Trade balance study draft report

Analysis of Trade Balance in Rwanda: From Fragility to Sustainability Draft Report

United Nations Development Program Prudence SEBAHIZI Consultant Kigali, January 2015

TABLE OF CONTENTS LIST OF TABLES ................................................................................................................................... vi LIST OF FIGURES ................................................................................................................................ vi PREFACE ............................................................................................................................................. viii GLOSSARY OF ACRONYMS AND ABBREVIATIONS ....................................................................... ix ACKNOWLEDGEMENTS ................................................................................................................... xii EXECUTIVE SUMMARY .................................................................................................................... xiii GENERAL INTRODUCTION ......................................................................................................... 1

I. 1.1.

Background of the Study ............................................................................................................ 1

1.2.

Objectives of the Study ............................................................................................................... 4

1.3.

Methods and Techniques Used ................................................................................................... 4

II.

ANALYSIS OF TRADE BALANCE IN RWANDA ...................................................................... 5

2.1.

Rwanda Economic Overview................................................................................................... 5

2.2.

Foreign Trade Overview.......................................................................................................... 6

2.3.

Analysis of Exports Evolution from 2003 to 2013 ..................................................................... 7

2.3.1.

Exports Target and Statistics Sources .................................................................................. 8

2.3.2.

Evolution of Exports Receipts in 2003 – 2013 ....................................................................... 9

2.3.3.

Destination of Exports ....................................................................................................... 14

2.3.4.

Rwanda’s Trade with EAC Partner States .......................................................................... 15

2.3.5.

Rwanda’s Exports to West African Countries .................................................................... 16 Analysis of Imports Evolution from 2003 to 2013 .................................................................. 17

2.4.

2.4.1.

Trend of Imports and its Components............................................................................... 17

2.4.2.

Main Origin of Rwanda’s Imports from 2009 to 2013 ........................................................ 22

2.4.2.1.

Imports from Different Continents of the World........................................................... 22

2.4.2.2.

Rwanda’s Imports from EAC Partner States from 2009 to 2013 ...................................... 23

2.4.2.3.

Rwanda’s Imports from West African Countries from 2009 to 2013 ............................... 24

2.5.

Informal Cross Border Trade (ICBT) ..................................................................................... 25

2.6.

Trade Balance Analysis from 2003 to 2013 ............................................................................. 27

2.6.1.

Trade Balance of Goods and Services ................................................................................ 27

2.6.2.

Rwanda’s Trade Balance with the Main Trading Partners ................................................. 31

KEY PRODUCTS AFFECTING TRADE BALANCE IN RWANDA........................................... 33

III. 3.1.

Criteria for Selection of Products .......................................................................................... 33

3.2.

Main Exports Products .......................................................................................................... 34

3.2.1.

Coffee ................................................................................................................................ 34

3.2.2.

Tea ..................................................................................................................................... 36

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3.2.3.

Tourism ............................................................................................................................. 38 Imports Products ................................................................................................................... 40

3.3.

3.3.1.

Cement .............................................................................................................................. 40

3.3.2.

Sugar ................................................................................................................................. 42

3.3.3.

Rice.................................................................................................................................... 43

SWOT ANALYSIS OF SELECTED EXPORTS AND IMPORTS PRODUCTS ........................... 44

IV. 4.1.

Introduction .......................................................................................................................... 44

4.2.

SWOT Analysis for Export Promotion Products .................................................................... 45

4.2.1.

SWOT Analysis of Coffee ..................................................................................................... 47

4.2.2.

SWOT Analysis of Tea .......................................................................................................... 49

4.2.3.

SWOT Analysis of Tourism .................................................................................................. 51

4.3.

SWOT Analysis for Import – Substitution Products ............................................................. 53

4.3.1.

SWOT Analysis of Rice ......................................................................................................... 55

4.3.2.

SWOT Analysis of Sugar....................................................................................................... 58

4.3.3.

SWOT Analysis of Cement ................................................................................................... 60 CAUSES AND CONSEQUENCES OF TRADE BALANCE DEFICIT IN RWANDA ................. 61

V. 5.1.

Is the Trade Deficit a Problem? ............................................................................................. 61

5.2.

The Balance of Trade and Living Standards .......................................................................... 62

5.3.

Macroeconomic and Institutional Causes of the Trade Balance Deficit ................................ 62

5.3.1.

Saving-Investment Disequilibrium: the other Side of the Current Account Deficit .......... 62

5.3.2.

Exports & Imports Price Volatility and Deteriorating Terms of Trade .............................. 65

5.3.3.

Real Exchange Rate Level .................................................................................................. 67

5.3.4.

Financing Structure of the Current Account Deficit ............................................................... 69 Microeconomic Causes of the Trade Balance Deficit ............................................................ 71

5.4.

5.4.1.

Exports Related Causes ....................................................................................................... 72

5.4.2.

Causes Related to Low Level of Industrial Development ........................................................ 74 Consequences of the Trade Balance Deficit in Rwanda ........................................................ 76

5.5.

5.5.1.

Debt Servicing Problems ...................................................................................................... 76

5.5.2.

Reduction in International Reserves ..................................................................................... 76

5.5.3.

Accumulation of Arrears ..................................................................................................... 77

MEASURES TO ADDRESS TRADE BALANCE DEFICIT ....................................................... 77

VI. 6.1.

Measures at Macro Level ....................................................................................................... 77

6.1.1.

Increase Savings to Finance Domestic Investment ................................................................. 77

6.1.2.

Import Substitution of Selected Products .............................................................................. 77

6.1.3.

Improve Domestic Production Capacity ................................................................................ 78

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6.1.4.

Encourage Public Private Partnerships ................................................................................ 78

6.1.5.

Implementation of the National Export Strategy and Industrial Development Policy ............... 78

6.1.6.

Properly Manage the Exchange Rate .................................................................................... 79

6.1.7.

Select and Apply Appropriate Trade Policy Instruments ........................................................ 80

6.2.

Measures at Micro Level ....................................................................................................... 80

6.2.1.

Review the Existing Measures ............................................................................................... 80

6.2.1.1.

Measures Related to Export Promotion ............................................................................. 80

6.2.1.2.

Measures Related to Industrial Development ................................................................... 82 New Proposed Measures ....................................................................................................... 82

6.2.2.

6.2.2.1.

Measures Related to Tea .................................................................................................... 82

6.2.2.2.

Measures Related to Coffee ............................................................................................... 84

6.2.2.3.

Measures Related to Tourism ............................................................................................ 85

6.2.2.4.

Measures Related to Cement Production ........................................................................... 87

6.2.2.5.

Measures Related to Sugar Production .............................................................................. 88

6.2.2.6.

Measures Related to Rice Production ................................................................................ 88

VII.

IMPACT OF PROPOSED MEASURES FOR TRADE BALANCE SUSTAINABILITY .............. 90

7.1.

Estimated Impact of Proposed Measures for Trade Balance Sustainability and Projections ..... 90 Impact of Proposed Measures on Specific Products .............................................................. 90

7.1.1.

7.1.1.1.

Projections and Estimated Impact of Proposed Measures on Coffee Exports .................... 90

7.1.1.2.

Projections and Estimated Impact of Proposed Measures on Tea Exports ......................... 93

7.1.1.3.

Projections and Estimated Impact of Proposed Measures on Tourism Receipts ................ 95

7.1.1.4.

Projections and Estimated Impact of Proposed Measures on Food Imports ...................... 97

7.1.1.5.

Projections and Estimated Impact of Proposed Measures on Intermediary Goods Imports 98

7.2.

Impact for Overall Trade Balance in Ten Years ....................................................................... 100

VIII.

CONCLUSION AND POLICY RECOMMENDATIONS ........................................................ 103

8.1.

Conclusion .............................................................................................................................. 103

8.2.

Policy Recommendations ........................................................................................................ 105

8.2.1.

Short Term Measures .......................................................................................................... 105

8.2.2.

Medium Term Measures ..................................................................................................... 106

Regional Integration as a means to Facilitating Trade ................................................................. 106 Push for reform of EAC Common External Tariff in 2015 ............................................................ 106 Leverage WTO Trade Facilitation Agreement .............................................................................. 107 Special Economic Zone and Export Processing Zones ................................................................. 107 Sensitization on Opportunities under AGOA and EPA ............................................................... 107

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8.2.3.

Long Term Measures ........................................................................................................... 107

ANNEX I: LIST OF KEY STAKEHOLDERS ....................................................................................... 109 ANNEX II: INTERVIEW GUIDE ........................................................................................................ 112 References .......................................................................................................................................... 115

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LIST OF TABLES Table 1: Evolution of Exports in millions of USD and its growth rates .................................................... 11 Table 2: Evolution of Exports volume in tons and its growth rates in % .................................................. 12 Table 3: Evolution of Exports Unit price ($/kg) and its growth rates in % ................................................ 13 Table 4: Imports performance in Rwanda for 2003 – 2013 periods ........................................................... 18 Table 5: Informal cross border Exports in million usd ............................................................................. 25 Table 6: Informal cross border Imports in million usd......................................................................... 25 Table 7: Informal cross border Trade Balance in million usd .......................................................... 26 Table 8: Evolution of trade balance deficit (2003 – 2013).......................................................................... 27 Table 9: COFFEE Overview as of end 2011 ............................................................................................. 35 Table 10: Coffee Growing Calendar ........................................................................................................ 35 Table 11: Rwanda tea factories ............................................................................................................... 37 Table 12: Annual revenue receipts from tourism (in millions USD) ......................................................... 39 Table 13: SWOT Analysis of Export sector in Rwanda ............................................................................ 46 Table 14: SWOT Analysis of Coffee ........................................................................................................ 47 Table 15: SWOT Analysis of Tea ............................................................................................................. 49 Table 16: SWOT Analysis of Tourism ..................................................................................................... 51 Table 17: SWOT Analysis of Industrial Sector in Rwanda ....................................................................... 54 Table 18: SWOT Analysis of Rice ............................................................................................................ 56 Table 19: SWOT Analysis of Sugar ......................................................................................................... 59 Table 20: SWOT Analysis of Cement ...................................................................................................... 60 Table 21: Evolution of the Balance of Payment from 2003 to 2013 (in millions of USD) ............................ 69 Table 22: Estimated impact on coffee exports ......................................................................................... 91 Table 23: Ten years of coffee program..................................................................................................... 92 Table 24: Estimated impact on tea exports .............................................................................................. 93 Table 25: Estimated impact on Tourism receipts ..................................................................................... 95 Table 26: Estimated impact on food (rice and sugar) imports.................................................................. 98 Table 27: Estimated impact on intermediate goods (cement) imports ...................................................... 99 Table 28: Impact for overall Trade Balance ........................................................................................... 100

LIST OF FIGURES Figure 1: Trade as a Percentage of GDP, 2002-2012 (Constant Prices 2011) ................................................ 8 Figure 2: Evolution of exports growths between 2003 and 2013 ................................................................ 9 Figure 3: Evolution of Shares of exports main products in Total Exports Receipts (in %)......................... 13 Figure 4: Evolution of Quarterly exports to different continent from 2009 to 2013 ................................... 15 Figure 5: Evolution of quarterly exports to EAC partner states from 2009 to 2013 ................................... 16 Figure 6: Evolution of quarterly exports to West African countries from 2009 to 2013 ............................. 17 Figure 7: Evolution of imports growth between 2003 and 2013 (in %) ..................................................... 19 Figure 8: Evolution of construction materials imports from 2004 to 2013 ................................................ 20 Figure 9: Evolution of the share of cement in construction materials imports from 2004 to 2013 (in %) .... 20 Figure 10: Evolution of VALUE AND the quantity of food imports from 2004 to 2013 ............................ 21 Figure 11: Evolution of the share of rice in Both value and quantity of food imports from 2004 to 2013 (in %) ......................................................................................................................................................... 22 Figure 12: Evolution of quarterly imports from different continent from 2009 to 2013 (in millions US Dolla

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rs).......................................................................................................................................................... 22 Figure 13: Evolution of quarterly imports from EAC from 2009 to 2013 (in millions US Dollars) ............. 23 Figure 14: Evolution of quarterly Imports from West African countries between 2009 and 2013 .............. 24 Figure 15: Monthly evolution of Informal Cross border trade in 2013 (in million USD) ........................... 26 Figure 16: Share of each country in Informal Cross Border Trade in 2013 ............................................... 27 Figure 17: Evolution of the Growth rates of Exports and Imports of Goods from 2003 to 2013 ................ 28 Figure 18: Evolution of the Growth rates of Exports and Imports of Goods & services from 2003 to 2013 29 Figure 19: Evolution of the Growth rates of trade balance of Goods & services from 2003 to 2013 ........... 29 Figure 20: Evolution of trade balance deficit growth rate and in % of GDP ............................................. 30 Figure 21: Evolution of quarterly trade balance with EAC partner states from 2009 to 2013 (in millions US Dollars) ................................................................................................................................................. 31 Figure 22: Rwanda’s Trade Balance with the West African Countries from 2009 to 2014 .......................... 32 Figure 23: Evolution of quarterly trade balance with different continent from 2009 to 2013 (in millions US Dollars) ................................................................................................................................................. 32 Figure 24: Evolution of monthly exports of coffee from 2003 to 2013 (in millions US Dollars and kilos) .. 34 Figure 25: Evolution of monthly exports of Tea from 2003 to 2013 (in millions US Dollars) ..................... 36 Figure 26: A map showing the tea factories ............................................................................................ 37 Figure 27: Evolution of monthly tourism receipts from 2010 to 2013 (in millions US Dollars) .................. 39 Figure 28: Evolution of monthly total number of tourists 2011 to 2013 .................................................... 40 Figure 29: Evolution of monthly imports of quantity of Cement from 2004 to 2013 (in kilos) ................... 41 Figure 30: Evolution of monthly imports of sugar from 2004 to 2013 (in millions US Dollars) ................. 42 Figure 31: Evolution of monthly imports of Quantity of Rice from 2004 to 2013 (in kilos) ....................... 43 Figure 32: Rwanda's Export Targets and Strategic Interventions ............................................................. 45 Figure 33: evolution of gross domestic saving and total investment ........................................................ 63 Figure 34: evolution of Government gross domestic saving and government investment ........................ 63 Figure 35: evolution of private gross domestic saving and private investment ........................................ 65 Figure 36: Evolution of exports, imports and terms of trade indices and their growth rates .................... 66 Figure 37: Evolution of Nominal and Real Exchange Rate ...................................................................... 67 Figure 38: Evolution of Financing of trade balance deficit (in MILLIONS of USD) .................................. 71 Figure 39: Moderate to Significant Barriers to Exporting Reported by Firms ........................................... 72 Figure 40: impact of proposed measures on coffee value (in million USD) .............................................. 92 Figure 41: impact of proposed measures on tea value (in million USD) .................................................. 95 Figure 42: Impact of tourism measures on trade balance of services ....................................................... 96 Figure 43: Impact of rice and sugar increased production of food imports .............................................. 98 Figure 44: mpact of increased production of cement on imported intermediate goods ............................ 99 Figure 45: Impact of policy measures on overall trade balance of goods and services............................ 101 Figure 46: Impact of policy measures on trade balance of goods and services ....................................... 102

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PREFACE

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GLOSSARY OF ACRONYMS AND ABBREVIATIONS AGOA: Africa Growth Opportunity Act BNR: Banque Nationale du Rwanda BPO: Business Process Outsourcing CEPGL: Communaute Economic des Pays des Grands Lacs CET: Common External Tariff CIMERWA: Cimenterie du Rwanda COMESA: Common Market for Eastern and Southern Africa CWS: Coffee Washing Station DP – Development Partner DRC: Democratic Republic of Congo DTIS – Diagnostic Trade Integration Study EAC – East African Community EAC: East African Community ECCAS: Economic Community for Central African States EDPRS - Economic Development Poverty Reduction Strategy EICV: Enquete sur l’Integration des Conditions de Vie EPA: Economic Partnership Agreement EPZ: Export Processing Zone EU: European Union FDI: Foreign Direct Investment FFS: Field Farmer School GATT: General Agreement on Tariff and Trade GDP: Gross Domestic Product GLC: Great Lakes Company GOR – Government of Rwanda ix

ICCA: International Conference and Congress Association ICTBT: Informal Cross Border Trade IMF - International Monetary Fund KCC: Kigali Cement Company KCC: Kigali Cement Company KG: Kilogram KSW: Kabuye Sugar Works LDCs: Least Developed Countries MICE: Meeting, Incentives, Conferences and Exhibitions MINAGRI - Ministry of Agriculture and animal resources MINEAC – Ministry of the East African Community MINECOFIN – Ministry of Finance and Economic Planning MINICOM – Ministry of Trade and Industry MINIRENA - Ministere des Ressources Naturelles (Ministry of Natural Resources) MSME: Micro Small and Medium Enterprise MT: Metric Ton NAEB: National Agricultural Export Board NAP: National Agricultural Policy NEER: Nominal Effective Exchange Rate NES - National Export Strategy NISR - National Institute of Statistics in Rwanda NTBs: Non Tariff Barriers p.a. – Per Annum PPC: Pretoria Portland Cement PPC: Pretoria Portland Cement PPPs: Public Private Partnerships PSF - Private Sector Federation x

PSI- Policy Support Instrument PSTA: Plan Strategique pour la Transformation Agricole RDB – Rwanda Development Board REER: Real Effective Exchange Rate RRA: Rwanda Revenue Authority SADC: South African Development Community SPIU – Single Projects Implementation Unit SWOT: Strengths, Weaknesses, Opportunities and Threats TFTA: Tripartite Free Trade Area TPOs: Trade Promotion Organizations UNCTAD: United Nations Conference on Trade and Development UNDP - United Nations Development Program UNIDO: United Nations Industrial Development Organization USAID: United States Agency for International Development VFR- Visiting Friends and Relatives WEO: World Economic Outlook WTO: World Trade Organization

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ACKNOWLEDGEMENTS This work was made possible by joint efforts of different people to whom we are very much indebted. First and foremost, the main role was played by the UNDP staff who provided guidance and support from the initial to the final level of this publication.

Special thanks go to Dr Amata Diabate, Mr. Schadrak Dusabe and Mr. Evard Havugimana for without their collaboration this project would not have been possible.

We appreciate the information provided by the very busy government officials and other stakeholders1 who accepted interviews and provided documents for this report as well as the time they have availed to us during the consultation process.

The list of stakeholders who contributed to this study is long but we take the liberty to recognize the Ministry of Finance and Economic Planning (MINECOFIN) that played a big role in providing us with the data on economy and other relevant information that needed to carry out this study. The Ministry of Trade and Industry (MINICOM) provided us with trade policies and the status of their implementation so far. The National Bank of Rwanda (BNR) was key in providing us with the trade statistics such Exports, imports etc. The National Institute of Statistics of Rwanda (NISR) was vital in providing us with detailed statistics, mostly the ones that could not be found in other institutions mentioned above. The Rwanda Development Board (RDB) facilitated our understanding of the services exports, especially the tourism sector. The National Agricultural Exports Development Board (NAEB) helped us understand the traditional exports products concentrated in the agriculture sector, mainly Coffee and Tea. We also consulted other stakeholders not mentioned here mainly private sector operators and civil society organizations. We are indebted to all development partners who contributed to the enrichment of the content of this study.

Prudence Sebahizi, UNDP Consultant, prepared this report.

1

See the list of consulted people in annex II.

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EXECUTIVE SUMMARY This study was commissioned by the United Nations Development Program (UNDP) Rwanda to make a focused and updated assessment of the underlying causes of Rwanda’s continuous trade balance deficit, and propose some practical short, medium and long term measures/strategies. In the first place, the study analyzed the past trends of trade balance deficit in Rwanda where secondary time-series data concerning the trade balance (defined as the difference between exports and imports) was analyzed during the period from 2003 to 2013.

This analysis was done by tracing the evolution of total exports, imports and trade balance.

Every component of imports and exports was deeply analyzed to show the most important components to focus on in order to reduce the trade balance deficit through increasing exports and substituting some imported goods that could be produced domestically.

Secondly, the research identified the causes and consequences of trade balance deficit in Rwanda by analyzing both micro and macro-economic factors that (positively and negatively) affect trade balance deficit in Rwanda. A thorough analysis of micro and macro-economic factors that affect trade balance deficit in Rwanda was made. After reviewing the existing literature, semi structured interviews with key respondents (Government actors, as well as private sector and members of civil society organizations) were conducted. In general, the causes of high trade deficit in Rwanda were analyzed in two aspects: The first aspect analyzed the exports sector. i.e. the causes that hinder the exports from growing very fast as needed. The second aspect analyzed the imports sector. Specifically, 3 major trade products on both sides of the trade balance (exports side and imports side) were selected for which a SWOT analysis was undertaken (for each selected product). These products are Coffee, Tea and Tourism on export side and Cement, Sugar and Rice on imports side.

Furthermore, the study reviewed currently proposed solutions to address trade balance deficit in Rwanda and assessed their performance. Ongoing mitigation strategies already underway to address the identified challenges were analyzed and their impacts assessed.

Finally, the study proposed new strategies of addressing trade balance deficit and quantified their impact in the short, medium and long term. These are potential innovative measures (policies and strategies) that will impact both exports and imports. Innovative strategic options focused on long term analysis in line with population growth and in relation with the expected demands for imported goods and local consumptions of locally manufactured products etc.

After proposing all those measures, their impact on some specific commodities and on overall trade balance in general was quantified by doing the projection in 10 years of the trade balance and its composition. Different scenarios on how to reduce the trade balance deficit in an efficient and realistic way in the Rwandan case were developed.

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I. 1.1.

GENERAL INTRODUCTION Background of the Study

The Rwandan economy has been growing at a good pace during the last twenty years.

However, it continues to depend heavily on agricultural activities, domestic demand and large public investments, financed by substantial foreign aid flows. Thus, the national economy is still facing a very high trade balance deficit. The growth and development of African economies in general and of Rwanda in particular have been influenced significantly by both the external trade environment and domestic policies geared toward using the opportunities of trade and responding to trade constraints.

According to the Balance of payment statistics obtained from the National Bank of Rwanda, Rwanda’s exports of goods have increased significantly in the recent past, rising to $703 million in 2013 from $63 million in 2003. Export revenues are highly concentrated in a few products, with coffee, tea and minerals together making up 79 per cent of exports excluding re-exports (NBR, 2013).

However, imports to Rwanda have grown faster, from $229 million in 2003 to $1,851.5 million in 2013. Petrol, sugar, cement, and cosmetic products have been leading the list of imported goods. For example, in the year 2013 alone, Rwanda experienced a trade balance deficit totaling to $1,148.4 million (NBR, 2013). Rwanda therefore has been and is still facing a severe trade balance deficit, with the trade deficit slightly offset by Foreign Direct Investment (FDI), diaspora and aid transfers and remittances.

Alongside minerals, tea and coffee, Rwanda has a number of much smaller existing exports – including horticulture, pyrethrum, hides and skins, and handicrafts. These exports have shown significant volatility in recent years, particularly as a result of the global economic crisis.

Rwanda’s imports largely constitute products that have had some degree of manufacturing, especially raw materials whose prices have been rising steadily. Among the main imports in recent years include but are not limited to: intermediate goods that are dominated by construction materials, of which cement and metallic construction materials, capital goods imports that are made of Machines, tools and transportation materials, as well as consumer goods that are dominated by food products. The food imports are dominated by sugar and sweets, cereals and fats & oil. Health care products are made of Pharmaceutical products and perfumed products. Imports of energy are dominated by petroleum products.

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Rwanda’s quest for export development to increase its capacity to import and resolve the problem of trade deficits has been a subject of keen interest and concern for a long time. A Diagnostic Trade Integration Study conducted in Rwanda under the Integrated Framework program in November 2005 and updated in December 2009 identified key barriers and constraints to Rwanda’s trade growth which include but are not limited to: infrastructure deficit, high transportation costs in trading across borders, lack of sufficient skilled human resources, limited value addition of existing exports, limited diversification of exports, lack of investment in productive sectors.

According to UNCTAD (2006), Rwanda’s major economic challenges and constraints in trade of both goods and services are largely manifested in the supply-side constraints and less in the demand side, and on market constraints, in particular in regards to goods trade. These constraints mainly comprise “the productive resources, entrepreneurial capacities and production linkages which together determine the capacity of a country to produce goods and services. These productive capacities develop through capital accumulation, technological progress, and structural change (UNCTAD, 2006).

The traditional way to approach the complex issues of appropriate trade policies for development is to set these specific policies in the context of a broader strategy of looking outward or looking inward. In the words of Paul Streeten (1973), outwardlooking development policies “encourage not only free trade but also the free movement of capital, workers, enterprises and students…, the multinational enterprise, and an open system of communications.” By contrast, inward-looking development policies stress the need for a country to evolve its own styles of development and to control its own destiny. This means policies to encourage indigenous “learning by doing” in manufacturing and the development of technologies appropriate to a country’s resource endowments.

For the authors Michael P. Todaro and Stephen C. Smith, (2009), the distinction between these trade-related development strategies is that advocates of import substitution believe that a country should initially substitute domestic production of previously imported consumer goods and then through domestic production for a wider range of more sophisticated manufactured items. By contrast, advocates of export promotion of both primary and manufactured goods cite the efficiency and growth benefits of free trade and competition. In practice, the distinction between import substitution and export promotion strategies is much less pronounced than many advocates would 2

imply. Most LDCs have employed both strategies with different degrees of emphasis at one time or another (Todaro, 2009).

According to Festus O. Egwaikhide (2000), the importance of foreign trade in the development process has been of interest to development economists and policy makers alike. Imports are a key part of international trade and the import of capital goods in particular is vital to stimulating economic growth, especially in countries characterized by limited productive capacity. This is so because imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. Economic reform is expected to affect imports as part of the strategy to restore external balance.

However, unless policy makers know what the major components of imports are and how they are determined, such a policy decision can be harmful to investment and output if domestic production relies on imports (Egwaikhide, 2000). This is the case for Rwanda whereby she relies heavily on imports of capital and intermediary goods for infrastructure and investment development. The total of capital and intermediary goods make up around 55% of total imports in 2013.

To address the constraints against trade expansion, Rwanda embarked on a number of reforms, including the Export Development Strategy initiative and the National Trade Policy. The Export Development Strategy recommended strategies for developing the capacity to produce for the export market with the creation of market links. The recommendations included specific action plans in institutional and human capacity development, improvement of the legal and regulatory framework, and provision of better infrastructure.

To fast-track trade performance, the government adopted the National Trade Policy. Its objective is to enable Rwanda to identify ways and means of navigating a viable and steady route toward competitive export-led growth to achieve the country’s poverty reduction goal. Pursuing this policy conforms to international obligations and regional undertakings. The reforms made contributed to the increase in exports, but unfortunately imports were increasing as well and made the trade balance generally unfavorable. Considering that demand for goods will continue to grow due to demographic increase and that purchasing power of urban dwellers would be affecting the consumption patterns in the long term, it is important to identify proactive actions for a long lasting industrialization development and reduction of trade deficit in Rwanda.

3

Despite Rwanda’s undertaking of substantial macroeconomic reforms and adopted various policies and strategies with respect to external trade, performance of the export sector has not been consistent with recommended policies and has been outstripped by the increase in imports. According to the available statistics, Rwanda has never experienced a trade surplus since the 1980s. There have been increasing balance of trade deficits, which cause a serious scarcity of foreign exchange to meet the import bill and other payment obligations, such as the country’s external debt. This deficit raises suspicions that there could be certain policy elements that have led to the deteriorating trends of the balance of trade. This study, therefore, will attempt to make a focused updated assessment of the underlying causes of Rwanda’s continuous trade balance deficit, and propose some practical short, medium and long term measures/strategies to address this persistent problem. It is in this context that the UNDP Rwanda has commissioned this study to look into all those issues and try to find appropriate solutions.

1.2.

Objectives of the Study

The main objective of the study is to investigate the causes of trade balance deficit in Rwanda and propose some feasible solutions for short, medium and long term. The specific objectives of the study are: a) To analyze the past trends of trade balance deficit in Rwanda; b) To identify the causes and consequences of trade balance deficit in Rwanda by analyzing both micro and macro-economic factors that (positively and negatively) affect trade balance deficit in Rwanda; c) To review currently proposed solutions and assess their performance; and d) To propose new strategies of addressing trade balance deficit and quantify their impact in the short, medium and long term (10 years maximum).

1.3.

Methods and Techniques Used

To carry out this study, both qualitative and quantitative approaches were used.

Existing trade data covering the period from 2003 to 2013 was used and then projections for the next 10 years (up to 2023) were made. During data analysis and interpretation, descriptive statistics such as tabular, graphical, and numerical methods were used.

The techniques of interviews and focus groups interviews were used. Interviews were conducted on two categories of interviewees: The first category was composed by the 4

policy makers mainly the ministries and government institutions and the second group was composed by the implementers mostly the private sectors involved in exportsimports sector including producers. The category of private sector actors included producers of Coffee, Tea, and Sugar, Rice and Cement as well businessmen involved in exports and imports of goods and services like the coffee washing stations, agroprocessing industries, Private Sector Federation etc. In conducting interviews with all those stakeholders, a SWOT analysis of selected products was done with the objective of sorting out what are the Strengths, Weaknesses, Opportunities and Threats of those products. For this purpose the interview guide was prepared.

II. 2.1.

ANALYSIS OF TRADE BALANCE IN RWANDA

Rwanda Economic Overview

Rwanda has made substantial progress in stabilizing and rehabilitating its economy to pre-1994 levels and regained its ability to attract private and external investment. GDP has rebounded with an average annual growth of 7-8% since 2003 and inflation has been reduced to single digits. Rwanda’s nominal GDP per capita was US$221.0 in 2003 and it reached US$701.0 in 2013.

Rwanda’s economy is dominated by subsistence agriculture, which currently employs approximately 80% of the workforce and provides for a substantial portion of Rwanda’s GDP. Rwanda’s export agriculture is dominated by traditional export products such as coffee and tea, which represented approximately 60% of total export earnings in 2003 and they represented only less than 20% of total exports earnings in 2013.

Rwanda’s industrial sector accounts for less than 20% of GDP. Most manufacturing is in agricultural processing. Rwanda’s mining industry is also an important contributor to the economy, generating Rwf92 billion in 2013. Minerals mined include cassiterite, wolframite and coltan, which is used in the manufacture of electronic and communication devices such as mobile phones.

Rwanda’s service sector rebounded in 2010, following the late-2000s global economic recession, becoming the country’s largest sector by economic output and contributing around 46% of the country’s GDP in 2013. Tourism has been one of the fastest-growing sectors and became the country’s leading source of foreign currency in 2013.

The biggest challenges for the Government still remain the diversification of the economy and the introduction of reforms to reduce the costs of doing business in 5

Rwanda, improve the competitiveness of the economy and ensure that the rural economy contributes significantly to overall growth. The Government has established various medium and long term programs aimed at implementing the country’s development goals, including Vision 2020, the Government of Rwanda Seven Year Program and the EDPRS II, with the overall goal of transforming Rwanda into a middle income country.

2.2.

Foreign Trade Overview

Rwanda has a highly open trade regime with trade liberalization being an integral part of the Government’s reform efforts. The Ministry of Trade and Industry is responsible for trade policy formulation, implementation and negotiations. Other ministries are involved as much as possible in trade-related activities, including, inter alia, the Ministries of Finance and Economic Planning, Agriculture, Infrastructure, Lands, Environment, Forestry, Water and Mines, and government institutions like Rwanda Revenue Authority, Rwanda Development Board and National Bank of Rwanda. The Government is fully responsible for decisions on all trade negotiations and the final establishment of international treaties. The Government also makes rigorous efforts to involve non-state actors in trade matters, especially from the private sector.

Rwanda is a signatory to regional and multilateral agreements as well as bilateral agreements. It is a member of the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), Economic Community of Central African States (ECCAS) as well as of the World Trade Organization (WTO). It has bilateral agreements with the United States under the Africa Growth Opportunities Act (AGOA) and has access to the European Union’s Everything But Arms, which grant preferential market access to the least developed countries (LDCs). In addition, it has bilateral agreements with other individual countries to which it exports to including China, Malaysia, South Africa and Thailand.

Rwanda acceded to the EAC Customs Union in July 2009 and subsequently adopted the EAC Common External Tariff. Under the EAC Customs Union, goods originating from the EAC territory attract zero tariffs (zero import duty) once traded among EAC Partner States. The tariff rates for imports sourced from outside the EAC have been set at 25% for finished goods, 10% for intermediate goods, and zero for raw materials and capital goods. Rwanda is currently in negotiations with the Southern African Development Community (SADC) and COMESA to form a tripartite free trade area (TFTA) between SADC, EAC and COMESA.

6

Rwanda’s trade policy emphasizes the development of competitive production capacity supported by a vibrant private sector. Participation in regional and international trade has allowed for more integration, leading to development gains in terms of job creation, welfare improvement and poverty reduction, moving Rwanda towards the goal of transforming the economy from an agrarian to a knowledge-based economy as it is envisaged in the vision 2020.

As part of its on-going efforts to promote exports, the Government established several strategic initiatives in recent years. An Industrial Development and Export Promotion Council (IDEC) was established, with its main objective to oversee the implementation of the National Export Strategy. The key role of the Council is to provide oversight, coordination and guidance in the implementation of the national policies and strategies related to industrial growth and development that quintessentially cut across multiple Ministries, and require public and private sectors to work towards a common goal. It collects information from its internal technical teams as well as from exporters’ clusters workshops.

In an effort to modernize and centralize the information available to exporters, a web portal is being developed aimed at providing relevant information for domestic exporters and to promote Rwandan products and services to international buyers. This initiative also envisages developing a comprehensive directory of exporters, key suppliers and service providers, and to produce an exporter’s handbook, which will be used as a useful reference guide for both existing and new exporters. The handbook will cover the mechanics of exporting (transport, documentation and payments) as well as exports planning (strategy, research, marketing and promotion). The National Agricultural Export Development Board (NAEB) also established an export diversification committee, with special focus on non-traditional exports. In addition, the Ministry of Trade and Industry has a cross border trade strategy in 2013.

Rwanda was ranked 46th out of 185 countries in the World Bank’s Doing Business Report of 2014 as measured through key variables benchmarked against regional and high income economy averages. Rwanda was ranked as the 2nd most reformed economy in the World over the last five years and the 3rd easiest place to do business in Africa (1st place in the EAC). The rewarded business reforms are part of the Government’s extensive efforts to promote Rwanda as an attractive business and investment destination, in order to drive the growth of the private sector and generate wealth.

2.3.

Analysis of Exports Evolution from 2003 to 2013

Exports of goods and services over the past decade averaged 17% annual export growth 7

(2002-2013). Despite this, Rwanda still runs a trade deficit (the balance of imports and exports) as growth in imports at 22% per annum outpaced export growth. The trade deficit as a percentage of GDP averaged 12.8% over the past decade. However a slowdown in imports in 2013 reduced the trade deficit to 7.2% of GDP, the lowest figure recorded since 2000 (Figure 1).

FIGURE 1: TRADE AS A PERCENTAGE OF GDP, 2002-2012 (CONSTANT PRICES 2011) 30.00% 20.00% 10.00%

Goods Imports Services Imports 2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-10.00%

2000

0.00%

Goods Exports Services Exports Trade Balance

-20.00% -30.00% -40.00%

Source: NISR GDP Tables (March 2014) The majority of the deficit comes from an imbalance in merchandise trade, where the deficit in 2013 stood at 7.9% of GDP compared to a positive of 0.67% of GDP for services. The gap to date has been largely financed by aid flows, however a sudden drop in aid in 2012 resulted in reduced foreign reserves. This experience brought into focus the need for Rwanda to reduce dependence on foreign aid as a means to financing the trade deficit and prioritise a shift toward increased export revenue as a means to generate foreign exchange (MINICOM, 2014).

2.3.1.

Exports Target and Statistics Sources

Exports are of fundamental importance to the achievement of Rwanda’s economic growth and poverty reduction targets. The Government of Rwanda has set an export growth target of 28% per annum over EDPRS2 period running from 2013 to 2018 and is making every effort to increase and sustain its participation in both regional and international trade. This section looks at the evolution from 2003 to 2013 of exports and its main components both goods and services emphasizing especially on coffee, tea and tourism. The analysis is done using the value, the volume (quantity) as well as the 8

prices of every exports product so as to isolate the effect of each. The analysis makes use of annual trade statistics provided by Rwanda Revenue Authority (RRA), National Bank of Rwanda (BNR), Rwanda Development Board (RDB) and National Agricultural and Export Development Board (NAEB). The performance of the services sector is covered in this study with more emphasis on tourism receipts that are got from Rwanda Development Board (RDB).

2.3.2.

Evolution of Exports Receipts in 2003 – 2013

Rwanda’s total exports receipts of goods have grown strongly during ten years (2003 – 2013) from US$ 63 million in 2003 to US$ 703 million in 2013 averaging at 25.6% (see Table 1 and Figure 2).

FIGURE 2: EVOLUTION OF EXPORTS GROWTHS BETWEEN 2003 AND 2013 EXPORTS GROWTH SINCE 2003 55.6%

51.4% 37.2%

44.0%

27.5% 17.9%

19.9%

2006

2007

27.3% 19.0%

25.6%

-6.4% 2003

2004

2005

2008

2009

2010

2011

2012

2013 Average

-12.2%

Source: Our own calculations based on BNR data

Between 2003 and 2008, exports of goods have been increasing constantly at different rates. Following the global financial crisis, a sharp decrease by 12.2% was experienced in 2009 and the increase recovered up to 2013 as it can be seen on the Figure 2 above.

Coffee’s performance was good during ten years increasing to US$ 54.9 million in 2013 from US$ 15 million in 2003 with an average growth rate of 19%. Both quantity and price affected this performance. Tea exports in ten years saw an increase of 9.8% in the value of exports increasing from US$ 22.5 million in 2003 to US$ 55.5 million in 2013.

Both tea prices and quantity have affected this moderate growth rate. Mineral exports are up 40.4% over ten years with US$225.7 million exported in 2013 compared to US$11.1 million exported in 2003. This high growth in mineral exports is explained by good growth performance of Coltan, Wolfram and Cassiterite exports during 2003 – 9

2013 period. Coltan increased by 40.5% on average during ten years from US$ 6.4 million in 2003 to US$ 134.6 million in 2013. Wolfram exports receipts increased by 97.4% to US$ 30.1 million in 2013 from US$ 0.2 million in 2003. Cassiterite exports increased in value by 65.6% between 2003 and 2013 period from US$4.5 million in 2003 to US$61.1 million in 2013.

Another high growing export sector is the non-traditional sector. A key driver of nontraditional exports sector include pyrethrum, hide & skins and other products such as horticulture, handicrafts, dairy and manufacturing & agro-processing (M&A). However, pyrethrum market remains unstable, with no exports in some months of the year.

SOPYRWA has been stockpiling pyrethrum since July 2013 following the buyout of a major buyer by a competitor. SOPYRWA is in the process of identifying a strategic partner particularly in the US market which will ease pyrethrum market access to the US. Horticulture sector is amongst growing exports sectors in non-traditional sector. The horticultural industry in Rwanda is committed to the production of high quality and environmentally friendly products while preserving the health and welfare of Rwandans. The horticulture sub-sector offers considerable potential which may contribute significantly to poverty reduction and economic development if adequately exploited. There are several types of horticultural products grown in Rwanda. These include the following: (1) Vegetables: Tomatoes and green paper, French beans, chilli, carrots, hot paper, etc.; (2) Fruits: Major fruit export products include avocadoes, mangoes, pineapples, passion fruits, bananas, and strawberry; (3) Nuts: Macadamia nuts and ground nuts etc.; (4) Herbs and Spices: These include lemon, parsley, spicy grass, ginger, and garlic.

Value added horticultural exports have been increasing. This is as a result of increasing demand for natural foods as health consciousness increases among the consumers both in Rwanda and in the region. The main products under this category include pineapple juice, mango juice, passion fruits juice, dried and canned vegetables, and pastes like tomato pastes and strawberry pastes.

The export destination for the processed horticultural products is the regional market and the EU for pineapples and passion fruits. Great market opportunities exist all over the world for the above mentioned value added products from Rwanda. Rain fed crops with enough irrigation systems is a major advantage as horticulture exports require regular and reliable supply which is possible in Rwanda.

10

Table 1 below shows the evolution of the main exports products value and their respective growths rates from 2003 to 2013.

TABLE 1: EVOLUTION OF EXPORTS IN MILLIONS OF USD AND ITS GROWTH RATES 1. Coffee % change 2. Tea % change 3. Cassiterite % change 4. Coltan % change 5. Wolfram % change 6. Hides and skins % change 7. Pyrethrum % change 8. Other products % change 9. Re-exports % change 10. Adjustments % change Total exports of goods, f.o.b. % change

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

15.0

32.2

38.3

54.0

35.7

47.1

37.3

56.1

74.6

60.9

54.9

2.5%

114.7%

18.7%

41.2%

-34.0%

31.9%

-20.8%

50.4%

33.0%

-18.4%

-9.8%

22.5

21.6

24.4

31.9

31.5

44.9

48.3

55.7

63.9

65.7

55.5

2.2%

-4.2%

13.1%

30.7%

-1.1%

42.6%

7.4%

15.4%

14.7%

2.9%

-15.6%

4.5

15.9

17.9

15.9

32.0

41.2

28.6

42.2

96.8

52.9

61.1

219.2%

253.7%

12.4%

-11.1%

101.5%

29.0%

-30.7%

47.7%

129.4%

-45.4%

15.5%

6.4

13.0

16.9

11.2

19.2

36.0

20.2

18.5

38.6

56.9

134.6

-54.4%

104.3%

29.8%

-33.8%

72.1%

87.3%

-43.8%

-8.7%

108.8%

47.5%

136.5%

0.2

0.4

2.6

9.5

19.4

13.4

5.8

7.1

16.0

26.3

30.1

-56.3%

78.5%

536.3%

270.1%

103.7%

-31.0%

-57.0%

23.3%

125.7%

63.9%

14.4%

3.8

3.4

4.7

2.0

3.6

2.8

2.0

3.7

7.6

14.4

16.0

43.7%

-10.9%

40.2%

-58.0%

79.3%

-20.1%

-31.2%

90.8%

103.4%

88.7%

11.5%

1.3

0.6

1.9

3.0

0.4

0.6

1.4

4.5

9.7

4.0

21.6%

-49.5%

-100.0%

56.0%

-87.2%

68.1%

118.6%

220.9%

115.1%

-59.0%

2.4

3.8

3.2

4.4

14.4

33.0

26.9

33.8

48.4

88.0

81.9

-13.4%

60.8%

-16.3%

38.5%

225.6%

129.6%

-18.5%

25.6%

43.2%

82.0%

-6.9%

6.8

7.0

17.0

16.5

17.9

52.8

22.4

35.9

37.3

108.0

135.0

16.6%

3.5%

143.7%

-3.1%

8.8%

194.2%

-57.6%

60.4%

3.8%

189.8%

25.0%

0.3

0.2

0.1

0.1

0.1

-5.1

42.1

68.0

76.6

108.0

130.0

-90.4%

-32.0%

-53.9%

3.3%

0.0%

-6341.7%

933.0%

61.4%

12.6%

41.1%

20.3%

63.0

98.1

125.0

147.4

176.8

267.7

235.0

322.4

464.2

590.8

703.0

-6.4%

55.6%

27.5%

17.9%

19.9%

51.4%

-12.2%

37.2%

44.0%

27.3%

19.0%

Source: National Bank of Rwanda

As the re-export consists of foreign goods exported in the same state as previously imported, from the free circulation area, premises for inward processing or industrial free zones, directly to the rest of the world and from premises for customs warehousing or commercial free zones, to the rest of the world; it does not have the crucial economic impact as principal items. Between the period of 2003 – 2013, re-export increased on average by 53.2% from US$6.8 million in 2003 to US$135 million in 2013 mostly due to the increase of petroleum products, machines and engine re-exported in EAC countries and DRC. This is highly correlated to the trend of imports, especially capital and intermediary goods which have increased during the same period.

The volume of Rwanda tea exports increased by about 3.8% between 2003 and 2013 from 1,430 MT in 2003 to 2,100MT in 2013 (Table 2). This good performance was a 11

combination of good weather pattern (substantial rainfall and fewer drought) and an increase in the area of tea plantation of the year.

TABLE 2: EVOLUTION OF EXPORTS VOLUME IN TONS AND ITS GROWTH RATES IN %

1. Coffee (1,000 tons) % change

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

14.7

27.1

18.4

26.5

13.7

18.2

15.0

18.2

15.6

17.0

20.0

-25.7%

84.3%

-32.1%

44.2%

-48.5%

33.0%

-17.6%

21.6%

-14.5%

8.9%

17.7%

2. Tea (1,000 tons)

14.3

13.1

15.5

16.5

18.4

19.8

18.7

21.5

23.7

22.5

21.0

% change

-1.7%

-8.8%

18.5%

6.7%

11.2%

7.9%

-5.7%

15.2%

10.2%

-5.4%

-6.4%

1,458.0

3,553.2

4,531.8

3,835.3

4,565.9

4,193.3

4,269.2

3,874.2

6,952.1

4,636.6

4,895.3

116.9%

143.7%

27.5%

-15.4%

19.0%

-8.2%

1.8%

-9.3%

79.4%

-33.3%

5.6%

732.0

861.0

1,061.6

724.2

969.0

1,190.3

949.9

748.7

890.1

1,144.7

2,466.0

-32.6%

17.6%

23.3%

-31.8%

33.8%

22.8%

-20.2%

-21.2%

18.9%

28.6%

115.4%

120.0

157.5

557.0

1,435.6

2,686.1

1,708.0

874.5

843.4

1,006.2

1,750.6

2,217.9

% change

-63.0%

31.3%

253.6%

157.7%

87.1%

-36.4%

-48.8%

-3.5%

19.3%

74.0%

26.7%

6. Hides and skins

2,728.0

2,150.8

3,183.5

1,159.9

1,805.6

2,043.6

1,791.7

3,730.9

6,220.4

10,025.1

10,298.3

% change

37.5%

-21.2%

48.0%

-63.6%

55.7%

13.2%

-12.3%

108.2%

66.7%

61.2%

2.7%

20.0

10.1

--

44.6

38.3

3.3

3.2

6.3

18.8

37.7

16.7

52.4%

-49.6%

-100.0%

-14.3%

-91.4%

-3.6%

99.2%

196.7%

100.6%

-55.8%

3. Cassiterite % change 4. Coltan % change 5. Wolfram

7. Pyrethrum % change

Source: National Bank of Rwanda

The overall weighted average prices for Rwandan tea exports increased from USD$1.57 in 2003 to USD$2.64 in 2013 per kilo equivalent to 4.6% on average. The highest price Rwandan tea exports reached is USD$2.93 per kilo in 2012 (Table 3). This increase in price is a result of improved (their tea) quality by most tea factories producing tea with cleaner leaf and good liquor. Generally buyers are acknowledging improvement in quality made by Rwanda tea producers, but are cautioning that consistency in quality should be maintained in order for them to embrace improvement so far made.

However, some tea buyers highlighted the presence of loose fiber and smoky character in some of our teas. Therefore, tea factories should undertake corrective measures to rectify these undesirable traits that lead to discounted prices offered to such teas. The main task for tea factories is to continue improving the quality of tea to be exported so as to increase the revenue from tea exports.

According to the statistics got from NAEB, seventy two percent (72%) of all teas exported from Rwanda are going through the port of Mombasa. Therefore, it is important to keenly monitor the trading climate along the northern corridor and at Mombasa port, and do the necessary advocacy to ensure that the business environment along the corridor is conducive to Rwandan tea export operations. In recent years, the top three importing countries of Rwanda tea were Pakistan, United Kingdom, and Egypt, and together they bought about 64% of Rwanda tea Exported.

12

TABLE 3: EVOLUTION OF EXPORTS UNIT PRICE ($/KG) AND ITS GROWTH RATES IN % 2003 1. Coffee ($/kg)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1.02

1.19

2.08

2.04

2.61

2.59

2.49

3.08

4.78

3.58

2.75

38.6%

16.9%

73.8%

-2.1%

28.1%

-0.8%

-3.8%

23.7%

55.5%

-25.1%

-23.4%

1.57

1.65

1.57

1.93

1.72

2.27

2.58

2.59

2.69

2.93

2.64

% change

3.9%

5.1%

-4.5%

22.4%

-11.1%

32.2%

13.9%

0.2%

4.0%

8.7%

-23.9%

3. Cassiterite ($/kg)

3.08

4.47

3.94

4.14

7.00

9.84

6.7

10.9

13.9

11.4

12.5

47.2%

45.1%

-11.9%

5.0%

69.3%

40.5%

-31.9%

62.8%

27.8%

-18.1%

9.4%

8.69

15.09

15.89

15.43

19.85

30.27

21.3

24.7

43.4

49.7

54.6

-32.3%

73.6%

5.3%

-2.9%

28.6%

52.5%

-29.6%

15.9%

75.6%

14.7%

9.8%

1.89

2.57

4.62

6.64

7.23

7.85

6.6

8.4

15.9

15.0

13.6

18.1%

36.0%

79.9%

43.6%

8.8%

8.6%

-16.1%

27.8%

89.2%

-5.8%

-9.7%

1.39

1.57

1.49

1.71

1.97

1.39

1.1

1.0

1.2

1.4

1.6

% change

4.5%

12.9%

-5.3%

15.3%

15.2%

-29.4%

-21.5%

-8.4%

22.0%

17.1%

13.9%

6. Pyrethrum ($/kg)

64.00

64.16

--

43.10

78.44

116.16

202.6

222.3

240.4

257.9

238.9

% change

-20.2%

0.3%

-100.0%

0.0%

82.0%

48.1%

74.4%

9.7%

8.1%

7.3%

2.0%

% change 2. Tea ($/kg)

% change 4. Coltan ($/kg) % change 5. Wolfram ($/kg) % change 6. Hides and skins ($/kg)

Source: National Bank of Rwanda

The chart below shows that the traditional exports such as tea and coffee have been decreasing as a share of total exports from 2003 though they have been increasing in absolute terms. Non-traditional exports reflecting the exports diversification into new products have been increasing though they still occupy a small share in the total exports. This increasing non-traditional export is a signal that the government policies of diversifying exports have begun to yield some good results. The minerals exports have been volatile over time. This is mainly a result of the prices in the international markets that are fluctuating over time and some miners decide to not export and store their production when the prices are at low levels.

FIGURE 3: EVOLUTION OF SHARES OF EXPORTS MAIN PRODUCTS IN TOTAL EXPORTS RECEIPTS (IN %)

13

Evolution of Shares of exports products in Total Exports receipts (in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Coffee

Tea

Cassiterite

Coltran

Wolfram

Hides and Skins

Pyrethrum

Other products

Reexports

Adjustments

Shares of exports products in TEX in 2003

Shares of exports products in TEX in 2013

Coffee

Coffee

Tea

11% 0%

4% 2% 6% 0%

24%

18%

8%

Coltran 9%

Other products

Wolfram Hides and Skins

19%

Pyrethrum

36%

Cassiterite

8%

Coltran Wolfram

10% 7%

Tea

Cassiterite

Hides and Skins

2014

19% 12% 1% 2%

4%

Pyrethrum Other products

Reexports

Reexports

Adjustments

Adjustments

Source: Our own calculations based on BNR data

We selected the exports products to focus on in this study based on the fact that coffee and tea are the main components of exports during ten years and their respective prices are not more volatile compared to the other exports products as it has been observed in the above analysis, the two commodities have been chosen to be focused on in this study. In the following section, we will analyze deeply coffee and tea for exports of goods and tourism for exports of services as crucial to reduce the trade balance deficit.

2.3.3.

Destination of Exports

Looking at the exports destination, we can observe in Figure 4 below that during recent 14

years, Rwandan export destinations have been diversified and expanded away from Europe. The share of Rwanda’s exports to Europe has been constant at 28% on average in 5 years though they increased to more than 40% between 2010 and 2012. Rwanda’s exports to African continent have decreased from 62.4% in 2009 to 51.3% in 2013 Africa is still occupying the lion’s share of Rwanda’s first destination of exports and reexports with share of more than 50% of total exports in 2013. Africa is followed by Europe, Asia and America, while Oceania comes last as illustrated below.

FIGURE 4: EVOLUTION OF QUARTERLY EXPORTS TO DIFFERENT CONTINENT FROM 2009 TO 2013

Rwanda's exports to different continents (in millions USD) 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00

AFRICA

Rwanda's exports to different continents (shares of each Partner State in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

AMERICA

ASIA

EUROPE

OCEANIA

AFRICA

AMERICA

ASIA

EUROPE

OCEANIA

Source: Our own calculations based on NISR data

2.3.4.

Rwanda’s Trade with EAC Partner States

Rwanda’s total trade with EAC Partner States has significantly expanded in the last five years for both exports and imports. Since 2009, the total trade value with EAC countries recorded a significant increase from US$484.4 million in 2009 to US$556.4 million in 2013, driven mainly by imports. The country’s trade with the region remains in deficit.

While it is not easy to capture the main products exported and imported, the available data does not allow to have a complete understanding of the final destination of Rwanda’s exports. For instance, Mombasa and Dar Es Salaam serve as exit ports for coffee and tea (after auctioning) and tracing the final destination of these products proved difficult. The data used here are therefore presenting the first destination of Rwanda’s exports instead of the final destination.

15

Kenya was the main destination of exports of Rwanda in the recent years. On the imports side, Uganda continues to be the main origin of imports of Rwanda followed by Kenya. The main exports to Kenya and Tanzania are dominated by: Niobium, vanadium ores, tantalum and concentrates; Tin ores and concentrates; Coffee, not roasted, not decaffeinated; Tungsten ores and concentrates. Since 2009, the total exports value to EAC countries recorded a significant increase and more than doubled from US$48.07 in 2009 to US$143.9 million in 2013.

FIGURE 5: EVOLUTION OF QUARTERLY EXPORTS TO EAC PARTNER STATES FROM 2009 TO 2013

Rwanda's exports to EAC Partner States (in millions USD ) 60.00

Exports of Rwanda to EAC Partner States (shares of each partner state in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

50.00 40.00 30.00 20.00 10.00 0.00

Burundi

Kenya

Tanzania

Uganda

Burundi

Kenya

Tanzania

Uganda

Source: Our own calculations based on NISR data

Rwanda’s exports to EAC have been concentrated in Kenya with the share of exports going to Kenya increasing from 67.5% in 2009 to 79.7% in 2011, 81.8% in 2012 before declining to 67.6% in 2013. The share of Rwanda’s exports to Tanzania increased from 7.4% in 2009 to 11.7% in 2013. The shares of Rwanda’s exports to Uganda decreased slightly from 13.7% in 2009 to 5.5% in 2013 and to Burundi from 11.4% in 2009 to 15.1% in 2013.

2.3.5.

Rwanda’s Exports to West African Countries

Rwanda’s total exports to West African Countries has significantly increased in the last two years. Since 2009, the total exports value with West Africa recorded a significant increase and almost increased fivefold from US$14.0 million in 2009 to US$196.3 million in 2013 driven mainly by exports to DRC. The country’s trade with the region is in surplus. Rwanda’s exports to West Africa have been concentrated in DRC with the share 16

of exports going to DRC increasing from 94.7% in 2009 to 96.7% in 2013 and 97.6% in 2014. The second biggest destination of Rwanda’s exports to West Africa is the Republic of Congo (Congo Brazzaville) with its share increasing from nearly zero in 2009 to 2.7% in 2013 and 2.3% in 2014. This increased exports to Congo was mainly a result of RwandAir new flight to Brazzaville. More than 99% of Rwanda’s total exports to West Africa are going to DRC and Congo Brazzaville.

FIGURE 6: EVOLUTION OF QUARTERLY EXPORTS TO WEST AFRICAN COUNTRIES FROM 2009 TO 2013 Rwanda's exports to West Afica (in millions of USD) 80.0

Rwanda's exports to West Africa (shares of each country) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Burkina Faso

DRC

Congo

Cote D'Ivoire

Cameroon

Ghana

Mali

Niger

Nigeria

Senegal

Burkina Faso

DRC

Congo

Cote D'Ivoire

Cameroon

Ghana

Mali

Niger

Nigeria

Senegal

Source: Our own calculations based on NISR data Countries in West Africa depend mainly on mining and oil and hence lack agricultural products, for this reason, it is a good opportunity for Rwandans to seek out markets for their produce. Some of the products that are exported to West African countries include but are not only limited to meat, wine, juice and other supplies. Aided by regular flights from national airline RwandAir, which now flies to Brazzaville and Libreville, Lagos and Accra and Douala, the Rwandan business community has been making use of the cargo capacity available on such flights to export a range of goods to these Western African destinations. It is such a holistic approach which has over time increased trade and travel and is benefitting RwandAir as an airline of choice when travelling to Kigali, or via Kigali to the rest of East Africa and to such places like Johannesburg and Dubai.

2.4.

2.4.1.

Analysis of Imports Evolution from 2003 to 2013 Trend of Imports and its Components

17

Rwanda’s primary imports include intermediary goods (27% of the total value of imports), consumer goods (27%), energy products (17%) and capital goods (26%). Total imports of goods and services increased both in value and quantity by 23.4% between 2003 and 2013 from US$304.9 million in 2003 to US$2,301.6 million in 2013, mainly due to increases in imports of intermediary goods and capital goods (Table 4). The significant increase in the value of intermediary goods was primarily a result of an increase in the industry and services sectors.

TABLE 4: IMPORTS PERFORMANCE IN RWANDA FOR 2003 – 2013 PERIODS Imports (USD millions) CIF basis2 Years

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Capital goods

76.0

80.0

109.9

126.8

202.5

367.3

372.4

357.6

465.3

589.5

596.3

Intermediate goods

64.8

79.2

111.2

146.2

189.9

323.9

332.5

382.0

526.6

622.7

632.9

Energy products

53.4

68.6

78.2

108.6

115.6

161.5

178.0

210.8

345.6

361.6

384.6

Food

24.7

33.2

35.3

47.9

71.8

87.1

122.7

154.2

207.6

227.9

230.2

Other consumer goods

54.4

69.3

95.9

118.6

157.3

197.0

241.3

284.8

345.5

398.4

403.4

Adjustment

31.7

37.5

41.0

43.3

33.5

37.2

63.9

41.7

147.5

207.7

54.2

304.9

367.8

471.4

591.4

770.6

1174.0

1310.7

1431.0

2038.1

2407.6

2301.6

Capital goods

24.9

21.7

23.3

21.4

26.3

31.3

28.4

25.0

22.8

24.5

25.9

Intermediate goods

21.3

21.5

23.6

24.7

24.6

27.6

25.4

26.7

25.8

25.9

27.5

Energy products

17.5

18.7

16.6

18.4

15.0

13.8

13.6

14.7

17.0

15.0

16.7

8.1

9.0

7.5

8.1

9.3

7.4

9.4

10.8

10.2

9.5

10.0

Other consumer goods

17.8

18.8

20.3

20.1

20.4

16.8

18.4

19.9

17.0

16.5

17.5

Adjustment

10.4

10.2

8.7

7.3

4.3

3.2

4.9

2.9

7.2

8.6

2.4

5.3

37.4

15.4

59.7

81.4

1.4

-4.0

30.1

26.7

1.2

Intermediate goods

22.2

40.3

31.5

29.9

70.5

2.7

14.9

37.9

18.3

1.6

Energy products

28.6

13.9

38.9

6.5

39.6

10.2

18.5

63.9

4.6

6.4

Food

34.1

6.3

35.9

49.7

21.3

40.9

25.6

34.7

9.8

1.0

Other consumer goods

27.4

38.4

23.7

32.6

25.2

22.5

18.1

21.3

15.3

1.3

Adjustment

18.5

9.3

5.6

-22.8

11.3

71.5

-34.8

254.1

40.8

-73.9

Total

20.6

28.2

25.5

30.3

52.3

11.6

9.2

42.4

18.1

-4.4

Total % of total

Food

% change Capital goods

Source: Our calculations based on the data collected from the National Bank of Rwanda and National Institute of Statistics

2

The CIF price (i.e. cost, insurance and freight price) is the price of a good delivered at the frontier of the importing country, including any insurance and freight charges incurred to that point, or the price of a service delivered to a resident, before the payment of any import duties or other taxes on imports or trade and transport margins within the country.

18

Between 2003 and 2013, intermediary goods imports increased by 27% in value. This increase was attributed to construction materials which rose by 35% in value and by 35.7% in volume. Imported cement represented 75% of domestic consumption, reflecting the existing gap between local demand for cement and domestic production capacity.

Between 2003 and 2013, the import value of capital goods rose by 25.5% to US$596.3 million in 2013 from US$76.0 million in 2003. Imports from capital goods were mainly composed of machines, devices and tools (approximately 54% in value) and transport materials (20% in value). Positive developments in imports of capital goods and intermediary products reflect a positive trend in the general industrial sector, as most industry sectors in the country indeed recorded positive developments in ten years.

The import value of final consumer goods increased by 24.3% during ten years from US$79.1 million in 2003 to US$633.6 million in 2013 mostly due to an increase in unit price. Food products represented the largest share with 36.3% of the total value of consumer goods. Despite the increased production of domestic food, the volume of food products imports continued to increase. Between 2003 and 2013, food imports increased by 22% in volume and 7.1% in the unit prices. Food imports products are dominated by cereals, flour and seeds, fats oil and sugar, comprising approximately 78% of total consumer goods imports.

Imports of energy and lubricants (of which 95.7% are petroleum products) increased by 23.1% in value to U$384.6 million in 2013 from U$53.4 million in 2003. The increase was a result of both volume and high energy prices and to a lesser extent due to high transportation costs, especially from port of Mombasa and Dar Es Salaam.

FIGURE 7: EVOLUTION OF IMPORTS GROWTH BETWEEN 2003 AND 2013 (IN %)

19

Imports Growth since 2003 52.3 42.4 28.2 20.6

30.3

25.5

23.4 18.1 11.6

9.2 -4.4

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 AVERAGE

Source: Our own calculations based on BNR data

As the chart above (Figure 7) shows, the imports were growing very fast starting in 2003 where they grew by 20.6% and increased to 52.3% in 2008 before declining to 11.6% in 2009 mostly as a result of the global economic and financial crisis. The imports growth has increased also in 2011 where it reached 42.4%. During 2003 and 2013, it is only in 2013 when imports growth was negative following the aid delay to the government of Rwanda by some donors which happened in 2012.

FIGURE 8: EVOLUTION OF CONSTRUCTION MATERIALS IMPORTS FROM 2004 TO 2013 Evolution of the value of Construction materials imports and its components (in USD)

Evolution of the quantity of Construction materials imports and its components (in kgs) 450,000,000 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 -

120,000,000.00 100,000,000.00 80,000,000.00 60,000,000.00 40,000,000.00 20,000,000.00

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

-

Cement and other similar products

Cement and other similar products

Metallics construction material

Metallics construction material

Other construction materials

Other construction materials

Source: Our own calculations based on BNR data FIGURE 9: EVOLUTION OF THE SHARE OF CEMENT IN CONSTRUCTION MATERIALS IMPORTS FROM 2004 TO 2013 (IN %)

20

Evolution of the share of Cement in the value of construction materials imports (in %)

Evolution of the share of Cement in the quantity of construction materials imports (in %)

120%

120%

100%

100%

80%

80% 60%

60%

40%

40%

20% 20% 0% 0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Other construction materials

Other construction materials

Metallics construction material

Metallics construction material

Cement and other similar products

Cement and other similar products

Source: Our own calculations based on BNR data

As it can be seen on Figure 8 and Figure 9 above, the cement imports is the second largest in the value of construction materials imports and the first largest component in the quantity of the construction materials imports. It is clear that the share of cement in the construction materials imports has been increasing over time in both value and quantity imported. This situation is alarming as there is a possibility of producing in Rwanda cement by either expanding CIMERWA or creating other cement factories.

FIGURE 10: EVOLUTION OF VALUE AND THE QUANTITY OF FOOD IMPORTS FROM 2004 TO 2013 Evolution of the quantity of Food imports and its components (in kgs) 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 -

Evolution of the value of Food imports and its components (in USD) 80,000,000.00 60,000,000.00 40,000,000.00 20,000,000.00 -

Meat and fish Fats and oils of animal or plant origin Vegetables, fruit and spice Cereals,flours and seeds Salt

Meat and fish Fats and oils of animal or plant origin Vegetables, fruit and spice Cereals,flours and seeds Salt

Source: Our own calculations based on BNR data

More than sixty percent (60%) of food imports are composed by cereals, flours and 21

seeds including rice as a big component together with sugar as it can be seen on the chart in Figure 10 and Figure 11. The value and quantity imported of rice and sugar have been increasing significantly. This is one of the causes of increasing food imports in the Rwandan balance of payment and hence the increasing trade balance deficit.

FIGURE 11: EVOLUTION OF THE SHARE OF RICE IN BOTH VALUE AND QUANTITY OF FOOD IMPORTS FROM 2004 TO 2013 (IN %) Evolution of the share of Rice in the quantity of Food imports (in %)

Evolution of the share of Rice in the value of Food imports (in %) 150%

150%

100%

100%

50%

50%

0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sugar and sweet Salt Cereals,flours and seeds Vegetables, fruit and spice Fats and oils of animal or plant origin

0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sugar and sweet Salt Cereals,flours and seeds Vegetables, fruit and spice Fats and oils of animal or plant origin

Source: Our own calculations based on BNR data

2.4.2.

Main Origin of Rwanda’s Imports from 2009 to 2013

In the following sub-section, we analyze the Rwanda’s main origin of its imports for the period of 2009 and 2013.

2.4.2.1.

Imports from Different Continents of the World.

FIGURE 12: EVOLUTION OF QUARTERLY IMPORTS FROM DIFFERENT CONTINENT FROM 2009 TO 2013 (IN MILLIONS US DOLLARS)

22

Rwanda's imports from different continents (in millions USD) 500.00 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00

Rwanda's imports from different continents (shares of each partner state in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

AFRICA

AMERICA

ASIA

EUROPE

OCEANIA

AFRICA

AMERICA

ASIA

EUROPE

OCEANIA

Source: Our own calculations based on NISR data

Most of the Rwandan imports come from Asia and Africa. Rwanda’s imports from Asia increased from 25.2% in 2009 to 46.2% in 2013 and imports from Africa decreased from 45.5% in 2009 to 29.7% in 2013. While Rwanda’s imports from Europe and Oceania almost remained constant throughout 2009 and 2013 as it can be seen on the chart above.

2.4.2.2.

Rwanda’s Imports from EAC Partner States from 2009 to 2013

The following graph shows the behavior of imports from EAC and EAC Partner States.

FIGURE 13: EVOLUTION OF QUARTERLY IMPORTS FROM EAC FROM 2009 TO 2013 (IN MILLIONS US DOLLARS) Imports of Rwanda from EAC Partner States (in millions USD)

Imports of Rwanda from EAC Partner States (shares of each partner state in %) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

140 120 100 80 60 40 20 0

Burundi

Kenya

Tanzania

Uganda

Burundi

Kenya

Tanzania

Uganda

Source: Our own calculations based on NISR data

Imports from EAC Partner States almost remained constant in value term throughout 23

five years from 2009 to 2013. Uganda and Kenya continue to occupy a big share of Rwanda’s imports from EAC. Rwanda’s imports from Uganda increased from 38.9% in 2003 to 49.6% in 2013 and imports from Kenya decreased from 41.9% in 2009 to 29.5% in 2013. This is to say that almost 80 % of imports from EAC Partner States are from Uganda and Kenya. The share of imports from Tanzania and Burundi occupy the remaining 20% of imports from EAC. Uganda remains the main exporter to Rwanda as it can be seen on the chart above. The main imports from Uganda are mostly dominated by: Cement; vegetable fats and oils and their fractions; Palm oil; other soap and organic surface active products in bars; worn clothing and other worn articles.

2.4.2.3.

Rwanda’s Imports from West African Countries from 2009 to 2013

Imports from West African countries increased between 2009 and 2010 from USD15.9 million in 2009 to USD29.4 million in 2010 and they started to decrease from USD14.7million 2011, to USD8.8million in 2013 and to USD9.6 million in 2014. DRC occupies a big share of Rwanda’s imports from West Africa with more than 85% of total imports to West Africa in all quarters. Rwanda’s imports from DRC increased from 87.2% in 2009 to 89.6% in 2013 and 92.9% in 2014 and imports from Ghana decreased from 5.5% in 2009 to 4.2% in 2013 and 0.9% in 2014. The Rwanda’s imports from Senegal decreased from 2% in 2009 to 1.2% in 2013 before rebounding back to 3.3% in 2014. This is to say that almost 97 % of imports from West Africa are from DRC, Ghana and Senegal.

FIGURE 14: EVOLUTION OF QUARTERLY IMPORTS FROM WEST AFRICAN COUNTRIES BETWEEN 2009 AND 2013 Rwanda's imports from West Africa (share of each country)

Rwanda's imports from West Africa (in million USD) 100%

14.0

90% 12.0

80%

10.0

70%

8.0

60%

6.0

50% 40%

4.0

30%

2.0

20%

0.0

10% 0%

DRC

Cameroon Ghana

Mali

Nigeria

Senegal

Liberia DRC

Cameroon

Ghana

Liberia

Mali

Nigeria

Senegal

Source: Our own calculations based on NISR data

24

2.5.

Informal Cross Border Trade (ICBT)

Apart from formal trade, there is another trade named informal. This informal cross border trade (ICBT) is captured in the balance of payment under the line called adjustment in exports. The National Bank of Rwanda (BNR) in collaboration with MINICOM conducts monthly informal cross-border trade (ICBT) surveys between Rwanda and the four neighbouring countries, Burundi, DRC, Tanzania and Uganda.

This trade is informal either because traders are trading in very small quantities or because the rules and procedures that apply to this trade are not being correctly administered by border officials (not necessarily on the Rwanda side of the border). It is important to note that ICBT is not synonymous with illegal trade.

TABLE 5: INFORMAL CROSS BORDER EXPORTS IN MILLION USD Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Total

BURUNDI

0.73

0.81

0.77

0.76

0.75

0.79

0.75

0.76

0.71

0.74

0.72

0.77

9.06

DRC

7.95

7.34

8.71

7.52

9.66

7.17

9.59

7.80

6.57

6.94

6.35

6.64

92.24

TANZANIA

0.01

0.01

0.01

0.01

0.01

0.02

0.01

0.01

0.01

0.00

0.00

0.00

0.11

UGANDA

0.61

0.73

0.95

1.91

0.87

0.50

0.86

1.07

0.90

0.67

0.67

0.67

10.42

TOTAL

9.30

8.89

10.43

10.21

11.29

8.49

11.20

9.64

8.19

8.35

7.74

8.09

111.82

Source: National Bank of Rwanda ICBT accounts for a substantial amount of Rwanda’s regional trade. BNR’s ICBT survey suggests that Rwanda exported US$111.82 million informally in 2013 or 16% of Rwanda’s total merchandise trade. The DRC is Rwanda’s largest informal export destination, accounting for 83% of informal cross border exports. A wide variety of goods are exported informally, ranging from livestock and horticulture products to clothing and construction material. While informal exports to DRC are continuing to grow, the rate of growth has slowed in 2013, due to instability in the DRC affecting demand, a reduction in border opening times and increased informal charges by border officials in the DRC. Burundi and Uganda are also large informal export markets with total informal exports to the two countries amounting to US$ 9.06 million and US$ 10.42 million respectively in 2013. Rwanda’s informal exports to Tanzania were just $108 343 in 2013, a consequence of low population density on the Tanzania side of the border and corresponding low demand.

TABLE 6: INFORMAL CROSS BORDER IMPORTS

IN MILLION USD

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Total

BURUNDI

0.97

0.39

0.32

0.36

0.35

0.63

0.52

0.46

0.59

0.56

0.35

0.31

5.81

DRC

0.13

0.28

0.25

0.49

0.42

0.31

0.25

0.23

0.19

0.19

0.12

0.09

2.95

TANZANIA

0.09

0.05

0.08

0.07

0.06

0.06

0.06

0.06

0.05

0.05

0.03

0.05

0.70

25

UGANDA

0.75

0.68

0.62

0.64

0.68

0.63

0.69

0.69

0.61

0.69

0.72

0.75

8.14

TOTAL

1.93

1.41

1.27

1.56

1.51

1.62

1.51

1.44

1.44

1.49

1.22

1.20

17.61

Source: National Bank of Rwanda The Table 6 above shows the ICBT imports from DRC was USD2.95 million, USD5.81 million from Burundi, USD8.14 million from Uganda and USD0.70 from Burundi.

TABLE 7: INFORMAL CROSS BORDER TRADE BALANCE IN MILLION USD

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

-0.24

0.42

0.45

0.41

0.40

0.16

0.23

0.30

0.12

0.17

0.37

0.46

3.25

7.82

7.06

8.45

7.03

9.25

6.87

9.33

7.57

6.38

6.75

6.23

6.55

89.29

TANZANIA

-0.08

-0.05

-0.07

-0.06

-0.05

-0.03

-0.05

-0.05

-0.04

-0.05

-0.03

-0.05

-0.59

UGANDA

-0.15

0.05

0.33

1.27

0.18

-0.12

0.17

0.39

0.29

-0.02

-0.05

-0.07

2.27

7.36

7.48

9.16

8.65

9.79

6.87

9.69

8.20

6.75

6.86

6.52

6.89

94.21

BURUNDI DRC

TOTAL

Total

Source: National Bank of Rwanda The ICBT trade balance in 2013 was a surplus i.e Rwanda’s ICBT exports are higher than its ICBT imports. The ICBT trade balance was a surplus in all months of 2013 and it is totaling to USD94.21 million in complete year.

FIGURE 15: MONTHLY EVOLUTION OF INFORMAL CROSS BORDER TRADE IN 2013 (IN MILLION USD)

MONTHLY EVOLUTION OF ICBT (IN MILLION USD) INFORMAL CROSS BORDER EXPORTS

INFORMAL CROSS BORDER IMPORTS 11.29

10.43 9.30

9.16

8.89 7.36

1.93

Jan-13

10.21

11.20 9.79

8.65

Feb-13

9.69 9.64 8.49

7.48

1.41

INFORMAL CROSS BORDER TRADE BALANCE

6.87

1.27

1.56

1.51

8.35

8.20 8.19

1.62

Mar-13 Apr-13 May-13 Jun-13

6.75

1.51

Jul-13

1.44

1.49

1.44

Aug-13 Sep-13

8.09

7.74 6.86

Oct-13

6.52

1.22

6.89

1.20

Nov-13 Dec-13

Source: Our own calculations based on National Bank of Rwanda The DRC accounts for more than 83% of total ICBT exports in 2013 followed by Uganda and Burundi with 9% and 8% of total ICBT respectively. Uganda was the biggest origin of Rwanda’s total ICBT imports in 2013 with 46% followed by Burundi, DRC and 26

Tanzania with 33%, 17% and 4% respectively (Figure 16).

FIGURE 16: SHARE OF EACH COUNTRY IN INFORMAL CROSS BORDER TRADE IN 2013 INFORMAL CROSS BORDER EXPORTS

INFORMAL CROSS BORDER IMPORTS

9% 8% 0% 33% 46% 83%

BURUNDI

DRC

4% 17%

TANZANIA

UGANDA

BURUNDI

DRC

TANZANIA

UGANDA

Source: Our own calculations based on National Bank of Rwanda 2.6.

Trade Balance Analysis from 2003 to 2013

2.6.1.

Trade Balance of Goods and Services

Trade balance (difference between Exports and Imports) has been increasing in value for both goods and services since 2003. Trade deficit of goods increased by 23.1% on average from US$ -165.7 million in 2003 to US$ -1 148.4 million in 2013 and the trade balance deficit of services increased by 12.9% from US$ -76.4 million in 2003 to US$ 122.4 million in 2013. The trade balance deficit of both goods and services increased from US$ -242.1 million in 2003 to US$ -1 270.8 million in 2013 i.e 19.2% increase on average in 10 years.

TABLE 8: EVOLUTION OF TRADE BALANCE DEFICIT (2003 – 2013) 1. Trade balance of Goods

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-165.7

-177.9

-228.7

-299.0

-404.4

-613.0

-764.2

-761.5

-1,101.6

-1,376.2

-1,148.4

7.3%

28.6%

30.8%

35.2%

51.6%

24.7%

-0.4%

44.7%

24.9%

-16.6%

% change Exports of Goods

63.03

% change Imports of Goods % change

228.7

98.05

124.98

147.38

176.77

267.67

234.97

322.4

464.2

590.8

703.0

55.6%

27.5%

17.9%

19.9%

51.4%

-12.2%

37.2%

44.0%

27.3%

19.0%

275.9

353.6

446.4

581.2

880.7

999.2

1,084.0

1,565.8

1,967.0

1,851.5

20.6%

28.2%

26.2%

30.2%

51.5%

13.5%

8.5%

44.5%

25.6%

-5.9%

27

2. Trade balance of Services

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-76.4

-63.6

-84.1

-132.3

-123.2

-100.6

-181.6

-246.2

-187.0

-85.2

-122.4

-16.8%

32.3%

57.3%

-6.9%

-18.3%

80.5%

35.6%

-24.1%

-54.5%

43.7%

% change Exports of Services

127.3

176.1

202.1

201.7

240.6

419.9

341.0

310.4

431.4

423.0

467.6

38.4%

14.7%

-0.2%

19.3%

74.5%

-18.8%

-9.0%

39.0%

-2.0%

10.5%

239.7

286.2

334.0

363.8

520.5

522.7

556.6

618.4

508.1

589.9

17.7%

19.4%

16.7%

8.9%

43.1%

0.4%

6.5%

11.1%

-17.8%

16.1%

-241.5

-312.8

-431.3

-527.5

-713.6

-945.9

-1,007.7

-1,288.6

-1,461.4

-1,270.8

-0.3%

29.5%

37.9%

22.3%

35.3%

32.5%

6.5%

27.9%

13.4%

-13.0%

-13.1%

-11.5%

-12.1%

-13.9%

-14.0%

-14.9%

-18.8%

-17.7%

-20.1%

-20.2%

-16.9%

190.3

274.2

327.0

349.0

417.4

687.5

576.0

632.8

895.7

1013.7

1170.6

44.1%

19.3%

6.7%

19.6%

64.7%

-16.2%

9.9%

41.5%

13.2%

15.5%

515.6

639.8

780.4

944.9

1401.2

1521.9

1640.5

2184.2

2475.1

2441.4

19.3%

24.1%

22.0%

21.1%

48.3%

8.6%

7.8%

33.1%

13.3%

-1.4%

35.5%

35.3%

33.0%

30.4%

30.4%

23.5%

29.7%

29.6%

30.0%

38.0%

% change Imports of Services

203.7

% change 3. Trade balance G&S

-242.1

% change % of GDP Exports G&S % change Imports G&S

432.4

% change 4. Exports/Imports (in %)

27.6%

Source: National Bank of Rwanda

The ratio between exports and imports called exports /imports cover has been volatile and it increased in the recent years. Exports/imports ratio was 27.6% in 2003 and it increased to 35.3% in 2005 before declining to the lowest number of 23.5% in 2009 because of the economic financial crisis that hit hard the world economy including Rwanda. The ratio rebounded in the recent years where it reached the record high of 38% in 2013. This ratio is important in the sense that it shows the extent to which Rwanda’s imports are financed by exports receipts. If this ratio is high or low and increasing over time, it is good for a country as it can pay its imports bill with exports receipts and the trade deficit in this situation is considered to be sustainable.

FIGURE 17: EVOLUTION OF THE GROWTH RATES OF EXPORTS AND IMPORTS OF GOODS FROM 2003 TO 2013

EVOLUTION OF EXPORTS AND IMPORTS OF GOODS (% CHANGE) 51.5%

55.6%

51.4%

44.5% 44.0% 37.2%

20.6%

28.2% 27.5%

30.2%

27.3%

26.2% 17.9%

19.9%

25.6%

19.0%

13.5% 8.5% -5.9%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-12.2%

Exports of Goods (% change)

Imports of Goods (% change)

28

Source: Our own calculations based on BNR data Apart from the 2004, 2010 and 2013, the growth rates of imports of goods outpaced the growth rates of exports in all periods. This is very clear that the trade balance deficit of goods were increasing as the growth rates of imports of goods were higher than the growth rates of exports of goods (see Figure 17 above).

The trend is not the same for the growth rates of exports and imports for both goods and services between 2009 and 2013. The growth rates of exports of goods and services were higher than the growth rates of services imports starting in 2010 as a result of a good performance of services exports (Figure 18).

FIGURE 18: EVOLUTION OF THE GROWTH RATES OF EXPORTS AND IMPORTS OF GOODS & SERVICES FROM 2003 TO 2013

EVOLUTION OF EXPORTS AND IMPORTS OF GOODS & SERVICES (% CHANGE)

64.7% 48.3%

44.1% 19.3%

24.1% 19.3%

22.0% 6.7%

41.5% 33.1% 7.8%

21.1% 19.6%

8.6%

9.9%

2009 -16.2%

2010

13.2% 13.3%

15.5%

2012

2013

-1.4%

2004

2005

2006

2007

2008

Exports G&S (% change)

2011

Imports G&S (% change)

Source: Our own calculations based on BNR data The trade balance of goods were growing faster than the trade balance of services which is an indication that the increasing trade balance deficit is main due to an increasing trade balance deficit of goods. Any policy measures to reduce the trade balance deficit of goods will have a positive impact on overall trade balance as it is the main sources of vulnerability of Rwanda’s trade balance deficit of goods and services.

FIGURE 19: EVOLUTION OF THE GROWTH RATES OF TRADE BALANCE OF GOODS & SERVICES FROM 2003 TO 2013

29

EVOLUTION OF TRADE BALANCE (% CHANGE) 51.6% 44.7% 29.5%

37.9%

35.2%

35.3%

30.8%

28.6%

32.5% 27.9%

24.7%

22.3%

24.9% 13.4%

7.3%

6.5%

-0.3%

2004

-0.4%

2005

2006

2007

2008

2009

2010

2011

2012

2013 -13.0% -16.6%

Trade balance of Goods (% change)

Trade balance G&S (% change)

Source: Our own calculations based on BNR data FIGURE 20: EVOLUTION OF TRADE BALANCE DEFICIT GROWTH RATE AND IN % OF GDP

Evolution of trade balance deficit growth rate and in % of GDP 50.0%

0.0%

40.0%

-5.0%

30.0% 20.0%

-10.0%

10.0%

-15.0%

0.0% 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-10.0% -20.0%

-20.0% -25.0%

Trade balance G&S, % change (left scale)

Trade balance G&S, % GDP (right scale)

Source: Our own calculations based on BNR data

The observations from the above analyses is that despite the fact that Rwanda undertook substantial macroeconomic reforms and adopted various policies and strategies with aim to overcome increasing trade balance deficit, performance of the export sector has not been consistent with recommended policies and has been outstripped by the increase in imports. There have been increasing balance of trade deficits, which cause a serious scarcity of foreign exchange to meet the import bill and other payment obligations, such as the country’s external debt. We analyzed the performance of exports and imports above for the past ten years and we identified that some traditional exports such as coffee and tea have not increased as expected. We saw also that some imports such as rice, sugar and cement were the main contributors to the increase of imports bill while there is a room to produce them locally and they even 30

present the opportunity for exports. We are going in the next section to make a focused updated assessment of the underlying causes of Rwanda’s continuous trade balance deficit based on the main six products namely Coffee, Tea, Tourism, Rice, Sugar and Cement so as to propose some practical short, medium and long term measures/strategies to address that problem.

2.6.2.

Rwanda’s Trade Balance with the Main Trading Partners

Rwanda trades with different regional blocks and continents both for exports and imports. In this section, we analyze the evolution of the trade balance of Rwanda with EAC Partner States and with five continents in the world.

2.6.2.1.

Rwanda’s Trade balance with EAC

The charts below shows the evolution of trade balance deficit of Rwanda and EAC Partner States which are Kenya, Tanzania, Burundi and Uganda for the period of 2009 and 2013 on quarterly basis.

FIGURE 21: EVOLUTION OF QUARTERLY TRADE BALANCE WITH EAC PARTNER STATES FROM 2009 TO 2013 (IN MILLIONS US DOLLARS)

100.00

Rwanda's Trade Balance with EAC Partner States in millions USD

0.00 -100.00 -200.00 Burundi

Kenya

Tanzania

Uganda

Trade Balance EAC

Source: Our own calculations based on NISR data

Even if the trade balance with EAC Partner States has been on a declining trend, it is still in deficit. Rwanda has a trade balance deficit with all EAC Partner States except Burundi. Rwanda has the highest trade balance deficit with Uganda as most of the imports from neighboring countries are from Uganda like cement; vegetable fats and oils and their fractions; Palm oil; other soap and organic surface active products in bars; worn clothing and other worn articles.

2.6.2.2.

Rwanda’s Trade balance with West Africa 31

Rwanda has a trade balance surplus with West Africa between 2011 and 2014. The trade surplus with West Africa increased significantly starting in 2012 where it reached USD157.4 million in 2013 and USD186.6 million in 2014. The main reason of this high trade surplus is the big amount of Rwanda’s exports to DRC and an increasing exports to Congo Brazzaville after RwandAir opened new flight to Brazzaville.

FIGURE 22: RWANDA’S TRADE BALANCE WITH THE WEST AFRICAN COUNTRIES FROM 2009 TO 2014

Rwanda's Trade Balance with West Africa (in million USD) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0

Total exports to West Africa

Total Imports from West Africa

Rwanda's Trade Balance with West Africa

Source: Our own calculations based on NISR data

2.6.2.3.

Rwanda’s Trade Balance with Different Continents

Rwanda’s trade balance deficit with different continents continued to increase in value term from 2009 to 2013. Rwanda has the highest trade balance deficit with Asia followed by Africa. The main reason is the high imports from China such as Telephones for cellular networks or for other wireless; parts of non-domestic heating/cooling equipment; boilers for central heating; other (Structures & parts of structures, of iron/ steel and other wooden furniture.

FIGURE 23: EVOLUTION OF QUARTERLY TRADE BALANCE WITH DIFFERENT CONTINENT FROM 2009 TO 2013 (IN MILLIONS US DOLLARS)

32

Rwanda's Trade Balance with different continents in millions USD 100.00 0.00 -100.00 -200.00 -300.00 -400.00 AFRICA

AMERICA

ASIA

EUROPE

OCEANIA

Trade Balance

Source: Our own calculations based on NISR data

III.

3.1.

KEY PRODUCTS RWANDA

AFFECTING

TRADE

BALANCE

IN

Criteria for Selection of Products

Based on the analysis above, six products have been identified. Three products are on the side of exports namely Coffee, Tea and Tourism, while three others are on imports side i.e. Cement, Sugar and Rice. These products will be analyzed in details in the following sections.

The main criteria for selecting the six products above include their significant share in total exports value and contribution to imports bills for exports and imports products respectively. More importantly, their potential contribution to the livelihood of the local population was also considered. For exports products, coffee and tea have played a significant role as cash crops in generating revenues to rural population. Most Rwandans are still employed by agriculture sector, thus promoting agricultural exports products would have a meaningful justification. Tourism as the country’s leading foreign exchange earner, is estimated to directly support 34,000 jobs with a further 74,000 jobs supported indirectly.

On imports side, Rice and Sugar were selected as food commodities for which domestic market is growing rapidly whereas their contribution to imports bill is very high.

Measures to produce these commodities locally would have a big impact on trade balance. Cement on the other hand, occupy the second largest share of imports value of construction materials and the first largest component in the quantity of imported construction materials. With existing production capacity, there’s potential to produce cement that can satisfy domestic market with possibilities of exports, thus contributing 33

to trade balance improvement.

3.2.

Main Exports Products

3.2.1.

Coffee

Coffee plays a major role in the economy of Rwanda, contributing significantly to foreign exchange earnings and to the monetization of the rural economy. According to the numbers obtained from NAEB, the area under coffee cultivation in Rwanda covers a total area of 41,300 ha with plans to increase the total area under production significantly in the coming five years (to be increased to 94,370 ha in 2018). Current yields per hectare of coffee are in the area of 670kg with plans to increase yields to an average of 850 kg per hectare over the next 4 years through roll out of a self-financed fertilizer program. The annual production in Rwanda was 19,988 MT of green beans in 2013 while total output is targeted to increase to 35,000 tons by 2018 (MINAGRI, 2013).

FIGURE 24: EVOLUTION OF MONTHLY EXPORTS OF COFFEE FROM 2003 TO 2013 (IN MILLIONS US DOLLARS AND KILOS) M O N T H L Y E XP O R T S V A L U E S O F COFFEE

Monthly Exports Volume of Coffee

7,000,000

20,000,000.0 18,000,000.0 16,000,000.0 14,000,000.0 12,000,000.0 10,000,000.0 8,000,000.0 6,000,000.0 4,000,000.0 2,000,000.0 0.0

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000

0

Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13

Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13

1,000,000

M O N T H L Y E XP O R T S P R I C E O F C O F F E E 6.00 5.00 4.00 3.00 2.00 1.00 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

0.00

Source: Our own calculations based on BNR data

34

Figure 24 above shows the monthly evolution of coffee from January 2003 to December 2013 in value, quantity exported and average price on international market of Rwandan coffee. As it is observed on the Figure 24, mostly the quantity exported peak between the month of May and September of each year. Price fluctuations are a major determinant of revenue generated through coffee exports. For example in 2011, coffee production was 16,000 MT increasing to 21,000 MT by 2012. However export revenue in 2011 was US$74.6 million while in 2012 revenue was US$ 61 million. This is the result of a sharp decline in coffee prices, which in 2011 averaged US$ 5.23 while in 2012 the price dropped to US$3. Typically 50% of coffee exports are generated between August and September each year.

TABLE 9: COFFEE OVERVIEW AS OF END 2011 DESIGNATION

Quantity

Number of coffee trees

90,000,000

Estimated coffee area (ha)

35,000

Productivity (Kg of cherry per tree)

3-4kg

Estimated number of Coffee farmers

400,000

Number of cooperatives

207

Number of Coffee Washing Stations

199

CWS average capacity utilization rate

44%

Source: NAEB When we take into consideration the coffee growing calendar , we observe that there is one crop of coffee per year and the flowering starts after the June – August dry season with the first rain in September (Table 10 below). Fruits are then formed and the harvesting period starts late February in the Western Province on the shores of Lake Kivu and Early March elsewhere. However in some areas in the Northern Province coffee is still harvested until August.

TABLE 10: COFFEE GROWING CALENDAR Sep Flowering and formation Fruit ripening harvesting

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

yield and

Source: NAEB

35

3.2.2.

Tea

Given its historic position as Rwanda’s leading export revenue earner, the tea industry was identified as a priority focus area in 2003 and a detailed tea industry strategy document was accepted by Cabinet in 2004. Tea is still considered a priority sector to generate exports earnings and contribute to Rwanda’s development agenda.

3.2.2.1.

Tea Production in Rwanda.

The tea sector consists of eleven tea factories and six tea projects with an annual production volume of over 23,000 metric tons of dry tea. The area under tea cultivation is approximately 15,000 hectares. Tea production in Rwanda has grown from 5,414 tons in 1995 to 23,249 tons in 2010 (NAEB, 2015).

FIGURE 25: EVOLUTION OF MONTHLY EXPORTS OF TEA FROM 2003 TO 2013 (IN MILLIONS US DOLLARS) M O N T H L Y E XP O R T S V A L U E O F T E A 9,000,000.0

Monthly Exports Volume of Tea 3,500,000.0

8,000,000.0 3,000,000.0 7,000,000.0 2,500,000.0

6,000,000.0 5,000,000.0

2,000,000.0

4,000,000.0

1,500,000.0

3,000,000.0 1,000,000.0

2,000,000.0

500,000.0

Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13

0.0

0.0 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13

1,000,000.0

Monthly Exports Price of Tea

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Source: Our own calculations based on BNR data

36

Figure 25 above shows the monthly evolution of tea from January 2003 to December 2013 in value, quantity exported and average price on international market of Rwandan tea. As it is observed on the chart above, both tea quantity and price have been volatile with quantity exported being the most driving force of tea exports revenue over ten year period. For example in 2013, tea exports volume stood at 1 734.5MT in May, 2 076.5MT in June, 2 265.9MT in July, 1 641.1MT in August, 1 124.3MT in September and jumped again to 1 752.1MT in November while the price of tea on international market was almost the same averaging around 2.5$/Kg. This is an indication that the quantity of tea being exported is the main determinant of the tea exports receipts and any effort to increase the production of tea will increase tea exports revenue.

3.2.2.2.

Tea Processing and Export

Rwanda produces one of the best quality teas in the world. Approximately 97.3% is exported in raw form. 60% of Rwanda Tea is sold in Auctions, 37.3% is sold directly and 2.7% is sold locally. Every week at the Mombasa auction, Rwanda tea especially Gisovu fetches the highest price.

TABLE 11: RWANDA TEA FACTORIES

S/N

TEA FACTORY

1 2

MULINDI SHAGASHA

3

GISAKURA

4

MATA

5

KITABI

6

RUBAYA

7

DISTRICT LOCATION

CAPACITY (MT OF MADE TEA PER YEAR) 4 200 3 200

NYABIHU

GICUMBI (NORTHERN PROVINCE) RUSIZI (WESTERN PROVINCE) NYAMASHEKE (WESTERN PROVINCE) NYARUGURU (SOUTHERN PROVINCE) NYAMAGABE(SOUTHERN PROVINCE) NGORORERO (WESTERN PROVINCE) NYABIHU (WESTERN PROVINCE)

8 9

GISOVU SORWATHE

KARONGI (WESTERN PROVINCE) GICUMBI (NORTHERN PROVINCE)

2 400 3 600

10

PFUNDA TC

RUBAVU (WESTERN PROVINCE)

2 400

11

NSHILI

12

KARONGI

NYARUGURU (SOUTHERN PROVINCE) KARONGI (WESTERN PROVINCE)

2 400 2 400 2 400 2 800 1 400

1 500 1 200

Source: National Agricultural and Exports Development Board (NAEB) FIGURE 26: A MAP SHOWING THE TEA FACTORIES

37

Source: National Agricultural and Exports Development Board (NAEB)

Tea is grown on 12 estates covering a combined total area of 15,000 ha. Annual production in Rwanda was 23,249 tons of dry tea in 2012 up from 14,500 in 2000.

Average yields per hectare are at a respectable 4.4 tons of dry leaves and efforts to improve this figure, while important, are anticipated to have a marginal impact on overall production. It is expected that increasing total tea production will come primarily through increasing the total land area under cultivation. NAEB is leading plans to increase the area under cultivation by an additional 18,000 ha between 2012 and 2017, bringing total area under cultivation to 38,650 ha by the end of 2018 (MINAGRI, 2013).

Tea exports in the first half of 2013 saw a decrease of 5% in the value of exports over the same period in 2012. Exports were impacted by the Kenyan elections in the early part of 2013 that disrupted sales at the Mombasa tea auctions. A drop in tea prices in the second quarter of 2013 also affected exports with the average price of tea down by 3% per kg compared to 2012 (NAEB, 2015).

On the processing side there are 12 operational tea factories with total annual processing installed capacity of 29,900 MT. In 2012 the 12 factories operated at a combined rate of 87% capacity (IDEC, 2013). In addition to the existing factories five new factories are currently being established.

3.2.3.

Tourism

Tourism is one of the fastest growing economic resources and became the country's 38

leading foreign exchange earner accounting for 21% of total exports between 2001 and 2010 and accounting for 4.2% of GDP in 2012. Tourism revenues (revenue from leisure visitors to Rwanda) in 2013 were USD 293.6 million, an increase of 4.2 per cent on the USD 218.8 million received in 2012. Leisure visitors to Rwanda generated USD 143 million, whilst a further USD 98.2 million came from business visitors, who predominantly come from neighboring countries and the EAC. The Volcanoes National Park continues to be a high foreign exchange earner, generating USD 13.3 million in revenues in 2013, which is 94% of all parks revenues.

FIGURE 27: EVOLUTION OF MONTHLY TOURISM RECEIPTS FROM 2010 TO 2013 (IN MILLIONS US DOLLARS) Monthly Tourism Revenue by purpose of visit

Monthly Tourism Revenue (in million USD) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 -

30.0 25.0 20.0 15.0

2010M1 2010M3 2010M5 2010M7 2010M9 2010M11 2011M1 2011M3 2011M5 2011M7 2011M9 2011M11 2012M1 2012M3 2012M5 2012M7 2012M9 2012M11 2013M1 2013M3 2013M5 2013M7 2013M9 2013M11

10.0 5.0 -

tourism_rev_leis

tourism_rev_vfr

tourism_rev_bus

tourism_rev_oth

Source: Our own calculations based on RDB data

The travel & tourism sector averaged 25% growth per annum between 2002 and 2012. In the past five years the growth rate has slowed to 9% per annum (MINICOM, 2014). The tourism sector is estimated to directly support 34,000 jobs with a further 74,000 jobs supported indirectly. The sector is expanding at a rapid pace. In Kigali alone, several new four to five star hospitality facilities are being built with 14 currently operational.

TABLE 12: ANNUAL REVENUE RECEIPTS FROM TOURISM (IN MILLIONS USD) 2004 2005 2006 Tourism 43.50 48.76 131.84 % change 12% 170% Source: Rwanda Development Board

2007 151.63 15%

2008 186.00 23%

2009 174.46 -6%

2010 201.65 16%

2011 251.80 25%

2012 281.80 12%

2013 293.60 4%

Tourism revenue is highly concentrated with organized mountain gorilla tours accounting for 90% of earnings. Rwanda also has other attractions to offer tourists

39

mainly in the area of nature and wildlife. Rwanda has six volcanoes, twenty-three lakes and numerous rivers.

At present, the majority of high-value international visitors to Rwanda spend no more than three nights on average in the country. Little additional revenue is generated for Rwanda as a general tourist destination hampered by perception of the country and visa requirements.

FIGURE 28: EVOLUTION OF MONTHLY TOTAL NUMBER OF TOURISTS 2011 TO 2013 MONTHLY TOTAL NUMBER OF TOURISTS ARRIVALS

MONTHLY NUMBER OF TOURISTS ARRIVALS BY PURPOSE OF VISIT

120,000 100,000

tourism_visit_leis

tourism_visit_vfr

tourism_visit_bus

tourism_visit_oth

50,000 80,000

40,000

60,000

30,000

40,000

20,000

20,000

10,000 2011M1 2011M3 2011M5 2011M7 2011M9 2011M11 2012M1 2012M3 2012M5 2012M7 2012M9 2012M11 2013M1 2013M3 2013M5 2013M7 2013M9 2013M11

2011M1 2011M3 2011M5 2011M7 2011M9 2011M11 2012M1 2012M3 2012M5 2012M7 2012M9 2012M11 2013M1 2013M3 2013M5 2013M7 2013M9 2013M11

-

-

Source: Our own calculations based on RDB data

As it can be seen on the chart above, the number of visitors has been increasing though fluctuating through different months. For example, Rwanda hosted in the month of August almost 77 068 visitors, 100 248 visitors and 93 871 visitors in 2011, 2012 and 2013 respectively. This is an indication of how the number of tourists arriving in Rwanda have been volatile over time. Business tourists accounted for almost of the majority of all arrivals though they have been outpaced recently by tourists for other purposes. The second largest tourists were the ones coming in Rwanda for VFR tourism purposes.

3.3.

3.3.1.

Imports Products Cement

At the end of 2013, the available figures show that 80% of Rwanda’s total domestic 40

production of cement was produced by two firms, Cimenterie du Rwanda (CIMERWA), and Kigali Cement Company (KCC) both accounting for 40% of the market respectively.

Rwanda also has one smaller operator, Great Lakes Cement, which has been undergoing a restructuring program and is operating well below capacity. CIMERWA has the largest installed capacity with an annual production capacity of 100,000 tons.

The three producers have a combined capacity to produce 190,000 tons of Portland cement per year.

Rwanda also imports a significant amount of cement from Uganda‘s Hima Ltd. In 2012, the total domestic demand for cement was 400,000 tons and expected to increase to 770,000 tons by 2017. To bridge the gap between domestic production and demand, Rwanda imported over US$67 million in 2012 up from US$ 50 million in 2011, a 34% year on year increase.

FIGURE 29: EVOLUTION OF MONTHLY IMPORTS OF QUANTITY OF CEMENT FROM 2004 TO 2013 (IN KILOS) Monthly Imports of Cement (in millions USD)

Monthly Imported quantity of Cement (in kilos)

10000.0

45,000,000

9000.0

40,000,000

8000.0

35,000,000

7000.0

30,000,000

6000.0

25,000,000

5000.0 20,000,000 4000.0 15,000,000 3000.0 10,000,000 2000.0 5,000,000

1000.0

May-13

Jan-12

Sep-12

May-11

Jan-10

Sep-10

May-09

Jan-08

Sep-08

May-07

Jan-06

Sep-06

May-05

Jan-04

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Sep-04

-

0.0

Source: Our own calculations based on BNR data

Both CIMERWA and Kigali Cement Company have plans to increase production capacity. Pretoria Portland Cement (PPC) recently bought a controlling stake (51%) in CIMERWA for approximately US$ 69 million and plans are now underway to increase production capacity to 600,000 tons by 2016. Kigali Cement is also intending to increase production capacity to 100,000 tons.

Given the size of the import bill for cement, expediting the expansion of production would have a significant and positive impact on Rwanda’s import bill. Furthermore the sector may be large enough to begin exporting to neighboring countries in the region.

41

3.3.2.

Sugar

Sugar is a sensitive item in the EAC’s Common External Tariff with a tariff of 100% on all sugar imports (EAC, 2012). Demand is expected to continue to increase in the short, medium and long term. Rwanda has one sugar processing plant, Kabuye Sugar Works (KSW), with installed capacity to produce 17,000 MT of sugar per annum. The factory is currently running below capacity due to a shortage of raw sugar cane for processing.

Sugar production is often disrupted by flooding. To bridge the gap in domestic production, Rwanda is importing sugar and sugar based goods. Sugar is imported mainly from India, Uganda, Brazil and Tanzania.

FIGURE 30: EVOLUTION OF MONTHLY IMPORTS OF SUGAR FROM 2004 TO 2013 (IN MILLIONS US DOLLARS) Monthly Imports of Sugar (in millions USD)

Monthly Imports of Suagar (in kilos)

12000.0

14,000,000 12,000,000

10000.0

10,000,000 8000.0 8,000,000 6000.0 6,000,000 4000.0 4,000,000 2000.0

2,000,000

Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13

Dec-13

Oct-12

May-13

Mar-12

Jan-11

Aug-11

Jun-10

Nov-09

Sep-08

Apr-09

Jul-07

Feb-08

Dec-06

Oct-05

May-06

Mar-05

Jan-04

Aug-04

0.0

Source: Our own calculations based on BNR data

A feasibility study for the construction of a second plant in Nasho was undertaken and subsequently updated by a potential Mauritian investor in 2012. The updated study recommended the construction of a second plant in Nasho, Ndego and Kirehe sectors.

Based on the findings of the study, the Mauritian investor has approached MINICOM with an expression of interest to invest in the site. The investor is ready to invest US$ 160 million in a new plant and employ about 2100 permanent workers. The sugar factory will have the capacity to crush approximately 650,000 tons of sugarcane per annum and produce 80,000 tons of pure sugar per annum. The investors intend to produce electricity using waste from sugarcane production as raw material. The investor has submitted a business plan to MINAGRI for review. MINAGRI is reviewing the business plan and if approved will allocated the requested land to the investor so that construction of the site can begin.

42

3.3.3.

Rice

Rice has become a major food crop in Rwanda. According to Rwanda Rice Policy, the total rice production has increased by 6-fold from 11,949 tons in 2000 to 72,000 tons in 2009. This increase is mainly due to a parallel increase in rice area under cultivation.

Due to rising incomes and changing lifestyles of the growing population however, the demand for rice consumption has outstripped the local production. To cope with the demand, the country has been importing an average of 21,340 tons per year mainly from countries such as Tanzania, Pakistan, Uganda and Vietnam (MINAGRI, 2010).

Currently Rwanda has 22,000 ha under rice cultivation with plans to increase the area to 28,000 ha by 2015. The largest area of rice production is in Eastern Province (40 percent), followed by Southern Province (36 percent), and Western Province (21 percent), with 90 percent of production in Western Province coming out of Rusizi. Production is about evenly divided between Season A (46 percent) and Season B (54 percent). MINAGRI statistics indicate that production area and yields peaked in 2009, but have since remained at a relatively stable level of production, around 70,000 MT and 5.5 MT/ha.

This is a relatively high yield for the small-scale production of paddy rice, comparable to that achieved in Vietnam (5.3 MT/ha) and higher than Thailand
 (2.8 MT/ha) or Bangladesh (4.2 Mt/ha) in 2011.

FIGURE 31: EVOLUTION OF MONTHLY IMPORTS OF QUANTITY OF RICE FROM 2004 TO 2013 (IN KILOS) Monthly Rice imports volume (in Kilos)

Monthly Rice Imports in Value (millions USD)

35,000,000

12000.0

30,000,000

10000.0

25,000,000

8000.0

20,000,000 6000.0 15,000,000 4000.0 10,000,000 2000.0

5,000,000

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13

0.0

-

Source: Our own calculations based on BNR data

Rice is a key component of both urban and rural diets. EICV3 data shows that rice is the single largest component of urban food consumption (7.5 percent), but less important in rural areas (2.6 percent). These figures correspond to urban and rural consumption 43

volumes of 32,000 MT and 43,000 MT respectively, indicating that national rice consumption in 2011 was 75,000 MT (roughly equivalent to the EICV3 statistics for maize meal). At an average milling output of 62 percent, this level of consumption is equivalent to 120,000 MT of paddy rice. Factoring in post-harvest losses of 13 percent, and seed requirements (480 MT), suggests a total utilization of 138,000 MT of paddy rice. Incorporating the 2012 trade deficit of 57,000 MT rice, domestic production would appear to be in the region of 80,000 MT (NISR, 2012).

IV.

4.1.

SWOT ANALYSIS OF SELECTED EXPORTS AND IMPORTS PRODUCTS

Introduction

A SWOT analysis (alternatively SWOT matrix) is a structured planning method used to evaluate the strengths, weaknesses, opportunities and threats involved in a project or in a business venture. A SWOT analysis can be carried out for a product, place, industry or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favourable and unfavourable to achieve that objective.

- Strengths: characteristics of the business or project that give it an advantage over others.

- Weaknesses: characteristics that place the business or project at a disadvantage relative to others.

- Opportunities: elements that the project could exploit to its advantage.

- Threats: elements in the environment that could cause trouble for the business or project.

Identification of SWOTs is important because they can inform later steps in planning to achieve the objective. First, the decision makers should consider whether the objective is attainable, given the SWOTs. If the objective is not attainable a different objective must be selected and the process repeated. Users of SWOT analysis need to ask and answer questions that generate meaningful information for each category (strengths, weaknesses, opportunities, and threats) to make the analysis useful and find their competitive advantage.

Strengths and Weaknesses: These are the internal factors within an organization like Human resources; Finances; Internal advantages/disadvantages of the Organization; Physical resources; Experiences including what has worked or has not worked in the past.

44

Opportunities and Threats: These are external factors stemming from community or societal forces like Trends (new research); Society’s cultural, political, and economic ideology; Funding sources; Current events; societal oppression.

In this chapter, we have discussed each commodity’s Strengths, Weaknesses, Opportunities and Threats related to outward-looking measures and inward-looking strategies. For outward-looking strategies, we have analyzed three products, namely: Coffee, Tea and Tourism. In terms of inward-looking measures, we have studied three commodities, i.e. Cement, Sugar and Rice.

4.2.

SWOT Analysis for Export Promotion Products

According to EDPRS II, the export target set for Rwanda over the next 5 years is 28% average annual export growth or approximately US$ 4.2 billion of goods and services exports by 2018 (MINECOFIN, 2013). The NES II has been developed based on the analysis of export growth trends for Rwanda. The four strategic interventions are presented in Figure 32 below. It should be noted however, that the NES fits into a broader range of private sector development activities and its success, to a large extent is dependent on delivery of commitments for private sector development made under the EDPRS II program.

FIGURE 32: RWANDA'S EXPORT TARGETS AND STRATEGIC INTERVENTIONS

• •

Sector Strategies for Increasing Production are separate, complementary and feed into Export Action Plan Addressing Cross-cutting constraints necessary for supporting achievement of Export Targets

Source: Adapted from National Export Strategy and EDPRS II

Table 13 below analyses the strengths, weaknesses, opportunities and threats related to export sector in Rwanda.

45

TABLE 13: SWOT ANALYSIS OF EXPORT SECTOR IN RWANDA

EXPORT SECTOR IN RWANDA Strengths Weaknesses - Good Quality: Rwanda’s export - Skills & Knowledge Deficit: Unfamiliar products such as tea, coffee, exporting procedures/paper work meeting horticulture, etc. enjoy the highest export product quality/ standards quality on international market. /specifications; inadequate quantity of and/or - Supporting Institutions and untrained personnel for export Policies: The central remit of the /internationalization; and unfamiliar foreign Rwanda Development Board business practices.

(RDB), established in 2008, - Limited Management Skills: Lack of includes providing current and managerial time to deal with potential exporters with trade and export/internationalization and develop new market information as well as products for foreign markets. advice and recommendations the - Poor relations between firms and buyers: Government on practical measures Inability to contact potential overseas to stimulate export trade. customers; - The Rwanda Development Board - Lack of understanding of international has a program of Export advisers. standards and high cost of product certification and meeting standards; - Limited information to locate and analyze markets and identify foreign business opportunities.

- Lack of competitiveness due to cost of transport & infrastructure.

- Low production capacity of local industries.

Opportunities Threats - Market availability: Rwanda is a - Limited Access to and Cost of Finance: signatory to regional and Shortage of working capital to finance exports. multilateral agreements as well as There’s no Export Finance program in Rwanda. bilateral agreements. This grants - Supply side constraints: low productivity of Rwandan products easy access to local industries, Rules of Origin, and Standards international markets with issues on international market. preferential treatment.

- Price volatility: Rwanda’s overall export - The National Export Strategy is performance is still determined primarily by clear with policy measures for world prices for its key commodity exports export promotion through despite diversification. investment and productivity, - Risks on Transport Corridors. infrastructure development, - Cumbersome Procedures: Paperwork related to capacity building of firms and exports. export financing mechanism.

- Untapped Opportunities: there is 46

EXPORT SECTOR IN RWANDA more potential to promote nontraditional exports in Rwanda.

4.2.1.

SWOT Analysis of Coffee

There are opportunities for international investors to invest in coffee sector through purchase of existing CWS networks, or set up new CWS. Opportunities exist for roasting and packing with toll roasting in Europe, the United States and China. Existing production is mainly Arabica/semi-washed, though existing providers are expanding into specialty coffees. The SWOT matrix of coffee presented in Table 14 below highlights factors constraining growth in coffee sector and factors constraining growth in coffee exports as well as exports strengths in the sector and potential opportunities.

TABLE 14: SWOT ANALYSIS OF COFFEE SWOT ANALYSIS OF COFFEE Strengths Weaknesses - Well Organized Farmers: Farmers - Scattered coffee producers with small land: are organized into 207 cooperatives The bulk of Rwanda’s coffee is grown by operating under 15 unions and one approximately 400,000 small-scale farmers who National Coffee Farmers’ typically produce on less than one hectare of Federation. land. Thus, exploitation of economies of scale by - Competitive Quality: Rwanda farmers becomes quasi-impossible.

Coffee is appreciated on - Lack of managerial capacity by farmers’ international market. According to organizations: Most of coffee farmers’ RDB, the price of Rwandan coffee organizations suffer lack of managerial capacity is consistently higher than the New and inability to access relevant support services York C - price, reflecting premium adversely affecting yield and quality of output. quality and targeting of specialty - Lack of optimization of production capacity by buyers (RDB, 2015).

CWS: the average capacity utilization of the CWS is just 30% and the percentage of coffee - High participation of its exported as fully washed stands at between 20% stakeholders: many financial and 30%. This is due to low levels of cherry institutions, exporters, partners, production which has led to low profitability of and buyers are interested and coffee washing stations. involved in coffee business compared to other exports - Low quality of coffee processed by smallholder producers: Once coffee is products. harvested it is either sold to one of the over 200 - Favorable environment: Rwanda coffee washing stations throughout the country has ideal climate, soil, elevation or processed by the smallholder producer and growing conditions for 47

SWOT ANALYSIS OF COFFEE Arabica coffee. themselves where quality is typically much - Initiatives on coffee quality lower. control already in place offer an - Low managerial capacity by some Coffee opportunity to continue placing Washing Stations: There are management good quality coffee on the world issues in CWS mainly those owned by market. cooperatives.

- Limited capacity of NAEB’s Coffee Collection Centre: The Centre includes a 2000 MT capacity warehouse for sorting and storage of coffee and a 1000 MT export warehouse. Compared to the projections in coffee production, the existing warehouse capacity should be increased.

- Lack of structured marketing and branding strategy: Individual coffee exporters struggle to market their goods in foreign markets. The low capacity of local exporters explains the reason why exports are dominated by foreign based companies.

Opportunities Threats - Availability of free warehouses: - Poor infrastructure: Many CWS are affected by NAEB’s Coffee Collection Centre low quality infrastructure, lack of availability of offers a warehouse for sorting and water and power. Costly and demanding storage of coffee and an exporting transportation of coffee cherries leading to high warehouse is free of charge. operating costs.

- Market Availability: Exports - Limited capacity of NAEB’s Coffee Collection market for Rwandan Coffee Centre: The capacity of the warehouse for include Belgium, Switzerland, sorting and storage of coffee is often USA, UK and China. Coffee traders oversubscribed in peak seasons leading to a have identified new markets for long wait for exporters when using the facility. low grade coffee (Sudan and Coffee left in storage deteriorates in quality over Egypt) but require support in time and coffee exporters have expressed developing the markets. concern that samples sent to coffee buyers did - Possibility of developing a single not match the quality of the coffee that was then branding strategy for Rwandan available for exporting. This can result in coffee: In existing markets, coffee cancelled orders and in some instances the exporters have expressed interest closure of coffee exporting firms. in developing a single brand for - Limited Financial resources: Limited financial Rwandan coffee, a proposal that resources has meant late payment by NAEB on has been discussed for the past a number of invoices related to the seedling three years, but a clear plan has yet program and may result in scaling back to materialise. expansion program in the coming years.

- Good Prices: Current coffee cherry - Inefficiencies of Mombasa Port: Coffee often 48

SWOT ANALYSIS OF COFFEE prices are a source of motivation to sits for long periods in warehousing close to farmers. Prevailing prices and ports in Mombasa and Dar due mainly to trends on the world market are inefficiencies associated with the ports. The cost favorable. of storage at the port is expensive and coffee exporters have identified a reduction in this cost and time in storage as a priority for ensuring quality and competitiveness.

- Price volatility in the international markets: Price fluctuations and demand side shocks makes export revenue to be very vulnerable.

- Limited Land: Land available for increased production is not enough.

4.2.2.

SWOT Analysis of Tea

Tea is Rwanda’s second largest export earner generating close to $65m in annual revenues. Demand for specialty teas is growing strongly. Global demand requires 60million kg of tea be added each year to world supply (RDB, 2015).

Table 15 below analyses the strengths, weaknesses, opportunities and threats related to tea sector in Rwanda.

TABLE 15: SWOT ANALYSIS OF TEA SWOT ANALYSIS OF TEA Strengths -

Weaknesses

Growing Sector: In addition to existing -

Lack of value addition: 97.3% of all

12

are

production exported in raw form. Value

currently being established. There’s high

addition can take place in this context, by

potential for growth in yields by up to

tailoring quality to the needs of the

30%. Over the last 2 years, the Rubaya tea

customer for example. However, value

plantation increased yields by more than

addition is most commonly thought of in

40%

terms of local packing, the logic being

factories

through

five

new

factories

improved

agronomic

practices demonstrating strong upside.

that producers can gain a larger slice of the final retail price.

-

Well Organized Sector: Tea farmers are -

Limited processing capacity: On the

well organized in cooperatives. There’s a

processing side the 12 operational tea

strong and clear relationship between

factories have a total annual processing

farmers cooperatives and tea factories.

installed capacity of 29,900 MT. In 2012 49

SWOT ANALYSIS OF TEA the 12 factories operated at a combined -

High Quality of Rwandan Tea: In2011,

rate of 87% capacity.

Rwandan tea achieved the highest price -

No Local Packing for Value Addition:

in Africa at the Mombasa tea auction and

There are very few examples where local

has been consistently higher than the

packing for export has been successful.

international price. Rwandan tea was

Packing machinery is expensive and

awarded best primary grade winner for

different

black tea CTC and best winner green tea

different markets – each market requires

at the 2013 Africa Tea Convention.

a tailored solution. Packaging will need to

formats

are

required

for

use a design and specification acceptable to the market.

Opportunities -

-

Threats

Market Availability with preferential -

Poor

treatment where Rwanda is signatory to

production: Tea producers have raised

market access agreements. Placing focus

concern about the pace of rollout of the

on increasing the visibility, quality and

tea expansion program as a result of poor

consistency of Rwandan tea, is a likely

coordination

way of promoting value in the sector. If

institutions responsible for developing

this process shows signs of success, then

the infrastructure required (feeder roads,

appropriate procedures can be put in

water, electricity).

place to capture and protect the higher -

Land

value.

planned increase of tea plantation area

Favorable

to

amongst

Scarcity:

With

support

tea

Government

the

currently

Conditions

from 15,000ha to 38,650 ha by 2018,

(climate, natural resources): Rich volcanic

there’s concern that land availability may

soil, high altitude and rainfall make for

be a challenge.

ideal

Production

infrastructure

growing

conditions.

Carefully -

Vulnerability

to

Climate

Change:

researched tea varieties are matched with

marshland tea suffers from floods during

soil conditions.

the period of heavy rains.

-

Storage at

Mombasa: As much of

Rwanda’s tea is sold through Mombasa, tea exporters have raised concern about the quality and cost of warehousing close to the port there. This challenge is compounded by long processing time and cumbersome procedures at the port.

These delays significantly increase the

50

SWOT ANALYSIS OF TEA amount of time tea is stored close to the border and the cost associated with renting storage.

-

Withholding Tax on Tea: Tea is often sold directly by the major tea producers to foreign based brokers. Currently, RRA is charging a withholding tax on all tea exports, including those sold directly to foreign brokers. While the withholding tax can be reclaimed, the time lapse can negatively impact the competitiveness of tea exports from Rwanda.

-

Limited financial resources will slow the pace of rollout of the tea expansion program. The limited financial resources imply that new tea factories may not be able to source sufficient inputs in initial years of operation to operate at high capacity.

4.2.3.

SWOT Analysis of Tourism

Tourism has been identified as a priority sector to achieve Rwanda’s development goals as set out in Vision 2020. With the application of tourism policies, the country has been able to make significant progress in developing and managing its tourism sector in recent years. As shown in previous analysis, Rwanda’s tourism industry accounts for a significant portion of foreign revenue.

Table 16 below analyses the strengths, weaknesses, opportunities and threats related to tourism sector in Rwanda.

TABLE 16: SWOT ANALYSIS OF TOURISM SWOT ANALYSIS OF TOURISM SERVICES Strengths -

Weaknesses

Unique Assets: Tourism in Rwanda offers tourists a one of a kind journey home to one third of the world’s

Lack of diversity of tourism product: 90% of tourism earnings are still derived from organized mountain gorilla tours 51

SWOT ANALYSIS OF TOURISM SERVICES remaining Mountain Gorillas, one third of Africa’s bird species, several species of primates, volcanoes, game reserves, resorts and islands on the expansive Lake Kivu, graceful dancers, artistic crafts and friendly people.

- Safe and easy to get around with short distances to diverse destinations: Rwanda is a thriving, safe country with one of the lowest crime rates in Africa. All major attractions are located along a circuit within 1-5 hour drive from the capital, Kigali. In a short vacation, a tourist can reach volcanoes, rainforests, savannah, islands, lakes and the beautiful city of Kigali.

- A base to visit East African destinations: Located in the heart of central and East Africa with easy access to bordering countries of Uganda, Tanzania, Burundi, Democratic Republic of Congo and Kenya. Rwanda is an ideal location for travel within the region for conference and leisure tourists.

Opportunities -

Product

Diversification

and this over-reliance on a single product will limit sustained growth in the tourism sector.

-

The lack of adequate

numbers

skilled

of

workers

is

a

significant constraint to business across all of Rwanda’s high growth sectors, including tourism. The tourism sector does not have the capacity to train and retrain professionals in the field in general tourism attributes or in MICE specific skills.

-

Infrastructure

challenges-connecting

tourist sites to roads and the national electric grid. Prime tourist attractions need to have better infrastructure from Kigali, particularly roads and electricity.

-

Rwanda’s destination brand is still weak and undefined.

Threats

the -

Agenda:

Skills gap:

Regional instability and low levels of

Government has put considerable effort

awareness – Association with instability

into diversifying the industry to include a

in the Democratic Republic of Congo

wider

(DRC) has a negative effect on Rwanda.

range

diversification strengthening

of

products.

has of

This

included

MICE

the

tourism

-

including large scale investment in a new Kigali

Convention

Centre

and -

This

is

compounded

International

awareness

by of

limited Rwanda’s

tourism offer.

High cost of air transport and limited air

establishment of a convention bureau

routes from high end tourism markets.

within RDB - as well as attempts to

The cost of flights to Rwanda is expensive

develop and market a range of cultural

when compared with other competing

and community tourism products such as

destinations.

the Kigali cultural village, the Kivu Belt -

Pre-travel visa requirements: A number 52

SWOT ANALYSIS OF TOURISM SERVICES tourism sub-master plan including the

of countries, including Germany, the

development of a spa and wellness

United Kingdom, the United States, and

integrated resort, Gisovu tea tour for

other EAC and CEPGL Member States,

excellence,

do not require visas to visit Rwanda but

Musanze

development,

Cave

and

tourism avitourism

citizens

from

other

countries

must

complete a visa process including paying

Introduction of East African Single

a visa fee.

Tourist Visa: The East Africa Tourist Visa -

VAT on Services Exports: In line with

allows travel between Kenya, Rwanda

international

and Uganda with the same multiple entry

regimes,

visa. This visa is the result of a joint

provides for zero-rating of exports to

initiative made by the Heads of States of

allow businesses to export goods and

the respective Partner States to boost

services on an equal and competitive

regional travel and create opportunities

footing with similar businesses around

for tourists to explore the diversity of East

the world without the encumbrance of

Africa.

irrecoverable VAT changes for customers.

Planned Government interventions: In

This is also the reason why most VAT

recognition

the

regimes - Rwanda inclusive - have

put

procedures for accounting for VAT on

considerable effort into diversifying the

imported services. Revenue authorities

industry to include a wider range of

can thus ensure that no one business

products.

gains advantage over another because of

Citizens from all African countries

its location. However, there are some

receive visa at the airport: According to

anomalies with how Rwanda’s existing

the Rwanda Migration Office, from 01

tax legislation is applied in the case of

January

travelers

services exports. Article 5(1)(e) of the VAT

coming to Rwanda, get visa at the

law (n0 37/2012) provides that for services

boarder

Kigali

to be considered as exported from

International Airport. Before, Africans

Rwanda and therefore not subject to VAT,

travelers had to get visa on internet, for

the services should be “rendered abroad”.

countries which don't host a Rwandan

The RRA interprets this to mean that the

Diplomatic

service should be physically performed

-

development.

-

of

Government

-

of

2013, or

this

at

constraint,

Rwanda

all

Africans

Kamembe

Mission.

has

For

or

both

EAC,

CEGPL countries, travelers don't need to

best

Rwanda’s

practice VAT

on

VAT

legislation

abroad for zero rating to apply.

get a visa to go to Rwanda

4.3.

SWOT Analysis for Import – Substitution Products 53

Rwanda‘s productive structure is still dominated by agriculture and low-value services.

Food crops form the largest single sub-sector of the Rwandan economy at 31 per cent of GDP. This is followed by wholesale and retail trade with 14 per cent, while other large service sectors predominate, including real estate and business services (10 per cent of GDP), transport and communication (8 per cent), public administration (5 per cent) and education (5 per cent). According to the National Industrial Policy of Rwanda, the industrial sector contributed 15 per cent of GDP in 2010, less than half the size of the services and agricultural sectors and some way short of Vision 2020‘s target of 26 percent. Construction is the largest industrial sub-sector, with 7 per cent of total GDP or 52 per cent of industrial output in 2010, up from 41 per cent in 2002. Manufacturing makes up 43 per cent of industrial output and just 7 per cent of total GDP, predominantly in food processing and beverages and tobacco. Other sub-sectors of manufacturing are negligible in total GDP (MINICOM, 2011).

Table 17 below analyses the strengths, weaknesses, opportunities and threats related to industrial sector in Rwanda.

TABLE 17: SWOT ANALYSIS OF INDUSTRIAL SECTOR IN RWANDA

INDUSTRIAL DEVELOPMENT IN RWANDA Strengths -

Sector

Weaknesses Strategies

and

Policies:

The -

Ministry of Trade and Industry has developed a number of key policies and strategies business

aimed

at

improving

environment

the and

complementing efforts to develop the industrial sector. These include the SME Development Policy (2010), Trade Policy (2010), and Competition Policy (2010).

-

-

Supporting Institutions: RDB acts as a one-stop-shop for investors and has significantly reduced the cost of doing business, making Rwanda the most reformed in the region. The Private Sector Federation of Rwanda (PSF) aims to strengthen private companies, build human capacity for the private sector, facilitate sustainable funding sources for Rwanda‘s private sector, develop a vibrant membership association of

Energy Cost is a major impediment to the Rwandan industrial sector: energy costs in Rwanda are double that of EAC Partners and far exceed larger industrial economies such as South Africa and China. This is a severe competitive disadvantage for Rwandan business, particularly in the industrial sector, which is the most energy intensive.

Transport is another major constraint faced by businesses in Rwanda: the majority of investment geared towards the road network is focused on national roads, which are often times already paved. As a result, district feeder roads are often neglected by investment programs, thereby causing extra costs for agricultural suppliers to markets and to industrial buyers.

High Interest Rate: The cost of money makes it difficult for business people to borrow capital from banks. Lack and high 54

INDUSTRIAL DEVELOPMENT IN RWANDA private sector players and provide cost of finance leads to high production economic dispute arbitration. costs.

- Good Governance and zero-tolerance to - Lack of Raw Materials and Industrial corruption has given Rwanda a Inputs: Rwanda’s integration into global competitive edge compared to its regional value chains will be determined by its neighbors. ability to access inputs at world prices, - Land Reform policies are being whether produced domestically or implemented and will impact on land internationally. availability for industries and agriculture.

Opportunities Threats -

-

Market Availability: Rwanda has joined both the EAC and the Commonwealth bodies hence ensuring more partnerships and wider markets.

Good Policies: The 7-year electricity development program aims at having a

international

been NGOs

supported

UNIDO

and

USAID

Central corridors to Mombasa and Dar es

including which

have

implemented industry support projects especially in support of rural small scale enterprises. Macroeconomic and policy

goods to and from international markets.

Rwandan goods along the Northern and

by

Netherlands Development Agency (SNV),

significant challenges and costs in getting

trade. Many NTBs are due to the transit of

industrial sector in Rwanda especially also

km from Dar es Salaam and faces

traders are non-tariff barriers (NTBs) to

and access rate of 50% by 2017. The has

km from the Port of Mombasa and 1,480

The principal constraints faced by Rwandan

cumulative installed capacity of 1000 MW

SMEs

Geographical Location: Rwanda is 1,740

Salaam respectively.

-

High

operational

costs

(transport,

logistics) -

Limited

rural

infrastructure

(water,

energy, transport, settlement, health).

environments are favorable. Industrial parks and special economic zones have been set up.

4.3.1.

SWOT Analysis of Rice

In more recent years the Government’s investment efforts have been directed towards the reclamation of vast areas of inland valleys swamps (marshlands), construction of several small dams in the valleys, organization of farmers’ co-operatives, privatization of rice mills, farm mechanization and facilitation of the supply of inputs such as seeds, fertilizers, and pesticides. As a result, the total area under rice cultivation as well as the total milled rice production have increased dramatically. However the demand for 55

consumption has also been surging during these years. The local markets responded to the increase in demand mainly by importing milled rice grains from countries such as Tanzania, Pakistan, Vietnam, and Uganda. It is nevertheless conceivable, from the rice supply and demand dynamics, that if Rwanda could scale up the local rice production, the country shall eliminate the need for imports and thereby attain self-sufficiency.

Table 18 below analyses the strengths, weaknesses, opportunities and threats related to rice sector in Rwanda.

TABLE 18: SWOT ANALYSIS OF RICE

SWOT ANALYSIS OF RICE Strengths -

Weaknesses

Increased area of marshlands for rice cultivation: By 2017 a total of 32,000 ha of marshlands will be developed, mainly cultivated with rice. The National Rice Development Strategy (NRDS) identified a catchment area of 2,700km2 receiving annual rainfall of 1500mm with 5,572 ha of marshland in the Nyabarongo River suitable for Rice cultivation.

-

-

-

-

Poor Quality: The poor quality of locally milled rice means that consumers have a preference towards imported rice.

Poor Relations between Millers and Producers: which discourages production of rice and results in poor quality of rice being supplied to millers.

Inefficiencies in Processing: Processing efficiency affects post-harvest losses of

Availability of good high yielding varieties of rice: Rwanda produces short grain rice (Kigori). Rice productivity of 5.5 MT/ha in Rwanda is a relatively high yield for the small-scale production of paddy rice, comparable to that achieved in Vietnam (5.3 MT/ha) and higher than Thailand
 (2.8 MT/ha) or Bangladesh (4.2 Mt/ha) in 2011.

Well Organized Farmers: High numbers of cooperatives already engage with the sector, with the potential for capacity building.

Sector Strategies and Policies: The National Rice Development Strategy aims -

rice and production costs. Milling output

at

the

suitable fertilizer recommendations and

current level of 5.8 t/Ha to 7 t/Ha, and

the high fertilizer cost are the two major

expanding the area under rice cultivation

reasons

to

management in rice fields.

increasing

28,500

productivity

Ha

by

2018.

from

National

can be affected by the variety of rice and the condition and management of the mill. Traders report that levels of output from the smaller village mills in Rwanda have been very low (below 50 percent), although

the

recently

introduced

regulations requiring cooperatives to sell and distribute rice are likely to reduce the number of smaller mills.

Lack

of

value

addition

industries:

Inadequate private investments in value chain.

Poor Soil Management: The lack of

for

the

poor

nutrient

56

SWOT ANALYSIS OF RICE Agricultural Policy (NAP) identifies rice as

one

of

the

priority

agricultural

commodities. It proposes that appropriate technological

packages

need

to

be

developed for the sector to improve its commodity chain. NAP recognizes that

-

farmers in decision making; -

envisages development of improved postharvest technologies to enhance quality and value of rice commodity. There’s synergy with other public investments

Less preparedness in handling natural risks e.g. pest/disease outbreak, climate

rice offers a potential market in the country and in the EAC region. NAP also

Poor organization of producers and lack of finance available leading to high production costs and; Weak participation/engagement of

change; -

Low adoption of mechanization;

-

Inadequate

storage

and

marketing

services; -

Lack of branding of local farm produces.

(irrigation, mechanization, post-harvest handling, storage).

-

Facilitation of Inputs (seeds, fertilizers): MINAGRI has experience in procurement and distribution of inputs.

Opportunities -

Threats

EAC Common External Tariff: According -

Scarcity of Seeds: Rice farmers in most

to EAC Customs management Act, rice is

parts of Rwanda find it difficult to access

on the list of EAC sensitive products

sufficient amounts of good quality rice

which

seeds.

are

protected

from

outside -

competition; -

-

-

Favorable

Production

Conditions

Water

Scarcity

irrigation:

Water

and

distribution/

becomes

scarce

(climate, natural resources): Fertile soil,

especially during the dry season in most

favorable

of the marshlands where rice is grown.

weather,

natural

water

resources, efficient manpower & rice -

Pests and Diseases: Lack of knowledge

yields in Rwanda exceed the average

on appropriate control measures against

level of productivity of several other

pests and diseases amongst farmers is a

traditional rice growing countries.

major

Strong Market Demand (local and regional): The EAC market demand was more than 2,088,000MT in 2012 and was expected to grow overtime.

productivity levels.

Good Price: Regardless of quality, most

and even the use of poor quality bags, has

mills operate at a price of RWF15/kg of

resulted in post-harvest losses as high as

impediment

in

raising

the

Regional Competition (Tanzanian rice) Weather Condition: harvesting during rainy conditions, lack of drying facilities,

57

SWOT ANALYSIS OF RICE paddy milled.

26 percent. The impact of such losses has been well recognized and programs are being designed to address these problem.

4.3.2.

SWOT Analysis of Sugar

Rwanda spends about $50 million every year on sugar related imports and the government has been on the lookout for a solution. Kabuye Sugar Works is Rwanda’s only sugar plant and it produces about 10,000 tons of sugar annually out of its estimated full capacity of 60,000 tons. The annual local market demand is around 80,000 tons. The shortfall is served by imports (Mbanda, 2014).

According to the Governor of National Bank of Rwanda, the high volumes of sugar and sweets contributed to a general increase of Rwanda’s import bill during the first six months of 2014. Between January and June 2014, the value of imports increased by 13 per cent which widened the country’s trade deficit by 17.4 per cent from $765.4 million in 2013 to $898.6 million (BNR, 2014).

Kabuye Sugar Works and the Ministry of Agriculture & Animal Resources have agreed to set up a Joint Technical Committee to implement a MoU that was signed on May 7th, 2013, with a mutual interest in the development of sugarcane cultivation and production.

The MoU targets the sugarcane value chain. MINAGRI will be providing technical support to sugarcane growers through already-existing extension services, both at the national and district levels, as well as strengthen the organizational capacity and mobilize the out growers by facilitating sugarcane stakeholder meetings. The Ministry will be working to introduce new, high-yielding, and resistant clones of sugarcane through the promotion of research. In addition, MINAGRI will target its efforts to mobilize funds aimed at wetlands development and water management infrastructure development in direct benefit of sugarcane cultivation.

In turn, Kabuye Sugar Works will be actively engaging in upland cultivation with the objective of expanding the land under sugarcane cultivation, and collaborating with public extension services to support farmers in improving farm management techniques to increase yields. Plans of modernization and expansion of the current sugar factory are to be facilitated by the company, with the objective of producing at least 50,000 tons of brown sugar annually.

58

Kabuye Sugar Works will be co-investing with the Dutch government in the Nyabarongo Land Reclamation Project with the objective of securing about 2,000 hectares of land from the Nyabarongo marshlands for sugarcane cultivation. In terms of productivity, there must be a joint effort to embrace new areas for outgrowing systems and organizing farmers.

Table 19 below analyses the strengths, weaknesses, opportunities and threats related to sugar sector in Rwanda.

TABLE 19: SWOT ANALYSIS OF SUGAR SWOT ANALYSIS OF SUGAR Strengths -

-

-

Rice

Weaknesses Production

for Low Production Capacity: KSW is the only Rwanda: Rwanda aims at increasing Rwanda’s sugar plant and it produces about domestic production to cover 100% of 10,000 tons of sugar annually out of its raw sugar by 2020. One site is being estimated full capacity of 60,000 tons. If KSW developed and it will include sugar was operating at its full capacity it would plantations, mill, co-generation & ethanol only meet 30% of local demand. To offset its huge import bill on sugar, Rwanda has had a production, in East of the country. longstanding arrangement with EAC partnerGovernment is committing up to 130 states for tax-free sugar from outside the million francs in transport, electricity and region. However, the Kabuye Sugar Works water infrastructure. plant managers have always opposed the Favorable Conditions: Rich soil and move, saying it encourages cheap sugar rainfall make for ideal growing imports which outcompetes their own conditions of sugarcane. Carefully supplies on the local market. But sugar research on sugarcane varieties that consumers counter that Kabuye producers matched with upland soil conditions. are standing on weak grounds given that Sugar Industry is tax contributor to the their factory can’t satisfy the needs of the government, provides employment to the local market. farmers.

is

a

Priority

-

Poor Technology: The sugar factory (KSW) uses the old technology that leads to low production and losses.

-

High

Cost

of

Production:

Rwanda

remains the last place where factor costs remain low.

Opportunities -

Threats

Market Availability: Market for raw -

Limited Land: the land availability may 59

SWOT ANALYSIS OF SUGAR sugar in Rwanda and in the region is

become a challenge is Rwanda is to

large and growing faster while local

produce 100% of raw sugar domestic

production covers less than 30% of local

demand.

-

demand.

-

Competition with the Brazil and World

EAC Common External Tariff: Sugar is

Market (China, India and US).

on the list of sensitive products in the EAC Common External Tariff. This makes a great opportunity for local producer to out compete sugar imported from outside the EAC at a tariff rate of 100%.

SWOT Analysis of Cement

4.3.3.

Cement is among the top 10 products on the list of Rwanda’s imports. Given the growing market of cement and construction materials, there’s a huge potential for Rwandan companies to invest in cement production for both local and regional markets opportunities.

Table 20 below analyses the strengths, weaknesses, opportunities and threats related to cement production in Rwanda.

TABLE 20: SWOT ANALYSIS OF CEMENT SWOT ANALYSIS OF CEMENT Strengths -

Weaknesses

Enough Production Capacity: CIMERWA -

Limited Investment in cement production:

is

only three companies are involved in

well

positioned

as

the

dominant

domestic cement producer in Rwanda.

CIMERWA

has

just

completed

the -

Reliance on External Skills: Lack of local

construction of a new modern cement

skills and difficulty of getting work

plant with a capacity of 600,000 tons per

permits for external experts.

annum; six times bigger capacity than the -

High Transport Cost of Raw Materials: For its process, CIMERWA imports from outside Gypsum, HFO, paper bags, spare parts and other consumables such as refractory materials, grinding aid and

existing

plant

(100,000

tons).

Kigali

Cement Company intends to increase its production capacity to 100,000 tons.

-

cement production in Rwanda.

High Quality: CIMERWA Ltd is the

60

SWOT ANALYSIS OF CEMENT leading Rwanda cement manufacturing

grinding balls/cylpebs. The plant uses heavy fuel oil from Kenya, leading to a high production cost of cement.

Company producing high quality cement for internal and external market because of high quality limestone deposit in the area.

Opportunities

Threats

-

-

Unavailability and instable power supply;

-

High cost of electricity;

-

High cost of transport as a land locked

-

Increasing Domestic and Regional Market: Apart from Rwanda market that has been growing steadily, Rwanda cement is being sold to neighboring countries. Market demand for cement currently stands at about 500,000 tons of cement per year, and the country depends mostly on imports. There’s estimated target regional market of 400,000 tons per year in Burundi, Eastern Congo and Southern Uganda.

New Technology: The plant will use a dry manufacturing process and a combination of peat and heavy fuel oil to substantially reduce fuel costs.

V.

5.1.

country; -

Delayed delivery of spare parts and consumables from abroad.

CAUSES AND CONSEQUENCES OF TRADE BALANCE DEFICIT IN RWANDA

Is the Trade Deficit a Problem?

Before investigating deeply the causes of trade balance deficit, we need to understand whether a trade balance deficit is always bad or not. According to Craig K. Elwell (2007), a trade deficit is not necessarily undesirable. It confers benefits and carries some costs, and the former may exceed the latter. Trade deficits are a vehicle for extending the gains from trade, where lending and borrowing among nations can lead to a more efficient allocation of saving and a preferred pattern of consumption over time. Trade deficits do not necessarily cause slower economic growth or lead to any economy wide loss of jobs. As seen in the 1980s and as was evident in the 1990s, the U.S. unemployment has fallen to record lows and the economy’s growth rate has accelerated to record highs even as the trade deficit has risen (Elwell, 2007). That deficit, therefore, does not necessarily come at the expense of current domestic economic activity. Of 61

course, borrowing carries a cost as the lender demands that interest be paid on the funds borrowed and the principal one day be repaid. This “debt service cost� is a burden the borrower must carry tomorrow for living beyond his means today. An evaluation of the desirability or undesirability of a trade deficit will hinge on the current benefits gained from that added spending relative to the future debt service burden that is incurred.

Also, reliance on foreign sources of finance often raises concern that trade deficits carry an elevated risk of instability and disruption to the economy. Finally, trade deficits have differential effects on different sectors of the economy, often placing large burdens on exporting and import-competing sectors.

5.2.

The Balance of Trade and Living Standards

A common misconception is that balance of payments deficits are always bad for the economy. This is not necessarily true. In the short term if a country is importing a high volume of goods and services this acts as a short-term boost to living standards since it allows consumers to buy a higher level of household durables and other items. A widening trade deficit might also be the result of an increase in imports of capital equipment and technology which will provide a boost to a country’s potential national output. If imports of investment goods improve our competitiveness, this raises the prospect of an increase in employment and real incomes arising from a better supplyside economic performance. However in the long term, if the trade deficit is a symptom of a weakening domestic economy and a lack of international competitiveness then living standards may decline.

5.3.

Macroeconomic and Institutional Causes of the Trade Balance Deficit

Factors that lead to a trade balance deficit must be investigated before any solutions can be proposed. This section discusses the trade balance deficit from different perspectives, drawing from the macroeconomic perspective in order to form a basis for possible solutions.

5.3.1.

Saving-Investment Disequilibrium: the other Side of the Current Account Deficit

In economic literature, the current account deficit is essentially determined by macroeconomic, microeconomic, and corporate developments that impact

62

savings/consumption and investments, and is defined as the difference between a country’s total investments and savings in a given period.

In Rwanda, the domestic savings ratio has been fluctuating between 2003 and 2013 increasing from RWF44.0 billion in 2003 to RWF493.0 billion in 2013 and averaged at 6.3% of GDP while the total investment has been growing faster than domestic savings from RWF174.2 billion in 2003 to RWF1 176.0 billion in 2013 averaging at around 21.3% of GDP during the same period. The root cause of Rwanda’s low savings ratio is the rapid downward trend in government sector savings.

FIGURE 33: EVOLUTION OF GROSS DOMESTIC SAVING AND TOTAL INVESTMENT

400.0

5.0%

200.0

0.0%

--

2013

10.0%

2012

15.0%

600.0

2011

800.0

2010

20.0%

2009

1,000.0

2008

25.0%

2007

1,200.0

2006

30.0%

2003

1,400.0

2005

Evolution of total Gross saving and investment (in % of GDP)

2004

Evolution of total Gross saving and investment (in billion of Rwf)

Gross domestic savings Gross domestic savings

Investment

Investment

Source: Our own calculations based on BNR data FIGURE 34: EVOLUTION OF GOVERNMENT GROSS DOMESTIC SAVING AND GOVERNMENT INVESTMENT

63

Government Gross saving and investment (in billion Rwf) 700.0 600.0 500.0 400.0 300.0 200.0 100.0 --100.0 -200.0 -300.0

Government Gross saving and investment (in % OF GDP) 15.0% 10.0% 5.0% 0.0% -5.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-10.0% -15.0%

Gross domestic savings (Gvt)

Gross domestic savings (Gvt)

Investment (Gvt)

Investment (Gvt)

Source: Our own calculations based on BNR data

The government of Rwanda did not experience positive savings since 2003. The government saving deteriorated during 2008 and 2011 as a result of the expansionary fiscal policy implemented that time so as to cushion the impact of the global financial and economic crisis. The gap between government saving and investment has been widening during ten years with only exception in 2012. The government has been able to cover this widening gap with donor grants which were increasing during that period.

The government was able to finance its investment bill by the grants and some concessional debts from the international donor community. The main cause of the widening trade balance of Rwanda was the government spending more than domestic resources and this is consistent with what is called twin deficits. The twin deficit hypothesis says that there is a strong link between current account balance and government balance.

Government expenditure has also positive effect on worsening of trade balance deficit in Rwanda. This simply means that there have been sensible government interventions, such as investment in imports of different kind to support the economic activity. The result supports the argument of the fiscal consolidation being undertaken by the Rwandan government where increased revenue mobilization and expenditure prioritization to close the fiscal gap remain the key components of Government’s medium- term strategy. However, there is also a need to reduce government expenditure, especially in non-priority areas (cars and other unnecessary expenditures).

Note also that reducing government expenditure may not be a sensible solution if it entails reducing expenditures in such priority sectors as health care, education, agriculture, and the like.

64

FIGURE 35: EVOLUTION OF PRIVATE GROSS DOMESTIC SAVING AND PRIVATE INVESTMENT

Private Gross Saving and Investment (in billion of Rwf)

Private Gross Saving and Investment (% of GDP) 20.0%

700.0 600.0

15.0%

500.0 400.0

10.0%

300.0 200.0

5.0%

100.0 --

Gross domestic savings (Private)

Gross domestic savings (Private)

Investment(Private)

Investment(Private)

2013

2008 2009 2010 2011 2012

2003 2004 2005 2006 2007

0.0%

Source: Our own calculations based on BNR data

As it can be seen on the graph above, private sector was able to finance its investment with their savings though investment was high in three consecutive years starting in 2008 to 2010 mainly because of the global economic and financial crisis.

Private consumption and government expenditure are the main variables that cause the trade deficit. This is correct and is strongly supported by the high import content of commodities found on the consumer shelf in Rwanda—cars, petroleum products, second-hand clothes, electronic equipment, and so forth. This is true because there are very few goods produced locally, compared with local demand. Total demand is fulfilled largely by imported consumer goods. Even the few locally produced goods that are available don’t meet the qualities preferred by local consumers, so there is a lot of substitution of imported goods for locally produced ones. That substitution continues to worsen the trade balance.

5.3.2.

Exports & Imports Price Volatility and Deteriorating Terms of Trade

Terms of trade (TOT) refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An improvement of a Rwanda’s terms of trade is its benefits in the sense that it can buy more imports for any given level of exports. The terms of trade may be influenced by the exchange rate

65

because a rise in the value of a country's currency lowers the domestic prices of its imports but may not directly affect the prices of the commodities it exports.

Since Rwanda typically export and import many goods, measuring the TOT requires defining price indices for exported and imported goods and comparing the two. A rise in the prices of exported goods in international markets would increase the TOT, while a rise in the prices of imported goods would decrease it. For example, Rwanda which is coffee exporter will see an increase in its TOT when coffee prices go up, while the TOT of countries that import coffee would decrease.

An abrupt change in Rwanda’s terms of trade (e.g., a drastic fall in the price of coffee or tea which are Rwanda’s main export) can cause serious balance-of-payments problems because Rwanda depends on the foreign exchange earned from those exports to pay for the import of manufactured goods and capital equipment. One long-held belief was that the terms of trade tended to move against less-developed countries including Rwanda because their exports consisted chiefly of primary products (such as coffee, tea or minerals) while their imports largely comprised manufactured and, consequently, more-expensive goods from developed countries. This is partly supported by the Rwanda’s terms of Rwanda represented on

Figure 36.

Exports and imports price indices

have been volatile between 2003 and 2013.

Apart from the year 2003, 2008 and 2012 where Rwanda’s terms of trade deteriorated by 16.4%, 12.7% and 5.3% respectively, in the remaining periods the terms of trade was improving. This cannot confirm that the deterioration of terms of trade was the cause of trade balance deficit of Rwanda but it cannot deny it. It is clear that Rwanda’s terms of trade was not consistently improving or deteriorating during the period of the study and this volatility is also another area of concern that policy makers must keep an eye on as it can cause serious balance of payment problems in the future.

FIGURE 36: EVOLUTION OF EXPORTS, IMPORTS AND TERMS OF TRADE INDICES AND THEIR GROWTH RATES

66

Evolution of exports, imports and terms of trade indices

Evolution of exports, imports and terms of trade (growth rates)

500

50.0%

400

40.0%

300

30.0% 20.0%

200

10.0% 100

0.0%

0

-10.0% -20.0% Export price index

Export price index (% change)

Import price index

Import price index (% change)

Terms of Trade index

Terms of Trade index (% change)

Source: Our own calculation based on IMF, Policy Support Instrument, Second Review

5.3.3.

Real Exchange Rate Level

A rise in the real exchange rate (REER): In such a situation, foreign goods become more expensive than domestic goods. This also will lead to an increase in competitiveness of exports and a shift of resources from sectors that produce non-tradables to those producing tradable goods. This means that exports will rise relative to imports and hence trade balance will improve. A fall in REER (real appreciation) will lead to an increase in the cost of production, thereby depicting deterioration in the country’s degree of international competitiveness (that is, the country produces in a way that is less efficient than it used to be). These explanations lead us to expect that REER will affect the trade balance positively, but that depends on the ability of the country to manipulate the exchange rate, given the level of foreign reserves. Real exchange rate measures competitive of Rwandan exports in the international market.

FIGURE 37: EVOLUTION OF NOMINAL AND REAL EXCHANGE RATE

67

Evolution of Nominal and Real Exchange rates 120.0

640.0 620.0

100.0

600.0 80.0

580.0

60.0

560.0 540.0

40.0

520.0 20.0

500.0

0.0

480.0 Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 NEER

REER

Exchange rate (RWf/USD), RHS

Source: Our own calculations based on BNR data

Nominal exchange rate was appreciating between 2005 and the first half of 2008 and at the same time the both Nominal and Real effective exchange rate were appreciating.

Some big depreciation of the nominal and real effective exchange rates took place during the second half of 2008 and the first half of 2009 mainly as a result the global economic and financial crisis. After the first half of 2009 till 2012, there was a depreciation of nominal exchange while both nominal and real effective exchange rates were somehow stable.

As it has been shown in the previous sections, it is clear that there is a positive correlation between the trade deficit in Rwanda and the real exchange rate. When there was a big appreciation of the real exchange rate, it was also a big growth rate in trade balance deficit. RER has also some positive impact on trade balance deficit though weak. Thus, currency depreciation in a situation of foreign currency scarcity and substandard export is somehow a feasible solution for promoting exports. Depreciation can work only in developed countries where their exports demand is inelastic (Shirvani, Hassan and Barry Wilbratte, 1997). In developing countries like Rwanda, what is more important is to improve the quality of exports such that they will compete in the world market not only in terms of price, but also in terms of quality. There is a need to improve production technology, but depreciation alone cannot enable a country to sell more in the world market, even if the products are of low quality. This reflects the reality about the nature of the export product—agricultural crops—which face deteriorating terms of trade. This suggests that Rwanda needs to improve productivity and efficiency so as to meet the standards of foreign demand. Going by the reality of the trade relationship between developed and least developed countries, this is particularly 68

true, as was revealed in the 2003 WTO meeting in Mexico. Developed countries have shown disinterest in the goods from developing countries and are helping their own local producers (particularly in the agriculture sector) through subsidies so that they out-compete agriculture products from least developed countries in terms of price and probably quality. There was thus no equity in trade relations under the framework of the WTO because developed countries were too defensive and protective in their trade negotiations.

5.3.4.

Financing Structure of the Current Account Deficit

The balance of trade is actually one component of a more extensive set of international financial accounts termed the balance of payments. The balance of payments summarizes all payments between the domestic economy and the foreign sector. While payments for exports and imports constitute a major portion of these payments, they are not the only payments.

On average, during ten years between 2003 and 2013 seventy percent (70%) of trade balance deficit has been financed by the donor grants though the share is reducing. The budgetary grants increased from USD195 million in 2003 to USD666.4 million in 2013. It is clear if measures are not taken immediately to increase exports and substitute some imports with domestic production, the trade balance deficit will not be sustainable.

TABLE 21: EVOLUTION OF THE BALANCE OF PAYMENT FROM 2003 TO 2013 (IN MILLIONS OF USD) 2003

2004

2005

2006

2007

2008

2009

2010

-173.7

-187.2

-238.9

-303.5

-406.2

-625.2

-764.3

-786.7

-1,101.6

Exports, f.o.b.

63.0

98.10

125.0

147.4

176.8

264.8

235.0

297.3

464.2

Imports, f.o.b.

-236.7

-285.3

-363.9

-450.9

-583.0

-890.0

-999.2

-1084.0

-157.7

-170.7

-193.7

-161.0

-140.4

-135.7

-218.4

Services (net)

-127.2

-137.1

-166.5

-132.3

-123.2

-100.6

Income (net)

-30.5

-33.7

-27.2

-28.7

-17.2

-300.9

-324.26

-405.4

-435.8

226.4

313.9

367.1

Private transfers

31.3

35.1

OW: Remittances from Diaspora

9.43

Trade balance

Services and income (net)

Trade and Services balance Current transfers (net)

Official grants Current account balance

2011

2012

2013.0

-1,268.3

-1,148.4

590.8

703.0

-1565.8

-1859.0

-1851.5

-288.7

-238.7

-159.1

-236.8

-181.6

-246.2

-186.9

-85.2

-122.4

-35.1

-36.8

-42.5

-51.8

-73.8

-114.4

-529.4

-725.8

-945.9

-1032.9

-1288.5

-1353.50

-1270.83

325.5

461.3

518.6

604.0

657.4

880.52

722.46

847.77

46.7

77.2

98.8

72.6

79.7

90.7

133.3

183.0

181.4

9.62

8.63

25.01

98.50

63.31

88.13

98.21

166.18

175.27

161.80

195.0

278.9

320.3

248.4

362.5

446.0

524.3

566.7

747.2

539.5

666.4

-105.0

-44.0

-65.5

-138.9

-85.3

-242.3

-378.6

-418.1

-459.8

-704.9

-537.5

69

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013.0

Capital and Financial account balance

71.4

135.7

175.9

216.0

196.7

316.1

426.8

499.4

682.5

511.5

773.2

Capital Account

41.1

61.3

93.5

1400.1

92.0

210.1

200.0

285.6

196.66

171.2

234.5

Financial transactions account

30.3

74.4

82.5

-1184.1

104.7

106.1

226.8

213.7

485.83

340.2

538.7

Public sector long term borrowing (net)

7.7

71.3

53.7

-1104.8

80.4

104.8

81.4

51.9

207.2

93.0

523.4

Private sector long term borrowing (net)

22.6

3.1

28.8

-79.3

24.3

1.3

145.5

161.8

278.6

247.3

15.3

4.7

7.7

10.5

30.6

82.3

84.6

118.7

63.7

137.5

166.59

163.46

-35.7

107.9

119.2

81.5

110.7

54.3

53.5

72.1

234.5

-212.4

228.5

Foreign Direct Investment (FDI) Overall balance (BOP)

Source: National Bank of Rwanda In Rwanda, where economic growth heavily depends on foreign financing due to its low rate of savings, the trade balance deficit should be kept at a sustainable level. For Rwanda like other countries in similar conditions, international direct investments (FDI)—the most permanent and, due to its contributions to the technology transfer, the most beneficial form of foreign financing—are important for a sustainable trade balance deficit. Depending on the extent to which foreign direct investment is concentrated in tradable sectors and on the import content of the associated domestic production, the impact of FDI on the trade balance may be positive or negative. For a developing nation like Rwanda, most of the capital equipment and intermediate products are imported by transnational companies from overseas affiliates and they take out foreign exchange in the form of repatriated profits, salary, and interest on loans. The short-run net effect of FDI on the trade balance under such circumstances most likely will be negative because of the production lag. In the long run, however, it is assumed that the net effect will be positive because export of production from transnational corporations is expected to rise.

Many empirical studies that tried to determine the current account deficit level which will not end in a crisis of balance of payments (in other words, the sustainable current account deficit level), concluded that either the ratio of ex-interest current account deficit to GDP should be kept low or the ratio of foreign direct investment (FDI) to GDP should be increased. Figure 38 shows that FDI inflows to Rwanda though increasing, are still insignificant compared to the trade balance deficit they are supposed to finance.

FDI increased from USD4.7 million in 2003 to USD163.5 million in 2013 while the trade balance deficit of goods and services increased from USD300.9 million in 2003 to USD1270.8 million in 2013. Although this increase is partly due to the creation of Rwanda Development Board (RDB), which facilitated the process of attracting foreign

70

investors and the improvement of doing business in Rwanda, FDI’s inflows are still low compared to the trade balance deficit to be financed.

FIGURE 38: EVOLUTION OF FINANCING OF TRADE BALANCE DEFICIT (IN MILLIONS OF USD)

Trade Balance deficit and its financing (millions of USD) 1000.0 500.0 0.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-500.0 -1000.0 -1500.0

Trade Balance of goods and Services

Remittances from Diaspora

Official grants

Foreign Direct Investment (FDI)

Overall balance (BOP)

Source: Our own calculations based on BNR data

Remittances from diaspora are also one of the sources of financing the Rwanda’s trade balance deficit. Remittances have been also low and volatile between 2003 and 2013.

They increased from USD9.5 million in 2003 to USD161.8 million in 2013. As FDIs, remittances are still low compared to the trade balance they are supposed to finance and measures must be taken to mitigate the constraints of increase them. Some of those constraints are still the high cost of money transfers that senders are charged when sending their money to Rwandan territory. The overall balance of payment has be positive between 2003 and 2013 except in 2003 and 201. This means that Rwanda was building up foreign reserves even though the trade balance deficit was high. It was possible because of high inflows of donor grants during the period. This is confirmed by the drawn down of foreign reserves totaling to USD212.4 million experienced in 2012 when some donors suspended or delayed the disbursement in that year. As the prospect of donor grants is uncertain, Rwanda need to find a sustainable way of financing its imports bills and hence maintain trade balance deficit that must be easily financed.

5.4.

Microeconomic Causes of the Trade Balance Deficit

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To understand the micro causes of the trade balance deficit in Rwanda, we have to investigate the sectors which experience the high trade balance deficit and why. The causes may come from exports sector or they may come from imports sector. In this section, we analyse key products having high exports potential and they are not maximized and other products being imported in big quantity while there is a possibility of producing them in Rwanda. (Refer to SWOT Analysis above).

5.4.1.

Exports Related Causes

In 2013, MINICOM carried out an industrial survey to identify barriers to export. Figure 39 illustrates the respondents’ barriers to export from a sample of 193 firms in the manufacturing and agro processing sector. Firms surveyed were both exporting and non-exporting firms.

The main reason for not exporting among this sector is a lack of information on what is required to export (44% of respondents). This is closely followed difficulty in establishing links with foreign customers (41%) and poor transportation linkages (40%).

However there is not one barrier that stands out, with approximately a third of all firms reporting quality standards, paper work in foreign markets, receiving export certificates within Rwanda and paperwork within Rwanda as a significant to moderate barrier.

This all points to a need for greater sensitization amongst firms of the opportunities for exporting, the requirements for exporting and support in establishing links in new markets.

FIGURE 39: MODERATE TO SIGNIFICANT BARRIERS TO EXPORTING REPORTED BY FIRMS

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Our products are not suitable for exports

20%

Paperwork needed in Rwanda to export from the country is

23%

cumbersome Even if all of the above barriers were not there, we would not be

28%

able to compete on price or quality in foreign markets Getting Export Certificates

30%

Paper work needed by foreign authorities to export to their

33%

country is cumbersome Quality standards required in export markets are too high

34%

Transportation to export markets is a problem

40%

It is hard to establish links with foreign customers

41%

We don’t have the necessary information to reach export markets

44% 0%

10%

20%

30%

40%

50%

Source: MINICOM Industrial Survey (2013) - Sample: 193 Firms Surveyed From the SWOT analysis of Export Sector in Rwanda, the following challenges affecting the sector may contribute to trade balance deficit: - Limited Management Skills & Knowledge Deficit: o Lack of managerial time to deal with export/internationalization and develop new products for foreign markets. o Unfamiliar exporting procedures/paper work meeting export product quality/ standards /specifications; inadequate quantity of and/or untrained personnel for export /internationalization; and unfamiliar foreign business practices. o Lack of understanding of international standards and high cost of product certification and meeting standards. o Limited information to locate and analyze markets and identify foreign business opportunities.

- Geographical Location: Rwanda is 1,740 km from the Port of Mombasa and 1,480 km from Dar es Salaam and faces significant challenges and costs in getting goods to and from international markets. The principal constraints faced by Rwandan exporters are non-tariff barriers (NTBs) to trade. Many NTBs are due to the transit of Rwandan goods along the Northern and Central corridors to Mombasa and Dar es Salaam respectively. Transport cost is exacerbated by the risks along transport corridors.

- Poor relations between firms and buyers: Inability to contact potential overseas 73

-

customers.

Lack of competitiveness due to: o High cost of transport & poor infrastructure o Lack of Raw Materials and Industrial Inputs. o High operational costs (transport, logistics) o Limited rural infrastructure (water, energy, transport, settlement, health).

-

-

o Low production capacity of local industries. o Limited Access to and Cost of Finance (High Interest Rate): The cost of money makes it difficult for business people to borrow capital from banks. Lack and high cost of finance leads to high production costs. o Shortage of working capital to finance exports. There’s no Export Finance program in Rwanda.

Supply side constraints: low productivity of local industries, Rules of Origin, and Standards issues on international market.

Price volatility in the international markets: Rwanda’s overall export performance is still determined primarily by world prices for its key commodity exports despite diversification. Price fluctuations and demand side shocks makes export revenue to be very vulnerable.

Cumbersome Procedures: Paperwork related to exports.

5.4.2.

Causes Related to Low Level of Industrial Development

Co-ordination failures constitute a wide range of market failures impacting on the efficiency of the private sector and its ability to make confident long-term investments in growth. The key investments required to overcome co-ordination failures can be generally classified within skills and infrastructure. They also include the environment faced by the private sector and the provision of information between firms.

The following challenges identified in the industrial sector may affect may also contribute to trade balance deficit: - Energy Cost: Energy availability is a major impediment to the Rwandan industrial sector. Biomass, such as wood, charcoal and peat accounts for 85% of Rwanda’s energy supply. The remaining share of energy is from petroleum (11%), and electricity (3%). Energy costs in Rwanda are double that of EAC Partners and far exceed larger industrial economies such as South Africa and China. This is a severe competitive disadvantage for Rwandan business, particularly in the industrial sector, which is the most energy intensive.

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-

-

-

-

High Transport Costs: Transport is another major constraint faced by businesses in Rwanda. The MINICOM Investor Perception Index 2010 found that only 22 per cent of industrial firms cite the cost of transport services as low or very low. Transport costs are further exacerbated by the quality of roads. The majority of investment geared towards the road network is focused on national roads, which are often times already paved. As a result, district feeder roads are often neglected by investment programs, thereby causing extra costs for agricultural suppliers to markets and to industrial buyers.

Skills Deficit: The skill deficit exists at all levels but is most acute at the technician cadre, where the gap is 60 per cent of requirement.

High Interest Rate: The cost of money makes it difficult for business people to borrow capital from banks. Lack and high cost of finance leads to high production costs. Rwanda’s financial sector provides a significant constraint, particularly to the MSME sector. The savings rate is amongst the lowest in the world. The low level of private savings is generally attributed to low real deposit rates combined with poor outreach of banking services.

Lack of Raw Materials and Industrial Inputs: Rwanda’s integration into global value chains will be determined by its ability to access inputs at world prices, whether produced domestically or internationally. As industries become increasingly technologically intensive in Rwanda and result in a higher value-added end product, the access and cost of raw materials and other industrial inputs becomes a central issue. For a sector to be profitable domestically and competitive internationally, the supply of affordable raw materials and inputs must be ensured.

This can be achieved through two channels, namely 1) utilising and developing linkages with domestic suppliers of inputs, and 2) reducing the cost of imported inputs.

High Cost of Production: Rwanda remains the last place where factor costs remain low.

-

Limited Land: the land availability may become a challenge for potential investors in agriculture sector and agro-industry.

-

-

Low Level of Technology, Research and Innovation: In order for Rwanda to compete in an increasingly competitive global economy and open trading system, it must build and acquire appropriate science, technology, innovation-entrepreneurial, engineering, and technical/vocational capacity to produce more value added goods and services.

Regulatory Environment: The manufacturing sector also complains of uncertainty over policies and rapid regulatory changes without sufficient consultation, as well as 75

-

inadequate information on recent pro-business reforms that have been implemented (e.g. improvement of land registration processes). The cost and lack of availability of land are rated the greatest constraints to starting and expanding a business according to the 2010 Investor Perception Survey. Land also ranked as the second highest issue faced by firms in the PSF Business Investment Climate Survey.

Environmental Sustainability: Economic activities are intrinsically linked with the physical environment. It is therefore paramount that mitigating measures are taken so that growth can take place in a sustainable long-term manner. The majority of industrial firms are not endowed with equipment for treatment of their industrial waste in the natural environment. The Rwanda Cleaner Production Centre was established to promote an integrated strategy applied to the whole of the production cycle to improve environmental performance of industrial firms in Rwanda.

5.5.

5.5.1.

Consequences of the Trade Balance Deficit in Rwanda Debt Servicing Problems

Till now, Rwanda has not yet suffered from high trade balance deficit as it has been easily financed especially by grants and the debt level is still low. However, if such situation prevails, while the donor grants are declining, Rwanda should reach the situation where to finance the imports will not be possible and abruptly adjustment will be necessary with adverse consequences on economic growth and living conditions of Rwandans mostly the poorest of the poor. The ability to attract capital inflows to sustain an external current account deficit without running into debt service problems depends, among other things, on the judgment of creditors as to the creditworthiness of the country and how efficiently the borrowed funds are used. In particular, if foreign borrowing is used to finance investments that generate sufficient returns to finance the repayment of such funds, then debt servicing problems will not arise. Debt servicing problems, however, may be expected when resources are used inefficiently or are used to support domestic consumption. In addition, changes in world economic conditions may significantly affect the availability and affordability of funds. For example, rising interest rates in the early 1980s exacerbated the debt servicing difficulties experienced by many developing countries at that time.

5.5.2.

Reduction in International Reserves

Considerations relating to external debt management have become an increasingly important part of program design. Important debt relationships need to be monitored on a medium-term basis under alternative assumptions about the country’s own 76

policies and the behaviour of the external environment, including foreign interest rates.

Financing may also take the form of a reduction in international reserves. However, such possibilities are limited by the size of the initial stock of reserves.

5.5.3.

Accumulation of Arrears

In addition to voluntary external financing, in some circumstances countries have resorted to financing external deficits by accumulating arrears. Arrears constitute payment restrictions and therefore militate against the beneficial effects of a more open world trading system; in addition, they complicate relations with external creditors and undermine creditor confidence.

VI. 6.1.

MEASURES TO ADDRESS TRADE BALANCE DEFICIT

Measures at Macro Level

Based on the findings of this study, the following actions (measures) are to be recommended to address the trade imbalance: 6.1.1.

Increase Savings to Finance Domestic Investment

To reduce the trade deficit, the country must increase the savings needed to finance domestic investment, which would then improve the industrial base. Different ways of doing that, however, would have greatly different effects on the economy. Reducing government spending would reduce the services and transfer payments for education and health care that are available to the citizens. An increase in personal taxes would reduce private consumption, saving, and investment. An increase in the tax on business investment would reduce the future growth of real wages and consumption. Therefore, Rwanda should consider the opportunity cost forgone in the choice to be made among these measures.

6.1.2.

Import Substitution of Selected Products

The import substitution strategy is also very important to reduce the trade deficit, by reducing import in parallel to increasing exports. This requires identification of high impact imported products which can be substituted by local production. Examples would include Cement, Sugar and Rice. When identified, the sectors will be actively promoted to attract private investment. This study has revealed that Rwandans simply are spending more on foreign goods than they are producing, and foreigners are 77

spending less. This condition cannot be sustained. Reducing the trade deficit requires that we reduce either private or government consumption by discouraging import of certain categories of goods such as imports of cement, sugar and rice and, at the same time, creating an enabling environment for increasing domestic production.

6.1.3.

Improve Domestic Production Capacity

This study has discovered that most resources (human and material) used by foreign investors are imported, even if they are available locally. This occurs because of the low quality of the available resources and the country’s poor infrastructure, so improving infrastructure and developing the country’s human resources is needed to correct this situation. Doing so will enable foreign investors to import fewer resources (inputs), so the government will be able to take full advantage of the FDI. In this regard, acting to reduce the import bill of consumer and intermediate goods where they can be competitively produced locally can significantly reduce outflows of foreign exchange. It should be noted however that imports of high technology inputs and capital goods is desirable and should not be curtailed – these are key in driving the industrialisation and construction.

6.1.4.

Encourage Public Private Partnerships

Focus on involvement of Public Private Partnerships (PPPs) to finance large infrastructure projects that require substantial imported materials and capital goods.

Not excluding the clear advantages, PPPs do not constitute money for free. Experience from Chile, one of the world’s most successful countries in PPP financing, indicates that developing a strong legal framework and dedicating skilled technical team to full time to management of PPPs are crucial steps to minimize the risks posed; 6.1.5.

Implementation of the National Export Strategy and Industrial Development Policy

Implementation of the National Export Strategy as well as a strategy for increasing domestic production with a clear exit strategy will be vital, as both form pillars of the Industrial Policy that will be implemented by the Industrial Development and Export diversification Council (IDEC). In addition to that, sector specific support should be considered for high potential, new sectors, as per the National Export Strategy. This includes those with high export potential or high potential for reducing dependency on imports. Support should be focused on addressing potential market failures such as infrastructure and access to finance.

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With a view to increase and diversify Rwandan exports, the National Export Strategy (NES I) was adopted by the Government of Rwanda in April 2011. This Strategy provided export targets for priority clusters over the subsequent five years, but these targets and clusters have recently been adjusted to be more ambitious, and to cover the period of 2011 – 2017. Since implementation of NES I began in 2012, a number of changes have occurred both in terms of Rwanda’s national strategic objectives, and in the understanding of the export sector and export growth in Rwanda. These changes have made it necessary to revise NES I in April 2014. EDPRS II set out targets to increase exports revenues from US$ 1.277 billion in 2013 to US$ 4.515 billion in 2018 or approximately 29% average annual growth over the next 5 years. This is a significant revision upward from the previous export target of 15% growth originally planned under Vision 2020, and captured within NES I. The NES requires Government and Private Sector coordination to be effectively implemented and to achieve its goals.

Efforts will focus on removing the key barriers and constraints to export, as well as increasing investments in key export sectors.

Four strategic interventions have been identified by the National Export Strategy to achieve exports targets as follow: - Increase Output for export (Export Supply through investment and productivity); - Put in place infrastructure and regulations conducive for export growth; - Upgrade Firm Capacity to Access and Grow in Export Markets; - Develop Export Finance Program.

6.1.6.

Properly Manage the Exchange Rate

The intuition of most policy makers is that a rising trade deficit or current account deficit is bad, whereas surpluses are good. This intuition is a poor guide to policy. First, it ignores the distinction between a rising trade balance deficit associated with a stronger currency and rising investment opportunities in the country and a rising trade deficit accompanied by a depreciation of local currency. For strong economies like that of the United States, market forces can operate on their own and produce self-correcting forces that operate on the country’s trade balance. For developing countries like Rwanda, such self-correcting mechanisms cannot work. The most appropriate way to control the Rwandan trade balance is to combine liberalization with proper management of the exchange rate. Such management is considerably more important 79

than import policy for successful exporting and sustained growth. A stable exchange rate would enable producers of tradables to make long-term investment plans. Proper management, however, will require having enough foreign reserves to hedge against exchange rate fluctuations.

6.1.7.

Select and Apply Appropriate Trade Policy Instruments

The results show that trade policy (liberalization) played a significant role in influencing the trade balance in Rwanda. To address the problem constraining trade expansion and growth in Rwanda, it is necessary that the choice of suitable policy instruments reflects the most direct relationship between issues involved in the identified constraint and the instruments available. Trade policy implementation has to prioritize the application of instruments to address specific problems on the basis of anticipated direct impact. Effective trade policy also depends on adopting a common direction for different instruments so that these instruments complement rather than contradict each other.

6.2.

Measures at Micro Level

6.2.1.

Review the Existing Measures

The existing strategies to decrease Rwanda’s trade deficit have to sustain current nontraditional exports, focus on export diversification (new products, especially service sector), focus on some most potential export products to add more value and to increase their volume, identify new destinations to export volumes (especially new regional markets such as Congo Brazzaville, as well as Middle East), and increase local production of most imported goods (import substitution).

6.2.1.1.

Measures Related to Export Promotion

EDPRS II states that a high average growth rate can be achieved by prioritizing interventions and investment in existing sectors, emerging sectors and potential new sectors. EDPRS II identifies what most promising sub-sectors within these categories are for export growth. These sectors cover the following: 1. Existing sectors: Sectors that have already contributed to boosting exports growth, many of the sector specific constraints are known and can be addressed through targeted soft and hard infrastructure investments in order to maintain and/or further stimulate exports growth. Existing export oriented sectors include: Tea, Coffee, Mining, Horticulture, Construction materials based on locally sourced raw 80

materials, Tourism, and Food processing and beverages.

2. Emerging sectors will require intensive and targeted engagement with potential investors in order to develop a clear understanding of what type of soft and hard public investments are required to jump start private sector investment in these sectors and attract FDI. Emerging export opportunities include: Logistic services, ICT related services (eg: BPO), Private equity fund base for regional investments, Remote back office operations for financial services such as retail and capital funds operations, and Electronic assembly.

3. Potential new sectors: GoR will earmark funding and build the institutional capacity to continuously explore the market potential for new Greenfield opportunities, as yet unknown, with the aim of developing a clear value proposition for investment in Rwanda. Future areas of opportunity in potential new sectors are: Green economy initiatives and exploring the potential of Greenfield investments in new sectors.

In the case of some priority sectors identified under EDPRS II, it is unclear why the sector is defined as emerging as opposed to potential. For example, currently Rwanda has no electronic assembly operations, and a number of services exports would be better classified as potential.

In this study we have identified three key sectors to be developed as part of export promotion strategy to address trade balance deficit in Rwanda. Measures related to the selected sectors are presented in the table below: Cluster

Key actions to achieve the targets

Tourism

Product diversification (e.g Eco-tourism ,cultural tourism, Conference / Business tourism) Marketing and Branding (strengthen visibility in high value markets) Capacity building and skills improvement (intensive training in identified tourism clusters, and improving infrastructure quality & standards) Attract private Investment for value addition activities in mining sector

Coffee

Increase acreage of coffee plantations and productivity

81

Cluster

Key actions to achieve the targets Improve quality and value addition of produced and exported coffee, as well as export marketing activities.

Tea

Increase green leaf production and productivity by availing tea seedlings Processing and quality of tea increased by constructing new tea factories and promoting product diversification

6.2.1.2.

Measures Related to Industrial Development

To develop industrial sector in Rwanda the following areas of interventions are proposed by the National Industrial Policy: - Improve Infrastructure Development; - Invest in Human Resources Development; - Improve Access to Finance; - Trade Facilitation; - Technology, Research and Innovation; - Improve Regulatory Environment; - Ensure Availability of Raw Materials and Industrial Inputs; and - Ensure Environmental Sustainability.

6.2.2.

New Proposed Measures

Measures proposed in this section are derived from the SWOT Analysis for the six selected products. These measures are related to export products (Coffee, Tea and Tourism) and import-substitution products (Cement, Rice and Sugar).

6.2.2.1.

Measures Related to Tea

The global environment is showing that there will be an oversupply of bulk black tea on international markets which is likely to worsen over the next 5-10 years and hence overcoming these key challenges is becoming more urgent.

- Improve the Quality: While revenues, both of exports in total and for tea farmers specifically, have been improving overtime, they remain well below their potential.

Indeed this study shows that Rwanda can reach high export revenues and at the same time more than double the average revenue for tea farmers. To do this, Rwanda needs to move from producing almost solely bulk black tea, the majority of 82

which is sold at auction, to producing better quality teas, diversified teas, and branded Rwandan packaged teas, which are sold directly to buyers with whom strong relationships have been built.

-

Increase Productivity: Increasing the productivity of Rwanda’s tea planted areas and developing a high quality brand, Rwanda can raise its tea industry revenues significantly. By building relationships with buyers and adding value to its teas, these revenues can be further increased. The impact on the economy of these actions will be much broader than simply export revenues, including a rapid growth in incomes for the 60,000 families involved in the tea industry. The tea industry should therefore remain a key priority for the government and every effort should be made to enable the investments be done.

-

Increase acreage of tea plantation to increase total output and revenues: PSTA III has identified tea as a priority export crop with export growth most likely to be generated through increasing the amount of land under production. The National Export Strategy has set the Targets for tea Export revenue of US$ 147 million per annum by 2018 (PSTA III).

-

Addressing Supply Side Constraints: The NES will monitor implementation of the tea expansion program. The key interventions to monitor is the roll out of production covering a total area of 38,650 ha by 2017/18 up from 20,800 in 2012. This is expected to increased total output from the tea sector from 21,886 MT in 2012 to 41,873 MT by 2018.

-

Strengthen Direct Relations with Buyers: Focus efforts for value addition on establishing strong direct links with buyers and tailoring production to meet needs of specific buyers. This will be run through the following interventions: - Encourage Trade Promotion Organizations (TPOs) to provide Technical assistance and policy lobby to companies with export growth potential. TPOs will advise private companies on how to develop and implement export action plans, specific market research and access to grant schemes.

- Develop Export capacity Building Programs for new or potential exporters as well as existing exports.

- Remove barriers to growth of large exporters especially barriers related to supply chains, import duties or other fiscal issues and access to infrastructure.

- Export Advisers Initiative: in late 2012, RDB started the process of recruiting and training the first group of future certified export advisers.

- Initiate Trade Promotion and Buyer Outreach Program (group branding, ‘Buy from Rwanda’ Export Portal, Buy from Rwanda promotional materials, Trade 83

-

Fairs program, Market linkages program, Presidential Award for exporting, etc.)

Establish a Trade Information Center; Sensitization on opportunities under AGOA and EBA.

-

Improving Trade Infrastructure: Addressing the challenges associated with the port of Mombasa.

- Infrastructure to Facilitate Trade (Bonded Warehousing at Borders, Cross-Border Markets, Off-Dock Container Facilities at Mombasa); - Policy and Regulation to Facilitate Trade: (Regional Integration as a means to Facilitating Trade, Push for reform of EAC Common External Tariff in 2015, Leverage WTO Trade Facilitation Agreement, Special Economic Zone and Export Processing Zones).

-

NAEB Immediate Efforts to Increase Tea Exports: Under NAEB a number of programs are underway to increase exports in the medium term, however unless the price of tea improves it is unlikely that Rwanda will achieve short term gains to export growth.

6.2.2.2. Measures Related to Coffee - Increase Coffee Export Revenues: New Export Revenue will be generated through supply side interventions with some additional opportunities through market diversification. The targeted Export revenue is US$ 157 million per annum by 2018.

- Increase Acreage of Coffee Plantation: Coffee Expansion to 94,370 ha by end 2018 - Addressing Supply Side Constraints: The NES will monitor implementation of the coffee expansion program. The key interventions to monitor is the roll out of production covering 94,370 ha by 2017/18 up from 40,300 in 2012. Total production is expected to increase from 21,886 MT in 2012 to 41,873 MT by 2018.

- Market Entry and Support: Individual coffee exporters are struggling to market their goods in foreign markets. Coffee traders have identified new markets for low grade coffee (Sudan and Egypt) but require support in developing the markets. This intervention is covered by the National Export Strategy.

- Improving Trade Infrastructure: As with tea, addressing challenges associated with the ports are addressed under the National Export Strategy.

- NAEB Efforts to Increase Coffee Exports: NAEB is the lead institution responsible for increasing coffee exports. While price is an externality largely beyond its control, NAEB focuses on growing exports through increased production (through either increased yield per hectare or increasing the area under cultivation) or through increasing the quality of coffee and moving coffee up the value chain. Under NAEB a number of programs are underway to increase coffee exports. These are as follows: 84

-

-

Improvement in mineral fertilizer application from 14% to at least 90% with the creation of fertilizer fund to be managed by private sector (exporters).

This program is now operational and appears to be running successfully; - Organizing competitions of farmers in good agricultural practices every year.

2,592 best farmers to be rewarded by September 2015; - Improvement of extension services by involving 210 CWS in extension services. (Coffee washing stations were 210 in 2012 but they moved up to 222 CWS in 2013, the plan is to reach 299 CWS in 2015). The CWS are strategically well located because they are established in areas with high coffee production.

- Construction of a Coffee Roasting Plant - The coffee roasting plant is at 75% completion with respect to construction. The plant is expected to produce 2,000 tons of ground coffee per annum. With the completion and operationalization of the plant it is expected that unit price will be 10 USD/Kg ground coffee compared to the current average price of around 3 USD/kg.

Other Activities: Farmer Field Schools are planned for establishment to train farmers in best practice for coffee production, crop care and harvesting.

6.2.2.3.

Measures Related to Tourism

In order to sustain growth in the sector and support diversification a number of key constraints should be addressed through the following interventions: -

Increase Revenues Receipts from Tourism Sector: EDPRS II has identified tourism as a priority service sector with export growth to be generated from leisure tourism and MICE tourism. The targeted exports revenues from tourism are set at US$ 1.075 million p.a. by 2018 (EDPRS II) and MICE Tourism – will account for 34% of overall tourism receipts by 2018.

-

Product

Diversification:

Diversification

of

tourism

products

include

the

strengthening of MICE tourism as well as attempts to develop and market a range of cultural and community tourism products such as the Kigali cultural village, the Kivu Belt tourism sub-master plan, Gisovu tea tour for excellence, Musanze Cave tourism development, and avitourism development. In order to diversify the sector and expand the existing “thin” product range, the Government can: o Develop cultural village covering: Packaging both traditional and modern local Music and dance, Heritage Restaurants for uniquely the traditional cuisine, and Development of a local souvenir center for tourists.

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o Invest in infrastructure and Promote Kibeho destination for religious tourism; o Fast track single EAC Tourist visa; o Promote the President’s waiver on visa requirement for all Africans; o Fast track establishment of MICE bureau for MICE tourism; -

Investment: The EDPRS II plans to connect a number of important secondary cities to domestic markets and Eastern DRC, stimulate investments in the tourism sector along the Kivu Belt and create a national tourism circuit, enabling travelers to combine a visit to the Virunga National Park, Lake Kivu, Nyungwe Forest and other notable touristic sites in one circuit.

-

MICE: Rwanda has facilities to host Meetings, Incentives, Conferences and Exhibitions (MICE) and this segment of tourism has been identified by the RDB as one of the fasting growing segments in the tourism industry. Kigali currently hosts a growing number of small and medium-sized international conferences. The completion of the $300m Kigali Convention Centre (KCC) – a facility that will house a five-star hotel, an information technology office park and a conference hall that can seat 2,600 people – will improve Kigali's performance in the service sector and also attract tourists and boost revenue.

-

Skills Development: The Skills and Innovation Program aims to provide greater private sector input into training to ensure that it meets the needs of the highgrowth sectors, including tourism. To address the skills shortage issue the following interventions are proposed: o Incentivize on job training by major brands/ investors; (Concessions management policy allows concessions in all Protected Areas including National Parks ); o Targeted campaign to attract big hotels and restaurants to invest in Rwanda; o Improve standards in training institutions.

-

Air Connectivity: RwandAir plans to continue its expansion with two new aircraft and new flight destinations in the Middle East, Asia and Europe.

-

Finally, infrastructure challenges remain which need to be addressed mainly around connecting major tourist sites to roads and the national electricity grid.

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By addressing the key constraints, tourism exports are targeted to increase by an additional US$ 100 million per annum by 2015.

The economic potential of the MICE sector for Rwanda is immense. Total revenues based on MICE tourism in 2013 were US$ 49m. This is projected to triple to US$ 150m in 2017, 16% of all national export earnings and 34% of the overall tourism receipts. While leisure tourism remains a vital part of the national tourism strategy, business tourists have been shown to spend up to three times more than leisure visitors. Rwanda’s share in the international meetings, incentives, conferences and events industry is presently minimal. The latest International Conference and Congress Association’s (ICCA) research ranks Rwanda as 21st in hosting global association meetings in Africa. The Rwanda Convention Bureau is a Destination Marketing Organization with a sales and marketing objective to see Rwanda enter Africa’s top 10 by the year 2016.

Tremendous efforts have been exerted on availing infrastructure and investment in new international meeting, conferencing and accommodation products. These include the iconic Kigali Convention Centre, a number of five star business hotels (Kigali Radisson Blu, Kigali Marriott, Park Inn, Kempinski and Protea amongst others), the development of transport links through Kigali International Airport as well as the expansion of RwandAir. In addition the upgrading of Kigali International Airport increases passenger capacity to 1,500,000 per annum.

Furthermore, Rwanda offers soft infrastructure such as biodiversity, city management, peace building and reconciliation as well as gender and health initiatives, making it a role model for the respective themes. The National MICE strategy is in line with diversifying the current tourism product offering while complementing existing gorilla tourism, eco-tourism, cultural and community based tourism products that are the mainstays of Rwanda’s economy.

6.2.2.4.

Measures Related to Cement Production

To speed up the expansion of the sector the following actions can be taken by the Government. In the short run: -

Accelerate the completion of the deal between CIMERWA and Pretoria Portland Cement (PPC) and facilitate rapid expansion of CIMERWA production facilities: o RDB has been facilitating PPC investment in CIMERWA and everything is on track;

87

o 11 km of paved road planned for new production facilities is under construction.

In the longer term activities to secure the future of the sector include: -

A new source of limestone has to be found to secure local production of cement and maintain competitiveness;

-

Alternative energy sources are essential to enable continuous and cost effective production - The Kivu methane project may provide a solution medium term.

6.2.2.5.

Measures Related to Sugar Production

The disruption to sugar production is being addressed through a land reclamation partnership between KSW and Government. MINAGRI and KWS have signed an MoU targeting sugar value chain. KSW has agreed to the following under the terms of the MOU:  Kabuye Sugar Works will be actively engaging in upland cultivation with the objective of expanding the land under sugarcane cultivation, and collaborating with public extension services to support farmers in improving farm management techniques to increase yields. Plans of modernization and expansion of the current sugar factory are to be facilitated by the company, with the objective of producing at least 50,000 tons of brown sugar annually.  Kabuye Sugar Works will be co-investing with the Dutch government in the Nyabarongo Land Reclamation Project with the objective of securing about 2,000 hectares of land from the Nyabarongo marshlands for sugarcane cultivation. The Netherlands investors will be managing the land.

On the proposed factory site, once the business plan has been reviewed and approved

by MINAGRI, it will be possible to move forward with planned activities.

A sustainable measure to increase sugar production in Rwanda is to find more investors who can venture in the sector to bridge the gap between local demand and supply of sugar.

6.2.2.6.

Measures Related to Rice Production

To achieve targets for rice production, Rwanda must focus on key sub-sector issues including quality of seeds, management of diseases, provision of seasonal irrigation, post-harvest handling infrastructure for reducing the incidence of broken grain, maintaining appropriate levels of humidity, appropriate mechanization of farming 88

operations, improving cooperative management, establishing solid market linkages between producers, cooperatives and millers, and improving milling processes.

The following measures are proposed: 1. Accelerate rice variety development, and involve the private sector in seed multiplication and distribution, to ensure delivery of high-quality seeds of diverse varieties, including fragrant rice 2. Extend the FFS (farmer field schools) system to rice producers, and include sitespecific soil tests for determination of appropriate fertilizer mixes and strategies to combat pests.

3. Explore mechanization options, starting with testing of the small tractors that have proven productive in neighboring countries.

4. Provide rice producers with support to design and install appropriate post-harvest infrastructure, to control grain humidity, impurities, and broken grains 5. Work with millers, cooperatives and producers to establish harvest purchase contracts to pay farmers promptly and provide inputs, and work to improve their financial management.

6. Encourage contract farming schemes.

Actions that are being taken by the Government under the action plan to improve the sector are as follows:  Improve quality and output of milled Rwandan rice through training, standards, and finance;  Breed Quality Rice Varieties, including training, infrastructure / equipment, selection, and test;  Release of certified rice varieties, sensitization training for farmers, follow up and support by technicians, and human resource capacity development, and access to finance;  Avail adequate quantity and quality of inputs to farmers;  Increase area under rice production in irrigated conditions and rehabilitation of existing land by 2000 ha p.a.  Increase Adoption of Appropriate rice improvement technologies through training, productivity gains, mechanization marketing and packaging.

Overall the following conclusions can be reached:  The importation of rice into Rwanda reflects a short fall in supply relative to demand. Imported rice is generally more expensive and hence there is real potential for import substitution through increased local supply.

89





Rice yields in Rwanda are already high. The potential for further increases will be limited. The most cost-effective pathways to increased supply are (a) increased efficiency of milling, (b) reduction of post-harvest losses, and (c) the further development (where possible) of the land available for rice.

Post-harvest losses of rice are generally estimated at 13 percent. This figure suggests that the potential exists to increase domestic supply through reduced post-harvest loss.

VII.

7.1.

IMPACT OF PROPOSED MEASURES FOR TRADE BALANCE SUSTAINABILITY

Estimated Impact of Proposed Measures for Trade Balance Sustainability and Projections

The projections used in this section are taken from the second review of Policy Support Instrument (PSI)3 as baseline and we tried to estimate the impact of proposed measures on both quantities and prices of coffee & tea exports and rice, cement & sugar imports.

On tourism receipts we took also the projections from PSI and we estimated the impact from new measures on tourism receipts. In the following sections, we are going to estimate the impact of proposed measures on specific products and on the overall trade balance deficit from 2014 to 2023.

7.1.1.

Impact of Proposed Measures on Specific Products

This sub-section presents the baseline scenario whereby there is no additional measures being taken on exports and imports side for ten years (from 2014 to 2023). After the presentation of the baseline projections of each product, the impact of proposed measures is estimated based on some assumptions to be presented. Coffee, tea, rice, cement and sugar are the products to be presented on exports and imports of goods and tourism is only considered on exports of services.

7.1.1.1.

Projections and Estimated Impact of Proposed Measures on Coffee Exports

Table 22 below presents the projections of coffee from 2014 to 2023 in both the baseline 3

The PSI is an instrument of the IMF designed for low-income countries that may not need balance of payments financial support but seek to maintain a close policy dialogue with the IMF through the IMF’s endorsement and assessment of their economic and financial policies. The PSI, once approved by the IMF's Executive Board, signals to donors, multilateral development banks, and markets, the strength of a member's policies.

90

and in the alternative scenario whereby the impact of proposed measures is taken into consideration.

TABLE 22: ESTIMATED IMPACT ON COFFEE EXPORTS Forecast of coffee (baseline)

I. Coffee % change Volume (1,000 tons) % change Unit value (US$/kg) % change

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

58.23

64.31

70.55

75.73

82.55

87.50

92.82

98.46

104.45

110.80

6.07

10.44

9.70

7.35

9.00

6.00

6.08

6.08

6.08

6.08

15.65

16.50

18.00

19.35

21.09

22.36

23.25

24.18

25.15

26.15

-21.71

5.43

9.09

7.50

9.00

8.00

4.00

4.00

4.00

4.00

3.72

3.90

3.92

3.91

3.91

3.91

3.99

4.07

4.15

4.24

35.47

4.75

0.56

-0.14

--

--

2.00

2.00

2.00

2.00

58.23

66.26

74.47

82.54

92.45

97.99

103.95

110.27

116.98

124.09

6.07

13.79

12.39

10.84

12.00

6.00

6.08

6.08

6.08

6.08

15.65

17.00

19.00

21.09

23.62

25.04

26.04

27.08

28.16

29.29

-21.71

8.63

11.76

11.00

12.00

12.50

9.00

9.00

9.00

9.00

3.72

3.90

3.92

3.91

3.91

3.91

3.99

4.07

4.15

4.24

35.47

4.75

0.56

-0.14

--

--

2.00

2.00

2.00

2.00

Source: IMF, PSP, second review, October 2014

Forecast of coffee (impact of proposed measures) I. Coffee % change Volume (1,000 tons) % change Unit value (US$/kg) % change

Source: Our projections based on PSI second review and impact on expected measures

In the baseline scenario where MINECOFIN, BNR and NAEB agreed with the International Monetary Fund (IMF) in the second review of the three year program called Policy Support Instrument (PSI), the plan is to increase coffee exports volume from 15,650 tons in 2014 to 26,150 tons in 2023 and from USD58.23 million in 2014 to USD110.80 million in 2023 i.e 3.3% increase on average during ten years. The unit price was taken from the world economic outlook- the projection done by IMF team for all different types of commodities to be exported based on different assumptions like expected production (supply) and income (demand) of the world economy.

In our projections, we took all those PSI projections as baseline and we tried to estimate the impact of proposed measures on both quantities and price (reflecting quality improvement on our coffee exported). The first simple scenario is where the volume will increase and keep the unit price constant i.e keeping the WEO unit price for coffee.

For this scenario, coffee exports volume will increase from 15,650 tons in 2014 to 29,290 tons in 2023 and from USD58.23 million in 2014 to USD124.09 million in 2023 growing on average between 2014 and 2023 at 7% and at 8.8% in volume and in value respectively. In the short and medium term, policy measures will not have big impact as implementing them will not come overnight. That is why we are projecting coffee 91

volume to grow at 4.3% on average in the first five years while it was 1.9% in the baseline. We are projecting also the coffee volume growth rate at 9.7% in the last five years while it was 4.8% without new policy change.

TABLE 23: TEN YEARS OF COFFEE PROGRAM Description

2014

2015

2016

2017

2018

2019

2020

Total Production

15650

17,000.0

19,000.0

21,090.0

Fully washed

6260

7,650.0

9,500.0

12,654.0

9390

9,350.0

9,500.0

8,436.0

40

45.0

50.0

60.0

65.0

70.0

72.0

66239

76,223.4

86,633.9

98,817.2

112,194.4

120,536.3

128,473.2

3.7

3.9

3.9

3.9

3.9

3.9

5

5.2

5.2

5.2

5.2

274

299.0

324.0

349.0

378.0

Ordinary FWC % age visa a total production Revenues (in millions USD)

23,620.8

25,038.0

26,039.6

2021

27,081.2

2022

28,164.4

2023

29,291.0

15,353.5

17,526.6

18,748.5

20,310.9

21,404.9

22,847.0

8,267.3

7,511.4

7,291.1

6,770.3

6,759.5

6,444.0

75.0

76.0

78.0

135,215.3

143,660.8

150,672.8

4.0

4.1

4.2

4.2

5.2

5.3

5.3

5.4

5.4

384.0

405.0

420.0

450.0

478.0

Prices SMC FWC Washing stations 187 to 349

Source: Our own projections based on policy change If we take into account the improved quality of coffee measured in terms of the quantity of fully washed coffee, we project coffee revenue to increase from USD66 239 million in 2014 to USD150 673 million in 2023 equivalent to 9.6% growth rate average in ten years while it is USD58.23 million in 2014 to USD124.09 million in 2023 growing on average at 8.8% during ten years without quality improvement.

FIGURE 40: IMPACT OF PROPOSED MEASURES ON COFFEE VALUE (IN MILLION USD)

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impact of proposed measures on coffee value (in million USD) 140.00 120.00 100.00 80.00 60.00 40.00 20.00 -2014

2015

2016

2017

2018

coffee value (baseline)

2019

2020

2021

2022

2023

coffee value (policy measures)

Source: Our projections based on PSI second review and impact on expected measures

Figure 40 above shows the coffee exports receipts in the baseline and policy measures during ten years. As it can be seen, coffee exports revenues are almost the same during the first three years as the policy measures will take some time to be implemented and yield expected impact. The impact of those measures will start to take place in 2017 on ward.

Improvement in mineral fertilizer application from 14% to at least 90% with the creation of fertilizer fund to be managed by private sector (exporters), the construction of a coffee roasting plant, improving trade infrastructure, increase acreage of coffee plantation are the main assumptions to bring about the increase projected in alternative scenario.

7.1.1.2.

Projections and Estimated Impact of Proposed Measures on Tea Exports

Table 24 below presents the projections of tea from 2014 to 2023 in both the baseline and in the alternative scenario whereby the impact of proposed measures is taken into consideration.

TABLE 24: ESTIMATED IMPACT ON TEA EXPORTS Forecast of Tea (baseline) II. Tea % change Volume (1,000 tons) % change

54.25

59.09

61.20

65.79

70.73

76.03

79.10

82.30

85.62

89.08

-2.22

8.92

3.57

7.50

7.50

7.50

4.04

4.04

4.04

4.04

23.00

25.00

27.00

29.03

31.20

33.54

34.21

34.90

35.60

36.31

9.47

8.70

8.00

7.50

7.50

7.50

2.00

2.00

2.00

2.00

93

Unit value (fob,US$/kg.)

2.36

2.36

2.27

2.27

2.27

2.27

2.31

2.36

2.41

2.45

-10.67

0.21

-4.10

--

--

--

2.00

2.00

2.00

2.00

54.25

60.27

63.47

69.81

76.10

83.71

92.21

102.52

113.98

126.73

-2.22

11.10

5.30

10.00

9.00

10.00

10.16

11.18

11.18

11.18

23.00

25.50

28.00

30.80

33.57

36.93

39.88

43.47

47.39

51.65

9.47

10.87

9.80

10.00

9.00

10.00

8.00

9.00

9.00

9.00

2.36

2.36

2.27

2.27

2.27

2.27

2.31

2.36

2.41

2.45

% change -10.67 0.21 -4.10 ---2.00 2.00 Source: Our projections based on PSI second review and taking into account impact on expected measures

2.00

2.00

% change Source: IMF, PSP, second review, October 2014

Forecast of Tea (impact of proposed measures) II. Tea % change Volume (1,000 tons) % change Unit value (fob,US$/kg.)

The projections which are in the Policy Support Instrument (PSI), tea exports in volume is projected to increase from 23,000 tons in 2014 to 36,310 tons in 2023 and from USD54.3 million in 2014 to USD89.1 million in 2023 i.e. 5.7% increase in volume and 4.9% in value on average during ten years. The unit price was taken from the world economic outlook- the projection done by IMF team for all different types of commodities to be exports based on different assumptions like expected production (supply) and income (demand) of the world economy.

In our projections, we took all those PSI projections as baseline and we tried to estimate the impact of proposed measures on both quantities and price (reflecting quality improvement on our tea exported). The first simple scenario is where the volume will increase and keep the unit price constant i.e keeping the WEO unit price for tea. For this scenario, tea exports volume will increase from23 000 tons in 2014 to 51,650 tons in 2023 and from USD54.3 million in 2014 to USD126.7 million in 2023 growing on average between 2014 and 2023 at 9.4% and at 8.7% in volume and in value respectively. In the short and medium term, policy measures will not have big impact as implementing them will not come overnight that why we are projecting tea volume to grow at 9.8% on average in the first five years while it was 8.2% in the baseline. We are projecting also the tea volume growth rate at 9.0% in the last five years while it was 3.1% without new policy change.

We assume that increasing the productivity of Rwanda’s tea planted areas and developing a high quality brand, increase acreage of tea plantation to increase total output and improving Trade Infrastructure will contribute a lot on estimated increase of tea exports revenue. On top of that Rwanda needs to move from producing almost solely bulk black tea, the majority of which is sold at auction, to producing better quality teas, diversified teas, and branded Rwandan packaged teas, which are sold directly to buyers with whom strong relationships have been built.

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FIGURE 41: IMPACT OF PROPOSED MEASURES ON TEA VALUE (IN MILLION USD)

Forecast of tea exports both in the baseline and impact of prosed measures 140.00 120.00 100.00 80.00 60.00 40.00 20.00 -2014

2015

2016

2017

2018

Forecast oftea baseline

2019

2020

2021

2022

2023

Forecast of tea policy measures

Source: Own calculations based on PSI forecast and proposed measures

The figure above shows the tea exports receipts in the baseline and policy measures during ten years. As it can be seen, tea exports revenues are almost the same during the first four years as the policy measures will take some time to be implemented and yield expected impact. The impact of those measures will start to take place in 2018 on ward.

7.1.1.3.

Projections and Estimated Impact of Proposed Measures on Tourism Receipts

Table 25 below presents the projections of tourism receipts from 2014 to 2023 in both the baseline and in the alternative scenario whereby the impact of proposed measures is taken into consideration.

TABLE 25: ESTIMATED IMPACT ON TOURISM RECEIPTS Trade balance of services (baseline) 2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Balance of Services

-136.4

-140.8

-87.7

-108.7

-66.5

-48.5

-22.9

-9.4

6.4

24.4

Exports of Services

504.3

535.0

554.0

645.8

755.5

826.9

911.1

997.5

1,092.2

1,196.2

317.2

342.8

394.2

473.0

567.6

624.4

686.8

755.5

831.1

914.2

640.6

675.9

641.8

754.5

821.9

875.4

934.0

1,006.9

1,085.8

1,171.8

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Balance of Services

-136.4

-140.8

-80.9

-92.4

-37.1

73.3

223.1

410.4

656.2

976.2

Exports of Services

504.3

535.0

560.9

662.1

784.8

948.7

1,157.1

1,417.3

1,742.1

2,148.0

of which: Tourism Imports of services

Source: IMF, PSP, second review, October 2014

Trade balance of services (impact on tourism)

95

of which: Tourism

317.2

342.8

401.1

489.3

596.9

746.2

Imports of services 640.6 675.9 641.8 754.5 821.9 875.4 Source: Our projections based on PSI second review and impact on expected measures

932.7

1,175.2

1,480.8

1,865.7

934.0

1,006.9

1,085.8

1,171.8

Tourism receipts in the baseline scenario (PSI projections) is projected to increase from USD317.2 million in 2014 to USD914.2 million in 2023 i.e. 12.6% increase on average during ten years. The assumptions were based on expected number of visitors for different purposes of their visit and the evolution of the world economy combined with regional environment conducive to tourists.

In our projections, we took all those PSI projections as baseline and we tried to estimate the impact of proposed measures on tourism receipts. For this scenario, tourism revenues will increase from USD317.2 million in 2014 to USD1 865.7 million in 2023 growing at 21.9% on average between 2014 and 2023. In the short and medium term, policy measures will not have big impact compared to long term as the implementation of all those measures will be gradual that why we are projecting tourism receipts to grow at 18.8% on average in the first five years while it was 14.6% in the baseline. We are projecting also the tourism revenue growth rate at 25.6% in the last five years while it was 10.0% without new policy change.

FIGURE 42: IMPACT OF TOURISM MEASURES ON TRADE BALANCE OF SERVICES

Impact of tourism measures on trade balance of services 1,200.0 1,000.0 800.0 600.0 400.0 200.0 -2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

-200.0 Trade balance of services (baseline)

Trade balance of services (impact on tourism)

Source: Our projections based on PSI second review and impact on expected measures

Figure 42 above shows the tourism receipts in the baseline and policy measures during ten years. As it can be seen, tourism revenues are almost the same during the first five years as the policy measures take some time to be implemented and yield expected impact. The impact of those measures will start to take place in 2018 on ward where tourism receipts are expected to more than double, compared to the baseline scenario.

96

The following assumptions have been made to estimate the impact on tourism receipts: Diversification of tourism products include the strengthening of MICE tourism as well as attempts to develop and market a range of cultural and community tourism products such as the Kigali cultural village, the Kivu Belt tourism sub-master plan, Gisovu tea tour for excellence, Musanze Cave tourism development, and avitourism development.

Connect a number of important secondary cities to domestic markets and Eastern DRC, stimulate investments in the tourism sector along the Kivu Belt and create a national tourism circuit, enabling travelers to combine a visit to the Virunga National Park, Lake Kivu, Nyungwe Forest and other notable touristic sites in one circuit. RwandAir will expand its destinations with two new aircraft and new flight destinations in the Middle East, Asia and Europe.

7.1.1.4.

Projections and Estimated Impact of Proposed Measures on Food Imports

Table 26 below presents the projections of food imports from 2014 to 2023 in both the baseline and in the alternative scenario whereby the impact of proposed measures on rice and sugar imports is taken into consideration. To estimate the impact of proposed measures on rice and sugar, the following assumptions have been made: Improve quality and output of milled Rwandan rice through training, standards, and finance; breed Quality Rice Varieties, including training, infrastructure / equipment, selection, and test; release of certified rice varieties, sensitization training for farmers, follow up and support by technicians, and human resource capacity development, and access to finance; avail adequate quantity and quality of inputs to farmers; increase area under rice production in irrigated conditions and rehabilitation of existing land by 2000 ha p.a.; increase Adoption of Appropriate rice improvement technologies through training, productivity gains, mechanization marketing and packaging.

The following assumptions have been made regarding sugar: Kabuye Sugar Works will be actively engaging in upland cultivation with the objective of expanding the land under sugarcane cultivation, and collaborating with public extension services to support farmers in improving farm management techniques to increase yields. Plans of modernization and expansion of the current sugar factory are to be facilitated by the company, with the objective of producing at least 50,000 tons of brown sugar annually.

Kabuye Sugar Works will be co-investing with the Dutch government in the Nyabarongo Land Reclamation Project with the objective of securing about 2,000 hectares of land from the Nyabarongo marshlands for sugarcane cultivation. The Netherlands investors will be managing the land.

97

TABLE 26: ESTIMATED IMPACT ON FOOD (RICE AND SUGAR) IMPORTS Imports of food (baseline)

Consumer goods imports

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

664.53

670.00

684.66

740.18

781.62

836.31

904.21

977.64

1057.02

1142.85

Food

254.17

255.00

260.00

275.38

290.25

305.73

330.55

357.39

386.41

417.79

Other consumer goods

410.36

415.00

424.66

464.80

491.37

530.58

573.66

620.24

670.61

725.06

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

664.53

670.00

684.66

738.24

775.69

823.92

882.07

944.02

1008.04

1074.15

Food

254.17

255.00

260.00

273.43

284.32

293.34

308.40

323.77

337.43

349.09

Other consumer goods

410.36

415.00

424.66

464.80

491.37

530.58

573.66

620.24

670.61

725.06

Source: IMF, PSP, second review, October 2014 Imports of food (impact of measures)

Consumer goods imports

Source: Our projections based on PSI second review and impact on expected measures

In the tables above, the baseline scenario are the projections of food imports without new proposed measures. Those projections are taken from the second review of PSI that MINECOFIN and BNR have agreed with IMF team. In the second table, we tried to do our own projections based on PSI and estimated impact on increased domestic production of Rice and sugar. With the implementation of all expected policy measures, food imports is expected to decline by USD 1.9 million in 2017 to USD68.7 million in 2023.

FIGURE 43: IMPACT OF RICE AND SUGAR INCREASED PRODUCTION OF FOOD IMPORTS

Impact of rice and sugar increased production of food imports 500.00 400.00 300.00 200.00 100.00 0.00 2014

2015

2016

2017

Food (baseline)

2018

2019

2020

2021

2022

2023

Food (policy measures)

Source: Our projections based on PSI second review and impact on expected measures

7.1.1.5.

Projections and Estimated Impact of Proposed Measures on Intermediary Goods Imports

Table 27 below presents the projections of intermediary goods imports from 2014 to 2023 in both the baseline and in the alternative scenario whereby the impact of proposed measures on cement imports is taken into consideration.

98

TABLE 27: ESTIMATED IMPACT ON INTERMEDIATE GOODS (CEMENT) IMPORTS Imports of intermediate goods(baseline)

Intermediate goods

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

773.69

796.12

798.72

863.59

935.59

1012.14

1109.82

1216.91

1334.35

1463.11

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

773.69

796.12

798.72

857.57

919.34

977.22

1045.35

1114.24

1187.67

1265.94

Source: IMF, PSP, second review, October 2014 Imports of intermediate goods(impact of cement)

Intermediate goods

Source: Our projections based on PSI second review and impact on expected measures

In the tables above, the baseline scenario are the projections of the intermediate goods imports without new proposed measures. Those projections are taken from the second review of PSI that MINECOFIN and BNR have agreed with IMF team. In the second table, we tried to do our own projections based on PSI and estimated impact on increased domestic production of cement. With the implementation of all expected policy measures, cement imports is expected to decline by USD 6.0 million in 2017 to USD197.2 million in 2023.

FIGURE 44: MPACT OF INCREASED PRODUCTION OF CEMENT ON IMPORTED INTERMEDIATE GOODS

Impact of increased production of cement on imported intermediate goods 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 2014

2015

2016

2017

Intermediate goods imports(baseline)

2018

2019

2020

2021

2022

2023

Intermediate goods imports (policy measures on cement)

Source: Our projections based on PSI second review and impact on expected measures

The following assumptions have been made in projecting and estimating the impact of policy measures on cement imports:

99

1. Accelerate the completion of the deal between CIMERWA and Pretoria Portland Cement (PPC) and facilitate rapid expansion of CIMERWA production facilities: 2. In the longer term activities to secure the future of the sector include: 

A new source of limestone will be found to secure local production of cement and maintain competitiveness;



Alternative energy sources will be available to enable continuous and cost effective production - The Kivu methane project will provide a solution medium term.

7.2.

Impact for Overall Trade Balance in Ten Years

TABLE 28: IMPACT FOR OVERALL TRADE BALANCE Trade balance of goods and services(baseline) 2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

710.8

750.1

820.5

947.9

1,061.9

1,144.8

1,250.3

1,355.3

1,473.1

1,605.7

Coffee

58.2

64.3

70.5

75.7

82.5

87.5

92.8

98.5

104.4

110.8

Tea

54.2

59.1

61.2

65.8

70.7

76.0

79.1

82.3

85.6

89.1

2,089.8

2,053.8

2,052.8

2,208.8

2,381.3

2,551.0

2,774.3

3,017.9

3,283.5

3,573.3

Intermediate goods

618.7

636.7

638.7

690.6

748.2

809.4

887.5

973.2

1,067.1

1,170.0

Consumer goods imports

531.4

535.8

547.5

591.9

625.1

668.8

723.1

781.8

845.3

913.9

203.3

203.9

207.9

220.2

232.1

244.5

264.3

285.8

309.0

334.1

-1,379.0

-1,303.7

-1,232.2

-1,260.9

-1,319.4

-1,406.2

-1,524.0

-1,662.5

-1,810.4

-1,967.6

Exports of Services

504.3

535.0

554.0

645.8

755.5

826.9

911.1

997.5

1,092.2

1,196.2

Tourism

317.2

342.8

394.2

473.0

567.6

624.4

686.8

755.5

831.1

914.2

Imports of services

640.6

675.9

641.8

754.5

821.9

875.4

934.0

1,006.9

1,085.8

1,171.8

Trade balance of Services

-136.4

-140.8

-87.7

-108.7

-66.5

-48.5

-22.9

-9.4

6.4

24.4

Exports of goods and services

1,215.1

1,285.2

1,374.5

1,593.7

1,817.4

1,971.7

2,161.4

2,352.8

2,565.4

2,801.8

Imports of goods and services

2,730.4

2,729.7

2,694.5

2,963.3

3,203.2

3,426.4

3,708.3

4,024.7

4,369.3

4,745.0

-1,515.3

-1,444.5

-1,320.0

-1,369.6

-1,385.9

-1,454.7

-1,546.9

-1,671.9

-1,804.0

-1,943.2

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

710.8

753.2

826.4

958.2

1,076.4

1,162.1

1,273.3

1,385.8

1,512.0

1,654.1

Coffee

58.2

66.3

74.5

82.5

92.4

98.0

104.0

110.3

117.0

124.1

Tea

54.2

60.3

63.5

69.8

76.1

83.7

92.2

102.5

114.0

126.7

2,089.8

2,053.8

2,052.8

2,202.4

2,363.6

2,513.2

2,705.1

2,908.9

3,127.0

3,360.6

Intermediate goods

618.7

636.7

638.7

685.8

735.2

781.5

836.0

891.1

949.8

1,012.4

Consumer goods imports

531.4

535.8

547.5

590.4

620.3

658.9

705.4

754.9

806.1

859.0

203.3

203.9

207.9

218.7

227.4

234.6

246.6

258.9

269.8

279.2

Exports of goods

Imports of goods

Food Trade balance of goods

Trade balance of goods and Services

Source: IMF, PSP, second review, October 2014 Trade balance of goods and services(policy measures)

Exports of Goods

Imports of goods

Food

100

Trade balance of goods

-1,379.0

-1,300.6

-1,226.4

-1,244.2

-1,287.2

-1,351.1

-1,431.7

-1,523.1

-1,615.1

-1,706.6

Exports of Services

504.3

535.0

560.9

662.1

784.8

948.7

1,157.1

1,417.3

1,742.1

2,148.0

Tourism

317.2

342.8

401.1

489.3

596.9

746.2

932.7

1,175.2

1,480.8

1,865.7

Imports of services

640.6

675.9

641.8

753.1

817.4

865.8

916.4

979.2

1,046.1

1,117.7

Trade balance of Services

-136.4

-140.8

-80.9

-91.1

-32.6

82.9

240.7

438.1

696.0

1,030.3

Exports of goods and services

1215.1

1288.3

1387.3

1620.3

1861.2

2110.8

2430.4

2803.0

3254.1

3802.0

Imports of goods and services

2,730.4

2,729.7

2,694.5

2,955.6

3,181.0

3,379.0

3,621.4

3,888.0

4,173.1

4,478.4

Trade balance of goods and Services

-1515.3

-1441.4

-1307.3

-1335.3

-1319.8

-1268.1

-1191.1

-1085.0

-919.0

-676.3

Source: Our projections based on PSI second review and impact on expected measures

The combination of all those proposed policy measures on both exports side and imports, will have an impact on overall trade balance deficit in the short, medium and long term. Exports of goods will increase from USD710.8 million in 2014 to USD1654.1 million in 2023 with policy measures on coffee and tea averaging at 9.9% during ten years while exports of goods were projected to increase from 710.8 million in 2014 to 1605.7 million in 2023 averaging at 6.2% in ten years.

Imports bill of goods will increase from USD2089.8 million in 2014 to USD3360.6 million in 2023 equivalent to 5.5% on average during ten years when we take into account the impact of proposed policy measures (with cement, rice and sugar imports decline being the main contributors) and they were supposed to increase from USD2089.8 million in 2014 to USD3573.3 million in 2023 without policy measures (baseline scenario) i.e averaging at 6.2% increase during ten years.

Trade balance deficit of goods will increase from USD1379 million in 2014 to USD1706.6 million in 2023 with 2.5% increase on average during ten years while they were expected to increase from USD1379 in 2014 to USD1967.6 million in 2023 averaging at 4.2% in ten years in the baseline.

FIGURE 45: IMPACT OF POLICY MEASURES ON OVERALL TRADE BALANCE OF GOODS AND SERVICES

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Impact of policy measures on trade balance of goods 0.0

Impact of policy measures on trade balance of services 1,200.0 1,000.0

-500.0

800.0

-1,000.0

600.0

-1,500.0

400.0 200.0

-2,000.0

-2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

-200.0

-2,500.0 Trade balalnce of goods(baseline)

Trade balalnce of Services(baseline)

Trade balalnce of goods(policy measures)

Trade balalnce of Services(policy measures)

The trade balance of services is only affected by expected measures on tourism sector which will have impact in the short, medium and long term. Exports of services will increase from USD504.3 million in 2014 to USD2148 million in 2023 with policy measures on tourism averaging at 17.7% during ten years while exports of services were projected to increase from 504.3 million in 2014 to 1196.2 million in 2023 averaging at 10.1% in ten years.

Imports bill of services will increase from USD640.6 million in 2014 to USD1171.8 million in 2023 equivalent to 7.1% on average during ten years when we take into account the impact of proposed policy measures they are almost the same in baseline scenario.

Trade balance deficit of services will turn to surplus in 2023. The deficit will decline from USD136.4 million in 2014 to a surplus USD1030.3 million in 2023 while they were expected to decline from a deficit of USD1136.4 in 2014 to a surplus of USD24.4 million in 2023 averaging 4.2% in ten years in the baseline scenario.

FIGURE 46: IMPACT OF POLICY MEASURES ON TRADE BALANCE OF GOODS AND SERVICES

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Impact of policy measures on trade balance of goods and services 0.0 2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

-500.0 -1,000.0 -1,500.0 -2,000.0 -2,500.0 Trade balalnce of goods and Services(baseline) Trade balalnce of goods and Services(policy measures)

Source: Our projections based on PSI second review and impact on expected measures

When we consider the impact of all proposed policy measures on overall trade balance deficit of both goods and services, we can observe on the graph above that the impact will start to be felt in 2018 when all measures will start to be fully implemented and yield expected results. The trade balance deficit of goods and services will decline from USD1515.3 million in 2014 to USD676.3 million in 2023 with 8.2% decrease on average during ten years while they were expected to increase from USD1515.3 in 2014 to USD1943.2 million in 2023 averaging 3% in ten years in the baseline.

VIII. 8.1.

CONCLUSION AND POLICY RECOMMENDATIONS

Conclusion

This study analysed the trend of trade balance deficit in Rwanda from 2003 to 2013 and identified key causes thereof. The findings revealed that trade balance deficit has been increasing in value for both goods and services since 2003. Trade deficit of goods increased by 23.1% on average from US$ -165.7 million in 2003 to US$ -1 148.4 million in 2013 and the trade balance deficit of services increased by 12.9% from US$ -76.4 million in 2003 to US$ -122.4 million in 2013. The trade balance deficit of both goods and services increased from US$ -242.1 million in 2003 to US$ -1 270.8 million in 2013 i.e 19.2% increase on average in 10 years. Despite the fact that Rwanda undertook substantial macroeconomic reforms and adopted various policies and strategies with aim to overcome increasing trade balance deficit, performance of the export sector has not been consistent with recommended policies and has been outstripped by the increase in imports.

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The analysis also revealed that Rwanda has a trade balance deficit with all EAC Partner States except Tanzania starting from 2012. Rwanda has the highest trade balance deficit with Uganda as most of the imports from neighboring countries are from Uganda like cement; vegetable fats and oils and their fractions; Palm oil; other soap and organic surface active products in bars; worn clothing and other worn articles. The same situation was observed with other trading partners. Rwanda has the highest trade balance deficit with Asia followed by Africa. The main reason is the high imports from China such as Telephones for cellular networks or for other wireless; parts of nondomestic heating/cooling equipment; boilers for central heating; other (Structures & parts of structures, of iron/ steel and other wooden furniture.

The study made a thorough analysis of key products affecting trade balance both on imports and exports side. On exports side, coffee, tea and tourism services were analyzed while cement, sugar and rice were studied on import side. The major challenges related to export promotion in Rwanda include supply side constraints, and limited relationship between buyers and producers. Exports are of fundamental importance to the achievement of Rwanda’s economic growth and poverty reduction targets. The GoR has set an export growth target of 28% per annum and is making every effort to increase and sustain its exports to both regional and international markets. The bulk of Rwandan exports, currently around 80 per cent, are concentrated in Rwanda’s traditional commodity export sectors of tea, coffee and minerals. Other export sectors, such as hides and skins, handicrafts and horticulture, bring in much smaller amounts of foreign currency comparatively. There is therefore an evident need to diversify in greater quantities into alternative sectors for exports.

For import-substitution to be possible, serious measures are needed to address competitiveness issues, production capacity, productivity and quality of products.

Specific measures to boost exports and improve industrial development in Rwanda were proposed for the sector in general and product specific measures. To develop industrial sector in Rwanda the following areas of interventions are proposed by the National Industrial Policy: Infrastructure development, Human resources development, improve Access to finance; ensure Trade facilitation, invest in Technology, research and innovation, Improve Regulatory environment, ensure Availability of raw materials and 104

industrial inputs, and Ensure environmental sustainability.

Furthermore, the study analyzed both macro and micro economic causes of trade balance deficit in Rwanda and adequate measures were proposed. The impact of proposed measures was determined with some projections of the next ten years.

Considering the impact of all proposed policy measures on overall trade balance deficit of both goods and services, it was observed that the impact will start to be felt in 2018 when all measures start to be fully implemented and yield expected results. The trade balance deficit of goods and services will decline from USD1515.3 million in 2014 to USD676.3 million in 2023 with 8.2% decrease on average during ten years while they were expected to increase from USD1515.3 in 2014 to USD1943.2 million in 2023 averaging 3% in ten years in the baseline.

8.2.

8.2.1.

Policy Recommendations Short Term Measures

Short-term improvement in trade performance: Some of the overall trade deficit is due to the strength of domestic demand for goods and services. If and when the economy enters a slowdown phase, the growth of imports will fall, and this should provide an element of correction for the trade deficit.  Higher Interest Rates - will act to slowdown the growth of consumer demand and therefore lead to cutbacks in the demand for imports.  Fiscal policy (i.e. increases in direct taxes) might also be used to reduce aggregate demand. The risk is that a sharp fall in consumer spending might lead to a steep economic slowdown (slower growth of GDP) or a full-scale.  A Lower Exchange Rate -Depreciation in the domestic currency exchange rate should help to boost the overseas demand for exports because domestic firms will be able to supply more cheaply in international markets.

The extent to which export sales rise following a fall in the exchange rate depends on (a) whether domestic firms actually decide to cut prices and (b) the price elasticity of demand for domestic products from foreign consumers. A lower exchange rate should also cause imports into the domestic economy to become relatively more expensive leading to a slowdown in import volumes and "expenditure-switching" towards domestic output. Again the significance of elasticity of demand should be mentioned. In the short run the change in import demand is likely to be fairly small - it takes time for movements in the exchange rate to affect trade flows.

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8.2.2.

Medium Term Measures

As both tea and coffee often sit for long periods in warehousing close to ports in Mombasa due mainly to inefficiencies associated with the ports and the cost of storage at the port is expensive as identified by coffee exporters a reduction in this cost and time in storage must be a priority for ensuring quality and competitiveness. The distribution and logistics services logistics facility interventions like off-dock terminals near the ports can help in increasing trade volumes through the Northern and Central Corridor for Rwanda and its neighboring countries by reducing both time and cost.

Regional Integration as a means to Facilitating Trade The EAC provides a framework to address key barriers to trade that affect both trade in goods and trade services. There is a wide range of areas that need to be advanced. These include: i) the completion of the Common Market Protocol, ii) the harmonization and mutual recognition (of standards and educational qualifications and related curricula) and iii) effective implementation of commitments to remove non-tariff barriers.

With regards to implementation, the trilateral arrangement is a means to fast-tracking initiatives to upgrade regional infrastructure that facilities competitiveness and trade.

While still new, the trilateral arrangement also appears to have brought into focus the need for stronger cooperation amongst all EAC Partner States and not just the three trilateral members. Co-operation also needs to be pursued in other fora including COMESA and the CEPGL.

Push for reform of EAC Common External Tariff in 2015 The EAC Common External Tariff (CET) was agreed between Kenya, Tanzania and Uganda prior to the accession of Rwanda and Burundi to the EAC in 2009. As a result the CET does not adequately take into account Rwanda’s interests and several issues have arisen from this, including the following: i.

Overall tariff structure: optimal for Rwanda.

ii.

Sensitive Items: Approximately 60 tariff lines have been singled out as sensitive items with highly protectionist tariff rates. Rwanda has so far avoided applying

Studies have shown that the CET structure is not

106

some of these tariff rates through the suboptimal solution of temporary stays of application. iii.

Product classification: The EAC CET was conceived to have three broad categories and sensitive items with highly protectionist tariff rates. Rwanda has so far avoided applying some of these tariff rates through the suboptimal solution of temporary stays of application.

The CET will be renegotiated at a EAC level in 2015. The Government should now undertake a CET review of the overall CET structure, and propose the optimal tariff structure for Rwanda that supports the competiveness of private sector and development objectives.

Leverage WTO Trade Facilitation Agreement Rwanda needs to prioritize finalization of its Trade Facilitation Needs Assessment and begin leveraging the considerable support potentially available through development partners to implement the WTO Trade Facilitation Agreement signed in Bali in December 2013.

Special Economic Zone and Export Processing Zones The Kigali Special Economic Zone currently operates as a normal industrial zone.

Although at one state planned, there is currently no special infrastructure or tax regime operating in the phases currently occupied. It is likely therefore that the Government will move to implement the EAC Export Processing Zones law on a company by company basis. The EPZ law offers tax advantages to exporters of manufactured products who sell more than 80% of their turnover outside the EAC. As an example, this is the tax regime under which Light Industry investors would expect to operate.

Sensitization on Opportunities under AGOA and EPA There is widespread lack of knowledge of the opportunities presented under the USA and EU trade agreements (AGOA and EPA). While some sensitization did take place when these agreements were initially launched this knowledge has now been largely lost. Continuous sensitization is required to ensure firms access the highest value markets for their goods.

8.2.3.

Long Term Measures

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Longer Term Improvements in Trade Performance - focus on the Supply-Side: The key to controlling or reducing a balance of trade deficit in the long term is for the domestic economy to achieve relatively low inflation with sufficient productive capacity to meet the domestic demand from consumers. In other words, the ability of the domestic economy to deliver sustained growth of exports and meet the challenge of imported goods and services depends critically on the supply-side economic performance. This requires a period of low inflation, low interest rates and a competitive exchange rate matched with sufficient non-price competitiveness in overseas markets. Often, price is not the deciding factor in winning the demand from buyers. Greater investment in research and development, more effective marketing strategies can have powerful long term effects in winning and maintaining market share in highly competitive global markets.

An outward shift of long run aggregate supply would provide the economy with an increased capacity – permitting a reallocation of resources towards exporting.

A sustained improvement in the balance of trade requires: (a) More domestic businesses to seek and exploit opportunities in export markets overseas; (b) A greater focus on resources in industries where the domestic economy has a genuine comparative advantage - e.g. increased investment in services (including business finance, tourism) - many services are exportable and have the potential to earn huge sums in foreign currency. (c) Higher levels of research and development to develop new products in potential high growth markets where the overseas income elasticity of demand is high.

Improve efficiency and productivity in export sectors and those parts of domestic industry that are exposed to international competition.

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ANNEX I: LIST OF KEY STAKEHOLDERS Institution Government Institutions 1. President’s Office – SPU: 2.

MINICAAF – Ministry of Cabinet Affairs 3. Prime Minister's Office PMO Coordination Unit 4. MINECOFIN

5. MINICOM

6. MINEAC

7. IDEC Secretariat 8. RDB

Contact persons -

Serge Kamuhinda: 0788309596 ASHANI: 0788306083

-

Evariste Rugigana : 0788555926

-

Geofrey (Director of Planning): 0788478597 Amina Rwakunda (Macro): 0788500525 Marcel Nshimiyimana: 0788358765 Mugwaneza Pacifique: 0788840941 Nteziyaremye Christophe: 0788356057 Emmanuel Hategeka: 0788312222 Peace Basemera: 0788574322 Laurence Mukarugwiza: 0788762846 Jonas Munyurangabo: 0788895292 Safari Innocent: 0788303649 Nathan Gashaija: 0788305178 Pascal Ngendahimana: 0788692059 Mugwaneza Pacifique: 0788840941

9. NAEB

-

10. BNR

-

Eusebe Muhikira: Diane Sayinzoga (Director of Trade): 0788487493 Viviane Kayitesi: Clare AKAMANZI: 0788301661 Joel (Tourism) Martin Gasasira: 0788490834 (martin.gasasira@rdb.rw) Bill Kayonga: 0788302125 Ndambe Nzaramba: 0788381234 Uwera Robinah: 0788511469 (u.robinah@naeb.gov.rw) Desire Ndwaniye: 0788753659 Tito HABIMFURA: 0788818455 Viviane MWITIREHE: 0788309163 (vmwitirehe@bnr.rw) 109

Institution

11. PPD Private Sector 12. PSF

13. Tea

Contact persons - Antoine: 0788899228 - Kigabo Thomas: 0788303633 - George Gakuba: 0788308224 - Daniel Nkubito: 0783593588 -

16. Cement

-

17. Rice 18. Sugar 19. Civil Society

-

14. Coffee 15. Tourism

-

20. Development Partners

-

Nkusi Mukubu Gerard:0788306088 Yvette: 0788300697 Manzi Antoine: 0788301410 Christine Murebwayire (Rwanda Horticulture Board): 0788536121 Tea Coffee Tourism Cement (CIMERWA, KCC, GL) Rice Sugar (KSW) Mulindi Factory Company (Vincent Hategekimana: 0788464050 – COTHEVEM)

Chamber of Tourism RDB CIMERWA: Juvenal Rutaganda (Director of Production Unit) – 0788300491 KCC Kabuye Sugar Works Rwanda Civil Society Platform (RCSPF) – Blair Robert ACORD – Rwanda: Munyantwari Francois ADECOR (Association des Consommateurs du Rwanda): Ndizeye Damien Rwanda Women Network: Peter Turyahikayo Pro-Femmes Twesehamwe: Emma Marie Bugingo CCOAIB: Ngendandumwe Jean Claude EACSOF Rwanda UNDP TMEA 110

Institution

Contact persons - WORLD BANK - DFID - European Commission

111

ANNEX II: INTERVIEW GUIDE ANALYSIS OF TRADE BALANCE IN RWANDA: FROM FRAGILITY TO SUSTAINABILITY Interview Guide Introduction and Background Despite Rwanda’s undertaking of substantial macroeconomic reforms and adopted various policies and strategies with respect to external trade, performance of the export sector has not been consistent with recommended policies and has been outstripped by the increase in imports. According to the available statistics, Rwanda has never experienced a trade surplus since the 1980s. There have been increasing balance of trade deficits, which cause a serious scarcity of foreign exchange to meet the import bill and other payment obligations, such as the country’s external debt. This deficit raises suspicions that there could be certain policy elements that have led to the deteriorating trends of the balance of trade.

It’s against this background that the United Nations Development Program – Rwanda (UNDP) has commissioned a study entitled “Analysis of Trade Balance in Rwanda: From Fragility to Sustainability”. The main objective of the study is to investigate the causes of trade balance deficit in Rwanda and propose some feasible solutions for short, medium and long term. The approach of the study is to collect and analyze all relevant information pertaining to exports and imports in Rwanda with particular focus on the key products and/or services that have a potential to make significant positive impact to the balance of trade in Rwanda.

Therefore, given your important role in the focus area of the study, your support and cooperation in providing access to necessary information is highly appreciated.

We would like to thank you for your time and clarify that this discussion is only for study purposes.

1. Describe briefly your activities and how they contribute to the balance of trade in Rwanda.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

112

2. What are major challenges that you face in your daily activities that may affect the production capacity?

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3. Are there challenges related to the market of your products? Explain.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4. What role do you expect from government of Rwanda to address some of those challenges?

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------5. Are there measures that you have put in place to cope with these challenges? If yes, explain.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------6. What challenges do you find in collaborating with the government?

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------7. How do you work with other partners and stakeholders to improve your activities?

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------8. What challenges do you find in collaborating with other stakeholders?

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Thank you for your time!

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References 1. BNR. (2014, August 24). Monetary Policy and Financial Stability Statement.

Monetary Policy and Financial Stability Statement. Kigali, Kigali, Rwanda: BNR. 2. EAC. (2012). The EAC Common External Tariff, Version 2012. Arusha: EAC. 3. Egwaikhide, F. O. (2000). Determinants of Imports in Nigeria; A Dynamic Specification, African Economic Research Consortium. Lagos.

4. Elwell, C. K. (2007). The U.S. Trade Deficit: Causes, Consequences, and Cures, Congressional Research Service. Washington DC: order code RL31032.

5. IDEC. (2013, October). IDEC Action Plan 2013. Kigali, Rwanda.

6. Mbanda, J. (2014, August 25). Kabuye Plant Repairs Push Sugar Imports Up. The New Times.

7. MINAGRI. (2010). Enabling Self Sufficiency and Competitiveness of Rwanda Rice: Issues and Policy Options. Kigali: MINAGRI. 8. MINAGRI. (2013). Strategic Plan for the Transformation of Agriculture in Rwanda, Phase III (PSTA III). Kigali: MINAGRI. 9. MINECOFIN. (2013). Economic Development and Poverty Reduction Strategy II. Kigali: MINECOFIN. 10. MINICOM. (2011). National Industrial Policy. Kigali: MINICOM. 11. MINICOM. (2014). National Export Strategy (NES II). Kigali: MINICOM. 12. NAEB. (2015, January 4). http://www.naeb.gov.rw.

Retrieved from http://www.naeb.gov.rw: http://www.naeb.gov.rw/index.php?id=44 13. NISR. (2012). The Third Integrated Households Living Conditions Survey (EICV 3) Main Indicators Report. Kigali: NISR. 14. RDB. (2015, January 17/01/2015). www.rdb.rw. Retrieved from www.rdb.rw: http://www.rdb.rw/fileadmin/user_upload/Documents/Agriculture/Green%20fie lds%20for%20tea%20production%20and%20processing%20focusing%20on%20sp ecialty%20tea.pdf 15. Shirvani, Hassan and Barry Wilbratte. (1997). The Relationship between the Real Exchange rate and the Trade Balance: An Empirical Reassessment. International Economics Journal 11 (1).

16. Todaro, M. P. (2009). Economic Development. New York: Pearson Education Limited.

17. UNCTAD. (2006). Trade and Development Report. New York: United Nations.

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