ood current and expected to be important in future modeling and landslide susceptibility to determine growth and e orts to be resilient to climate change. how to best zone cities and protect existing critical Rwanda’s structural transformation has involved a infrastructure within oodplains. Interventions shift towards services with gains in productivity in on low-carbon energy and transport solutions for “traditional” manufacturing being limited. Agro- climate-smart development are oriented towards industry and horticulture value chains and tourism enabling Rwanda to maintain a low-carbon growth (dominated by nature-based tourism) are key trajectory. e CCDR recommends improving contributors to the rapid growth in services. With private sector participation and crowding in private 70 percent of Rwanda’s workforce involved either sector investment for high-impact projects. directly or indirectly in agriculture, investments for improving agricultural productivity will need e main climate change challenge for Rwanda’s to also be climate resilient. Such investments nancial system is to ensure the system continues would bene t from complementing capital to develop in a manner that is aligned with the investments with nature-based solutions. e vision of a low-carbon, green, sustainable economy. rationale for such complementary investments is Rwanda’s Green Growth and Climate Resilience well illustrated with the case of investments in Strategy (GGCRS) notes that one of the major irrigation infrastructure - resilience gains from impediments to the adoption and scale-up of investments in irrigation can also create risks green technologies is the lack of nance for such if the investments exceed capacity and create investments (Government of Rwanda, 2021a). trade-o s across water demand, and result in Rwanda has recognized the need for suitable stranded assets. Nature-based solutions can be a nancing mechanisms and facilities to acquire, use complementary investment that can support long- and transfer green technologies. is inevitably term storage and reduce the negative impact of requires Rwanda to undertake an ambitious low oods, droughts, and soil erosion on agricultural carbon and climate resilient pathway by ensuring productivity. Another example is the link of that all sectors of the existing economic model are nature-based solutions and capital investments as e cient and optimized as possible. erefore, in nature-based tourism (NBT). Infrastructure Rwanda must transition from short term project investments for boosting urban productivity to programmatic approach/platform nancing. also benefit from investments in the nature- is underpins speed and scale through enhanced based solutions as they are often cost-effective partnerships for leveraging additional and investments for climate resilience. Rwanda CEM | 2024 CHAPTER 6 179 Box 6.1: Highlight of key climate actions proposed in other chapters in this report The reliance on Rwanda’s growth to climate sensitive sectors exposes the country to climate change risks that can undermine the delivery of rapid and inclusive growth. Resilience to the potential impacts of climate change and benefits from opportunities presented by global trends to decarbonize supply chains reduce global carbon emissions call for a holistic approach; an approach that mainstreams climate considerations across sectors and the overall economy. The climate considerations highlighted in chapters, other than the current chapter, are summarized below: • The chapter on agriculture discusses the importance of CSA. The recommendations for implementing CSA include: 1. Promoting investments in improved on-farm technology to increase productivity and adapt to climate change 2. Developing start-up programs for cold chain infrastructure The chapter on agriculture also highlights the importance of promoting the uptake of agriculture insurance and collaborating with agroindustry to develop new products for different value chains in the sector (promoting value addition and diversification). • The coverage on urbanization underscores the importance on 1. Investment programs for urbanization accounting for climate change and environmental challenges 2. Ensuring that efforts to promote rapid urbanization are also climate compatibility—this could include, for example, prioritizing zoning to avoid settlements in flood-prone areas, investing in resilient infrastructure (e.g., drainage, nature- based solutions for flood-attenuation, and effective solid waste management to prevent drain blockage), minimizing growth of unplanned settlements and increasing the resilience of urban households to climate change hazards, and implementing land readjustment. 3. Maintaining a low-carbon urban footprint by investing in BRT and e-mobility • In the context of MSME development 1. Provision of skills development programs that respond to the needs of priority economic sectors with strong job creation potential should support the development of specific skills associated with climate change adaptation and decarbonization—for example, skills in developing and using the technologies associated with climate smart agriculture, in deploying and installing renewable energy, in developing carbon market projects and becoming a service provider (verifier) for carbon market. Recommendations include developing blended and online learning material for ‘green’ skills and ensuring the curriculum of TVETs and secondary and tertiary education include content that support ‘green jobs’. 2. Ensuring that efforts to expand the digital network is resilient to climate shocks and uses the latest climate smart and energy efficient network technology. • With regards to internalizing climate change in trade-related measures, the chapter on trade recommends: 1. Accelerating efforts to diversify exports, as climate shocks can undermine Rwanda’s competitiveness in specific export markets 2. Leveraging foreign investment to access global value chains and benefit from the associated knowledge, technology, and skills transfers. 3. Adopting regulations that support climate goals to create a level playing field for foreign investments in low-carbon technologies, services, and infrastructure (OECD, 2022). The discussion on social protection highlights the importance of a climate responsive social protection program and recommends: • Building flexibility into the existing social protection programs to for mitigation, adaptation, and response to shocks, enabling the program to offer well-functioning adaptive social protection (ASP). 180 CHAPTER 6 Rwanda CEM | 2024 e CCDR highlights that nature-based solutions as topsoil loss is estimated to be 25 tons per hectare (NBS) can also be attractive to the private sector. per year. Soil erosion has increased by 54 percent NBSs are de ned as actions to protect, conserve, since 1990 (NISR, 2019). In terms of soil erosion, restore, sustainably use and manage natural or an estimated area of 1,080,168 hectares (45 percent modi ed terrestrial, freshwater, coastal and marine of Rwanda’s land area) is at risk of topsoil loss. Soil ecosystems, which address social, economic and erosion alone has resulted in the loss of 6 million environmental challenges e ectively and adaptively, tons of crops each year, valued at US$76 million while simultaneously providing human well-being, (Rwf 76 billion). Nature-based tourism (NBT) is ecosystem services and resilience and biodiversity an important source of foreign exchange. Wildlife, bene ts (World Bank, 2023). In Rwanda, NBS which require healthy natural habitats, are the key opportunities that could be attractive to private natural asset for NBT. In urban areas, NBS o er sector include conservation through ecotourism, cost e ective measures to reduce the impact of reforestation and terracing on slopes to prevent climate events such as ooding. soil erosion and intercropping. CCDR underscores the importance of using NBS to protect ecosystem e Government of Rwanda has put in place services that help address climate change as the proactive policy measures to manage its latter alters natural cycles that are key for many natural assets and address climate change, yet sectors. Ecosystem services, such as nutrient implementation challenges linger. As a result, recycling, storm water management, and carbon Rwanda is still experiencing: sequestration need to be protected consider the 1. Soil erosion due to unsustainable land cover synergies between these ecosystem services, sector change and land use practices. Unsustainable productivity, human capital and green growth. For land cover change and inadequate land example, ecosystem services of water retention, management is exposing the agriculture, storm water management and pollination make energy, and urban sectors to climate risks (as a positive contributions to agricultural productivity. result of loss of nutrients in topsoil, increased risk of landslides during periods of heavy 6.1. Introduction precipitation, and siltation of water storage In Rwanda, natural assets o er both provisioning infrastructure). e loss of topsoil is estimated services (e.g., raw materials) and regulatory services to result in a societal loss of between US$476 (e.g., services that control water ow, erosion, and US$798 million per year (NISR, 2019). sequester carbon etc.) for the economy. Despite 2. Unsustainable conversion of native vegetation their importance, global data indicates that the (e.g., trees and forests, and wetlands). depletion of natural capital3 has lowered gross Deforestation and forest degradation national income (GNI) by a range of approximately negatively impacts wildlife habitat, results in 5.5 percent to 8 percent (World Bank, 2021). carbon emissions and lowers the potential for Unsustainable exploitation of these assets results sustainable timber production. In urban areas, in degradation and imposes a direct and indirect loss of wetlands and green lanes for water cost, setting back growth and a ecting household storage and ood control, increase ood risks incomes and livelihoods. in the built-up areas. Inclusive and climate resilient growth in Rwanda’s e Government of Rwanda’s ambition to sustain requires sustainable management of Rwanda’s high growth rates and ensure inclusive and resilient natural assets including land, water, forests, and growth will require, among other things, investing in biodiversity. As mentioned earlier, agriculture, natural assets (especially NBS) to augment resilience NBT, and cities are important part of Rwanda’s to climate change. e importance of restoration is economy and depends on natural assets. Agriculture re ected in various strategic Government documents is dependent on land management practices, water, including the Revised Green Growth and Climate biodiversity (for pollination), etc. NBS that involve Resilience Strategy (revised GGCRS, approved/ sustainable land management and reduce soil adopted by Cabinet in February 2023) and the erosion are important for agricultural productivity 2020 revised NDC. e revised GGCRS prioritizes Rwanda CEM | 2024 CHAPTER 6 181 four thematic program areas and two programs of revenue for the country and indirectly by bu ering action. e four thematic program areas are: (i) the impact of climate change on key sectors of the green industrialization and trade; (ii) green urban economy. e chapter also provides a brief coverage transition and integration; (iii) sustainable land use of options for maintaining a low-carbon growth and natural resource management; and (iv) vibrant path. e chapter highlights the tested technical resilient green rural livelihoods. e revised NDC and institutional measures that need to be further details adaptation and mitigation measures together supported, and nancing measures needed to with costed investments, program, and policies. All support the scale up of existing pilots and roll out measures are carefully designed to mutually reinforce of national initiatives that contribute to resilience adaptation and mitigation objective and contribute and low-carbon growth path. Linked to the latter, to meeting Rwanda’s development objectives. ese the chapter presents innovative approaches for priorities are translated into national development mobilizing nancing. sector priorities, including in the agriculture sector, that have a strong focus on reducing the losses from 6.2. Climate futures for Rwanda and their extreme weather events and climate change. economic implications Climate change is expected to signi cantly increase Designed and implemented appropriately, NBS can temperatures in Rwanda, and to increase the also contribute to mitigation of GHG emissions and frequency of large rainfall events, contributing to inclusive growth. Although Rwanda’s contribution ooding that will damage infrastructure (e.g., a to GHG emissions is low (i.e., 0.003 percent to substantial share of the road network is vulnerable global CO2 emissions),4 e orts to reduce emissions to landslides), reduce agricultural production, and sends positive signals to markets concerned about endanger human safety. decarbonization and can help mobilize climate nance. e agriculture, forestry, and other land A range of climate models converge on increases use (AFOLU) sector accounts for approximately in temperature a ecting Rwanda. Under di erent 74 percent, or 6.26 MtCO2e, with emissions from climate futures, the projected number of days with a livestock contributing the most (approximately maximum temperature exceeding 25°C is projected 29 percent of total emissions in 2015). Energy to increase from approximately 220 days per annum accounted for 18 percent. e CCDR analysis (p/a), based on the historical reference period, to revealed that if Rwanda implemented its NDC between 279 days p/a, and 307 days p/a by 2050 and invested in forests Rwanda could lower its for the optimistic and pessimistic scenarios.5 e GHG emissions beyond what is committed in its models project that the most signi cant increase NDC without compromising growth by 2030 and in the number of days over 25°C are expected to dampen GHG emissions out to 2050. Rwanda occur from October to May, a time coinciding could further reduce its emissions by deploying with rainfall and planting seasons for much of the low carbon energy and transport solutions and country (World Bank Group, 2021). Although the improving waste management (World Bank projected increases in temperatures for Rwanda Group, 2022). through mid-century are not expected to surpass critical biophysical or extreme heat thresholds, is chapter discusses how investment in and Rwanda’s broader climate is warming. management of NBS and the environment can reduce the Rwanda’s exposure to climate risks and Climate change is expected to increase the frequency environmental degradation, and opportunities of extreme weather events a ecting Rwanda. e for mobilizing climate nance to support these frequency of the largest precipitation events was and other key climate actions. It will present the calculated for the events that are expected to have expected climate future for Rwanda and the current a return period of 1, 5, 10, 20, 50 and 100 years, level of degradation of natural assets. e chapter under an average and pessimistic climate scenario also brie y discusses the relevant NBS for Rwanda, (see Figure 6.1 for 1-in-100-year ood). Across the and the potential for select NBS to contribute to ve provinces of Rwanda, frequency of extreme growth—directly through the creation of jobs and precipitation events is expected to increase under 182 CHAPTER 6 Rwanda CEM | 2024 the pessimistic climate scenario over time. is impact is on agriculture under a pessimistic climate implies a higher frequency of occurrence towards scenario, with the impact on agricultural yields the middle and end of the century. For example, the varying by crop and whether under the pessimistic large precipitation event that is normally expected climate scenario, the conditions are wetter or to occur every 50 years could occur every 45 or 37 drier.6 e direct e ect of temperature rise on labor years in an average or pessimistic climate scenario in productivity is expected to be relatively modest. the 2020–49 period. However, climate change has an indirect impact on labor productivity by having a detrimental impact ese anticipated climate futures are likely to impact on human health. Rwanda’s GDP (see Figure A6.1), developmental risk and vulnerability in terms of physical capital, 6.3. Status of Rwanda’s natural assets and implications for nature based solutions water, agriculture, and labor. e impact of oods on physical and produced assets is likely to increase Rwanda’s economy is heavily dependent on natural over time. In terms of physical capital estimated that assets, which are being degraded by excessive in 2015 approximately 45 percent and 39 percent exploitation and climate change. e reduction of paved and unpaved national roads were exposed of vegetation cover owing to conversion of land to landslides, respectively. In addition, 74 percent to agricultural use has increased runo and soil of district roads were also exposed to landslides erosion, which combined with inappropriate (MIDIMAR, 2015). Most of the road network in settlements and unsustainable agricultural Rwanda is currently unprepared for current and practices has impaired agricultural productivity. future weather events. In addition, the climate Unplanned land use also has degraded natural futures are likely to create a situation in which assets in urban areas. Rwanda is likely to experience a water supply gap and unmet demands across all sectors. According to 6.3.1. Status of Rwanda’s natural assets the Rwanda CCDR, the baseline scenario indicates e Rwandan territory is covered with diverse an increase in water demand of 83 percent by 2050 forms of natural capital many of which have relative to 2020, while a more ambitious growth path been degraded due to anthropogenic factors. e (i.e., Rwanda’s Vision 2050) will require an increase ecosystems across Rwanda include mountain in water demand of 1,140 percent. Even after rainforests, gallery forests, savannah woodlands, factoring in e orts to mitigate the potential impacts wetlands and aquatic forests and agroecosystems. of climate change on water availability (i.e., a Water e natural capital of Rwanda has been changing Resilient Vision 2050) there will be an increase in over the past decades. A review of the components water demand of 740 percent by 2050 over 2020 of natural capital stock reveal that croplands7 have levels. e anticipated impact of climate change on been expanding at the expense of other natural water demand underscores the importance of water assets. Examining Rwanda’s land accounts, reveals storage and better water resource management. that cropland area (annual + perennial) increased In terms of produced capital, the most notable by approximately 220,000 hectares (ha) from Figure 6.1: Damages and Losses from a Single 1-in-100-year ood under an average climate scenario Capital stock GDP at market prices 2 2 percent deviation from baseline 0 0 Percent deviation from baseline -2 -2 -4 -4 -6 -6 T e ood destr Th tr roys tro y 11.2% t e ood pushes GDP an th -8 ta of capita t l - 8 to t nal 4.4% points addito t belo ts l w lo th t e baseline -10 -10 -12 -12 2035 2040 2045 2050 -14 2020 2030 2040 2050 Average flood damage 100-yeare flood in 2036 Source: World Bank Group, 2022 Rwanda CEM | 2024 CHAPTER 6 183 2000–15, or 16 percent of the area in 2000. is savanna and shrubland area potentially re ecting suggests that the increased cropland value (which the expansion of agriculture and settlement. e increased by 45 percent between 1995–2018) large losses in shrubland and savanna result in an is a result of primarily increased area and some overall decline in the coverage of natural woody increased productivity. e expansion of area under habitats between 2009 and 2019 by around 11-14 cropland, however, is often occurring at the expense percent while plantations expanded by 30 percent of Rwanda’s forests, savannas and wetlands. Despite over the same period. e results underscore the this, there are indications that forest cover has importance of considering changes in the extent of stabilized and even increased in recent years. For the underlying habitat classes to capture dynamics example, Rwanda’s Forest Cover mapping report that are missed when looking at aggregate changes showed an increase in forest coverage between 2009 across the broad de nition of forest used in the and 2019, allowing the country to reach its target of Forest Cover Mapping report. 30 percent forest coverage. is increase was largely driven by the expansion of plantations rather than A concerted e ort will be needed to maintain this natural vegetation cover. progress towards reducing deforestation in the face Figure 6.2: Changes in the area of broad land cover of future increases in demand for agricultural land categories between 1990 and 2015 and woody resources. A consequence of reduced 1,400,000 vegetation cover is increased runo and river 1,200,000 ows, increasing the water yield (NISR, 2019). 1,000,000 Reduced vegetation has also resulted in decreases in 800,000 in ltration, and depletion of groundwater reserves (a form of water storage). Increased runo often Area (ha) 600,000 also means greater soil erosion and soil loss, which 400,000 has consequences for agricultural productivity. e 200,000 impact of erosion on the agrarian population of 0 1990 1995 2000 2005 2010 2015 Rwanda is vast, compromising its social protection Forest Shrubland Woodland Cropland Grassland Wetland and increasing poverty and increasingly threatening Source: Wilson, Turpie and Letley (2023). Using data derived from SERVIR and land food security. e cumulative e ect of watershed cover data destruction, inappropriate settlements, and Deforestation and land degradation in critical inappropriate agricultural practices have led to more watersheds and water catchments has been driven siltation, sedimentation, pollution, and the risk of by conversion of the land to agricultural. e invasive aquatic weeds. Deterioration in water assets land area with high vegetation cover (forests, is further exacerbated by climate-related impacts on woodlands, grasslands, and shrublands) declined water resources (World Bank Group, 2022). from 1.6 million ha in 1990 to only 914,000 ha in 2015, with croplands increasing from 614,000 e impact of natural asset degradation extends to ha to 1.3 million ha. Similarly, analysis of Global urban areas. Unplanned land-use change in urban Land Analysis and Discovery (GLAD) land cover centers threatens wetlands and results in pollution data indicates expansion of cropland between 2000 and poorly managed waste (wastewater and solid and 2020, though the increases are slightly less waste). e consequence of natural asset degradation pronounced than what is reported in the accounts. includes increased ood risks, biodiversity loss, and However, there are indications that deforestation an increase in the vulnerability of people in urban has stabilized in Rwanda’s Forest Cover mapping areas to climate events (including severe rainfall, report, which notes that tree cover (i.e., rainforest, landslides and heatwaves). e 2018 oods caused plantations, shrubland and savanna) increased damage to physical assets valued at Rwf201 billion from 670 000 ha in 2009 to around 720 000 ha and economic losses of Rwf21 billion (2.4 percent in 2019. Disaggregating forest data by habitat and 0.3 percent of GDP, respectively) (Government type reveals that the increase is due to expansion of Rwanda, 2019). Urban areas also endure the of plantations and a modest increase in rainforest consequence of the con uence of inadequate land area. Conversely, there is a signi cant decline in management and climate change on agricultural 184 CHAPTER 6 Rwanda CEM | 2024 production, as it can result in food price increases. expansion. e analysis compared the generation For example, prices of basic foods rose signi cantly of ecosystem services that are important for during a particularly long drought in 2016, a ecting climate resilience under a business-as-usual (BAU) all major cities. Secondary cities that are hubs for scenario, which was de ned as no changes in policy agro-processing (e.g., Nyagatare) also su er from or interventions to address the existing threats to the loss of crop and livestock as it has implications habitats and biodiversity, with a scenario which for production in the agro-processing sector located included implementation of improved landscape in the cities. management and restoration (referred to as an aspirational scenario). The latter included 6.4. Contribution of nature based solutions to expansion of the protected area network, the climate resilient and inclusive growth full roll-out of erosion control and restoration Measures to restore natural assets / NBS through measures proposed in the Catchment Restoration forest restoration and improved land use have Opportunity Mapping (CROM) exercise, generated positive bene t-cost ratios, especially improving vegetation cover in critical areas when combined with and economic activities. such as riparian buffers and steep slopes, and For example, interventions to restore habitats and plans for agricultural intensification and urban conserve biodiversity for NBT, if done in areas densification as detailed in the National Land Use where soil erosion is also a problem, can generate and Development Master Plan (NDLUMP). downstream bene ts by reducing erosion, and global bene ts by increasing biomass-based carbon e average biodiversity habitat quality could storage. Given the long history of land deterioration decline by 8 percent under a BAU future relative outside protected areas, NBS to restore these to current habitat quality. is was largely because degraded landscapes could contribute to improving of the extensive habitat transformation that has Rwanda’s low-quality habitats and augment the already occurred in Rwanda as re ected in the low NBT o ering in these areas. overall average habitat quality score for the country of 0.28.8 Most of the land cover changes under 6.4.1 Investing in NBS that can improve BAU scenario occur outside of protected areas, biodiversity habitat could also generate where remaining natural habitat patches are already climate relevant ecosystem services soil generally small with low habitat quality, thus their erosion control and carbon sequestration transformation makes only a modest contribution In Rwanda, implementation of a range of planned to further declines in habitat quality. A few main and proposed sustainable land management “islands” of higher quality habitat remain inside interventions (sometimes referred to as NBS) protected areas (Table A6.3). could o er meaningful bene ts for inclusive and climate resilient growth. Scenario modeling Landscape restoration e orts in the aspirational work was done to assess the potential impact scenario could have a positive impact on of implementing nature-based actions that are biodiversity habitat quality while improving proposed in various government commitments resilience to climate change. e aspirational and are meaningful for NBT and preservation scenario could improve habitat quality by 21 of ecosystem services that help address climate percent by 2050 relative to BAU and improve it change. e actions were primarily associated with by 9 percent relative to current land cover. While improved biodiversity protection, natural habitat an improvement, the overall average habitat restoration and more sustainable agricultural and quality score of 0.31 is still low and underscores urbanization practices. It included extending the the urgency of controlling cropland expansion protected area network, restoring degraded natural at the expense of natural habitats. e current vegetation, and improving vegetation cover in conditions reinforce the importance of prioritizing critical areas such as riparian bu ers and areas with conservation of existing biodiversity habitat in high erosion risk. e scenario modeling recognized protected areas and investing in intensifying future population growth and included expansion climate resilient agriculture in order to increase the of cropland and assumed continued settlement area available for landscape restoration. Rwanda CEM | 2024 CHAPTER 6 185 As Rwanda examines options for expanding its NBT areas could create opportunities for erosion o ering, it should consider how such investments control, carbon sequestration and local water could improve habitat quality and augment climate storage. e latter can also help create watering resilience concomitantly. Analysis by African holes that are important for the resilience and Parks reveals that the level of domestic visitation, survival of wildlife to drought conditions. combined with people staying, points to the Expansion of habitat through a multifunctional need for improved visitor management strategies approach to landscape restoration and which could be used to spread demand and avoid consideration for community engagement and crowding. A key part of such visitor management bene t-sharing could augment the contribution strategy is diversi cation of the NBT o erings. that investments in expanding the natural asset Expanding NBT o erings through expansion of for NBT has on augmenting climate resilience in nature reserves and bu er zones around protected the investment area. Box 6.2: Nature based tourism in Rwanda’s economy NBT is defined as tourism to experience natural resources in a wild or undeveloped form, is estimated to have constituted 80 percent of the visitors entering Rwanda for leisure. Rwanda’s key nature-based assets for NBT include three excellent tourism destinations—Volcanoes National Park (VNP) which has the habitat for mountain gorilla and is part of the UNESCO Volcans Biosphere Reserve), Akagera (ANP) and Nyungwe (NNP) which provide habitat for charismatic wildlife including the ‘Big Five’, and sites of scenic and scientific importance. Together these offer tourists the opportunity to visit diverse landscapes that provide habitats for diverse wildlife species has grown rapidly and generated substantial foreign exchange earnings. Available statistics from RDB (see Figure A6.3) indicate that the number of NBT tourists overall are relatively modest compared to total number of tourists, yet among the NBT tourists, foreign NBT tourists are relatively important share. The revenue from these NBTs visiting Rwanda’s three main national parks increased from approximately US$8.20 million in 2008 to US$27.3 million in 2022. Tourism generates substantial economic activity in and spillovers to other sectors. Hotels and other types of accommodation generate economic activity through backward and forward linkages to agriculture, fishing, and manufacturing. Tourist services and tourists themselves, through personal spending in and outside the tourist accommodation, increase the demand for transport, banking, insurance, telecommunications, medical, security and retail services, arts, entertainment, and recreation as well as for handicrafts and other souvenirs. Tourism leads to the creation of businesses related to water, mountain and adventure sports and other recreation activities, as well as every facet of travel and transport. Tourism linked services generated more than 43 percent of non-agricultural jobs.9 NBT plays an important role in job creation, especially in locations where there are few employment alternatives. The overall tourism sector has been a major source of quality jobs in the formal sector in Rwanda. The latest WTTC data (“total contributions of travel and tourism to employment”) suggests that tourism employment fell from 385 thousand in 2019 to 262 thousand in 2020, and recovered to 302 thousand in 2021, still below its pre-pandemic level. Based on annual Labor Force Survey (LFS) data, total employment in the tourism sector fell from about 10.4 percent of employment in 2019 (pre-COVID19 pandemic) to 8.2 percent in 2021 (post COVID19 pandemic).10 Yet, more than 24 percent of jobs in accommodations and food services are formal, compared to 13.5 percent for national average. The accommodation and food sectors are also more likely to employ women compared to the rest of the economy. While most tourism jobs are mainly urban and created in Kigali and districts with relatively lower unemployment and lower poverty compared to national average, formal NBT jobs can engage local community members in other parts of the country. For example, the Porters Cooperative operating in Kinigi (VNP) is composed of former poachers (Benitez et al., 2021) and in ANP, 50 percent of the park revenue in 2019 (US$1.25 million) paid salaries to 273 staff. Most (90 percent) of the people employed in ANP are Rwandan. Tourism also has a high job multiplier effect in Rwanda’s economy indirect connections to employment-generating activities in other economic sectors (e.g., agriculture, hospitality, transportation, etc.). A preliminary World Bank analysis of this multiplier effect indicates that for every US$1 million (about Rwf1,050 million) that NBT activities inject into the economy, an additional 1,328 new jobs are directly and indirectly created.11 These are spread across the transport, accommodation, and hospitality sectors and generated across the country, with the multipliers being found mostly in Kigali, followed by the eastern part of the country, and less prominently the western part (Figure A6.3).12 186 CHAPTER 6 Rwanda CEM | 2024 Targeted investments to secure Rwanda’s natural investment could potentially create additional capital for expanding its NBT sector o erings can jobs, including in lagging regions of the country. yield positive outcomes on scal sustainability and In the past, growth in Rwanda’s construction growth, regardless of nancing options (Figure sector bene ted from the construction of hotels. 6.3). Using the Rwanda Biodiversity Financial e number of hotels and similar establishments Needs Assessment (BFNA) as a proxy for the increased by 82.8 percent between 2013 and 2019, nancing needs for improving habitat for NBT, a reaching 722 in 2019. If the government plan for rapid analysis was conducted using a computable NBT infrastructure were implemented through general equilibrium (CGE) model. e nancing a public-private partnership (PPP), having a costs for implementing the NBSAP II are estimated signi cant share of private investment would result at US$97.5-107.7 million over 2019–2029/30 in a bigger gain than in any public nancing option (Masiga & Uwababyeyi, 2018). BIOFIN identi ed as the latter would require borrowing or imposition the nance needs for implementing NBSAP II over of taxes. two timelines (Masiga and Uwababyeyi, 2018):13 e recent Law no 001/2023 of 13/01/2023 1. 2018/19 to 2023/24 for the NST-1, the Governing National Parks and Nature Reserves aggregate nance needs were estimated at gazette on February 2, 2023, provides a robust legal between Rwf37.5 and 41.01 billion (equivalent basis whereby there are opportunities for private to US$44.3 and 48.4 million) sector to engage the diversi cation and expansion 2. 2018/19 to 2029/30 for the Sustainable of opportunities for NBT. e Law enables private Development Goal (SDG) planning period, sector engagement in the collaborative management the aggregate nance needs were estimated of national parks and nature reserves. It also at Rwf82.6 to 91.2 billion (equivalent to provides a legal basis for engaging communities US$97.5 and 107.7 million). that reside in the neighborhood of national parks e CGE results revealed that if the entire amount and nature reserve to play an important role in of the BFNA was nanced by borrowing, public environment conservation. A third aspect of the debt would decrease in 2025 from 74 percent of law that noteworthy is that it allows for a private GDP in the baseline to 70 percent, and in 2030 entity to own a nature reserve and its bu er zone from 62 percent in the baseline to 58 percent.14 in accordance with provisions of this Law, creating Relying in part on private sector to nance the opportunities to private investment in managing BFNA can generate a greater increase in GDP than the natural assets that are vital for NBT. relying solely on public resources. In addition to the economic bene ts from NBT, Figure 6.3: The impact on debt of investing in restoring and managing habitat for NBT the aspirational scenario could substantially reduce 19 annual soil erosion by 34.2 million t relative to BAU, a reduction of 49 percent. e amount of eroded 18 sediment reaching watercourses could decline by 5.1 million tonnes (t), a 57 percent reduction in 17 sediment export relative to BAU (see Table A6.1). Another bene t is from biomass carbon storage. 16 According to biomass mapping studies, Rwanda has managed to increase its stocks of carbon through tree 15 planting e orts on farmland and forest restoration 2022 Baseline 2025 Deficit financing Tax increase 2030 Private sector in recent years. Assuming these current levels of Source: World Bank sta estimate as cited in World Bank, 2023a tree planting continue, total storage of carbon in vegetation biomass could increase by around Investments to improve habitat quality would 3.9 million t under BAU, a 16 percent increase bene t from complementary e orts to mobilize over current levels. Additionally, ongoing tree private sector investment in resilient capital planting e orts could increase soil carbon storage infrastructure for tourism.15 Greater private sector by around 7.9 million t. While these e orts are Rwanda CEM | 2024 CHAPTER 6 187 commendable, further increases in tree planting on with e orts to upgrade bridges/culverts in farmland and restoration of natural habitats under ooding hotspots around the city, as much as 30 the aspirational scenario could result in even larger percent of transport related ood risk could be gains. e proposed interventions could increase averted. e design of the rehabilitation e orts, total storage of carbon in vegetation biomass by if done in a manner that factors in recreational around 9.1 million t over current levels, an increase activities, and aesthetic and amenity values, could of 38 percent relative to current, and 18 percent attract private investment in recreational facilities relative to BAU. Additionally, more extensive and and infrastructure that augment the access of denser agroforestry under the aspirational scenario wetlands to local communities and tourists. could increase soil carbon storage by around 11.3 Wetland restoration also assists with protecting million t, around 44 percent greater than the gain existing carbon stocks and increasing vegetation in soil carbon under BAU. cover. In the Second Rwanda Urban Development Project, nanced by the World Bank, the net present 6.4.2. In urban areas, NBS can contribute to value of avoided costs under two di erent ood ood attenuation frequency scenarios ranged from US$ 45 million to Nature based solutions are often an important US$ 90 million. part of e orts in urban areas to reduce ood risks. Urbanization plays a major role in Rwanda’s Rwanda performs well on considering climate strategy to facilitate the transformation of the change in public investment planning, and could national economy to become a developed country strengthen the operationalization of these plans, and is expected to occur rapidly. e government including in project appraisal phase. Integrating aims to increase the urban population from the climate considerations in the project appraisal current level of less than 30 percent to 53 percent would be bene cial for urban development (e.g., by 2035, and 70 percent by 2050 (Government of in solid waste management, mobility, industrial Rwanda, 2021a). Urbanization is projected to occur zones, housing and sanitation) and help reduce rapidly in Rwanda, underscoring the importance unintended consequences (both in terms of carbon of accompany the growth with urban planning, emissions and exposure to climate risks). It would zoning, and building codes. While urban planning also help ensure climate-informed planning results includes considerations regarding the transport in tangible outcomes and lower climate change system, energy e ciency, and how to facilitate related repair and disruption costs. NBS, that o er modal shifts towards zero-carbon transport modes, regulating services (e.g., regulating water ows), in the context of Rwanda, it should also assess the can reinforce design and technological measures to potential to use cost-e ective NBS to improve augment climate change resilience. climate resilience and sequester carbon. 6.4.4. Nature based solutions can augment the NBS, such as wetlands restoration, augment country’s wood supply in ltration capacity, retain storm water and reduce Sustainable forest management is a form of NBS the speed of stormwater runo while enhancing that can contribute to carbon sequestration and biodiversity, contributing to the resilience of erosion control while contributing to Rwanda’s the urban area. In the City of Kigali, wetlands economy by expanding its wood supply. Rwanda is that have been impacted by industrial uses and a wood de cit country and sustainable wood supply rapid urbanization. Wetland restoration can, in is well below the current wood use and bridging addition to helping ood attenuation, contribute the gap would require both improved management to improving water quality, enhance habitat of the existing production forests and the use of for biodiversity, and provide socioeconomic improved and more productive genetic material. bene ts. E orts to restore the wetlands in City With appropriate implementation of the National of Kigali are expected to avert damages in sectors Forest Policy (Ministry of Natural Resources, 2017) as diverse as agriculture (based on reduced ood and the Forest Sector Strategy Plan (FSSP) for risk in downstream areas) and transportation. For 2018–24 (Ministry of Lands and Forestry, 2018), transportation, if the NBS are complemented there is an opportunity to increase sustainable 188 CHAPTER 6 Rwanda CEM | 2024 wood supply. is needs to include both technical will also help to reduce greenhouse gas emissions. and institutional investments and changes: forest ere is considerable technical potential to achieve management needs strengthening, improved genetic deep cuts in emissions while still achieving ambitious material needs to be introduced and tree densities development targets. e impediments to reducing increased in agroforestry systems. Increasing access emissions are largely overcoming limits on capacity to and use of fuel-e cient stoves and sustainable and obtaining su cient investment. energy sources would reduce demand for wood. Majority (68 percent) of forests plantations/ In Rwanda there is value in investing in maintaining woodlots in Rwanda belong to private smallholder a low-carbon development pathway16 as it can owners. e woodlots are very fragmented and often improve the quality of growth17 and involve severely degraded (for example due to overreliance accelerating implementation of actions that boost on copping), yielding less than a 1/3 of their yield Rwanda’s resilience to climate risks (i.e., landscape potential ((4-7 m3/ha/year compared to 10-12 m3/ restoration and other nature-based solutions). e ha/year in optimal standard). is is due to poor primary source of GHG emissions in Rwanda is forests management practices, coupled with lack livestock (see Figure 6.4). However, forests serve as of capital investments in reconversion of very old a source of CO2 removals (see negative numbers forest stamps. in Figure 6.4). e removals from increased forest restoration and improved forest management Both the 2018 Forest Policy and 2018–24 FSSP could also create space for Rwanda to transition emphasize the role of the private sector and forest other sectors more gradually to a lower-carbon owners’ collaboration. e FSSP recognizes that footprint. Rwanda has prioritized transitioning most forest stands are too small to sustain an households from using biomass for domestic cooking economically viable operation. Incorporating these to cleaner energy sources, which is central to facilitate into larger scale economically viable groupings has augmenting removals from forests. ere are a range been frustrated by lack of essential inventory data of solutions being deployed to facilitate this transition and by an absence of a suitable owners’ organization and the government could leverage private sector and structure to manage their individual and collective climate nance to accelerate the process. interests. is could be alleviated through Figure 6.4: NDC emissions pro le, 2015–30, all sectors implementation of the measures in the Strategy MtCO2e such as facilitating organization of smallholders 15 into suitable Forest Owners Associations (FOA) 10 and support their capacity building in operational 5 and nancial planning and management. To further motivate private sector investment in the 0 timber industry it would be important to support -5 for growing more tree species that are valuable -10 and compatible with the climate such as species 2015 2020 2025 2030 that contribute to more carbon sequestration and Other energy Transport Manufacturing Waste Electricity IPPU Net emissions that can produce good construction material. Livestock Other AFOLU Forestland Increased production volumes and improved raw Source: (Government of Rwanda, 2021b) (Government of Rwanda, 2020) material quality would also help to develop the wood processing sector in Rwanda. Equally helpful A series of mitigation scenarios show signi cant for private sector engagement is providing grants technical potential for Rwanda to achieve deep through local investment vehicles for monitoring, emission cuts across all sectors, while advancing on reporting, and veri cation (MRV) e orts in the its economic growth agenda (World Bank Group, medium to long-term. 2022). Rwanda can achieve even greater reductions in GHG emissions by implementing changes to 6.5. NBS can contribute to maintaining a low- energy use over the coming decades. is could carbon development pathway include a combination of fuel switching to lower- Taking steps to improve resilience, for example carbon energy sources (for example, from peat, reducing the pace of converting forests to croplands, diesel, and gasoline to electricity, solar energy, and Rwanda CEM | 2024 CHAPTER 6 189 lake methane), fuel e ciency and fuel switching of GDP per year from 2020 to 2030. Mobilizing in the transport sector, and improved operational a wide range of innovative debt and non-debt e ciency. E orts to promote sustainable waste instruments could help mobilize climate nance. management measures could also contribute a Financing needs could be also reduced by shifting signi cant share to overall mitigation. Technologies existing expenditures to more climate-friendly such as land ll gas utilization, waste-to-energy, projects, and shifting taxes, subsidies and transfers composting and wastewater treatment alongside to favor climate resilience. Strengthening public reduction, reuse, and recycling policies can assist nancial management (PFM) and public investment with these changes. management (PIM) could provide additional and intermediate opportunities to advance Government’s e challenges to maintaining a low carbon growth e orts to implement climate resilient measures and path are mainly associated with overcoming promote low-carbon development. investment hurdles and capacity needs.18 e barriers to mobilizing private sector engagement in e Rwanda CCDR assessed that implementation the widespread roll out of low-carbon measures are of the climate actions presented in Rwanda’s policy, market and institutional. An example of a 2020 NDC, will attenuate economic losses policy related barrier includes the import duties on from climate change and enable the country renewable energy appliances. Similarly, an example to realize its broader economic development of a market related barrier includes the need to bu er objectives. Rwanda CCDR simulations of the risks associated with large upfront investments the NDC implementation also underscore needed for commercially viable energy providers the challenges associated with financing these to become involved with the grid energy. An actions (see Figure 6.6). The GoR estimated that institutionally related barrier is the absence of needed implementing the projects to meet unconditional skills to promote the use of greener technologies— NDC commitments would cost US$4.2 billion for example, the limited technical capabilities to between 2020 and 2030. Adding the measures roll out infrastructure and trained mechanics for needed to meet conditional commitments, potential new electric vehicles. Financing is also a would raise the total cost to US$11.0 billion. challenge and requires mobilizing nancing from This is equivalent to spending an average of equity investors and leveraging blended nance to 8.8 percent of GDP each year through 2030— make the capital investments needed to facilitate a exceeding the recorded and projected inflows of low-carbon growth path. official development assistance (ODA) and FDI between 2015 and 2030—and representing a 6.6. Mobilizing climate nancing for bolstering large share of domestic revenue collection or public resilience to climate change risks and main- investment spending during the same period.19 taining a low-carbon development pathway Given Rwanda’s limited scal space, identifying Meeting Rwanda’s NDC commitments will require additional sources of nancing—through policy, substantial resources, equivalent to 8.8 percent debt, and non-debt instruments to scale climate Figure 6.5: Projected NDCs costs compared to 2021 scal and external ows Unconditional Conditional Total 25 (Millions of US dollars 20 Mitigation 2,010 3,667 5,677 15 Percent Adaptation 2,145 3,218 5,364 10 Combined 4,155 6,885 11,041 5 Avg. annual share 0 3.3% 5.5% 8.8% of GDP, 2022-2030 2015 2020 2025 2030 Unconditional NDCs Conditional NDCs Share of 2020 GDP 43% 71% 114% Domestic revenue Public investment spending FDI ODA Source: World Bank Group sta calculations using GoR, updated Nationally Determined Contribution, 2020, and IMF-World Bank, Debt Sustainability Analysis (DSA) 2022 Notes: Average annual spending is calculated starting in 2022, the rst year of forward-looking projections in the DSA and the CGE model 190 CHAPTER 6 Rwanda CEM | 2024 and nature action—is crucial for the country to be recent e orts to craft a new PFM reform strategy able to sustainably meet its development needs in explicitly calls for green PFM practices, such as: the medium term. (i) incorporating environmental considerations into PFM strategies; (ii) promoting sustainable Rwanda can utilize a suite of instruments for resource management, including investments in mobilizing nancing for climate action—policy renewable energy; (iii) incorporating climate risk instruments, debt instruments and non-debt assessments in budgeting and nancial decision- instruments. Grants, biodiversity o sets, carbon making; and (iv) green budget tagging to enable credits, green value chain initiatives are examples monitoring of climate-related resource allocations of non-debt instruments that can nance and achievements. e current thinking in climate action. Debt instruments can range from Rwanda embraces frontier concepts such as using concessional and non-concessional loans to “use of the budget as an instrument to promote circular proceeds” bonds, sustainability-linked bonds and economy initiatives and aligning PFM strategies loans as well as debt for climate and nature swaps. with global sustainability goals. e Government aims to also strengthen sub-national PFM systems 6.6.1 Policy instruments for mobilizing to support districts in the implementation of nancing for climate resilience climate change policies. In this context, a whole- Between 2013/14 and 2019/20, GoR invested of-government e ort to green public spending and on average 4.3 percent of total expenditure on leverage the decentralization process to entrench environment and climate change. e national green public spending could assist with addressing government spent comparatively a higher average of climate change. 5.4 percent than districts whose average expenditure was 2.3 percent (REMA, 2022).20 ese investments Decentralization presents an additional and are aided by policies and strategies on environment intermediate opportunity to utilize public spending and climate change that are implemented across for climate change. Considering how climate risks di erent sectors of the economy. Further analysis can vary by location and tightening scal resources, of the expenditure showed that the government local governments would be well placed to select spent highest (2.1 percent) in adaptation-related and prioritize the resilience of local communities in activities, followed by 1.4 percent in environment their development planning and implementation. and 0.8 percent in mitigation activities. However, Understanding better the risk exposure of local the expenditure on adaptation declined from 2.6 communities and the resilient infrastructure gap, percentage points in the year 2013/2014 to 0.8 investments in infrastructure and social safety percentage points in the year 2019/2020. Building nets to build resilience against drought and oods on the achievements to date, GoR could deploy should be a core component of local development policy instruments to utilize available domestic plans. Greening current and planned public public resources more e ectively (e.g., through spending at the national and subnational level climate disaster risk screening) and ensure that ‘green’ should be the foundational principle underpinning investments are prioritized (e.g., through inclusion the PFM reform. of climate related criteria in public investment management). GoR could also deploy levies or In this context, two thematic priorities to repurpose existing subsidies that undermine climate operationalize green PFM can help the government resilience or include resilience criteria to determine mobilize nancing including as part of the subnational allocations. Such measures would help decentralization process: ensure that the expenditures achieve the envisaged i. strengthening the policy basis for closing climate resilience outcome. the climate resilient infrastructure gap in urban and rural areas. Understanding the In Rwanda, the green and resilient PFM and PIM ine ciencies in government nancing in the processes are core to facilitating the Government’s infrastructure sector and adopting principles climate resilient strategies, including to leverage the to reallocate spending toward more e cient country’s decentralization plans. e Government’s and sustainable outcomes at the national and Rwanda CEM | 2024 CHAPTER 6 191 subnational levels will be important in the expenditure management system, including at the prevailing macroeconomic reality. e PIM subnational level. is would help strengthen the system can play a key role in the transition to tracking of progress toward the achievement of the a climate resilient and low-carbon economy. NDCs as well as the case for increased access to GoR can consider: (a) establishing a legal, climate nance. Local development budgets can be policy, and institutional framework governing mandated or incentivized to prioritize the proposal climate-smart infrastructure investments and and implementation of investments that advance infrastructure maintenance at the national adaptation and resilience, particularly of urban and subnational levels, (b) crafting a medium- and rural communities and infrastructure against term public investment plan that addresses drought and oods. low-carbon transition goals at the national and subnational levels, and (c) developing 6.6.2 Debt and non-debt instruments for strategies for nancing this plan, climate nance ii. developing resource mobilization strategies Obtaining the nancing the adoption and scale-up to support climate action at the subnational of NBS and green technologies for climate resilience level. e national government may consider will also require mobilizing innovative nancing leveraging mechanisms such as budget (Government of Rwanda, 2021a). e 2023 reallocations, green bonds, dedicated national Assessment and Options Analysis of Climate and climate funds, insurance and guarantee Nature Financing Instruments and Opportunities nancing for local projects, and national in Rwanda identi ed, near-, medium- and long- intermediary institutions such as subnational term options for GoR to mobilize nancing (World development banks to support local and Bank, 2023). e analysis, which included debt and regional green infrastructure outcomes (some non-debt instruments, identi ed two instruments of which are discussed in greater detail below). that could have high impact and several that could be utilized in the near term (see Table 6.1). Rwanda’s rich endowment of ecological resources and protected areas o ers the opportunity for Increasing Rwandans’ low uptake of insurance could the implementation of innovative scal transfer help to bolster resilience to climate change. e mechanisms such as Ecological Fiscal Transfers insurance sector is at an early stage of development, (EFT). EFTs could incentivize local governments insurance penetration is low, and the sector has to take climate action based on their achievement limited exposure in property, agriculture, and of ecological indicators that measure preservation other sectors that are vulnerable to climate change. and restoration of natural capital. Climate change Currently nonlife insurance, which dominates the adaptation and mitigation could be added in gross written premiums, is heavily dependent on the Local Governments Own-Source Revenue motor and medical insurance products. Property Mobilization Strategy21 as strategic interventions insurance accounts for only 11 percent of total in the form of either subsidies or tax exemptions premiums, and less than 2 percent of the Rwandan to incentivize sustainability outcomes at the local population use microinsurance, of which level. Such incentives could involve the exemption agricultural insurance is a subcategory. Agricultural of property tax, or reduction of applicable rate, for insurance peaked in 2013 and failed to scale up example, when renewable sources of energy are used. thereafter.22 Currently, coverage in terms of crops It could also involve subsidies in the agriculture and locations is low, insurers’ technical knowledge sector to promote resilient agricultural practices. and nancial capacity is constrained, and the range of crop and livestock insurance products On the spending side of the budget, a framework available is restricted and not well suited to the to identify and tag climate-related expenditures risk management needs of smallholder producers can be developed and incorporated into the public (World Bank Group, 2022). 192 CHAPTER 6 Rwanda CEM | 2024 TABLE 6.1: Options analysis of di erent debt and non-debt instruments, including time horizon and indicative actions Type of Example Time Impact Instrument horizon Potential for Rwanda Non-debt instruments Grants Unlock undisbursed grant funding. Near Term Medium An e ort should therefore be made to increase the share of grants from current providers (Green Climate Fund (GCF), Global Environment Facility (GEF), Adaptation Fund (AF)), including bilateral and multilateral donors, with an emphasis on the donors that already provide budget support. It would also be useful to explore grants from new philanthropic organizations. ese grants can be structured into new forms of nancing, including viability gap funding for projects as equity capital for climate funds, a de-risking component of a project nancing, or to blend with other sources of nancing to bring the overall cost down. Wildlife In this innovative structure, investors agree to full/partial ordinary bond coupon from Near Term Medium Conservation IBRD to be diverted to nance conservation activities at the parks. is instrument was Bond successfully tested in South Africa for black rhinos, and it can be piloted in the Rwanda context to replicate it for a di erent species and landscape. is instrument can be scaled to other parks in Rwanda and beyond. Carbon O set Consider expanding its carbon o set veri cation program where possible. As of early 2023, Near Term / Medium Credits 87 percent of o sets generated in Rwanda come from adopting greener cookstoves, with Near-Medium the remainder split between di erent forms of clean energy production.45 ere could be Term space for Rwanda to expand this framework to support MRV for REDD+ o set credits. is would require development of the necessary infrastructure in the form of monitoring, reporting, and veri cation (MRV) systems and registry infrastructure. Debt Instruments Concessional Concessional loans can be blended with semi- or non-concessional loans to bring the all- Near-Medium High Loans in costs down for speci c budget or project investments in priority climate areas. Kenya Term can also explore more innovative nancial structures from these concessional and semi- concessional resources. For example, they can be used for liquidity backstops for climate- focused projects (e.g., to create a price oor under a power purchase agreement for renewable energy projects) to incentivize private sector investments. e environmental and social safeguards that are applied would also give added comfort to investors on the quality of projects Use of proceeds Finalize green taxonomy, green bond framework, preparation of pipeline of eligible Medium bonds (green projects, and mechanism for providing the investor with credibility and data to show the bonds, social debt will achieve the stated outcomes. bonds) Sustainability · Building on ongoing SLB e orts, explore options for expanding KPIs to include Medium- Very High linked bonds NDC targets. Long Term · KPIs should be realistically achievable, yet ambitious, scienti cally backed, and for issuance designed in partnership with external experts. is ensures transparency and improves the issuer’s perceived level of governance. · Consider using donor support for providing a guarantee to improve the credit rating of the instrument · Develop the necessary institutional capacity to independently ful ll climate and nature commitments in the agreed-upon timeframe Source: Potomac Group, 2023. Assessment and Options Analysis of Climate and Nature Financing Instruments and Opportunities in Rwanda. Technical Report prepared for World Bank Rwanda CEM | 2024 CHAPTER 6 193 6.7. Options for operationalizing greater developing the implementation capacity at the key resilience to climate risks government agencies (e.g., RDB, RFA, REMA, Policy measures to strengthen resilience to climate Rwanda Green Fund, etc.) and subnational entities, risks can be classi ed as those using NBS to reduce improving monitoring systems, improving scienti c vulnerability to climate events, those enhancing the knowledge (e.g., on climate models and biophysical contribution of NBS to development and those models), and improving labor skills to name a few. reducing greenhouse gas emissions. Given scal Strengthening local and regional planning will be limits, mobilizing private nance for climate change pivotal. Strong implementation capacity will ensure adaptation will be critical. ere could be potential resources are used e ciently and debt instruments to attract sustainability-linked nance by putting lead to improvements in climate resilience and in place the appropriate framework, particularly generate revenue. de ning credible key performance indicators related to climate resilience and GHG emissions reductions. 6.7.1. Policy measures for enabling NBS to Resilience to climate risks is imperative for both reduce vulnerability to climate risks Rwanda’s growth and to minimize the extent In line with GoR’s GGCRS, the following measures to which climate shocks diminish Rwanda’s would help scale up the application of NBSs to development gains. Use of NBS (in both rural and reduce vulnerability to climate risks: urban landscapes) at scale in combination with other • Reduce the pressure to convert natural solutions will be central to bolstering resilience to vegetation. climate change. • Use data to determine optimal approaches. • Build local monitoring reporting and is section presents some of the key policy veri cation (MRV) capabilities. measures for strengthening Rwanda’s resilience to climate change. e policy measures are divided into • Invest in ood control and water storage. three categories: (i) policy measures for enabling • Intercropping. sustainable implementation of NBS to reduce • Formalize and incentivize implementing NBS. vulnerability of a region or sector to climate events, • Reduce the growth of unplanned settlements (ii) policy measures for enhancing the contribution and reduce the vulnerability of the average of NBS to development; and (iii) policy measures urban household to climate change hazards. for maintaining a low carbon growth path. e • Encourage cities to include in their master other policy measures presented in this section, plans the greening of urban landscapes and such as the measures related to climate nance, are complementing e orts to integrate urban relevant for all climate action. e policy measures stormwater and drainage with e orts to restore are presented based on whether they are: (a) Short- wetlands. Term or Medium Term (ST or MT); (b) High or Medium Priority (HP or MP); and (c) High, • Encourage the mainstreaming of climate Medium or Low Feasibility (HF, MF or LF). considerations among the private sector. • Encourage the use of renewable materials is section underscores the importance of focusing (e.g., wood from production woodlots) in equally on both increasing climate nance and construction and other uses. improvements in implementation capacity (across government levels) to achieve the desired outcomes 6.7.2. Policy measures for enhancing the of improved resilience to climate change and low- contribution of NBS to growth carbon development. Improved access to public and e viability of NBS will be enhanced by ensuring private nance will allow increased investments to that the solutions contribute to creating jobs and NBT, NBS, renewable raw material production, generating revenue. ere are many commonalities etc., and improved policy implementation. While, and complementarities between the measures need improving access to “wholesale” nance is necessary to augment the contribution of NBS to growth it is not su cient. Improve capacity to utilize the and those described in section 6.6.1. ese policy nancing is equally imperative. is will include measures include: 194 CHAPTER 6 Rwanda CEM | 2024 • Increase awareness (through improved 6.7.4. Mobilizing climate nance extension and outreach) about a wider variety e revised GGCRS responds to emerging trends of trees suitable for agroforestry systems. and climate challenges and is an implementation- • Encourage private investments in urban ready, and reliable instrument for programmatic wetlands that could serve as hubs for approach to nancing to meet long term climate ecotourism and recreation through and green growth targets in Rwanda over the time collaborative management. horizons: 2030, 2035 and 2050. e Revised • Operationalize the law governing national GGCRS is structured to successfully deliver parks and nature reserves to enable increased climate compatible results based on programmatic private sector participation in the provision of investment planning. Importantly, programmatic NBT service. approach to climate nancing aims to catalyze • Enable sustainable and productive forestry for more systemic change at national and sub-national nancial and environmental bene ts. levels, increase e ciency and promote integrated cross sector coordination. A programmatic • Improving the management of existing forests approach also reinforces the country’s ability to and woodlots increases their productivity plan and program larger nancing streams under and carbon capture, using improved genetic one long-term multi-year and multi-phased material when replanting. approach, as is needed to strategically address • Establish a payment for ecosystem services and adapt to climate change. e programmatic scheme to cover the costs of reforestation and approach would also facilitate coordination terracing on slopes to prevent soil erosion. among nanciers of the program, enabling the • Finalize the carbon framework to enable leveraging of di erent sources of nancing. Such individual and collective owners of forests coordination would also augment predictability, and woodlots for which productivity has been exibility, transparency, accountability, and speed increased to bene t from carbon capture. of disbursement of climate nance to maximize bene ts, impact and sustainability. 6.7.3. Policy measures for maintaining a low- carbon growth path To support the implementation of the GGCRS and Mobilizing private sector engagement in reducing NDC, as GoR drafts its national climate nance GHG emissions will be central for maintaining a strategy (CFS), there is a unique opportunity to low-carbon growth path. As noted earlier in the highlight the importance of mobilizing nance for chapter, the barriers to mobilizing private sector adaptation. e CFS should articulate how, as part engagement in the widespread roll out of low-carbon of GoR’s e orts to capitalize the Green Climate measures are policy, market and institutional. Many Fund (formerly named FONERWA24) greater challenges are sector speci c (e.g., energy sector, emphasis could be given to mobilizing nancing agriculture sector, etc.). Below we highlight some against adaptation outcomes. e Climate Finance of the cross-cutting policy measures that are key for Strategy could also elevate the level of government greater private sector involvement23 across all sectors, coordination, including around project nancing by a few of which overlap with those mentioned in involving the Ministry of Finance (MINECOFIN) subsections 6.6.1 and 6.6.2. and Green Climate Fund in project preparation, and Ministry of Environment and its a liated • Improve access to nance (including long- agencies in direct oversight. In addition, the CFS term nance). should require the establishment of a climate • Build a cadre of adequately skilled personnel. nance information system to monitor nancing • Consider the adoption of innovative nance of climate and environmental protection sensitive mechanisms such as PPPs. projects and a regulatory framework for climate- focused nancial instruments. Rwanda CEM | 2024 CHAPTER 6 195 GoR could bene t from complementing the Green development activities while maintaining a low- Climate Fund fund-raising e orts with policy carbon footprint and to bolster resilience are vital measures that ensure the available domestic public for the country to be able to sustainably meet resources are directed towards climate resilient its development needs in the medium term in a infrastructure and interventions. is could include climate compatible manner. Instruments such measures to formalize the application of climate as Sustainability-linked bonds (SLBs) and loans disaster risk screening of public investments in the (SLLs) can be powerful tools to catalyze change government’s project pipeline and the Rwandan and accelerate achieving a country’s sustainable authorities taking meaningful steps toward goals25. Sustainability-linked nancing (especially reducing the information gap by including data SLBs) have been slow to take o in Emerging on a project’s contribution to reducing damages Markets and Development Economies (EMDEs), to land, labor, capital, and productivity (and other particularly for sovereigns and development banks. items needed to quantify economic losses from For lower-income EMDEs, it will be important to climate change) as part of the project appraisal, put in place mechanisms that help de-risk issuers, monitoring, and evaluation processes. e latter meet investors’ risk appetite, and embed nancial would help add climate resilience metrics to the incentives to commit and achieve credible key criteria for prioritizing and selecting investments. performance indicators (KPIs). is would complement the guidelines and criteria being considered in MINECOFIN’s Green and As BRD develops its KPI framework, including Climate Sensitive Project Pre-Screening and KPIs related to climate/ GHG emission reductions Selection Procedures (MINECOFIN, 2023). Such will facilitate mobilizing nancing for climate actions would send a positive signal to external action. e credibility of an SLB issuance rests investors regarding GoR’s commitment to reduce on the selection of one or more KPI(s) which are the country’s exposure to climate risks. credible. e KPIs should be central to the issuer’s sustainability and business strategy and address GoR’s e orts to develop a green taxonomy and relevant environmental, social and/or governance mobilize private sector nancing for sustainability (ESG) challenges. Consideration could be given to focused development should also be further including KPIs related to the NDC targets. is will supported. Considering Rwanda’s limited be critical to scale-up private capital mobilization scal space, mobilizing private capital to scale for climate action. 196 CHAPTER 6 Rwanda CEM | 2024 Annex 6.1. Matrix of key policy recommendations: Enabling greener and climate resilient growth NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency 4.6.1 Policy Area 1: Enable NBS to Reduce Vulnerability to Climate Risks. Priority Area 1: Reduce the Pressure to Convert Natural Vegetation. Accelerate the transition from fuelwood and charcoal-based cooking MoE, ST HP HF to improved and modern cookstoves. MININFRA, REMA Reduce the dependence on fuelwood and charcoal. MoE, ST HP HF MININFRA, REMA Priority Area 2: Use Data to Determine Optimal Approaches. Update continuously the spatial model developed by the government RWB ST HP HF for determining Catchment Restoration Opportunities. Utilize the information compiled (as part of this updating process) RWB ST HP HF to determine the optimal combination of soil and water conservation structures and restoration of vegetation to stabilize the structures. Priority Area 3: Build Local Monitoring Reporting and Veri cation (MRV) Capabilities. Address currently limited technical capabilities in MRV that are REMA ST HP HF forcing investors to hire foreign expertise at high costs. Position Rwanda as a proof of concept for new veri cation REMA ST HP HF technologies. Priority Area 4: Invest in Flood Control and Water Storage. Implement policies and programs for the sustainable management of water resources, to optimally accompany the Rwanda’s population that keeps growing and industrial development taking place. Invest in ood control and water storage to reduce risks and RWB ST HP HF manage uncertainty owing to the variability of precipitation expected to increase due to climate change. Increase adaptability of the population to preserve several RWB ST HP HF human activities that would otherwise be adversely impacted by precipitation variability. Priority Area 5: Promote Intercropping. Encourage smallholder farmers as well as large-scale exporters, such MINAGRI, ST HP MF as co ee exporters, to practice intercropping, building on the existing NAEB movement. Inform farmers on the bene ts of intercropping, which range from MINAGRI, ST HP MF economic revenues, erosion mitigation, added nutrient bene ts, and NAEB soil fertility. Priority Area 6: Formalize and Incentivize Implementing NBS. Formalize, for all sectors of the country, sustainable land use, MoE, ST HP MF catchment restoration and soil erosion control strategies that are MINAGRI coordinated and aligned, including with the agriculture sector. (RAB), RWB and RFA Strengthen tenure security through strengthening of property rights or MoE, ST HP MF introducing new institutional mechanisms that give households and MINAGRI rms an economic interest in preserving natural assets that provide (RAB), RWB ecosystem services. and RFA Rwanda CEM | 2024 CHAPTER 6 197 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Regularize ownership of forest land to allow private investment. MoE, ST HP MF MINAGRI (RAB), RWB and RFA Priority Area 7: Reduce the Growth of Unplanned Settlements. Reduce the vulnerability of the average urban household to climate MININFRA, ST HP MF change hazards. Rwanda Housing Authority (RHA) Engage in land readjustment, in parceling peripheral (but well-linked) MININFRA, ST HP MF urban land into grids in advance of settlement, and in sites and RHA services. Priority Area 8: Promote Sustainable Urban Development. Encourage cities to include in their master plans the greening of urban MININFRA ST HP MF landscapes. Complementing e orts to integrate urban stormwater and drainage MININFRA ST HP MF with e orts to restore wetlands. Priority Area 9: Encourage the Mainstreaming of Climate Considerations Among the Private Sector. Communicate widely on Rwanda’s investment opportunities in RDB, Rwanda ST HP LF conservation, to sensitize private investors about potentialities. Green Fund Coordinate a concerted e ort to increase understanding of climate RDB, Rwanda ST HP LF investment opportunities by the private sector. Green Fund Enable land aggregation, which could provide proof-of-concept for RDB, Rwanda ST HP LF land conservation in Rwanda. Green Fund Priority Area 10: Encourage the Use of Renewable Materials (e.g., wood from production woodlots) in Construction and Other Uses. Facilitate climate-friendly material substitution. MININFRA Improve the nancial performance of productive landscape restoration MININFRA and sustainable resource production. 4.6.2 Policy Area 2: Enhance the Contribution of NBS to Growth. Priority Area 1: Increase Awareness (through improved extension and outreach) About a Wider Variety of Trees Suitable for Agroforestry Systems. Raise awareness regarding the potential of the trees to protect soil RAB, RFA ST HP HF fertility. Support farmer resilience on small plots through more diversi ed RAB, RFA ST HP HF income and prevention of land degradation. Priority Area 2: Promote Sustainable Ecotourism and Recreation. Encourage private investments in urban wetlands that could serve as hubs for ecotourism and recreation through collaborative management. Prioritize development of the Nyandungu Urban Wetland of 130 ha RDB MT MP HF for botanical gardens, walking and cycling trails. Priority Area 3: Operationalize the Law Governing National Parks and Nature Reserves to Enable Private Sector to Invest More. Make additional investments in the reserves. RDB ST HP HF Expand the habitat available for biodiversity. RDB ST HP HF 198 CHAPTER 6 Rwanda CEM | 2024 NOTE: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Actions Priority Timeframe Feasibility Agency Priority Area 4: Enable Sustainable and Productive Forestry for Financial and Environmental Bene ts. Promote sustainable and productive forestry led by private entities RFA MT HP MF Support in parallel the production of renewable biomass that can be RFA MT HP MF leveraged to boost incomes. Improve the management of existing forests and woodlots, to increase RFA MT HP MF their productivity and carbon capture using improved genetic material when replanting. Priority Area 5: Establish a Payment for Ecosystem Services Scheme to Cover the Costs of Reforestation and Terracing on Slopes to Prevent Soil Erosion. Exploit any opportunities to engage the private sector where there are RWB MT HP HF potential cost savings. Prioritize, for instance, tea farms operating downstream, or RWB MT HP HF hydropower developers that could su er from siltation. Priority Area 6: Finalize the Carbon Framework to Enable Individual and Collective Owners of Forests and Woodlots for Which Productivity Has Been Increased to Bene t from Carbon Capture. Take advantage of still largely untapped carbon nance for Rwanda’s MoE, REMA ST HP HF clean energy solutions—solar energy providers, mini-grids, clean cookstoves, and hydropower, which could all bene t from carbon nancing from selling carbon credits. 4.6.3 Policy Area 3: Maintain a Low-Carbon Growth Path. Priority Area 1: Improve Access to Finance (including long-term ST HP MF nance). Support Green Climate Fund’s and BRD’s e orts in introducing MINECOFIN ST HP MF more nancial products on the market and tailoring such products to speci c commercial contexts. Support commercial banks capacity building initiatives related to MINECOFIN ST HP MF climate nance to increase investment in space and the creation of adequate nancial instruments for green businesses. For long-term nance, work with Rwanda Finance Ltd. To actively MINECOFIN ST HP MF identify and attract equity investors to Rwanda; Support and prepare Rwandan businesses to approach and appeal to MINECOFIN ST HP MF global climate investors; and seek blended nance to develop a locally appropriate and managed climate equity fund. Priority Area 2: Build a Cadre of Adequately Skilled Personnel. Support Green Climate Fund’s and BRD’s e orts to support technical Rwanda Green ST HP LF capacity building of climate businesses. Fund Implement an aggressive “investment promotion” to attract Rwanda Green ST HP LF sophisticated climate businesses to Rwanda. Fund Priority Area 3: Consider the Adoption of Innovative Finance Mechanisms Such as PPPs For Land, Infrastructure, and Housing Development. Promote PPPs for land, infrastructure, and housing development. MINECOFIN ST HP MF Rwanda CEM | 2024 CHAPTER 6 199 Annex 6.2. Tables and gures Table A6.1. Comparison of soil erosion and sedimentation rates across land management scenarios. Total soil loss (t/ Average soil loss (t/ Total sediment Average sediment Scenario year) ha/year) export (t/year) export (t/ha/year) Current 63 640 224 25.3 7 736 089 3.1 BAU 75 982 780 30.2 10 680 096 4.2 Aspirational 70 654 355 28.1 9 504 141 3.8 Note to reader – There is another scenario being run that considers more intensive agriculture and more urbanization (i.e., less rural settlement). These results will be updated once those results come in Table A6.2. Total biomass carbon storage across land management scenarios. Scenario Total AGB carbon (t) Total BGB carbon (t) Total biomass carbon (t) Current 14 721 077 9 850 292 24 571 369 BAU 14 010 901 8 897 656 22 908 557 Aspirational 14 803 871 9 689 929 24 493 800 Note: AGB: Above ground biomass BGB: Below ground biomass Table A6.3 Estimated habitat quality across scenarios, with percentage differences in quality rela- tive to BAU land cover. Scenario Total Habitat Quality Mean Habitat Quality/pixel % difference relative to BAU Current 415 614 0.16 8% BAU 381 413 0.15 - Aspirational 454 326 0.18 19% 200 CHAPTER 6 Rwanda CEM | 2024 Figure A6.1: Deviation of GDP from the baseline by Climate Scenario, 2020–50 Source: World Bank, 2022 (Rwanda CCDR) Figure A6.2: Snapshot on NBT in Rwanda a. International visitation to Rwanda (2008-2022) b. Number of park visitors to Rwanda’s National Parks by origin (2008-2022) 2,000,000 120,000 100,000 1,500,000 80,000 1,000,000 60,000 40,000 500,000 20,000 - 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2008 2009 2020 2010 2018 2022 2016 2015 2019 2014 2013 2012 2021 2017 2011 Transit/other Visiting Friends & relatives Rwandan residents Foreign residents Foreign visitors Business (with MICE) Leisure Source: WBG sta using data from RDB and NISR (2021b) Rwanda CEM | 2024 CHAPTER 6 201 Figure A6.3: Job multiplier e ect on activities closely related to tourism Source: McLiberty 2022, with data from the 2018 SAM of Rwanda and the Labor Force Survey 2018. Note: The spatial analysis was based on information provided by the SAM and the 2018 Rwanda Labor Force Survey that classi es the workforce in the 21 industries of the International Standard Classi cation (ISIC). 202 CHAPTER 6 Rwanda CEM | 2024 References Government of Rwanda. (2019). Rwanda Rapid Post Disaster Needs Assessment (PDNA). Kigali: Republic of Rwanda. Government of Rwanda. (2020). Updated Nationally Determined Contribution. Kigali: Republic of Rwanda. Government of Rwanda. (2021). Green Growth and Climate Resilience Strategy. Dra 15 June 2021. Kigali: Republic of Rwanda. Government of Rwanda. (2021a). Green Growth and Climate Resilience Strategy. Dra 15 June 2021. Kigali: Government of Rwanda. Government of Rwanda. (2021b). Rwanda First Biennial update report under the United Nations Framework Convention on Climate Change. Kigali: Government of Rwanda. Masiga, M., & Uwababyeyi, J. (2018). Rwanda Biodiversity Financial Needs Assessment, e Biodiversity nance initiative (BIOFIN), revised dra report. Kigali: Bio n, REMA, UNDP. MINECOFIN. (2023). Green and Climate sensitive project pre-screening and selection procedures. Kigali: Republic of Rwanda. Retrieved from https://www.mineco n.gov.rw/index. php?eID=dumpFile&t=f&f=67539&token=52f561784e8e3ab183bb16713f12465f7775be0b Ministry of Disaster Management and Refugee A airs (MIDIMAR). (2015). e National Risk Atlas of Rwanda. Kigali: Republic of Rwanda. Ministry of Lands and Forestry. (2018). Forest Sector Strategic Plan 2018 – 2024. Kigali: Republic of Rwanda. Ministry of Natural Resources. (2017). National Forest Policy. Kigali: Republic of Rwanda. NISR. (2019). Rwanda Natural Capital Accounts - Ecosystems. Kigali: National Institute of Statistics of Rwanda. REMA. (2022). Summary report for Rwanda Public Expenditure and Institutional Review for Environment and Climate Change (PERECC). Kigali: REMA. World Bank. (2021). e Changing Wealth of Nations 2021: Managing Assets for the Future. Washington, DC: World Bank. World Bank. (2023). Climate Change Knowledge Portal. Retrieved from https://climateknowledgeportal. worldbank.org/country/rwanda/vulnerability World Bank. (2023). Nature-Based Solutions for Climate Resilience in the World Bank Portfolio. Fiscal Years 2012-2021. Washington, DC: World Bank. World Bank. (2023). Rwanda Economic Update No. 20: Making the Most of Nature-Based Tourism in Rwanda. Washington: e World Bank. World Bank Group. (2021). Climate Risk Pro le: Rwanda. Washington, DC: World Bank Group. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank. World Bank Group. (2022). Rwanda Country Climate and Development Report. CCDR Series. Washington, DC: World Bank. Rwanda CEM | 2024 CHAPTER 6 203 Notes 1 e ND-GAIN Index (Notre Dame Global Adaptation Initiative. URL: https://gain.nd.edu/our-work/country-index/) ranks 182 countries using a score which calculates a country’s vulnerability to climate change and other global challenges as well as their readiness to improve resilience. is Index aims to help businesses and the public sector better identify vulnerability and readiness in order to better prioritize investment for more e cient responses to global challenges. e more vulnerable a country is the lower their score, while the more ready a country is to improve its resilience the higher it will be. 2 e pension sector represented 17% of assets, 95% of which is in the public scheme (Rwanda Social Security Board (RSSB)), and the remaining 9.2% is in the insurance sector (data from the National Bank of Rwanda, 2021). 3 Natural capital depletion includes net forest depletion, mineral depletion, CO2 damage, and air pollution damage. 4 https://databank.worldbank.org/source/world-development-indicators# as cited in World Bank Group (2022). 5 e optimistic scenario is one that uses a representative concentration pathway (RCP) 2.6, which, according to IPCC, requires CO2 emissions to start declining by 2020 and go to zero by 2100. is scenario will keep global temperature rise below 2oC. e pessimistic scenario uses an RCP8.5 which provides a useful (and not implausible) warming scenario. In this scenario, emissions continue to rise throughout the 21st century. 6 Maize, rice, and sorghum production performs better under drier and warmer conditions, while co ee and potatoes are negatively a ected. In contrast, banana and tea production bene t most under wetter and cooler conditions. 7 Croplands are estimated using data on production of crop and livestock production from FAOSTAT, valued with resource rent (prices from FAOSTAT times an average regional rental rate. us, cropland area does not come into play, just annual production. ey are valued by the annual production of crops and livestock products. Change in croplands measures change in value. It does not measure the change in area. 8 Considering that a value of 0 re ects habitat with no biodiversity value and a value of 1 re ects pristine natural habitat. 9 Tourism linked services are determined from the I-O tables. Data on employment in the tourism sector does not di erentiate between nature-based tourism and overall tourism. 10 Employment in transport and storage and accommodation and food service activities, which together account for about 78 percent of proxy tourism employment in 2021, has been more or less stable in recent years. 11 It is estimated that more than 70 percent of tourism visits in Rwanda is NBT. 12 e spatial analysis was based on information provided by the SAM and the 2018 Rwanda Labor Force Survey that classi es the workforce in the 21 industries of the International Standard Classi cation (ISIC). 13 Average exchange rate $1 = Rwf847.1 (BNR 2018, Oct.) 14 is is outcome is di erent from the assessment of the NDC nancing where de cit nancing would lead to an unsustainable scal situation (See World Bank Group, 2022a). e di erence of outcome is due to the fact that nature based-tourism nancing is less important (1.2 percent of GDP versus 11 percent for NDC). Furthermore, and most importantly, investments in nature-based tourism target speci cally natural capital with high return in terms of tourism receipts that lead to increased productivity, foreign exchange, and tax revenue. 15 Expansion of the sector will also require expanding necessary physical infrastructure in an environmentally sustainable and climate informed manner. 16 A low-carbon development pathway would enable Rwanda to achieve a net emissions pathway that is lower than the projected increase to 3.96MtCO2 by 2030. 17 Lowering GHG emissions would also reduce the impact of GHG emissions on pollution and public health. 18 Many of the abatement options that could be deployed in Rwanda are globally proven technologies. 19 ere is an open question regarding whether the $11.0 billion should be treated as already part of ’ versus additional to projected public investment spending. ere is no evidence that all or most NDC projects are already part of Rwanda’s public investment program, or that the NDC assumed that the NDC projects would replace others in the pipeline. In principle, some of the NDC projects could substitute for other planned projects (for example, renewable energy projects in the NDC might displace planned fossil fuel projects), and therefore not add to Rwanda’s projected public investment spending, while others seem more likely to have been conceived of as new projects that would supplement the public investment portfolio. e $6.9 billion estimated as needed to nance conditional NDC projects would be additional to projected public investment spending, and the $4.2 billion needed for unconditional NDC projects is su ciently large to require a substantial reorganization of the public investment program, whether or not it is additional to planned spending. 20 e national spending is within the range of spending environment and climate in countries such as Ghana, Tanzania and Kenya. 21 is was recently developed under the revised Decentralization Policy. 22 Currently, there are three insurance companies and two reinsurance companies in Rwanda that underwrite agricultural insurance programs. 23 Annex 8 of the technical appendix of the Rwanda CCDR (World Bank Group, 2022) presents recommendations towards li ing barriers for private sector involvement in the following sectors agriculture, forestry, land, water, grid energy, o -grid energy, clean cooking, transport, housing, and waste 24 Associated with the Green Climate Fund are three ‘sub funds’ - Ireme Invest, the Community Adaptation Fund (CAF) and INTEGO. Ireme Invest is the vehicle for mobilizing nancing for private sector engagement in climate action; CAF provided communities with access to nancing for collective e orts to boost resilience to climate change; and INTEGO provides public institutions in Rwanda, at central and local level, access to funding for climate change adaptation and mitigation projects on the priority issues identi ed in Rwanda’s NDC. 25 ese instruments are based on nancial incentives that link the borrower’s nancing cost to its ability to achieve KPIs- usually linked to climate and sustainable development objectives. 204 CHAPTER 7 CHAPTER 7 Rwanda CEM | 2024 FISCAL SPACE FOR RESILIENCE AND SUSTAINABLE GROWTH 7.1. Introduction doubling when compared to the levels at the second e objective of this chapter is to explore decade of the century. is constituted a vulnerable potential avenues for increasing scal space for starting point to face the subsequent multiple crises the government of Rwanda to nance the varying hit in 2020–22 (COVID-19 pandemic, the impacts development needs identi ed throughout the from the war in Ukraine – in ationary pressures, report. e chapter rst identi es how scal space global turmoil, and climate conditions), where the has narrowed in recent years and then outlines scal position worsening exacerbated, shrinking the the measures to ensure a sustainable scal outlook already narrowed scal space. while implementing Rwanda’ development initiatives identi ed in this report. is will require e central government scal de cit rose sharply enhancing domestic revenue mobilization and before the COVID-19 pandemic. e overall improving the e ciency and e ectiveness of public scal de cit deteriorated from 0.8 percent of GDP spending1, thereby creating more room for priority in 2008 to 5.1 percent in 2019, driven by rising programs. In this context, the chapter provides a expenditures and stagnation in revenues (relative comprehensive analysis of revenue mobilization to GDP). Massive government support in response and the quality of public expenditure. to the pandemic (COVID-19-related spending equaled about 3.6 percent of GDP in FY2020/21), After a concise analysis of recent scal a one percent decline in revenue in real terms, and developments and the short-term outlook, the the 3.4 percent drop in GDP boosted the overall chapter identi es the key action areas to cope with de cit to 9.5 percent of GDP in 2020 (IMF, 2021). structural challenges. ese include increasing Rapid recovery in revenue and gradual phasing out public spending e ciency, mobilizing revenue, of COVID-19 support supported a decline of the promoting a more e cient infrastructure spending de cit to a still-high 7 percent of GDP in 2021. system with greater private participation, and When considering debt service, arrears, and net addressing the underlying challenges in human lending, gross nancing needs hover around 20 capital development. e nal section o ers percent of GDP, double the pre-COVID levels. conclusions and key policy recommendations to enhance revenue mobilization and improve the Expenditures have increased over the past two quality of public spending, ultimately supporting decades, particularly driven by capital expenditures sustainable economic growth and development. with two large investment pushes (2013–16 and e overall objective is to provide policymakers in 2017–19). Primary expenditures of the Central Rwanda with a comprehensive understanding of Government expanded from an average of 22 the potential avenues for increasing scal space. percent of GDP in 2008–09 to nearly 27 percent of GDP in 2014, and after a brief scal consolidation 7.2. Recent scal developments and short-term period (2014–16), returned to 27 percent of GDP outlook in 2019, before soaring to an average of 30 percent Rwanda´s scal situation improved in the rst of GDP in 2020–22. Capital expenditures rose decade of the century allowing scal accounts to from more than 9 percent of GDP in 2008–09 to balance during 2004–09. From 2010–19 onwards the 13.5 percent in 2020, before receding to 11 percent scal stance became expansionary, mainly driven by in 2022. Current primary outlays increased more increasing expenditures. Overall scal balance, which rapidly, widening from an average of 13 percent of was slightly positive in 2008–09, displayed a downward GDP in 2008–09 to around 22 percent of GDP in trend since 2010 and reached a de cit of 5 percent 2022. Interest payments increased from an average of GDP in 2019. In parallel, public debt heightened of 0.4 percent of GDP in 2008–09 to 2.22 percent to around 50 percent of GDP in 2019, more than of GDP in 2022. Rwanda CEM | 2024 CHAPTER 7 205 Figure 7.1: Central government – overall balance, revenues, and expenditures 1990–2019 Overall balance (% GDP) Revenue and expenditure (% GDP) 4.0 40 2.0 35 0.0 30 - 2.0 Percent 25 Percent - 4.0 20 - 6.0 15 - 8.0 10 - 10.0 5 - 12.0 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 2000 2008 2006 2004 2002 2020 2010 2018 2022 1990 1998 2016 2014 1996 1994 2012 1992 Revenue Expenditure Source: MINECOFIN, BNR-National Bank of Rwanda and World Economic Outlook (IMF), October 2023. Historically, Rwanda´s public spending displayed a Nonetheless, this procyclicality seemed to reverse high procyclical behavior. e cyclicality of public in recent years. e massive o cial response to expenditure can be measured as the correlation mitigate the social and economic impact of the between real government expenditure and real pandemic (hence being countercyclical) was GDP (the business cycle). Over the last three immediately followed by a winding down of the decades, there seemed to be in Rwanda a clear bias extra-spending during the economic recovery towards overspending during good times (Figure (hence moving again against the cycle). Particularly, 7.3). In fact, according to a recent Inter-American the scal consolidation process envisaged for the Development Bank’s study, over more than 130 upcoming years in Rwanda indicates that this countries Rwanda displayed the most procyclical procyclicality impulses should be bounded, as stance over the period 1980 to 2016, with a economic growth is expected to accelerate while correlation of almost 0.9 (versus an average of 0.35 the rebuilding of the scal space is projected to be for the developing countries) between Output and expenditure driven. Primary spending (Pessino, Izquierdo, & Vuletin, 2018). Furthermore, Fuentes and De Soto (2022) Public expenditure in Rwanda displays space for locate Rwanda among the group of Procyclical rationalization so procyclicality impulses could be countries, according to their scal policy stance. restrained. Given that primary expenditures of the However, government expenditures have not central government (around 31 percent of GDP in always contributed to growth. Expenditure 2022) remain around 6 percent of GDP above the growth has remained elevated, with the high pre-COVID 5-year average (25 percent of GDP wage bill and interest payments contributing to in 2015–19), there is still a scope to reduce non- persistent budget rigidities. priority spending and improve e ciency gains. Figure 7.2: Central government – primary expenditure Figure 7.3: Central government – primary expenditure and and interest GDP growth (Percent of GDP) (Transit time in days) 40 35 30 25 Percent 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Primary expenditure Interest payments Expenditure Source: MINECOFIN and World Economic Outlook (IMF), October 2023. Source; MINECOFIN and World Economic Outlook (IMF), October 2023. 206 CHAPTER 7 Rwanda CEM | 2024 Figure 7.4: Central government – total revenues and 22.6 and 23.8 percent through 2019, and then main items (Transit time in days) averaged 24.8 percent of GDP in 2020–22. e relatively small rise in total revenues understates 23.3 23.2 23.8 24.9 23.6 23.7 22.9 22.6 23.8 23.1 23.9 24.6 25.2 the government’s scal e ort, as stronger domestic 22.6 22.2 20.0 21.0 20.6 20.9 revenue mobilization compensated for declining 18.3 17.9 17.2 17.2 external grants: total tax and non-tax domestic revenues rose from 12.6 percent of GDP in 2008– 09 to 18.7 percent in 2020–22, while grants fell by 4.3 percentage points of GDP over this period. Despite this rising trend, there remains considerable 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 room for increasing domestic revenues. Revenues Tax revenue Non - tax revenue Grants to the tune of three percent of GDP remain Source: World Economic Outlook (IMF), October 2023, Article IV – December 2023, World Bank Revenue Dashboard, Reviews for the Policy Coordination Instruments for forgone, due to tax expenditures. A review of the Rwanda (IMF) and author’s calculations. tax expenditure portfolio, including eventually the Revenues have increased relative to GDP, although removal of temporary exemptions, together with insu cient to avoid the recent worsening of the additional e orts to broaden the tax base and to scal de cit. e total revenue of the Central strengthen compliance, could signi cantly increase Government rose from about 23 percent of GDP in domestic revenue mobilization. 2008–09 to 23.6 percent in 2014, varied between 22.6 and 23.8 percent through 2019, and then As a consequence of the worsening scal position, averaged 24.8 percent of GDP in 2020–22. e public debt displayed an increasing trend before the relatively small rise in total revenues understates COVID-19 pandemic shock and was accentuated the government’s scal e ort, as stronger domestic in 2020 (though it remains sustainable). e public revenue mobilization compensated for declining debt to GDP ratio fell to 23 percent in 2006 amid external grants: total tax and non-tax domestic the multilateral and bilateral debt relief received at revenues rose from 12.6 percent of GDP in 2008–09 the completion point of the Heavily Indebted Poor to 18.7 percent in 2020–22, while grants fell by 4.3 Countries (HIPC) Initiative and remained roughly percentage points of GDP over this period. Despite stable for the next few years. However, expenditures this rising trend, there remains considerable room to support the National Strategy for Transformation for increasing domestic revenues. Revenues to the (NST) led to a worsening scal position, boosting tune of three percent of GDP remain forgone, due the public debt to 50 percent of GDP by 2019. to tax expenditures. A review of the tax expenditure Public debt then surged in 2020 as the pandemic portfolio, including eventually the removal of recession induced increases in expenditures and temporary exemptions, together with additional impaired revenue collection, while the 3.4 percent Public expenditure in Rwanda displays space for decline in GDP further increased the debt to GDP rationalization so procyclicality impulses could be ratio. Public debt reached 66 percent of GDP in restrained. Given that primary expenditures of the 2020 and has remained at roughly that level, as central government (around 31 percent of GDP in rapid growth in GDP was accompanied by continued 2022) remain around 6 percent of GDP above the high scal de cits (7.8 percent of GDP average in pre-COVID 5-year average (25 percent of GDP 2020–22). But despite the steep increase in public in 2015–19), there is still a scope to reduce non- debt, sustainability outlook risks remain moderate. priority spending and improve e ciency gains. e Joint Bank-Fund Debt Sustainability Analysis downgraded the evaluation from low to moderate after Revenues have increased relative to GDP, although the recent debt surge. Although this indicator is not insu cient to avoid the recent worsening of the yet at worrying levels, it also highlights the shrinking scal de cit. e total revenue of the Central scal space and the need for scal consolidation, in a Government rose from about 23 percent of GDP in context of important scal and growth risks linked to 2008–09 to 23.6 percent in 2014, varied between climate-related shocks (Box 7.1). Rwanda CEM | 2024 CHAPTER 7 207 BOX 7.1: Fiscal and growth risks from the macroeconomic impact of climate-related shocks Rwanda is experiencing rising temperatures, in line with global and continental patterns, while rainfall has also been uctuating. Temperature is approximately 1.25 to 1.5°C higher than preindustrial times and has accelerated from the 1990s. e main climate-related natural disasters that adversely a ect the population include droughts, oods, and landslides. ese are associated with damages to infrastructure, loss of lives and property including crops, soil erosion, and water pollution. A further rise in temperature across Rwanda is expected in coming years. Best estimates based on plausible emission scenarios indicate a potential for additional warming between 1 and 3 degrees Celsius. Projections of droughts at national level are very uncertain, but they can increase locally, especially in the eastern part of the country. Rwanda is also prone to hazard, exposure and vulnerability to volcanic eruption and seismic activities. On average, ve districts per year face serious natural disasters. But, in 2016 and 2018, the spread and severity of oods and landslides rose well above average, with over 2 million people a ected, and negative consequences for agriculture, trade, and industry. Building on lessons learnt over the past several years, the Government has shifted to a more proactive approach. e country has strengthened the institutional, legal and coordination framework for disaster risk management. MINECOFIN’s simulations of the impact of temperature changes show that, apart from a Paris scenario which sees a marginal improvement in GDP growth and level, under each of the climate change scenarios envisaged (moderate temperature, high temperature, hot temperature) there is a compounding decrease in annual GDP growth and the level of GDP. Based on an assumption of unchanged expenditure against baseline, and declining revenue in line with the lower levels of GDP, the primary de cit increases under each scenario except the Paris scenario, leading to an increase in net borrowing and the debt to GDP ratio. While the overall scal risks from the macroeconomic e ects of climate change are expected to be relatively modest, at least over the next 30 years, the impact from discrete scal risks – such as landslide causing damage to key public infrastructure or transitioning to a carbon neutral economy possibly a ecting the value of government assets -- could be signi cant. Recall that a discrete risk relates to a situation that may or may not occur; but, if it did, could negatively impact assets, liabilities, and government spending and revenues. e vulnerability to discrete scal risks increases when the capacity to absorb risks is low. Financially weak public corporations (PCs) and, more generally, thinly capitalized sectors such as agriculture and mining in Rwanda do not have the nancial capacity or access to nance to absorb the nancial consequences of natural hazards and climate change risks, and the cost is more likely to fall on the Government. A complete understanding of discrete scal risks would require further work to be done on the assessment and quanti cation of discrete scal risks in the coming year. e Government will continue scaling its response to disaster management, with a budget increasing regularly -- Rwf21.4 billion in FY2016/17 to 63.5 billion in FY2022/23. It prioritizes addressing the four levels of disaster risk nancing namely agriculture, housing, infrastructure, and environment, while strengthening disaster preparedness and management institutions. Government’s proposed actions include: • Mitigation measures: Increase the use of renewables; promote climate compatible mining; support improved livestock husbandry; scale-up energy e ciency in agro-processing; encourage o -grid and rooftop solar electri cation; expand soil and water conservation practices; promote electric vehicles and public transport infrastructure; and support adoption of on-farm biogas for energy. • Adaptation measures: Expand the utilization of integrated water resources planning and management; achieve diversity in local and export agricultural markets; adopt sustainable forestry, agroforestry & biomass energy; implement vector-based disease prevention; promote climate-sensitive integrated land use planning and spatial planning; enhance the capacity in disaster preparedness and emergency response; and build and use climate data and projections for EWS. Source: Rwanda Fiscal Risk Statement FY2023/24, Government of Rwanda, April 2023. 208 CHAPTER 7 Rwanda CEM | 2024 Over the short term, Rwanda’s development path is e weakening of the central assumptions on expected to include strong growth and signi cant which this outlook heavily relies could result and expenditure-driven scal consolidation in in a blurrier sustainability perspective. e order to stabilize public debt. Relative to output, current macro- scal outlook, which results in revenues are expected to normalize to historical a mild downward debt trend, involves the joint levels while total expenditure is projected to be materialization of sturdy GDP growth alongside reduced to 29.5 percent of GDP in 2023, in the scal consolidation (Table 7.1). advent that no major disrupting climate-related shock strikes the country with signi cant negative e structural challenge that Rwanda faces in the macroeconomic and growth impacts (see Box 7.1). next few years will be to ensure a growth friendly e drivers of this decline would be the phasing scal consolidation process while also addressing the out of scal measures taken to ght the COVID-19 closing of infrastructure and spending gaps. On the pandemic and SDR- nanced spending (the one hand, focusing solely on broadening the scal latter could contribute 1.3 percentage points space entails the risks of failing to meet the strategic of GDP), rationalization of spending through infrastructure gaps and harming the expected e ciency gains and digitalization, and better robust growth path -also crucial for ensuring the prioritization of the existing pipeline of public projected downward debt trend. On the other projects through the adoption of a medium-term hand, directing all of the e orts in boosting the investment program. e scal de cit is projected economic cycle without scal consolidation e orts to average 7 percent of GDP in 2023-24, while (hence exacerbating procyclicality) can jeopardize scal consolidation e orts are expected to return debt sustainability and the virtuous macroeconomic the de cit to pre-pandemic levels (around 3 path itself. Likewise, concentrating the actions percent of GDP) by 2027. Given the expected purely on closing the strategic infrastructure economic growth and gradual but steady scal gaps without seeking a growth-friendly scal consolidation, public debt is projected to stabilize. consolidation process can also hazard the pursued Central Government debt is projected to peak goal if sustainability concerns end up a ecting at 78 percent of GDP in 2024 and then slightly the economic cycle. In this sense, the structural reverse its upward trend in the following years, as challenge that Rwanda faces in the coming years the primary de cit is expected to decline from 4.2 is how to combine the needed scal consolidation percent of GDP in 2024 to 0.7 percent in 2027 process amid a growth-friendly environment while amid robust economic expansion. strategic gaps are being addressed (Figure 7.5). TABLE 7.1: GDP, Overall Balance and Debt (2019–28) Figure 7.5: The medium-term scal outlook and the (YoY real change, and percent of GDP ) structural challenges Indicator / Period 2019-22 2023-28 Macroeconomic Performance Fiscal consolidation (Real sector) (fiscal sector) Real GDP - average 6.3 7.0 Fiscal space is widened Economic rebound is although with large strong but fiscal space spillovers on activity Overall Balance (% GDP) - average –7.3 –4.8 is not widened and failing to close the gaps that can compromise sustainability, and failing to close the gaps Overall Balance (% GDP) - e.o.p –7.6 –3.0 CHALLENGE Average yearly increase in Public Debt (p.p. of GDP) 5.8 0.3 Public Debt (% GDP) - e.o.p 68.0 69.5 Gaps are closed Source: IMF, World Economic Outlook (October 2023) for historical data and Article IV although with a latent risk of negative (December 2023) for projections. spillovers from the fasal to the real sector Closing strategic and structural gaps Source: World Bank sta elaboration. Rwanda CEM | 2024 CHAPTER 7 209 e numerous avenues explored in this document private sector in the overall country investment (to aim at increasing the feasibility of meeting this reduce the reliance of public spending for meeting structural challenge, which shall result in better the strategic goals). spending practices and public resource savings. e di erent set of measures contained in this document For scal consolidation fully supportive of growth- can be conceptually grouped in actions to increase -at least from the expenditure perspective, Rwanda public spending e ciency (so as to increase the can rely on its reasonably strong scal discipline, growth-friendliness of scal policy), mobilize which explains (at least partially) betterment in revenue without raising legal rates (to underpin an expenditure execution rates. Considering the expected expenditure-driven scal consolidation implementation of PFM rules and regulations, process minimizing new burdens over the private the 2022 Public Expenditure and Financial sector), and increasing the participation of the Accountability (PEFA) of Rwanda concludes to the adherence to macro- scal and debt management Figure 7.6: Central government – overall and primary de cit practices that are consistent with reasonably (Percent GDP) strong scal discipline (Box 7.2). e 2022 - 1.8 - 1.3 - 1.5 - 1.4 - 3.8 - 2.0 - 7.9 - 5.2 - 4.4 - 3.2 - 4.1 - 2.4 - 1.8 - 1.5 PER of Rwanda highlights important progress - 2.3 - 2.5 made by Rwanda for instance in rationalizing - 2.7 - 2.6 - 3.0 - 3.0 - 4.2 - 3.4 and controlling (“austerity” e orts) its highly - 5.1 - 5.4 - 6.1 rigid expenditures items, e.g., compensation of - 6.5 - 7.0 employees and public debt service payments. But - 9.5 these e orts need continuous monitoring and greater stabilization. As Rwanda solidi es scal 2023p 2024p 2025p 2026p 2027p Avg. 15 -19 2020 2018 2015 2016 2019 2022 2017 2021 discipline, expenditure execution rates reach Primary deficit Overall deficit increasingly high levels--e.g., 85 percent on average Source: World Economic Outlook (IMF), October 2023, Article IV – December 2023, in 2017–19, indicating greater (allocative and World Bank Revenue Dashboard, Reviews for the Policy Coordination Instruments for Rwanda (IMF) and author’s calculations. technical) e ciency achievement2. Social functions BOX 7.2: Rwanda’s PFM practices are consistent with reasonably sound scal discipline e level of compliance to PFM rules and regulations in Rwanda is consistent with PFM performance and institutional arrangements that re ect reasonably sound scal discipline. e speci c elements that follow are worth underscoring: • Aggregate revenue and expenditure outturns are assessed to be reliable, alongside their respective composition. • e low levels of in-year budget reallocations, which are done within clear guidelines and strict limits, enhance scal discipline. • Its robust and veri able macroeconomic and scal projection framework, which supports revenue forecasts, is functional and bodes good for quality scal projections. • e general internal control framework shows reasonable performance, with the existence of PFM laws and regulations that provide clear guidance on the segregation of duties, supported by political will to enforce PFM laws. • e inclusion of all expenditure in nancial reports and the timely submission of nancial reports by extrabudgetary units to the government are e ective. is is facilitated by the low level of revenue and expenditure of extra-budgetary units outside central government operations. • Sound cash management framework, together with sound public investment and payroll management systems, contribute to strengthening scal discipline in Rwanda as well. • e e ectiveness of expenditure commitment control framework is another booster of scal discipline in the country. • A strong debt management system, in addition to the comprehensiveness of recording and reporting on central government scal risks, contributes positively to scal discipline. Source: The 2022 PEFA of Rwanda report. 210 CHAPTER 7 Rwanda CEM | 2024 like education and health present execution rates 7.3. Fiscal implications of future drivers of above 90 percent, moving above 100 percent in growth some years, e.g., linked to support measures related is report has identi ed several new expenditure to the COVID-19. Infrastructure sectors, which needs to drive Rwanda’s growth. For example, tend to be intensive in capital spending, present Chapter 2 discusses an investment program that execution rates below 80 percent, with acquisition promotes a more balanced approach across cities, of xed assets dragging them down. While including new transport infrastructure to increase preventing faster progress in expenditure execution connections between cities. It also describes the rates, such signi cant (sectoral) di erences re ect expenditure needs of a social protection system remaining ine ciencies in budget planning and that aims to provide lifecycle universal coverage execution a ecting mostly infrastructure sectors. and as such will need to expand its coverage, A lack of stability in execution rates is another sign improve the adequacy of transfers, and increase its of ine ciencies3, which may delay scal discipline nancing sources. Chapter 2 proposes expanding from reaching its full potential impact in terms of government programs to support enterprise growth supporting growth-friendly scal consolidation. including investments in skills upgrading, credit reporting systems, and digital public infrastructure, Further progress toward fully sound scal among other new programs. Chapter 3 proposes discipline, as may be witnessed by high and new investments to reduce trade costs while stable execution rates, shall be pursued through increasing revenues, including improving logistics addressing some important challenges. e respect and trade transport infrastructure. ese additional of budget appropriations (approved budgets and expenditure needs represent an enormous share of even revised budgets) should be rmly enforced, government revenues or investment spending at a with signi cant deviations kept exceptional and time when scal space is already limited. well explained thanks to user-friendly guidelines/ reminders hammered to “o ending” budget e identi ed expenditure requirements in some entities. is would entail in-year (periodic) reviews chapters are substantial. In Chapter 6, for example, and updates of the cost of sectoral multiyear plans. a low-carbon growth path that meets Rwanda’s is will help ensure that actual programs and NDC unconditional commitments will require ensuing costs are consistent with the medium-term signi cant additional resources equivalent to resource envelope, thus providing robust inputs about US$4.2 billion. Together with conditional into medium-term scal framework (MTFF) and commitments, the required resource more than medium-term expenditure framework (MTEF). doubles to US$11 billion. is will amount to is upstream step to Parliament’s budget expenditures of nearly 9 percent of GDP each year discussions and enactment of appropriations through 2030. is projected new expenditure is could bene t from a refresher regularly a orded estimated to be larger than all of aid and foreign to MINECOFIN through a capacity building and investment ows combined. modeling program focusing on credible/ reliable approaches to assessing and timely correcting Some of these expenditure needs could be eased forecasting errors, with perhaps a special attention by the greater participation of the private sector. to those emanating from weaknesses in project Chapter 5, for example, discusses incentives to appraisal and costing. To ensure that budget increase private sector investment in agriculture outturns get consistently closer to original budgets infrastructure, such as storage facilities and last mile (downstream step), it is important to tighten connectivity. Chapter 2 discusses ways to increase guidelines on virements4, seriously take stock of private sector participation in skills upgrading, arrears in the view of eliminating them5, and deepen such as through skills audits led by private rms spending units’ understanding of commitment to identify possible improvements to existing registration for multiyear contracts and projects. curriculum. Rwanda CEM | 2024 CHAPTER 7 211 7.4. Potential avenues for expanding scal space pre-pandemic levels, indicating space for some in Rwanda rationalization of expenditures. Rwanda’s high Rwanda can reduce expenditures by limiting spending relative to peers re ects the country’s public employee compensation, achieving greater ambitious scal policy that led to exceptionally high e ciency in health and education spending, growth before the pandemic (the second highest in improving technical and allocative e ciency of the continent after South Africa). e gap between public investment, and improving SOE governance Rwanda and its peers was accentuated in scal to mitigate contingent liabilities. E orts to years 2020–21, re ecting the robust government increase tax revenues could focus on reducing tax scal stimulus to respond to the crisis through the exemptions and enhancing selected excise tax rates. economic recovery plan. Greater private sector investment in infrastructure should be encouraged to maintain critical services A substantial share of Rwandan spending will be without overburdening the public budget. di cult to adjust in the short term as expenditure displays constraints regarding the presence of rigid e challenge Rwanda faces is to reduce scal items. Around 60 percent of Rwandan expenditures expenditures without deferring the achievement between 1990 and 2018 were allocated to items of critical development goals, such as closing classi ed as high to medium rigidity, largely the infrastructure gap and improving the living compensation of employees, purchase of goods and standards of the population. e scal consolidation services, interest payments and transfers (subsidies, process should be carried out in an e cient fashion grants, and social bene ts), for which the authorities that minimizes negative spillovers on economic have a very limited margin to modify during a growth. Also, alternative actions should be explored scal year. is limits the government’s ability to to prevent other equally important structural reallocate expenditures to priority and pro-growth challenges from becoming an adjustment variable. programs like public investment. e following sections discuss scal measures in further detail. Potential gains for improving e ciency in health and education spending. 7.4.1. Improving the primary balance— Investments in the health sector are generally rationalization of recurrent expenditures put to good use in Rwanda, but there is margin Rwanda’s total public spending is higher than for improvement. Cross country e ciency pre-pandemic levels and higher than regional and analysis suggests Rwanda to be a high e ciency aspirational peers. Primary spending in 2022 stood country with regards to translating inputs into at about 4–5 percentage points of GDP above health services. Given its level of current health Figure 7.7: Total expenditure – Rwanda vs. peer countries expenditures, Rwanda performs signi cantly better (2015–21 average, percent GDP) than peer countries on the universal health coverage (UHC) e ective coverage index6. For example, 31.3 28.1 27.9 while Rwanda spends signi cantly less than South 25.9 24.7 23.0 21.7 21.7 Africa, its service delivery output is comparable. 19.0 17.7 16.9 Yet, Rwanda is less e cient at translating service 16.1 12.6 delivery outputs into better performance, indicating need for greater emphasis on service quality and population health interventions. Relatively high e ciency in the production of services should a da a i a nd a m ka da ia ia sh nd ric di ny encourage the government to allocate more an na an an op an la an de In ru Af Ke Gh ai et nz Rw hi iL Bu Ug la h Th Vi Et Ta ng Sr ut So Ba resources to the sector. Source: MINECOFIN and World Economic Outlook, IMF (October 2023). 212 CHAPTER 7 Rwanda CEM | 2024 Based on the Public Expenditure Review conducted training programs by harmonizing the content and by the World Bank, measures to improve e ciency objectives of di erent interventions, raising the of health sector spending include: i) reallocating level of expected impact of teacher training, better funding from vertical disease programs (HIV/ aligning it to the needs of teachers at schools, AIDS and malaria) to RSSB/CBHI bene ts and reducing turnover of teachers. e large package based on claims analysis7; ii) reducing number of teachers with no formal educational administrative costs of RSSB from 21 percent to training, as recruited during the pandemic, under 10 percent, as in many OECD countries; iii) raises similar concerns of quality and e ciency strengthening facility management by reducing of spending; iv) ensure better use of data in fragmentation across nancing sources; iv) decision making, for example, identifying the developing a PFM reform roadmap that will link between nancial resources and student foster e ciency and accountability across the learning outcomes at school levels by making budget cycle through a close collaboration student learning outcomes readily available at between MINISANTE and with MINECOFIN; disaggregated level (schools and districts). and v) revising the adequacy of social security contributions which at 16 percent of gross wages 7.4.2. Capital expenditures seem high and could potentially represent a tax Capital expenditures as a share of GDP were burden to the competitiveness of the private signi cantly higher than in comparator countries. sector while encouraging contribution evasion. Between 2015 and 2019, Rwanda’s capital expenditure averaged 13.0 percent of GDP, E ciency gains in the education sector budgets compared to 8.5 percent of GDP in Ethiopia, could contribute to scal consolidation. Education 5.3 percent in Tanzania, 5.4 percent in Uganda spending increased by 57 percent in 2020/21, after and 5.7 percent on average in SSA. e share of modest increases in real terms over the preceding capital expenditure in non-interest expenditures four years. Shares of education spending in total averaged 41 percent in Rwanda between 2015 government expenditure and GDP reached 13.7 and 2019, while it was 47 percent in Ethiopia, 33 percent and 4.5 percent, respectively, in 2020/21, percent in Tanzania and 37 percent in Uganda. e close to the globally recommended spending level SSA average was lower than in any of the above- (15 percent and 4.5 percent, respectively). is mentioned countries, with capital expenditure re ected increases on school construction while accounting for 26 percent of total primary schools were closed, the hiring of over 20,000 new expenditure. teachers, salary increases and improved remote learning/ICT facilities and latrines renovations. e strong focus of public investment on Nearly half of the funds were spent at pre-primary infrastructure has yielded signi cant improvements and primary education level, followed by secondary in access and quality of infrastructure. Rwanda’s education (27 percent). rating for the quality of infrastructure (road, communication, energy, water and sanitation, e World Bank Public Expenditure Review water transport, air transport, rail transport, and recommended measures to improve e ciency other transport) in the Global Competitiveness in education as follows: i) prioritize spending Index (GCI) improved from 37 in 2010 to 52 on improving learning outcomes as the system in 2019, compared to an average of 45 for SSA. continues to expand; in particular, ensure that For example, Rwanda’s power generation installed funding meets the needs of in-service teacher capacity rose to 238.4 Megawatt in 2021, or triple training; ii) further accelerate progress in the level in 2010, while access to electricity grew addressing the issues of high repetition and from 6 percent of the population in 2008 to an drop-out by improving quality and learning; iii) estimated to 80.1 percent in 2024 (56.2 percent increase e ciency of pre-and in-service teacher grid and 23.9 percent o -grid). Rwanda also Rwanda CEM | 2024 CHAPTER 7 213 has achieved strong growth in tourism jobs and Compared to regional and international peers, foreign exchange earnings through infrastructure public investment e ciency in Rwanda seems investments, for example the Kigali Convention low. In 2015–19, Rwanda’s incremental public Centre (KCC), RwandAir infrastructure, the capital output ratio (IPCOR)8, which measures Kigali Arena and two ve-star hotels. to what extent the increase in public investment is associated with GDP growth, averaged (1.7), e priority should be to foster e ciency gains higher than in Kenya (1.5) and Burundi (0.7), and in public investment rather than continuing the equal to the level of Uganda. erefore, economic current, unsustainable high rate of growth. is will growth was apparently being delivered in Rwanda be essential to provide adequate funding to critical with a relatively higher level of public investments needs in the human capital sector and agriculture than in its EAC counterparts, except Tanzania. to ensure long-term inclusive growth. Further is nding is consistent with a public investment e orts to boost e ciency in public investment e ciency index derived from data envelopment could involve improvements in both allocative and analysis (Figure 7.9). e index is based on the technical e ciency. provision of selected infrastructure services, including the number of hospital beds, broadband Rwanda’s public investment execution is highly subscriptions, access to drinking water, road tra c, concentrated at the central government level. logistics performance and port infrastructure. e central government was responsible for 90 e most e cient country is assigned a score of percent of development expenditures in 2020/21, one. Rwanda has a score of 0.55, indicating that while the districts implemented only 13 percent of the country has some scope for improving the public investment over 2017–21, compared to an e ciency of infrastructure investment. average of about 25 percent in Africa and over 40 percent in South Asia (Figure 7.8). e authorities e public investment project portfolio is are encouraged to review the current set-up of dominated (in terms of numbers) by micro/ responsibilities on capital expenditures across tiers, small projects and relatively young projects. e with a view eventually to seek e ciency through number of micro projects, which often fail to an enhanced role of subnational governments, bene t from economies of scale in management or where feasible. is could include an evaluation of services delivery, has grown over the past few years. e orts to improve coordination by MINECOFIN Nevertheless, they remain a small and declining through planning and budgeting call circulars in share of total investment expenditures, as large 2016/17–2020/21. projects accounted for 62 percent of development Figure 7.8: Share of development budget managed at Figure 7.9: Capital e ciency scores subnational levels- Rwanda and global regions (percent) Average (2008-2018) 70 60 50 40 30 20 10 0 RWD AFR EAP ECA LAC MNA OECD SAR Note: RWD: Rwanda, AFR: Africa, EAP: East Asia and Paci c, ECA: Europe and central Source: WB sta estimates Asia, LAC: Latin American and Caribbean, MNA: Middle East and North Africa, SAR: South Asia region. Source: extracted from World Bank (2020) 214 CHAPTER 7 Rwanda CEM | 2024 expenditures in 2020/21 (Figure 7.10). As indicates weakness in the mechanism to protect they are probably designed, implemented, or funding for ongoing projects in the annual budget, managed separately by di erent public entities resulting in wasteful expenditure on abandoned (fragmentation), a large number of micro projects works over the medium term. Shortfalls in project can impose a signi cant burden on civil servants implementation include inadequate design and for a relatively lower impact than larger projects costing of feasibility studies, changes in terms of can achieve. e consolidation of such projects reference during implementation, and questionable would help implement consolidated procurement, e ectiveness in project management. Poor project which could save money. Similarly, 88 percent of management at the district level has resulted in projects were allocated budget for one or two years implementation delays, although LODA has only, but these projects’ share of the budget was 44 appointed private consultants to resolve this issue. percent, compared to 56 percent for three-to- ve- year projects. e number of one-year projects has Raising the e ciency of public investment been declining over time, which could potentially management will be key to rationalizing the contribute to greater e ciency as one-year projects use of public funding and can also support the are likely to contribute less to building the structure/ development of a more robust PPP pipeline. infrastructure of an economy, which are drivers of productivity and sustainable economic growth. Several aspects of public investment management are of high quality in Rwanda. e IMF’s 2022 Rwanda’s development projects face limited Public Investment Management Assessment but signi cant e ciency challenges in terms of (PIMA) found that Rwanda performs better implementation delays and stalled projects. e than peers in SSA and other emerging market most recent audit report in 2020 nds 62 cases economies in the design and e ectiveness of public of delayed contracts worth Rwf216.1 billion investment management institutions. Rwanda (around 2 percentage points of GDP) in 38 public has guidelines for project implementation, which entities and projects. Delays were up to 2,721 are not often seen in many countries, although days. e delays were caused by late payments, more standardization is required. Considerable inadequate contract management, lack of adequate e orts are made to encourage the participation supervision and inadequate internal control. e of citizens and non-governmental stakeholders in o ce of Auditor General (OAG) reports also note the planning and budget process. Comprehensive stalled projects due to budget constraints and policy and strategic frameworks support the public lengthy procurement procedures. Public entities investment program, while the legal framework had abandoned contracts worth Rwf11.7 billion is aligned with government e orts to instill a (around 0.12 percent of GDP) by the time of culture of result-based performance management completion of the audit of 2020 projects. is in the Rwandan Public Service. Budget thresholds Figure 7.10: Dominant micro and small projects in numbers, but trailing in terms of budget a) Budget share (%) of categorized projects b) Number of projects per size category 70 600 60 500 50 400 40 300 30 200 20 100 10 0 0 2016/17 2017/18 2018/19 2019/20 2020/21 2016/17 2017/18 2018/19 2019/20 2020/21 Micro projects Small projects Micro projects Small projects Medium projects Large projects Medium projects Large projects Source: Author’s calculations using revised Laws of Finance’s data from MINECOFIN’s o cial website. Rwanda CEM | 2024 CHAPTER 7 215 help to ensure that the level and complexity of above, could signi cantly improve debt appraisal is commensurate with the investment sustainability or household welfare, depending on project, although the formulation of guidelines how the savings are spent. A computable general stating requirements for appraisals could improve equilibrium estimate shows that a hypothetical planning and coordination of the program. 10 percent improvement in public investment e ciency would lead to 1 percent of GDP savings Most major projects are tendered in an open and per year. Devoting these savings to reducing competitive process that has become closer to the de cit would increase GDP in 2030 by 3.5 international standards over the past few years, percent relative to baseline, as reduced government although the capacity in procurement entities borrowing lowers pressures on the interest rate and remains a challenge. Information on procurement reduces the debt to GDP ratio by 4 percentage is readily available to the public. However, points relative to baseline. Alternatively, devoting audited reports show inadequate training, a lack the savings to human capital expenditures would of clear technical speci cations in some bidding raise GDP in 2030 by 1 percent higher than documents, missing documents, fraud, and failures baseline, and reduce the public debt to GDP ratio to follow the procurement law (e.g., not imposing by 2 percentage points below baseline in 2030 (less penalties for delays in execution, awarding contract than if savings were devoted to reducing the de cit). prices that greatly exceed plans). Finally, devoting the savings to investments in agriculture, allied activities and rural infrastructure Despite progress in monitoring, persistent would increase household welfare in rural areas weaknesses have undermined project portfolio by 2.4 percentage points over the baseline level in management. Funds are rarely or never reallocated 2030, more than 0.2 percentage points more than during implementation, meaning that money in urban areas and lift 35,000 more people out of is tied up in poorly performing projects instead poverty in 2030 compared to the baseline scenario. of reallocated to high-quality projects that have Without a reallocation to agriculture, the number stalled because of lack of funding. Despite being of people lifted out of poverty by infrastructure required, ex-post reviews are not conducted for all investments of 1 percent of GDP would be 15 major projects. Also, there is no requirement in the percent lower. guidelines that an independent expert conducts ex-post reviews, undermining their credibility. e Recent audit reports and the above analysis indicate OAG indicated that Rwanda does not have the true several speci c measures could improve public value of state assets in the nancial statements. is investment e ciency and contribute to growth and impairs investment planning and selection and improvements in equity. makes it di cult to estimate maintenance needs. Finally, of the 7 modules in the integrated nancial Public investment management e ciency management information system (IFMIS), only enhancing measures. planning, budgeting, and accounting are fully Project appraisal: Issue guidelines on operational, while modules for receipts, reporting project appraisal for use by all contracting assets and inventory are not. e IFMIS also is not agencies; devote more resources to ensuring upstream planning elements are completed fully interfaced with the e-procurement system. before submission of a proposal; require an assessment of risks and mitigation plans in Scenario analysis can be used to analyze the impact of project appraisals; compile a database of one- e orts to improve public investment e ciency o or micro/small projects, with a view to Increasing the e ciency of public investment, combining them to enable use of framework notably through improvement in the public agreements or consolidated procurement. investment management challenges discussed 216 CHAPTER 7 Rwanda CEM | 2024 Project selection: Approve only projects with coordination through planning and budgeting thorough feasibility studies and appraisals; call circulars in 2016/17–2020/21. establish a ranking system for proposed projects; require an independent external review of major Equity and Sustainability projects; maintain a comprehensive pipeline Equity: As described in Chapter 1 (section of appraised projects; enhance the authority 1.2 and subsequent sections), Rwanda needs of MINECOFIN to approve projects into a to rebalance its current investment model pipeline for potential funding. to address the declining trend of the growth Project implementation review: Expand elasticity of poverty in recent years. is training of project and contract management; would involve a shift in priorities from large devote greater scrutiny to projects in sectors with strategic capital-intensive projects in urban a history of greater implementation problems; areas toward projects critical for broad-based ensure that the project rationale is reviewed after social returns such as in agriculture, allied major cost adjustments are made. activities and rural infrastructure. Maintenance: Provide standards for the Decentralization: To close the rural/urban gap costing of maintenance; hire more experienced in access to critical services such as roads and sta as facility managers; review asset registers communication, Rwanda should build on its for completeness and accuracy. successful experience in the decentralization of social spending to increase the share of Monitoring: Implement a strong central infrastructure projects implemented at the portfolio management system that can district level. monitor project performance and identify systemic patterns of time and cost overrun. 7.4.3. Improve State-Owned Enterprises (SOEs) Abandoned and stalled projects: Give governance to mitigate SOEs related priority to ongoing over new projects in the scal risks budget process; analyze the procurement and As emphasized in the rst FDG report, de ning budgeting system to determine the root cause the role of SOEs in the Rwandan economy and of stalled projects. strengthening their corporate governance are Transparency: A multitude of national and important reforms to improve competitiveness and sub-national government reporting often innovation. Properly managed SOEs can be critical goes unpublished, reducing scrutiny and to spurring economic development while poorly accountability. Some of the most important managed SOEs can cause a drain on public nances unpublished documents and analysis and limit private sector development. SOE reforms include the Fiscal Risk Review (FRS) of the can have a positive impact on reducing scal risks government’s Portfolio, infrastructure project for instance decreasing hidden subsidies, direct costs, PPP projects and projects undertaken transfers, and oversta ng; and can also strengthen by public corporations, and project selection competition and develop capital markets. criteria. It will also be essential to publish data on sector and urban/rural composition of projects and shares of budget devoted to rural e government of Rwanda has made it a priority bene ciaries; and operationalize remaining to improve the productivity and returns of modules in IFMIS (modules for receipts, pro t-oriented public investments. is includes reporting assets and inventory are not). promoting a private sector-driven approach to Allocation of capital expenditure planning the management of enterprises which it owns, and implementation across tiers of or in which it holds signi cant interests. Like government: Align more closely roles on other countries in Africa (e.g., Morocco), has recurrent and capital expenditures in health identi ed SOEs as a sector whose management and education, to enhance the role of can be improved to unlock gains such as better subnational governments, where feasible. governance, economic and social e ciency, Evaluate MINECOFIN’s e orts to improve and reduced dependence on national budgets. Rwanda CEM | 2024 CHAPTER 7 217 Although current private sector capacity is still on privatization and sale of government shares. limited, Rwanda’s long-term goal is to gradually Rwanda has also developed a privatization policy establish a pathway for the private sector to play a and strategy which articulates the broader goals of leading role in Rwanda’s growth. is is expressed its privatization process. in long-term strategies such as the National Medium-Term Strategy for Development (NST- A Presidential Order, which is in the draft stages, 1) and Vision 2050. seeks to ll gaps in the legal framework governing state-owned companies (SOCs) but can be further is section highlights the key issues that strengthened. e draft Order determines the government of Rwanda could prioritize to help prerequisites for the establishment of an SOC and unlock better management and performance the rules of its management. Some of the issues the of SOEs, increase transparency, and ensure Order covers are the purposes for the establishment better value for money. Rwanda will need to of a state-owned company; the priority sectors for operationalize changes to the legal and institutional investments in a state-owned company; the roles framework governing SOEs by selecting and and responsibilities of the general assembly, board sequencing activities in a strategic way to achieve of directors and CEO; capitalization requirements; high impact. Important reform issues that should internal audit requirements; monitoring and be prioritized include (i) strengthening the legal evaluation; winding up and transfer; and other framework for SOE governance and oversight issues. However, the draft Order does not yet capture (ii) clarifying the institutional arrangements that all the important issues. Some of the recommended the government of Rwanda intends to deploy in provisions that could be incorporated include SOE management and building their capacity (iii) provisions to clarify the governance framework for developing an SOE performance management mixed ownership companies, holding companies system, and (iv) increasing nancial reporting and and their subsidiaries. is will ensure that the disclosure. Furthermore, a framework to assess the wider universe of government investments is rationale for State ownership in sectors would be captured and there is oversight over them. From a complementary to refocus public resources). corporate governance perspective, some of the issues that need to be clari ed and strengthened include e legal and institutional framework requirements around the professionalization of SOE governing SOEs boards of directors, SOE board remuneration, and e management of SOEs is governed under laws transparency including publishing of information relating to public institutions, laws and policies by both SOEs and government’s supervising entity. on privatization, and the wider legal framework governing companies and nancial regulation. Within the government, MINECOFIN oversees e Organic Law on Public Institutions regulates SOE ownership management, although this function companies in which the government of Rwanda was brie y moved to a stand-alone ministry before is the sole shareholder, while company laws and being reabsorbed. MINECOFIN has long been the nancial sector laws, for example laws governing government’s ownership entity, and this was done capital markets, insolvency and bankruptcy, through a unit within the ministry. However, the competition and consumer protection, and public government of Rwanda brie y tested a centralized private partnerships, are applicable to the full range approach and in 2022 created a standalone of entities in the SOE sector. e government ministry—the Ministry of Public Investments and of Rwanda has stated its intention to attract Privatization (MININVEST)9—to manage public private sector investment in SOEs, and various investments, of which SOEs are one. However, instruments govern privatization, including the this ministry was discontinued after a year and law on privatization and public investment, its functions reabsorbed into MINECOFIN. It a presidential order establishing a National is not yet clear what informed the government’s Privatization Commission and a ministerial order decision to discontinue MININVEST, and what 218 CHAPTER 7 Rwanda CEM | 2024 this may mean for the institutional arrangements a ect the nancial health and viability of the entities. for SOE management going forward. Furthermore, e World Bank’s toolkit on Corporate Governance in addition to government ownership and of State-Owned Enterprises recommends that management, there are at least four holding a sound performance-monitoring framework companies who themselves have an oversight role should address the inherent tensions between over the SOEs they control. is gives the portfolio commercial and non-commercial objectives by a “tiered” structure which, although not unusual, explicitly identifying the core nancial and non- creates institutional complexity. nancial objectives of the SOE and by clarifying the government’s priorities for the various strategic Going forward, one of the government’s top objectives of each SOE. Ideally, this should lead to priorities for the sector should be to enhance the development of appropriate performance targets MINECOFIN’s capacity for the successful that re ect and balance both types of priorities. execution of its mandate. is includes (a) hiring personnel with well-honed, specialized skills in De ning SOE performance indicators presents nance, business strategy, accounting and auditing, the government with an opportunity to articulate legal matters, and human resources management broader social and government goals. SOE and good knowledge of the sectors in which the key performance indicators can either be nancial SOEs operate; and a continued e ort to training or non- nancial. On the one hand, nancial the sta in relevant areas including secondments, indicators would cover issues such as pro tability, study visits and regular peer-to-peer exchanges revenue, and debt management, and focus on the with ownership entities in other countries; (b) nancial health and viability of the SOEs. On equipping MINECOFIN with a management the other hand, non- nancial indicators provide a information system that enables it to carry out its broader perspective of the company’s performance business e ciently; and (c) putting in place e cient and could be tied to speci c government programs coordination mechanisms with the policy ministries or the government’s overall social goals, philosophy, in the sectors where key SOEs operate, and the or manifesto. Examples of these indicators include also di erent SOE holding companies to make customer satisfaction, innovation, climate-smart coordination as seamless as possible. Furthermore, operations, and employee involvement, amongst revamping its privatization function and assessing several possibilities. In choosing these indicators, the e ects of SOEs in markets on private investment the government of Rwanda can ensure that SOEs is necessary as well (See section 2.3.1.2). are furthering the development agenda of the government. Performance management framework of SOEs As the government moves towards more holistic Financial reporting and disclosures monitoring of SOEs beyond nancial risks, it will Financial reporting both by individual SOEs and need to clearly de ne a performance management on the overall portfolio needs to be expanded. framework that balances the competing operational Currently, only Agaciro and REG publish (on purposes that SOEs are often faced with. e their websites) nancial reports with a clean government’s intention is to focus on more holistic audit opinion.10 SOEs should submit regular, monitoring and performance management of reliable nancial reports, with an appropriate SOEs including operational performance. is level of public disclosure. Also, the government would entail clarifying a performance target setting should publish an annual, aggregate report for and evaluation framework for SOEs. One major the SOE portfolio as a whole. ere are no challenge in creating performance frameworks for publicly available reports speci cally analyzing SOEs is that these entities are usually established the performance of the entire SOE portfolio. (and continue in government ownership) because Examples of countries that publish high-quality they have both commercial and non-commercial aggregate reports include Bhutan, France, objectives. Often, achieving these non-commercial Lithuania, Norway, Slovenia, and Sweden. objectives may carry nancial implications which Rwanda CEM | 2024 CHAPTER 7 219 BOX 7.3: State-owned enterprises Like most countries in Africa, Rwanda has a large portfolio of SOEs and government shares in private companies. Based on information accessed as of July 2023, the portfolio includes 22 rms that are fully owned by the state (referred to as ‘state- owned companies’) and 16 companies in which the state holds more than 40 percent but less than 100 percent of the shares (see Annex Tables A7.4 and A7.5). Of these SOEs, four are holding companies, with Agaciro the most prominent (Annex Table A7.6 lists AGACIRO’s holdings). * ere also are 24 companies in which the state owns less than 40 percent. e state’s portfolio is a combination of traditional SOEs (e.g., electricity and water utilities, the post o ce, the airport management company, the national airline, a state-owned commercial bank, and the national printing company), and companies in competitive markets (for example, agriculture—co ee, cassava, and other cash crops—and agribusiness, climate change, construction, engineering, entertainment—casinos—hospitality, and logistics). Many of these companies represent the government’s e orts to act as a business incubator in growth sectors. Financial position of SOEs A lack of information on SOEs makes it di cult to estimate their nancial position or performance. Financial statements are available for an aggregate of 27 “public corporations”, which includes the RSSB and the National Bank of Rwanda (NBR), plus individual statements for Agaciro and RGE (see Annex Tables A7.8 –A7.11). e aggregate nancial statement for the year ending June 30, 2022, shows a net pro t margin of 25 percent of revenues and a debt-to-equity ratio of 1.1. However, since RSSB in 2019 had assets exceeding Rwf 1.1 trillion and no debt, while no nancial statement is available for RSSB in 2021–22, it is impossible to draw any conclusion concerning the nancial position of the remaining public corporations. TABLE 7.2: Summarized nancial information of government portfolio as of June 30, 2022 (27 Public Institutions, in million Rwf ) Income statement Balance sheet 30-Jun-21 30-Jun-22 30-Jun-21 30-Jun-22 Revenues 1,052,327 1,379,812 Total assets 6,210,806 7,530,383 Of which subsidies 199,165 105,439 Borrowings 2,337,846 2,837,345 EBITDA 309,619 476,634 Financial liabilities 444,782 443,751 Depreciation and amort. (143,788) (62,207) Other liabilities 853,919 1,165,879 Operating income 165,831 414,427 Equity 2,574,259 3,083,408 Finance costs (52,447) (69,733) Debt/equity 1.1 1.1 Surplus for the period 113,384 344,694 Net pro t margin 11% 25% Source: Audited consolidated nancial statements for the year ended 30 June 2022. SOEs receive substantial subsidies, some incur large losses, and in aggregate they owe a signi cant amount of debt guaranteed by the government of Rwanda. Total subsides to Rwandair, Rwanda Energy Group (REG) and Water and Sanitation Corporation (WASAC) averaged Rwf480 billion a year over 2018–22, equaling 39 percent of revenues over the period (Annex Table A7.7), re ecting their importance to the national economy or compensation for public-service obligations. REG registered losses of Rwf35.5 billion during the nancial year 2021–22 (Annex Table A7.10), due mainly to a sharp increase in the cost of electricity sourced from diesel-fuel plants.** e guaranteed debt of SOEs at the end of 2022 amounted to Rwf465.5 billion, equivalent to 3.4 percent of GDP.*** 90 percent of that debt was in local currency, the balance being denominated in US$. e Fiscal Risk Statement (FRS) concludes that “the risk of default in deemed to be low.” However, the government of Rwanda views Rwandair, REG, and WASAC as posing a very high scal risk. is assessment, which uses the IMF’s “SOE Health-check” tool, re ects negative or very low returns on equity, and liabilities that substantially exceed assets, although REG’s liabilities are overstated because they include grants which don’t have to be repaid. Overall, the available data indicates that SOEs are not a major drag on Rwanda’s public nances, but some of them have incurred large losses in the recent period, face signi cant uncertainties, and therefore represent a potential contingent liability for the state. Note: * Agaciro has a portfolio of mostly equity investments valued at Rwf256 billion at the end of 2021, in which the main holdings by far are a controlling stake in the Development Bank of Rwanda (BRD) and 22% of Bank of Kigali (BK) Group Plc. ** REG’s annual reports for 2020–21 and 2021–22 (https://www.reg.rw/public-information/reports/) *** Source: Government FRS, April 2023. 220 CHAPTER 7 Rwanda CEM | 2024 Policy recommendations to improve SOEs governance nances. In this respect MINECOFIN will going forward need to assess the di erent options in terms of Rwanda has taken positive steps to improve the ICT solutions to monitor the SOE portfolio management and performance of SOEs and and prepare an annual aggregate report on it. increase the value for money of public investments. • Enhance the SOE performance monitoring ese include updating its legal framework and system. For the purpose of carrying out its performing an initial comprehensive analysis of the SOE monitoring activities (including the nancial health of key SOEs. Building on recent monitoring of scal risk associated with the achievements, the government of Rwanda could SOEs), MINECOFIN should develop a take further steps to improve the way it monitors methodology to compile and analyze SOE- and manages the SOE portfolio to improve related data. Such methodology should provide for forward-looking data (e.g., budgets and corporate governance practices and strengthen three-year plans), not just historical data, to be the management of public nances. Key policy used for monitoring purposes. Furthermore, recommendations include: in its role of SOE ownership management, • Address gaps in the legal and regulatory MINECOFIN should start expanding the framework governing SOEs to better cover scope of its monitoring activities to include the entire universe of SOEs. is includes other facets of the SOEs’ performance and strengthening and adopting the Presidential activities including operational/service- Order on SOCs, and de ning the way delivery/customer-related, human resource/ oversight over mixed ownership entities, training and corporate governance aspects, particularly those in which the state has a through a system of “corporate scorecard” or majority stake, will be carried out. equivalent. Evaluation of SOEs’ achievement • Clarify the institutional arrangements for SOE of intended public policy goals should also ownership management. Having only tested be complemented with an evaluation of the more centralized management approach indirect e ects on market performance and for a year and given that MININVEST private sector participation in the sectors had not yet been fully operationalized at they operate, and consideration of alternative the time it was collapsed, it is not yet clear government interventions to achieve the same what informed the government’s decision to policy goals. halt this approach. ere is need for stability • Increase nancial reporting and transparency and clarity on how the SOE ownership both at the levels of both the portfolio management role will be carried out within (aggregate) and the SOE themselves. At the the government and the respective roles of portfolio level, MINECOFIN should prepare MINECOFIN and the policy ministries in an annual report presenting the economic the respective sectors. Additionally, a speci c performance and the nancial situation of the issue to address as part of that is how to engage SOE portfolio as a whole and the key SOEs. with the holding companies to maximize e report prepared on the basis of the IMF’s e ciency and e ectiveness. Health-check tool would be a good starting • Enhance institutional capacity for SOE point for this, as it contains the information portfolio monitoring and ownership for almost of the SOEs. Signi cant holdings management. is includes developing and in other companies (e.g., the 22 percent implementing a comprehensive plan to stake in BK), although not SOEs, should support the full professionalization of sta also be covered – albeit more brie y in the working on SOE ownership management aggregate report.11 At the SOE level, a key and deploying better approaches and tools measure would be the systematic and timely to carry out this key function especially the publication of annual audited nancial monitoring of the SOEs’ performance and statements. Rwanda CEM | 2024 CHAPTER 7 221 7.4.4. Fiscal space and e ciency gains in capital Rwanda is already at moderate risk of debt distress, expenditure programs might be achieved a signi cant increase in public investment is through a larger role of private sector unlikely. Similarly, any increases in concessional nancing in infrastructure projects nancing from development partners will likely Increasing infrastructure investment in a scally be minimal. Under these constraints, 55 percent sustainable manner is critical to supporting Rwanda’s of infrastructure investment required to meet the development objectives. Under the second National SDGs will need to be nanced by the private sector, Transformation Strategy, a key development a sharp increase on its current share of about one- challenge is the need to increase infrastructure third of total infrastructure commitments. Rwanda investment. Infrastructure investment will have has already established a strong track record in to rise by 8.8 percent of GDP per year to meet attracting private investment. e country’s PPI the goal of 6.5 percent annual real GDP growth commitments of 5.6 percent of GDP since 2008 and reach upper middle-income status by 2035 exceeded that of structural comparators (Burkina and by 14.6 percent of GDP per year to achieve Faso, Malawi, Mali and Uganda),13 twice as high as the SDGs (Oxford, 2023). However, given scal the second-best performer (Uganda) and six times constraints, public and concessional nancing higher than the worst performer (Malawi). And alone will not be su cient to close Rwanda’s Rwanda’s private participation in infrastructure infrastructure nancing gap. (PPI) (as a percent of GDP) was very close to that of the highest performer among aspirational Increased private sector investment in infrastructure comparators, Senegal (6.0 percent of GDP). will be essential to alleviate the overall pressure on Foreign direct investment (FDI) has been the the capex/GDP ratio, as well as to seek e ciency backbone of private investment in infrastructure, and improved e ectiveness in sectors other and most FDI is focused on infrastructure. FDI than infrastructure. Rwanda has performed well in ows to infrastructure sectors totaled US$235 compared to regional peers in attracting private million in 2018, or 62 percent of total FDI in ows. investment in infrastructure, but further reforms In ows as a share of GDP exceeded the level in are required. e government of Rwanda identi ed Rwanda’s structural comparators and were higher PPPs as essential tools for promoting infrastructure than the SSA average. in Vision 2050. Consequently, strong government commitment has supported the delivery of a large Further reforms to Rwanda’s PPP framework are PPP pipeline, including 39 closed transactions required. Reforms should prioritize e orts to prior to the enactment of the 2016 PPP Act, and address gaps in substantive provisions of the a further 24 transactions after the law’s enactment, Act, streamline institutional roles and the PPP generating a total infrastructure investment of process ow, create a strong capacitated and more than US$900 million.12 However, while the funded central PPP Unit, provide a framework PPP Act and 2018 PPP Guidelines were positive for management of scal commitments and steps in establishing an appropriate legal and contingent liabilities, regulate unsolicited regulatory framework for PPPs, further reforms are proposals, provide for an objective methodology required to enable PPPs to make a more impactful for project screening and prioritization, embed contribution to the country’s infrastructure climate change considerations, establish a development agenda. framework for local content development, and provide for formal mechanisms for funding Attracting further private investment will be project preparation and underpinning public essential to meeting infrastructure investment support to PPPs which may include a Project needs, closing the infrastructure nancing Development Fund and a Viability Gap Fund. gap, and pursuing a Green, Resilient, Inclusive ese improvements would deliver various Development (GRID) approach. Given that bene ts, as illustrated below: 222 CHAPTER 7 Rwanda CEM | 2024 Strengthening the institutional framework. Developing a project selection methodology. Inconsistencies need to be addressed between e PPP Act is silent on the methodology the PPP Act and PPP Guidelines. In particular, and normative values governing PPP the guidelines create new and additional project selection, does not address climate institutions, over and above those expressly considerations within the project selection prescribed under the law, and prescribe a PPP process, and does not provide for sub-national process ow di erent from that in the PPP PPPs. While the PPP Guidelines include a Act. Greater clarity is therefore required on high-level project selection methodology, the roles of the various institutions (RDB, based on the World Bank’s Project Screening MINECOFIN, PPP Steering Committee, and Analytics Tool (PSAT), in practice the Public Investment Committee, etc.) to ensure application of the methodology is inconsistent, alignment between the PPP Act and the PPP meaning not all projects are subjected to an Guidelines and deliver an e ective PPP project identical and uniform evaluation framework. cycle process. Improving project preparation and the design Strengthening control of the scal commitment of PPP contracts. e PPP Act contains basic and contingent liabilities (FCCL) framework features that a feasibility study should address, in PPPs. e PPP Act is completely silent with a more comprehensive prescription on FCCL, while the Organic Budget Law on how a PPP feasibility study should be and the PPP Guidelines assign responsibility undertaken included in the PPP Guidelines. to MINECOFIN for the assessment and e PPP Act should be amended to provide management of FCCL. However, none of for more comprehensive coverage on these instruments prescribe the process or feasibility studies and synergize it with the PPP methodology for FCCL administration Guidelines. In addition, the PPP Act contains (assessment, quanti cation, approval, limited information on tender disputes and management, and reporting). e government renegotiations, except to con rm that the PPP of Rwanda has adopted a basic version of Steering Committee is the administrator and the World Bank and IMF’s PFRAM tool to adjudicator of tender complaints. support this, and the government of Rwanda Providing for government support received technical assistance from the IMF in mechanisms. e PPP Act and PPP Guidelines 2022 on conducting scal risk assessments of are silent on government support mechanisms. PPPs (IMF, 2022b). ere is no reference to a project development Aligning the PIM-PPP framework. Linkages or preparatory facility, viability gap fund, between the public investment management or liquidity mechanism for management of (PIM) and PPP frameworks need to be contingent liabilities. E ective frameworks developed, where the PPPs could bene t from for government support mechanisms can be consistent and systematic processes to identify, catalytic in PPP program development, and prioritize and structure sector investments, as these should be anchored in law. in the PIM framework. Projects considered Strengthening engagement with stakeholders. for PPP suitability by the PPP Steering E orts should include developing a Committee established in the PPP Act already communications plan to educate the public should have been considered by the Public sector and civil society on the potential bene ts Investment Committee, while the latter of PPPs, communicating the government of should involve the PPP Steering Committee Rwanda’s objectives and plans, and explaining in reviewing proposed projects. Projects the role of the PPP Law in procurement should also be prioritized based on their (particularly sensitizing the private sector to alignment with the Green, Resilient, Inclusive competitive procurement processes, which are Development (GRID) approach and ensure a departure from the previous use of USPs and the incorporation of green aspects into PPPs. direct regulation). Rwanda CEM | 2024 CHAPTER 7 223 In addition to increasing local nancing and using At the same time, the revenue capacity to service PPP arrangements, e orts to attract additional debt is a core underpinning of a sound scal FDI could be strengthened. Rwanda has a strong space. For Rwanda, the number of tax years, to legal framework for FDI. ere are not de jure repay outstanding debt, rose gradually from 1.5 in restrictions on foreign ownership, capital ows, 2012, the lowest recent level, to 4.1 years in 2022, or capital gain exemptions on sales or transfer signaling that scal space is constraining. of shares. e February 2021 Investment Law formalized the process for the review of strategic Rwanda has had considerable success in increasing investment projects, introduced more performance- tax revenues, but there is still room for improvement. based investment incentives, required e orts to Tax revenues rose from about 11 percent of GDP in accelerate the resolution of investors’ issues, and 2009 to 16 percent in 2022. Substantial increases identi ed priority sectors. Since the establishment in income taxes and in VAT revenues re ected tax of the RDB, company registration can be completed reforms and modernization of tax systems and within a few hours, all permits and documents can administration. In 2021, Rwanda’s ratio of tax be obtained at RDB’s one-stop shop, investment revenue to GDP was around 4 percentage points promotion activities have increased and have been above the average of regional peers (11.6 percent) more targeted to priority sectors, and private sector and around 0.5 percentage points higher than concerns are better addressed across the wider the average for SSA (15.2 percent). Nevertheless, government. Eight of the 17 high-risk grievances Rwanda’s tax performance remains below that of registered with RDB’s Reinvestment and Aftercare some top-performing comparators, particularly Department have been resolved, resulting in South Africa. For example, Rwanda’s tax revenue US$26.6 million in retained investment. Rwanda of 16 percent of GDP is well below South Africa’s now ranks second in investment climate for FDI in level of 25 percent. Indeed, Rwanda is only SSA, after Mauritius (World Bank, 2023d). Further slightly above the level of tax receipts expected, e orts at investor promotion, and at increasing given its GDP per capita (Figure 7.11). e World the e ciency of investments, should be assisted by Bank estimates that Rwanda could raise its ratio of regulatory impact assessments and consultations on tax revenue to GDP by 3–4 percentage points.14 new regulations, to avoid any unnecessary negative A major contribution to this goal would involve impact on many investors. reducing the size of the informal sector, which currently accounts for about 80 percent of the 7.4.5. E ciency and e ectiveness under workforce, as well as addressing ine ciencies issues existing tax burden in the tax expenditure portfolio. Since Rwanda’s scal space has narrowed in recent Figure 7.11: Tax revenue vs GDP per capita (2021) years and the worsening in the public accounts position has been driving up public debt, mobilizing 50.00 LES NAU DEN domestic revenue becomes essential to ensure a 40.00 scal consolidation path. Careful attention to any Tax revenue (% GDP)-2021 distortionary impact on the private sector represents 30.00 SAM SA MOZ SOL NEP one dimension amongst others, as the overall tax 20.00 RWA burden is enhanced. e tax mix, including the TH KEN use of tax expenditures, are core entry points, and 10.00 BAN VIE UGA ETH the generous use of tax expenditures in Rwanda 0.00 SL 2.5 3.0 3.5 4.0 4.5 5.0 5.5 during recent periods of signi cant increase in the Log GDP per capita (PPP) -2021 tax burden may have had distortionary impacts on Source: World Economic Outlook (IMF), October 2023 and World Bank Revenue Dashboard. doing business across and within priority sectors. 224 CHAPTER 7 Rwanda CEM | 2024 Recent tax measures include the introduction of and relatively robust. World Bank (2023) points to new taxes and improvements in tax compliance. options for improving ‘gift taxes’, combining revenue e government of Rwanda introduced a new enhancements and a positive impact on health. income tax in 2017 and a property tax in 2018. Increasing the tax burden on the consumption of Several steps have been taken to strengthen VAT these items may also have an impact on the longer- compliance, in part based on recommendations term growth agenda, through a ‘healthier’ human from a 2019 Tax Administration Diagnostic capital foundation, as well as re-prioritization of Assessment Tool (TADAT), including: (i) measures health measures, towards other needy areas than to boost registration by using information from ‘gift-related diseases. Despite having among the other government databases and (ii) intensive highest cigarette taxes in the region, the current 64 relying on technology by, for instance, expanding percent is lower than the 75 percent total tax burden the use of electronic billing machine (EBM) (tax as a percent of average RSP) recommended by software to provide real-time information to the WHO. Excises on soft drinks, and on wine/liquor RRA on VAT transactions, using SMS messages to may also be enhanced, in terms of rates applied send reminders to le and pay taxes, and linking and the use of ad valorem principles, while a high EBM and customs declarations to the E-tax systems yield is already arising from excises on beer. Any to detect underreporting. is digitalization of tax revenue enhancement e orts through rate changes services has accomplished a key strategic objective in Rwanda’s excise taxes should comply with the in the Transformational Governance Pillars of the EAC’s excise harmonization framework prohibiting NST-1. higher taxation of imported goods than on similar domestic production. Complementary innovations in reporting technology and tax incentives have the potential e revision of tax expenditures should strongly to further improve compliance and revenue discontinue those that were created to mitigate mobilization going forward. As of 2020, the the e ects of the pandemic and intended to be EBM for All policy requires large rms to provide temporary. ere currently are at least 51 provisions EBM receipts issued by their suppliers in order to on tax expenditures, including half of them for deduct expenses on their tax declarations. Aligning VAT, 16 for income tax, and 10 for import duty incentives along the supply chain has led to greater (MINECOFIN, 2023); where most of the income adoption of EBM technology by small suppliers, taxes measures aim at fostering investment. e more reliable expense accounting among large 2019 tax expenditure reports estimated total rms, and higher tax revenue, as documented in a foregone tax revenue at 17.9 percent of total tax Background Note jointly prepared by DIME and revenue collection in 2019, which is equivalent to RRA sta . Expansion of these incentives has the 3.2 percent of GDP. e revision of tax expenditures potential to reduce informal economic activity and should result in a discontinuation of those that were ease the cost of doing business in the medium term, created to mitigate the e ects of the pandemic and advancing the Economic Transformation Pillar of intended to be temporary. During 2022, however, the NST-1. the government of Rwanda added on new tax expenditures, raising the importance of seeking a Revenues from excises could be enhanced, to more sustainable level of tax expenditure portfolio support objectives in human capital development. (IMF, 2023). Excise taxes can both raise revenues and help to achieve broader policy objectives, including While the increase in tax expenditure in response to combating pollution, improving health indicators, COVID was partly designed to mitigate the rising or improving equity. e demand for goods and cost of inputs, much of the forgone revenue is leaked services subject to excises are often relatively price- via VAT exemptions. A tax holiday was granted on inelastic, making revenue generation predictable inputs for the factory producing masks in Rwanda, Rwanda CEM | 2024 CHAPTER 7 225 while a reduction in the fuel levy was introduced as VAT is charged on value-added; zero-ratings to mitigate the e ect of the international oil price and exemptions can pass through supply chains increase. e government of Rwanda also adopted to unexpected or undesired bene ciaries. Other temporary tax incentives under the Manufacture best practices include sunset clauses, where all tax and Build to Recover Program (MBRP) to fast- expenditures are set to expire in 3–5 years, limiting track investments to support the recovery. Tax the size of the tax expenditure envelope. expenditure related to VAT is estimated at 1.5 percent of GDP in 2019, or 46.4 percent of total To complement ongoing tax expenditure reporting, tax expenditure. e ve largest categories of VAT rigorous impact evaluation can enable holistic expenditures included education (12.1 percent cost-bene t analyses. Tax expenditure reporting of VAT tax expenditure), nancial services (11.0 reveals estimates of the government outlay of a percent of VAT tax expenditure), transport services given tax policy. To make a concrete statement (10.6 percent of VAT tax expenditure), petroleum about impact, policymakers require estimates of products (8.5 percent of VAT tax expenditure) and the social value of a given policy. Credible estimates machinery and equipment (8.2 percent of VAT of bene ts use rigorous impact evaluation research tax expenditure). e second largest source of tax methods, predicated on the creation of a credible expenditure are import duties, which in 2019/20 counterfactual.15 e research team at the Rwanda accounted for 40.1 percent of total tax expenditure Revenue Authority have placed concerted e orts or 1.3 percent of GDP. Corporate income tax on research which evaluates the bene t of tax expenditures are estimated at 13.6 percent of total expenditures. Recent evaluations completed jointly tax expenditure or 0.4 percent of GDP. by RRA and DIME sta include fee waivers for overdue VAT payments during COVID-19 and Enhanced focus on scal management of tax tax exemptions for manufacturers of masks during expenditures is key to ensure portfolio e ciency COVID-19. and to target tax expenditures towards key sectors of importance in the growth agenda. If the e Medium-Term Revenue Strategy (MTRS) structure of the tax base changes, expenditures measures established central guidelines to can grow unexpectedly large. For this reason, tax consolidate tax revenue. MTRS measures and expenditure reporting is crucial to transparent scal the unwinding of temporary exemptions are management. MINECOFIN’s Chief Economist expected to add 1.5 percentage points of GDP to o ce have published three tax expenditure reports, tax revenues. Alongside this, the government of promoting transparency and prudent scal Rwanda has also recently started taxing immovable management of Rwanda’s domestic revenue. By property. e unfolding of these measures aimed annually estimating and publishing the nancial at maintaining domestic revenue mobilization cost tax expenditures, or scal revenue foregone, is crucial to preserving debt sustainability while this reporting applies the same scrutiny to tax supporting the nascent recovery, provided any incentives and exemptions as other forms of public increase in tax burden is not creating disincentives expenditure. For example, e orts to evaluate for economic growth or dampening equity and VAT tax expenditures are especially important. household welfare. TABLE 7.3: Tax expenditure by type - Rwanda (percent GDP) Rwanda’s tax expenditures 2017/18 2018/19 2019/20 VAT 1.5 1.5 1.5 Corporate Income tax 0.3 0.4 0.4 Import duties 0.7 1.1 1.3 Total tax expenditure 2.4 3.0 3.2 Source: World Bank sta calculations using data from MINECOFIN. 226 CHAPTER 7 Rwanda CEM | 2024 Annex 7.1. Matrix of key policy recommendations: Fiscal sustainability Note: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame 4.7.1 Policy Area 1: Addressing the Underlying Challenges to Foster E ciency Across Social Spending. Priority Area 1: Strengthen PFM in the Health Sector. Identify and exploit opportunities to strengthen PFM in health. Encourage MINISANTE to develop a PFM reform roadmap to foster HP ST HF e ciency and accountability across the budget cycle, in close collaboration with MINECOFIN and the districts. Strengthen facility and hospital nancial management capacity. Implement a training program in accounting and reporting of various MT HP HF nancing sources. Ensure that FMIS deployment to district hospitals is matched with MT HP HF human capacity for system utilization. Consider a support structure of districts accountants to facility MT HP HF managers when no accounting sta is on site. Enable the IFMIS to respond meaningfully to health managers’ information needs. Create a cross tabulation in the FMIS that allows for a summary of spending by meaningful categories for the health sector. Include a functionality enabling a data presentation by total wage bill, HP ST HF drugs and medical supplies, spending on community health workers, and transfers to RSSB. is is critical for health sector management and is not easily generated HP ST HF given the categories in the FMIS. Create this presentation through manual tagging in the health sector as HP ST HF the budget is developed. Draw customized reporting from this adapted presentation to the HP ST HF health sector. Strengthen expenditure data integration. Build on existing expenditure management systems and strengthen HP MT HF integration of systems Ensure ability of the IFMIS to capture holistically what nancing sources HP MT HF are paying for what spending categories in the health sector. Strengthen the capacity to purchase health services strategically, based on HP MT HF reliable information on costing, improving evidence-based decisions. Priority Area 2: Strengthen the Impact of the Insurance System. HP MT Reduce administrative costs of RSSB from 21 percent to under 10 HP MT HF percent, as in many OECD countries. Expand RSSB capacity to carry out informed decision-making more effectively. Invest in an RSSB member database, provider database and claims database HP LT LF at RSSB. Build capacity for data management and conduct periodic analysis. HP LT LF Design RSSB data system to prepare for the transition to capitation-based HP LT LF payments and to ensure e ciency in operations. Rwanda CEM | 2024 CHAPTER 7 227 Note: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame Improve membership enrollment to CBHI. Streamline membership enrolment by scanning individual s ID documents. HP LT LF Fasttrack CBHI enrolment mechanism of foreign nationals living in HP LT LF Rwanda. Prepare members for a shi to subsidized enrolment under a dynamic HP LT HF social registry. Prepare shi to capitation per member per month based on the number of HP LT HF members registered with health center during previous month. Continue strengthening the management of RAMA for better benefits to members. Revisit and monitor contribution rates and expenditures for RAMA HP ST HF members. Ensure a comprehensive bene t package and insurance solvency. HP ST HF Consider the impact on labor cost. HP ST HF Revisit/ review the adequacy of social security contributions. HP ST HF Consider aligning social security contributions to regional/ global best HP ST HF practices, which, at current level of 16 percent of gross wages, are high and a tax to the competitiveness of the private sector and encourages contribution evasion. Rationalize the excessive annual surplus that RAMA is accumulating. HP ST HF 4.7.2 Policy Area 2: Addressing the Underlying Challenges to Stronger Tax E ciency Priority Area 1: Make Administrative Reform to Reduce the Fixed and Variable Costs of Compliance by Small Firms. Facilitate small firms’ compliance. Extend the usage of the free EBM so ware to MSMEs. HP  ST HF Consider subsidizing airtime for accessing relevant administrations HP  ST HF informing on compliance requirements. Priority Area 2: Make Interventions to Promote Taxpayer Compliance. Support a knowledge sharing and training program for taxpayer compliance. Develop the capacity of taxpayers on legal requirements for compliance. MP  ST  HF  Provide technical skills to taxpayers on compliance. MP  ST  HF  Sensitize taxpayers on the nancial bene ts of compliance. MP  ST  HF  Priority Area 3: Increase Compliance by Large Firms. Utilize EBM and CIT Data to Identify Noncompliance by Large Firms and Inform Auditing Activities. Reduce the willingness for and/ or incidence of noncompliance in the large firms’ segment. Utilize EBM and CIT data to identify noncompliance by large rms. HP ST MF Inform auditing activities to carry out timely audits and eventual tax HP ST MF redress. Priority Area 4: Deepen the Impact of EBM Technology on Tax Revenue/ Compliance. Make periodic adjustments on the EBM technology to accelerate its wide adoption. 228 CHAPTER 7 Rwanda CEM | 2024 Note: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame Recalculate the optimal threshold of income tax expenses to be supported MP LT MF by EBM receipts. Add a module on EBM usage, supply chain relationships, and informal MP LT MF transactions to NISR statistical products, such as the Establishment Census or Industrial and Mining Survey. Consider alternative policies increasing compliance through EBM MP LT MF technology and supply chain incentives (taxation of HNWI, validation of PIT, validation of CIT turnover). Priority Area 5: Expand evidence-based decision-making in tax policy Incorporate cost-benefit analysis and rigorous impact evaluation methods into implementation of tax revenue and expenditure policies. Partner with external organizations to evaluate policies and develop HP LT HF capacity to evaluate policies internally. Incorporate impact evaluation into project budgets and implementation HP LT HF plans. 4.7.3 Policy Area 3: Improve Public Investment E ciency for Strong Growth and Improvements in Equity. Priority Area 1: Enhance Public Investment Management (PIM) E ciency. Improve project appraisal. Issue guidelines on project appraisal for use by all contracting agencies. HP LT HF Require an assessment of risks and mitigation plans in project appraisals. HP LT HF Compile a database of one-o or micro/small projects, with a view to HP LT HF combining them to enable use of framework agreements or consolidated procurement. Improve project selection. Approve only projects with thorough feasibility studies and appraisals. HP LT HF Establish a ranking system for proposed projects. HP LT HF Require an independent external review of major projects. HP LT HF Improve project implementation review. Expand training of project and contract management. HP LT HF Devote greater scrutiny to projects in sectors with a history of greater HP LT HF implementation problems. Ensure that the project rationale is reviewed a er major cost HP LT HF adjustments are made. Eliminate abandoned and stalled projects. HP LT HF Give priority to ongoing over new projects in the budget process. HP LT HF Analyze the procurement and budgeting system to determine the root HP LT HF cause of stalled projects. Increase the capacity to undertake quality maintenance. Provide standards for the costing of maintenance. HP LT HF Hire more experienced sta as facility managers HP LT HF Review asset registers for completeness and accuracy. Rwanda CEM | 2024 CHAPTER 7 229 Note: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame Promote impeccable transparency. Promote the systematic publication the multitude of national and sub- HP LT HF national government reports that o en goes unpublished. Operationalize remaining modules in IFMIS (modules for receipts, HP LT HF reporting assets and inventory are not). Priority Area 2: Support Equity and Sustainability. Rebalance the current investment model to address the declining trend of the growth elasticity of poverty in recent years. Operate a shi in priorities from large strategic capital-intensive projects HP LT HF in urban areas toward projects critical for broad-based social returns (agriculture, allied activities, and rural infrastructure). Increase the share of infrastructure projects implemented by districts HP LT HF , building on its successful experience in the decentralization of social spending. Publish data on sector and urban / rural composition of projects and shares of budget devoted to rural bene ciaries. Assess Allocation of capital expenditure planning and implementation across tiers of government. Align more closely roles on recurrent and capital expenditures in health and HP LT HF education, to enhance the role of subnational governments, where feasible. Evaluate MINECOFIN s e orts to improve coordination through planning HP LT HF and budgeting call circulars 4.7.4 Policy Area 4: Addressing the Underlying Challenges for Stronger Private Sector Financing of Infrastructure (Public Private Partnership - PPP). Priority Area 1: Strengthen the PPP Framework. Strengthening the quality/ readiness of PPP projects. Strengthen the institutional framework to remove inconsistencies, ensure MINECOFIN; HP ST MF alignment between the PPP Act and the PPP Guidelines, and deliver an RDB e ective PPP project cycle process (amendment to PPP Act & Updated PPP guidelines). Develop methodology to provide clear and consistent process for MINECOFIN; HP ST MF project selection and prioritization, also incorporating climate change RDB considerations (amendments to PPP Act, Updated Guidelines). Provide more detailed guidance, aligned with the PPP Guidelines, in the MINECOFIN; HP ST MF PPP Act to support preparation of higher quality feasibility studies and dra RDB contracts (amendments to PPP Act). Consolidate the skills of PPP managers. Strengthen control of FCCL in the PPP Act and the PPP Guidelines to MINECOFIN; HP ST LF provide for adoption of a framework, process, and methodology for FCCL RDB management. In addition, recognition of PPPs within Organic Budget Law. (Amendment to PPP Act, development & adoption of FCCL Guidelines/ Framework). Improve management of USPs by tightening the grounds of admission MINECOFIN; HP ST HI of USPs to and encouraging competition in the procurement process via RDB updates to the PPP Act and the PPP Guidelines (amendment to PPP Act, updates to PPP guidelines). 230 CHAPTER 7 Rwanda CEM | 2024 Note: Priority: High (HP) Medium (MP). Timeframe: Short-term (ST), Medium-term (MT), Long-term (LT). Feasibility: High (HF), Medium (MF), Low (LF) Responsible Time- Actions Priority Feasibility Agency frame Enable the use of government support mechanisms in the PPP Act and PPP MINECOFIN; HP ST MD Guidelines (amendment to PPP Act, updates to PPP guidelines). RDB Build capacity of sta from key government institutions in PPP project MINECOFIN; HP MT HF identi cation, preparation, procurement, contract management and good RDB; MININ- practices. FRA Develop communications plan to strength engagement with the public MINECOFIN; MP LT HF sector and civil society on the potential bene ts of PPPs. RDB Priority Area 2: Develop the PPP Pipeline. Pursue a small number of flagship projects to test and strengthen the MINECOFIN; MP LT HF institutional and regulatory framework. RDB Build the capacity through learning-by-doing. MINECOFIN; MP LT HF RDB 4.7.5 Policy Area 5: Improve State-Owned Enterprises (SOEs) governance to mitigate scal risks and improve business environment Priority Area 1: Strengthen the legal and institutional framework for SOE governance and oversight Bridge gaps in the legal and regulatory framework governing SOEs by government of HP MT HF improving and adopting the Presidential Order that is currently in draft Rwanda form Assign clear responsibilities for SOE ownership management within the MINECOFIN HP ST HF government and develop coordination mechanisms Enhance MINECOFIN’s institutional capacity for SOE MINECOFIN MP MT HF management by: • Training of staff on corporate governance, monitoring and evaluation and corporate finance • Upgrading the SOE monitoring tool Priority Area 2: Strengthen SOE performance monitoring Build an SOE performance management system and expand MINECOFIN MP LT MF the scope of monitoring to operational/service-delivery/ customer-related, human resource/training and corporate governance aspects, through a system of “corporate scorecard” or equivalent Priority Area 3: Increase financial reporting and disclosure Prepare and publish an annual aggregate report for the SOE portfolio as MINECOFIN HP MT HF a whole Establish guidelines for individual SOEs to produce and disclose their MINECOFIN HP ST HF annual financial reports Rwanda CEM | 2024 CHAPTER 7 231 Annex 7.2. Medium-term macroeconomic trends Historical macroeconomic trends in 2021, even more than SSA (+10.9 percent and +4.7 percent respectively). Rwanda made signi cant economic and social progress in the two decades before the outbreak In ation decelerated in 2020 and remained subdued of the COVID-19 pandemic. As a result of rapid in 2021 but peaked in 2022 amid global turmoil. growth and decisive reforms during the last two decades, real economic growth averaged 7.4 percent End-of-period in ation reduced from 6.7 percent in 2000–22 and per capita GDP almost tripled in in 2019 to 3.7 percent in 2020 and 1.9 percent in constant price terms. is is signi cantly higher than 2021. However, in ation surged to 21.6 in 2022, their counterparts in SSA. is group of countries mainly driven by Food and non-alcoholic beverages has grown at an average rate of 4 percent in the same (44 percent). period, leading to an increase in per capita GDP of about 30 percent. e current account de cit has been widening in recent years, reaching a peak in 2022. e current e outburst of the pandemic and global recession account de cit increased by 0.7 percentage points a ected the economy of Rwanda in 2020. After in 2022 compared with the 2015–19 average, growing at an average rate of 7.4 percent in the and by 1.7 percentage points compared with the ve previous years, Rwanda’s GDP contracted improvement registered in 2021. is was mainly by 3.4 percent in 2020, surpassing the slowdown a result of the strong economic recovery which in SSA (–1.6 percent). anks to strengthened is re ected in imports but partially o set by the vaccination e orts, a pickup in external demand, recovery of metals and manufacturing exports. As accommodative macroeconomic policies, and base tourism receipts remained weak in the context of e ects from the economic contraction observed in the pandemic, the current account bene ted from 2020, Rwanda’s economy has rebounded strongly strong growth in remittances. 232 References Fuentes, J. R., & De Soto, R. (2022). Does Countercyclical Fiscal Policy Pay? e Relevance of Fiscal Acyclicality. Washington, DC: World Bank. Fuentes, J. R., & Soto, R. (2022). Does Countercyclical Fiscal Policy Pay? e Relevance of Fiscal Acyclicality. Washington, DC: World Bank. IMF. (2021). Fourth Review of the Policy Coordination Instrument and Request of an Extension of the Policy Coordination Instrument,” IMF Country Report No. 19/211 (July). Washington, DC: IMF Publication services. IMF. (2022b). Rwanda: Sixth Review Under the Policy Coordination Instrument and Monetary Policy Consultation Clause-Press Release; Sta Report; and Statement by the Executive Director for Rwanda. Washington, DC: IMF Publication Services. IMF. (2023). Rwanda: First Reviews Under the Policy Coordination Instrument and the Arrangement Under the Resilience and Sustainability Facility, Request for the Modi cation of End-June 2023 Quantitative Targets, and Rephasing of Access Under the Resilience and Susta. Washington, DC: IMF Publication Services. MINECOFIN. (2023). Rwanda Fiscal Risk Statement FY 2023/24. Kigali: MINECOFIN. Oxford. (2023). Oxford Economics’ Global Infrastructure Hub. Retrieved from https://outlook.gihub.org/ countries/Rwanda Pessino, C., Izquierdo, A., & Vuletin, G. (2018). Better Spending for Better Lives: How Latin America and the Caribbean Can Do More with Less. Mexico City: Inter-American Development Bank. Pradhan, S. (1996). Evaluating Public Spending: A Framework for Public Expenditure Reviews. World Bank discussion papers; no. WDP 323. Washington, DC: World Bank Group. Republic of Indonesia; World Bank. (2020). Indonesia Public Expenditure Review: Spending for Better Results (Indonesia 2020 PER). Indonesia and World Bank. World Bank. (2023d). Rwanda Economic Update No. 21: With a Focus on Inclusiveness of Foreign Direct Investment in Rwanda. Washington, DC: e World Bank. World Bank Group. (2015). Republic of Congo - Public Expenditure Management and Financial Accountability Review (PEMFAR): implementing public nancial management reforms to stimulate growth and achieve shared prosperity. Washington, DC: World Bank Group. Retrieved from http:// documents.worldbank.org/curated/en/997911495565545219/Republic-of-Congo- 233 Notes 1 In this chapter 7, the e ciency analysis of public expenditure means responding to the following basic question: have public resources been used e ciently in delivering public services, i.e., allocated to the ‘right’ interventions, with the ‘right’ mix of inputs and at an optimal per unit cost? (See (Republic of Indonesia; World Bank, 2020)]). Relying on the framework in Pradhan (1996) (Pradhan, 1996)[Pradhan, Sanjay. 1996. “Evaluating Public Spending: A Framework for Public Expenditure Reviews. World Bank discussion papers; no. WDP 323, Washington, D.C.: World Bank Group”] that guided for instance Indonesia 2020 PER, we de ne e ciency as “...the use of inputs (e.g., monetary and non-monetary) to produce outputs (goods and services) at the lowest cost possible, or commonly referred to as “doing things right”. E ciency generally has two dimensions: allocative e ciency and technical e ciency. Allocative e ciency refers to whether resources are being spent on the ‘right interventions’ (i.e., optimal mix of inputs to produce outputs) across or within the sectors. Technical e ciency refers to the capacity to produce the outputs and to do so at the lowest cost (minimizing cost per unit of output)”. 2 e e ciency of spending can be assessed by looking at budget execution rates (See Republic of Indonesia; World Bank (2020, p. 150)). 3 Aggregate expenditure outturn was between 85 and 115 percent of approved aggregated expenditures in 2 of the last 3-year period 2017–19. According to the PEFA guidelines, this performance corresponds to a score of “C” (with “A” being the highest score), which suggest signi cant di erences between budget estimates and actual expenditure that re ect ine ciencies in budget planning and execution. 4 e International Monetary Fund points out to the importance of regularly issuing updated guidelines on the permissible use of virements, alongside closely monitoring which expenditure lines virements are concentrated on, and advising to only approve virements that are “business critical”. 5 ...putting special attention to spending units that are at high risk of re-accumulating expenditure arrears. 6 e UHC index is a composite index comprised of 23 indicators drawn across a range of health service areas. 7 To the extent possible, partners should relax co- nancing requirements for vertical disease interventions. 8 e Incremental Public Capital Output Ratio (IPCOR) measures the marginal productivity of capital. A higher IPCOR value for a given country indicates a higher investment required to earn an additional point of GDP growth, and thus a lower marginal productivity of capital. It is computed as the ratio of GDP growth (denominator) to the rate of capital spending to GDP (numerator) (World Bank Group, 2015). 9 In 2022, the Ministry of Public Investments and Privatization (MININVEST) was created as a dedicated public investment ministry, hived o from MINECOFIN, with the mandate to promote and ensure productivity of pro t-oriented public investments and privatization. e Ministry was tasked with unlocking the potential for growth that public investments present for the Rwandan economy. MININVEST’s mandate covered pro t-oriented public investments, which includes for pro t SOEs. At the time, MININVEST’s core responsibilities included developing national laws and policies on public investment and privatization; identifying and analyzing strategic opportunities for pro t-oriented public investments which will lead to economic growth for Rwanda; monitoring the performance of pro t-oriented public investments to ensure their nancial and economic viability; identifying public investments that should be privatized and the modalities to do this; and identifying and optimizing government assets through strategic monetization. 10 BDR also publishes its annual nancial statements. 11 Examples of countries who publish “best-practice” SOE aggregate reports include inter alia France, Lithuania, Norway and Sweden. 12 Forward Looking Joint Sector Review for FY (2018/2019); Least Cost Development Plan (2019 – 2040); Rwanda Investment Teaser (2020); Accelerating investments in A ordable Housing Development (2020); Investment Incentive Performance Review (2020). Sources collated in World Bank Rwanda Economic Update, 2021. 13 ese are low-income countries with GDP per capita (based on Atlas method) below US$1,035, and lower middle-income countries (LMICs) have GDP per capita (Atlas method) of between US$1,036 and US$4,045. 14 e World Bank estimates the potential tax capacity of a country by using the Stochastic Frontier Analysis module from Stata, controlling for per capita GDP and the openness of the economy. 15 In impact evaluation, a credible counterfactual is an estimate of the outcomes of the population targeted by the policy’s outcome, in the absence of the policy. 234 CONCLUSION Improving on, and even continuing, its remarkable internships, apprenticeships, scholarships and rates of growth and poverty reduction Rwanda loans. Policies to improve the e ciency of health will need to address several key issues. ese services could focus on assessments of the issues include low levels of domestic savings, the low confronting quality of care, reallocating resources quality of education and skills, limited innovation from vertical disease programs to the RSSB/ and productivity growth by rms, the high CBHYI bene ts package and investing in health concentrations of exports in primary commodities, workforce education. Equity considerations should low coverage of improved seeds or irrigation, high play a larger role in planning, for example in the vulnerability to climate change and the accelerating workforce establishment plan and district health degradation of natural assets, and a mounting budget allocations. public debt burden all constrain development. Improving technological capabilities and Rwanda’s stellar economic performance in the innovative activities, supporting for ICT and face of these limitations speaks to the quality of digitization, reinforcing the insolvency regime, its institutions and policies. Nevertheless, there strengthening the privatization legislation, remains considerable potential to strengthen rationalizing the SOE portfolio, and strengthening the policy framework, which is essential if the programs to promote competitiveness would government is to achieve its development ambitions. help to increase productivity. e portfolio of Key goals include removing constraints on private SME support programs should be upgraded sector competition and improving programs and rationalized, while training, support to the that support rms (particularly in innovation), digitalization and consolidation of SACCOs, and continued infrastructure investment in key areas improving nancial institutions’ services could (e.g., to support trade, ICT), improving education increase SMEs’ access to nance. Support for and skills, increasing access to public services ICT and digitization could include strengthening and expanding social protection, supporting digital capacity, data infrastructure and agricultural productivity, using nature-based cybersecurity, supporting interoperable systems solutions to maintain natural assets, adapting to (e.g., payments systems), and expanding online climate change, reducing greenhouse gas emissions commerce. Efforts also are needed to develop in ways that improve the quality of growth and and deepen technological capabilities and welfare, and strengthening scal sustainability. e innovative activities, for example to help firms main policy recommendations, while interlinked, achieve ISO Certification, and to encourage can be divided into four major themes: sources firms to use a combination of short- and long- of growth, productivity and competitiveness, term production targets. inclusiveness and sustainability. Trade openness is also critical to improving Recommendations to boost growth focus productivity. Key steps to increase export on savings, education and skills, and heath. growth include supporting rm innovation and Improvements to the Ejo Heza scheme, increased productivity, reducing restrictions on services digitization, training in nancial literacy, and trade, strengthening the legal framework for support for innovative savings products would cross-border data transfers, building closer trade increase savings. Priorities for education include links to the DRC and implementing measures to improving teachers’ skills, expanding access, bene t from the African Continental Free Trade focusing on foundational skills and remediation Agreement (AfCFTA), strengthening Rwanda’s at the lower grades, and strengthening STEM role as a regional hub for transit trade, and using education and addressing gender gaps in secondary investments and international agreements to attract school. Other e orts to improve skills include FDI in modern sectors. addressing skills mismatches, and expanding Rwanda CEM | 2024 CHAPTER 8 235 Policies to promote inclusiveness should focus on programs for agricultural support services (e.g., generating high-quality jobs and strengthening food processing, cold chain infrastructure) could social protection. Urban planning should be scaled up. Food security risk management could promote a more balanced approach to structural be strengthened based on PSTA-5. e uptake of transformation, densi cation and more compact agricultural insurance could be increased. Finally, urban growth. Developing secondary and satellite e orts to promote an equitable agro-food sector cities, and upgrading informal settlements, could include developing a strategy and promoting would promote equity. Increasing the coverage of investments in local food sector development and social protection following a life cycle approach, enhancing private investments through PSTA-5. providing uninterrupted access to contributory social insurance schemes, and expanding school Urgent steps are required to improve sustainability feeding programs should be based on a system that by reducing vulnerability to climate risks. Key ensures adequate and predictable nancing. e areas include reducing dependence on fuelwood exibility of the social protection system could and charcoal; using data analysis based on be increased through on demand registration, local monitoring, reporting and veri cation to digitized cash transfers, and the operationalization determine optimal strategies to preserve natural of shock-responsive transfers. e adequacy of vegetation; investing in ood control and water social bene ts should be increased, taking into storage; promoting intercropping; encouraging account household composition and size. Public formal nature-based solutions to conservation; employment services and institutions should be reducing the growth of unplanned settlements strengthened to improve the inclusiveness of services and promoting sustainable urban development; and increase collaboration with the private sector. encouraging the use of renewable materials in Finally, e orts should be made to improve RDB’s construction and other sectors; and encouraging overall e ectiveness in attracting FDI, its ability to the mainstreaming of climate considerations in identify investment opportunities in sectors and private sector activities through communications locations that can contribute to inclusive and green and enabling land aggregation. A wide range of growth, and the integration of inclusive and green innovative debt and non-debt instruments could considerations in all its operations (e.g., dispute be used to mobilize climate nance, and nancing resolution, investor outreach, data collection needs could be reduced by shifting expenditures to and target setting). FDI promotion could attract more climate-friendly projects, and shifting taxes, projects bene ting women and young workers, as subsidies and transfers to favor climate resilience. well as poorer districts. e contribution of NBS to growth could be Increasing the productivity of agriculture and enhanced by increasing awareness (e.g., through the demand for o -farm employment is critical improved extension and outreach) of the wide to promote inclusiveness. Encouraging and variety of trees suitable for agroforestry systems, deepening business-oriented farming, modernizing promoting sustainable ecotourism and recreation, the seeds sector and supporting private sector operationalizing the law governing national parks investment in export-oriented infrastructure would and nature reserves, establishing payments for strengthen the commercialization of agriculture. ecosystem services to cover the costs of reforestation E orts to improve farm productivity could involve and terracing on slopes, and nalizing the carbon developing sustainable nancing strategies and framework so owners of forests and woodlots can appropriate instruments and promoting more bene t from carbon capture. Improving access to e cient use of water in farming (e.g., through water nance, improving skills of personnel and adopting fees and improved irrigation water management). innovative nancing mechanisms, such as PPPs for Programs to support small-scale farmers could land, infrastructure and housing development, be improved through taking stock of lessons would contribute to maintaining a low-carbon from experience. Vocational training and start up growth path. 236 CHAPTER 8 Rwanda CEM | 2024 Strengthening scal sustainability will require raising Recommendations 1.1.4, 3.5.3 and 4.71 would revenues and improving the e ciency of public help to increase the e ciency of health spending, expenditures. ere is scope for increasing revenues as well as enhance social protection, which should by expanding the coverage and rates for excise taxes contribute towards the health metrics in the and reducing tax exemptions. Tax compliance ambitious scenario. could be improved through administrative reforms to reduce the costs of compliance by small rms, Ten policy areas focus on boosting productivity promoting compliance through the dissemination and would contribute towards the ambitious of information and capacity building, using EBM scenario goal of accelerating TFP growth to 2.5 and CIT data to identify noncompliance by percent. ese include improving the e ciency large rms and to inform auditing activities, and of the labor market (recommendation 1.1.3), deepening the impact of EBM technology on tax enhancing rm productivity (recommendation revenue/compliance. 2.2.2) and better allocating nance across rms (recommendation 2.2.3), boosting digitization and ere is substantial potential for improving the innovation (recommendation 2.2.4), enhancing e ciency of social spending by strengthening transportation to boost trade and services e ciency public nancial management in the health sector, (2.3.2., 2.3.3, 2.3.4) and improving agricultural reducing the administrative costs of RSSB while productivity (3.4.1 and 3.4.2). expanding capacity, improving procedures for membership enrollment in CBHI and continuing Even assuming strong policy implementation, to strengthen the management of RAMA. Processes the Rwandan economy will continue to depend for project appraisal, selection, review, maintenance on external factors and will remain vulnerable to and transparency in public investment could be economic shocks. is underlines the importance improved. E ciency gains also are possible through of accelerating reform e orts while taking steps assessing the allocation of capital expenditure to strengthen the resilience of its economy planning and implementation across tiers of through climate changes, environment protection, government, strengthening the quality/readiness of pandemic preparedness, education, and scal PPP projects and developing the PPP pipeline. A sustainability, and adaptative social protection shift from large, capital-intensive projects in urban measures presented in this report. areas towards projects critical for broad-based social returns and increasing the share of infrastructure Implementing to Succeed projects implemented at the district level, could Strong leadership with clear vision, and sustained improve equity. implementation based on lessons learned remain critical for bringing about economic reforms. While all of these numerous recommendations are Essential ingredients for success in the recent important for growth and development, only a few episode of FDG reforms have been a strong political can be integrated into the aggregate categories of will and large consensus to implement di cult the long-term growth model (LTGM) framework, policy decisions. e future agenda can also so that the model can be used to estimate the bene t from ve lesson learned of similar reforms impact of policy reform. In the most optimistic worldwide that could be applied to Rwanda: scenario, implementation of the reforms could (i) PRs bene t from added precision on their enable Rwanda to grow at the same rate as high phrasing and requirements jointly formulated with growth economies (see chapter 1). e policies Authorities; (ii) PRs also bene t from adopting recommended to boost domestic and foreign results indicators: (iii) Focusing on the approval savings (recommendations 1.1.1, 2.35, and 3.5.5), of new laws is as critical as prompt passing their could help fund an acceleration in investment from key implementing regulations and setting solid 28 percent to 35 percent of GDP, as envisioned coordination mechanisms; (iv) Flexibility of the in the ambitious scenario Recommendations reforms pace in adjusting to unexpected shocks is contributing to the development of human capital, needed; and (v) Continuous and carefully selected such as recommendation 1.1.2, would help to and funded TA is relevant to reforms, given boost schooling quality and the years of schooling, limitations in institutional capacity. Implementing Rwanda CEM | 2024 CHAPTER 8 237 these lessons would avoid “stop and go” policies. Last but not the least, a few lessons from pending Once the new NST-2 strategy is adopted, making reform or unsuccessful FDG reform point to a string start, and appointing a competent team key di culties that should be handled when responsible for following through with solid and implementing reforms. steady implementation will be essential. Private entrepreneurs tend to avoid policy Moreover, four additional lessons from the reforms that foster a culture of nancial implementation of recent FDG reforms can transparency, likely for tax avoidance purposes, be extracted from Rwanda’s own successful which raises the cost of credit and contributes experiences. to lower domestic savings. Examples of this were: (i) e di culties to build a pipeline of An institutional restructuring of key ministries credible ( rms) issuers of non-government may become essential for success. is was the bonds, (ii) the resistance of commercial farmers case of MINECOFIN’s 2021 restructuring to and SMEs grouped in cooperatives to ll report strengthen the Public Investment Management requirements as a pre-requisite for obtaining System; the 2019 creation of the National banking credits. In response, scal incentives to Agricultural Insurance Scheme (NAIS)’s create a culture of business transparency might subsidized mechanism; and the 2020 setting be needed. of the TVET Board ensuing the 2019 RDB’s National Skills and Employment Strategy. Signi cant human skill gaps may prevent/delay the implementation of more complex reforms. Dedicated human and nancial resources are e lack of quali ed professionals prevented critical to the success of well-selected initiatives. carrying on (i) the planned regularization of Both supports were relevant for the success of urban plots into grids; and (ii) urban land the Integrated Early Childhood Development, valuation. is requires previous institutional Nutrition and WASH (2018-24) strategy; capacity development e orts to be achieved the 2022 abolition/reduction of school fees; ex-ante. and progress on Tertiary Education relying Isolated scal reforms bene ts do better when on a signi cant increase in the percentage integrated into a comprehensive tax reform. of scholarships given to STEM and higher e elimination of the exemption of the VAT education (including grants from foreign on service exports, had a dead-start (except for universities like Carnegie Mellon. Business Process Outsourcing—BPOs—whose Adoption of multi-year targets positively tax exemptions became approved on a case-by- contributes to introducing a performance-based case basis). culture in the public sector. e experience with Strong resistance to reform from SOEs requires Imihigo has been positive in gradually adopting a comprehensive rather than a piecemeal performance contracts as part of the Sector approach, accompanied by strong political Strategic Plans and the annual assessment of support. As this is a matter of political will, in ministries’ performance. response, the Government could start selecting Policies to attract pioneer foreign rms may those SOEs that represent the higher scal prove decisive for the successful launching of burden and major sources of scal risks. some regional logistic hub initiatives. is has A bad diagnostic not leading to focus on been the case with Kigali’s Logistic Platform, the most pressing challenge can only lead to run by DP World, operational since 2019 an unsatisfactory outcome. Tackling high with a cost of US$35 million and covering an energy costs the two non-compliant PRs had area of 13,000 square meters. Its example is a wrong focus on electricity generation: (i) being followed by other logistic operators like Institutionalize least-cost sector planning and Bollore Logistics and Magerwa, whereas major competitive procurement supported by a (ii) international operators like Maersk and GCM comprehensive assessment of Rwandan energy (shipping lines) have started operations. sources. However, whereas these instruments 238 CHAPTER 8 Rwanda CEM | 2024 are essential for mastering energy costs in the reform of the Common External Tari (CET) medium term, Laterite’s report (2023) pointed which not only did not lower tari s on inputs out that the major energy problem were well- but created another tari at the upper end (35 featured gaps in electricity transmission and percent for certain nished products) thus insu cient distribution. raising overall protection; and (ii) the failed Under the best of circumstances, PRs relying proposal for a regional energy market. In on regional agreements may at best achieve contrast, small but promising achievements signi cant progress gradually and only have been obtained from the PR aiming at the if political tensions among countries are expansion of the regional trade for Rwandan minimized. Two unmet PRs su ered from food products through strong engagement in major disappointments: (i) e long-awaited the EAC and COMESA agricultural markets.