In times of regional and global turbulence, Rwanda’s economy has demonstrated remarkable resilience. A new Rwanda Economic Update shows why.
In 2011, growth will reach 8.8 percent, inflation has been contained below 10 percent and the exchange rate remains stable. This economic resilience reflects sound macroeconomic management.
Rwanda’s growth prospects for 2011 compare favorably with others in the region, but this outlook is contingent on three factors. First, prudent macroeconomic management continues, inflation is at single digits and the exchange rate remains stable. Second, the global economy experiences moderate growth in 2012 and even higher growth in 2013, ensuring robust export demand, stable commodity prices, increased tourist arrivals and continued aid inflows. Third, fuel and imported food prices continue to moderate.
Rwanda’s growth remains dependent on domestic consumption which is fueled by imports and partly financed by substantial donor inflows. Continued global shocks, particularly if they lead to a substantial price declines for Rwanda’s exports, a reduction in donor assistance, or repeated adverse weather conditions would test Rwanda’s resilience. Rwanda will also need to rebuild its fiscal buffers, which were depleted following the 2009 crisis and subsequent stimulus program, to be ready for the next big global shock.
To illustrate Rwanda’s vulnerability to shocks in foreign aid, we simulated the impact of a five percent decrease (equivalent to U$42.6 million in budgetary and capital/project grants) in foreign aid inflows on external balances. The simulation assumes exports and imports continue on the trend of the last three years. This relatively small decrease in aid would result in a widening of the current account deficit (including grants) from 7.5 percent in 2010 to 12.1 percent of GDP in 2011, the highest deficit in the last decade. The balance of payments would also deteriorate and record a deficit for the first time since 2004.
As a land-locked and fuel-dependent economy, Rwanda is always vulnerable to external shocks, such as the rapid rise of fuel prices in the first half of 2011. But as the economy grows, Rwanda should be able to produce goods for the expanding domestic market and for some of its neighbors, and achieve the transition it seeks to a more diversified economy, based on services and light industry.