Rwanda is the most compelling turnaround story in Africa today. Eighteen years after the genocide that made Rwanda international news, but left it abandoned by the West, the country has achieved a miraculous change of fortunes. Rising out of the devastation of a failed state, Rwanda has emerged on the world stage yet again — this time with a unique model for governance and economic development.⁽²⁾ Less than a generation after a brutal genocide in 1994 that killed more than 800,000 people in 100 days, the World Bank calls Rwanda “a country at peace and among the most stable on the continent.” According to the Rwandan Ministry of Finance, in the past five years alone more than 1 million Rwandans, or nearly 10% of the population, have pulled themselves out of extreme poverty, and the country continues to grow.

Rwanda, a former Belgian colony, grew its economy by 8% in 2012, making it the strongest performer in the East African Community (EAC), the regional intergovernmental organisation of Burundi, Kenya, Rwanda, Tanzania and Uganda, and one of the fastest-growing frontier markets in the world today.⁽³⁾ Rwanda has followed a course of prudent macroeconomic management, effective use of foreign aid, and sound fiscal and monetary policies, all of which have underpinned its strong economic performance, and increased its resilience during a period of global economic turbulence.

Nonetheless, risks grew significantly in the second half of 2012 due to a shortfall of aid. Nearly half of Rwanda’s budget is financed with foreign aid due to low domestic revenues. The impact of this shortfall on the real economy has thus far been muted because of swift action taken by the government in the form of increased domestic borrowing, enabling it to execute most of its budget, including social expenditures and wages. Domestic borrowing has supported activity in the private sector, especially services sectors like communications and finance. Overall economic growth has exceeded expectations. However, the cost of this growth has been a sharp increase in interest rates due to raised domestic borrowing. Increasing demand for imports and a shortage of foreign currency have also led to the depreciation of the Rwandan franc.

This CAI paper examines Rwanda’s post-genocide rebirth, and economic successes achieved thus far. It explores Rwanda’s goal of becoming a middle-income nation by 2020 with a well-diversified economy, buoyed by technology. The paper analyses progress made in encouraging private sector development and fostering entrepreneurship, and the reconciliation and unification underpinning these initiatives.

The Rwandan genocidal massacre

The Rwandan genocide refers to the 1994 mass slaughter in Rwanda of the ethnic Tutsi and politically moderate Hutu peoples. The killings began in early April 1994 and continued for about 100 days until the Hutu Power Movement’s defeat in mid-July 1994. Hutu Power was an ideology propounded by the Hutu extremists in Rwanda which contributed to the genocide. Hutu Power political parties and movements included the Akazu, the Coalition for the Defence of the Republic and its Impuzamugambi (‘those who have the same goal’ or ‘those who have a single goal’ in the native Kinyarwanda language) paramilitary militia, and the former governing National Republican Movement for Democracy and Development and its Interahamwe (‘those who stand, work, fight, attack together’ in Kinyarwanda) paramilitary militia.⁽⁴⁾ The genocide was carried out primarily by Hutu supremacist militia groups, co-perpetrated by the Government of Rwanda, the Rwandan Army, and Rwandan civilians in compliance with the Hutu Power movement. By the conclusion of the genocide, there is common agreement that at least 500,000 ethnic Tutsis had been murdered, along with thousands of Tutsi sympathisers, moderate Hutus, and other victims of the atrocities. Some estimates claim between 800,000 and 1 million people were killed. Another 2 million became refugees, mostly Hutus fearing the retribution of the newly-empowered Tutsi rebel government, who were packed into disease-ridden refugee camps in neighbouring Burundi, Tanzania, Uganda and Zaire, later to become the Democratic Republic of Congo (DRC).⁽⁵⁾

Prior to the genocide, Rwanda’s economy relied mostly on rain-fed subsistence agriculture. About 90% of the population engaged in subsistence agriculture using simple tools for farming, which accounted for about 38% of gross domestic product (GDP). The industrial sector was small and uncompetitive, manufacturing cement, small-scale beverages, soap, furniture, shoes, plastic goods and textiles.⁽⁶⁾ In the 1960s and 1970s, Rwanda's prudent financial policies, coupled with generous external aid and relatively favourable terms of trade, resulted in sustained growth in per capita income and low inflation rates. However, growth became erratic when world coffee prices fell sharply in the 1980s. Compared to an average annual GDP growth rate of 6.5% from 1973 to 1980, growth slowed to an average of 2.9% a year from 1980 to 1985, and was stagnant from 1986 to 1990. The economic crisis peaked in 1990 when the first measures of an International Monetary Fund (IMF) structural adjustment programme were carried out. While the programme was not fully implemented before the genocide, key actions such as two large devaluations of the Rwandan franc and the removal of official prices had been enacted.⁽⁷⁾ The genocide resulted in Rwanda’s GDP falling by 50% in 1994.⁽⁸⁾ It furthermore left the entire population, both survivors and perpetrators, traumatised. Of the refugees, up to 1 million people who had been pushed into exile returned.

The media widely attributes Rwanda’s miraculous recovery to the country’s effective leadership.⁽⁹⁾ Rwanda’s president, Paul Kagame, is a former rebel leader whose Rwandan Patriotic Front army ended the genocide when it took control of the capital Kigali in July 1994. His pro-Western government has successfully curbed bribery, instituted the rule of law, and dramatically reduced street crime. Perhaps most significantly, Kagame’s government has actively discouraged use of the terms ‘Hutu’ and ‘Tutsi’, wiping such ethnic identifiers from all official paperwork.⁽¹⁰⁾ Corruption is on the decline and the country, which remains very poor, especially outside Kigali, nonetheless enjoys a fast-growing economy. Kagame has said he hopes to turn this small landlocked nation into Africa’s Singapore.

Another important factor in Rwanda’s turnaround was a system of traditional restorative justice known as gacaca. Recognising that institutional courts and prisons could never deal with the hundreds of thousands of genocide perpetrators, gacaca courts were instituted as community-based public trials allowing victims to confront accused. If convicted, perpetrators were sentenced to such punishments like repairing homes, carving out agricultural terraces or even tending the fields of their victim’s family, punishments that focused on rebuilding the country.⁽¹¹⁾

How did Rwanda grow out of poverty?

Through good governance, a strong anti-corruption campaign, and clear economic vision buoyed by effective use of foreign aid, Rwanda has lifted itself out of extreme poverty and put itself on a trajectory toward greater self-sufficiency. The World Bank projects GDP growth in 2013 of 7%, which would make Rwanda the ninth-fastest growing economy in the world.⁽¹²⁾

In its quest to deepen good governance, the government of Rwanda in July 2013, launched the Rwanda Governance Scorecard (RGS) 2012, to measure governance along eight indicators, namely rule of law; political rights and civil liberties; participation and inclusiveness; safety and security; investing in people; control of corruption, transparency and accountability; quality of service delivery; and economic and corporate governance.⁽¹³⁾ The 2012 edition showed significant improvements in areas of rule of law, participation, and political rights and civil liberties. Rwanda’s safety and security indicator achieved a top score of 91.4%, but quality of service delivery ranked last, despite registering an improvement of 4.2 percentage points. Access to legal aid was the most improved area with an increase of 25.18 percentage points.⁽¹⁴⁾ Other most improved sectors included: Civil society participation; vibrancy of non-state actions in policy formulation; access to public information; control of corruption; and transparency and service delivery in education.⁽¹⁵⁾ The eight categories of the governance scorecard are critical to attracting foreign direct investment (FDI) into the country, as they collectively present a holistic measure of good governance and transparency.

Rwanda’s commitment to stamp out corruption in its quest to lift the country out of poverty has earned recognition from the anti-corruption watch dog, Transparency International (TI). The 2012 Global Corruption Barometer report released by TI shows strong political will to fight corruption with the Rwandan Government’s effectiveness rated at 95%, the highest in Sub-Saharan Africa. Rwanda is listed as the least bribery-prone country in East Africa.⁽¹⁶⁾ This firmly underlines the pivotal role of effective leadership that lifted Rwanda out of poverty and placed it on the path towards middle income status.

The Government of Rwanda adopted a Vision 2020 strategy in the year 2000 with the primary objectives of transforming Rwanda into a middle-income country by 2020.⁽¹⁷⁾ Vision 2020 identifies six interwoven pillars: good governance, efficient state, skilled human capital, vibrant private sector, world-class physical infrastructure, and modern agriculture and livestock. It seeks to release the productive capacities of the Rwandan people and offer solutions adapted to their needs. Against this backdrop, the Government of Rwanda initiated a series of programmes aimed at realising its Vision 2020 targets, notably the Economic Development and Poverty Reduction Strategies (EDPRS), which focus strongly on growing the private sector, increasing exports, urbanisation and rural development, increasing agricultural productivity, creating jobs, especially for youth, and improving efficiency in service delivery in both public and private sectors.

The country has made good progress towards attaining these Visions 2020 objectives, and has even surpassed some targets. With less than a decade to go, Rwanda revised and strengthened the indicators and targets in March 2012 to ensure they continued to reflect its long-term development goals.⁽¹⁸⁾ The revised targets aim to reduce poverty levels to 20% from the current rate of 44% by 2020—the previous target was to reduce poverty levels to 30%.⁽¹⁹⁾ Annual GDP per capita is now targeted at US$ 1,240, up from the old target of US$ 900. GDP per capita increased from US$ 212 in 2001 to US$ 540 in 2010 and to US$ 644 in 2012.⁽²⁰⁾ It appears that clear and well-defined economic goals, coupled with the determination to achieve them, are lifting Rwanda out of poverty.

One of the key pillars of Rwanda’s Vision 2020 is private sector-led development, spearheaded by entrepreneurship. The ultimate goal of the reform programme is a private sector that promotes economic growth and job creation. After Rwanda simplified formalities for business registration in 2006, 77% more firms registered in the following year. In 2008 more than 3,000 firms registered, up from an average of 700 in previous years. In 2009 the number rose to 6,905 firms, and in 2010 the government managed to register 18,447 new businesses—nearly achieving its goal of registering 20,000 that year. The jump in registration numbers cannot be attributed solely to the simplification of the start-up process; the business registration reforms were part of a wider government agenda to promote private sector growth and entrepreneurship in Rwanda.⁽²¹⁾

Rwanda’s governance reforms, anti-corruption and Vision 2020 initiatives have paid off, evidenced in the World Economic Forum’s (WEF) Global Competitiveness Report 2012-2013, which ranked Rwanda 63 among 144 countries, and third among Sub-Saharan African countries, behind South Africa and Mauritius.⁽²²⁾ Rwanda continues to benefit from strong and well-functioning institutions, a good security environment and efficient labour markets. However, its ranking worsened in areas such as wage flexibility, hiring and firing practices, and pay and productivity. Nevertheless, the overall positive ranking firmly endorses Rwanda’s post-genocide achievements and affirms its initiatives to achieve middle-income status by 2020. Consequently, the country continues to enjoy a deepening investor confidence, as FDI increased by 50% to USD 159.8 million in 2012. Foreign investment came from Singapore-based Nandan Agro-processing Industries Ltd, and South African cement manufacturer, Pretoria Portland Cement.⁽²³⁾

Unlike the majority of Sub-Saharan African countries which rely heavily on commodity exports for economic growth, Rwanda’s strong GDP growth is driven largely by the services sector, which accounted for 48% of GDP growth in 2012.⁽²⁴⁾ Tourism has become the largest foreign exchange earner for the country, securing US$ 281.8 million in 2012, an increase of US$30-million compared to 2011. The contribution of tourism as a foreign exchange earner is welcome, as diversifying the economy away from the export of commodities is an upside for Rwanda, given the volatility of commodity prices, as discussed below. In addition to the contribution from tourism, other strong performances within the service sector over the past decade have come from communications, education, public administration, storage, as well as transport.

Rwanda is generally not considered a resource-rich country, and agricultural commodities dominate trade, with coffee, cereals, tea and vegetables forming 77% of overall exports, and minerals 28%.⁽²⁵⁾ By 2012, the EAC accounted for 35% of total Rwandan export volumes, exceeding the 32% recorded by Europe, Rwanda’s traditional trading partner.⁽²⁶⁾ The country’s main import sources were China (12.7%), Uganda (14.1%), Kenya (8.3%) and India (8%).⁽²⁷⁾ Consequently, Rwanda is compelled to diversify its economy away from the export of natural resources to services and tourism.

A major driver of Rwanda’s strong economic growth is the country’s budding Information and Communications Technology (ICT) sector which bolstered the business climate. The Government of Rwanda initiated the national ICT plan in 2000 in the hope of transforming Rwanda into the ‘Singapore of Africa’. Singapore is the second most network-ready country in the world, and the first in Asia, with its ICT sector earning about £35.3 billion in 2010 (US$ 56.4 billion today), according to the World Economic Forum’s Global Information Technology Report 2010/2011.⁽²⁸⁾ Rwanda hopes to emulate and replicate Singapore’s ICT feat in Africa by creating favourable ICT policies that lay the groundwork for its ICT sector. Earlier this year, the state-run Rwanda Information Technology Authority announced the completion of a 2,300 kilometre nationwide fibre-optic cable. It is designed to connect Rwanda to the outside world to provide fast internet access to a wider range of broadband services, replacing expensive and slower satellite connections.⁽²⁹⁾

Figure 1: Sectoral contribution to Rwanda’s GDP growth (%)⁽³⁰⁾

Declining foreign aid: A downside threat to economic growth

Despite the impressive economic achievements of post-genocide Rwanda, the economy still relies heavily on foreign aid, as 48% of Rwanda’s budget is financed by foreign donors. The majority of foreign aid is from general budget support donors, namely the World Bank, European Union (EU), African Development Bank (AfDB), United States (US), Germany and the United Kingdom (UK), and two sector budget support donors, Belgium and the Netherlands.⁽³¹⁾ Budget support is a term used for aid funds that are managed by the partner government using its own financial system and procedures, either for general funding of the budget or for specific sectors. General budget support is designed to contribute to the implementation of generic goals as set in Rwanda’s national development or poverty reduction strategy, whilst sector budget support is designed to accelerate progress towards the partner government’s sectoral goals.

Rwanda has built a strong reputation for making the best out of its foreign aid. Nevertheless, such support is being threatened following allegations that Rwanda has been financing rebels in the DRC, as many Rwandan refugees who fled the genocide remain in the DRC.⁽³²⁾ Consequently, the UK, the second-largest bilateral contributor to Rwanda after the US, has frozen, unfrozen, and then refrozen its aid, worth US$ 120 million a year. Other European governments have also stopped or reduced their contributions. The US has suspended military aid worth US$ 200,000 a year and may also cut development projects. The World Bank, IMF and the AfDB are hesitant and undecided over the matter.⁽³³⁾ Looking ahead, the aid shortfall is likely to derail economic growth in the medium term and frustrate Rwanda’s growth initiatives, as domestic revenue is still insufficient to finance the country’s annual budget and Vision 2020 plans.

In response to the aid shortfall, the Government of Rwanda has moved quickly to implement policies that have maintained robust growth in the economy. The Government has financed some of the aid shortfall, through increased domestic borrowing, which spurred economic growth by 8% in 2012, higher than the 7.4% growth rate projected in World Bank’s July 2012 Rwanda economic update, which was prepared prior to the shortfall of aid.⁽³⁴⁾

Maintaining the growth momentum

The shortfall in aid flows has hampered the ability of the central bank, the National Bank of Rwanda, to continue meeting market demand for foreign exchange, contributing to the Rwandan franc’s depreciation of 4.5% against the US dollar in 2012, after depreciation of 1.6% in 2011.⁽³⁵⁾ External foreign exchange reserves also declined by 18.1% as the central bank attempted to meet market demand for foreign exchange. In effect, whilst Rwanda’s macroeconomic response to aid shortfall has been effective thus far in sustaining economic growth, the government cannot indefinitely draw down its foreign reserves and increase domestic borrowing. Consequently, home-grown solutions to generate state revenues remain critical to executing its budget and Vision 2020 initiative.

Although Rwanda’s performance in terms of growth and poverty reduction has been remarkable, several factors still merit close attention. Despite the large reduction in poverty over the past decade, Rwanda remains a severely under-developed country, with high inequality and around 60% of the population living below the poverty line.⁽³⁶⁾ Policies should therefore focus on creating equal opportunities to foster competitiveness, and bolstering the country’s budding private sector.

Concluding remarks

Rwanda’s post-genocide rebirth and subsequent economic achievements present a strong example for other countries that have suffered the wreckage of human-induced catastrophe to emulate. Rwanda has shown how to lift itself out of poverty and failure through reconciliation, unification, as well as defined and clear economic goals. It is commendable that Rwanda has emerged from a massacre that left it morally, socially, politically and economically bankrupt just a few years ago, to one of the most stable and reformed African countries. Nonetheless, Rwanda still has a long way to go, as the bulk of its people are still living below the poverty line, and the country needs to explore other sources of revenue to finance its budget to cut reliance on foreign aid.

Rwanda’s positive economic outlook is therefore contingent on continued strong economic management by the government. If the aid shortfall was to reverse, increased government expenditure could spur even faster economic growth. The uncertainty about future external aid flows, alongside the complicated state of the global economy, is among its key risks.

Written by Samuel Amanor (1)

NOTES:

(1) Samuel Teye-Larbi Amanor is a Research Associate with CAI and an Africa-focused financial and economic analyst. Contact Samuel through Consultancy Africa Intelligence's Finance & Economy unit ( finance.economy@consultancyafrica.com). Edited by Nicky Berg.
(2) Crisafulli, P. and Redmond, A., 2012. Rwanda, Inc: How a devastated nation became an economic model for the developing world. Palgrave Macmillan: New York.
(3) ‘Rwanda’s GDP per capita in 2012 rises to USD 644 from USD 593 in 2011’, Government of Rwanda , August 2013, http://allafrica.com.
(4) ‘Hutu Power’, Wikipedia, 6 October 2013, http://en.wikipedia.org.
(5) ‘Rwandan Genocide’, World Without Genocide, 13 September 2013, http://worldwithoutgenocide.org.
(6) ‘Rwanda’, Africa.com, 5 October 2013, http://www.africa.com.
(7) ‘Economy of Rwanda’, Wikipedia, 5 October 2013, http://en.wikipedia.org.
(8) ‘Rwanda poverty note. Rebuilding an equitable society: Poverty and poverty reduction after the genocide’, World Bank Report no. 1 7792-RW, 19 June 1998, http://web.worldbank.org.
(9) Johnson, T., ‘Rwanda’s great turnaround’, UC Observer, 15 September 2013, http://www.ucobserver.org.
(10) Ibid.
(11) Ibid.
(12) Yuk, P., ‘Rwanda and Costa Rica: Riding the wave of cheap money’, Financial Times, 24 April 2013, http://blogs.ft.com.
(13) ‘Launch of Rwanda Governance Scorecard (RGS) 2012’, Rwanda Governance Board, 30 July 2013, http://www.undp.org.
(14) Ibid.
(15) Ibid.
(16) ‘The Global Corruption Barometer 2012’, Transparency International, 9 July 2013, http://www.transparency.org.
(17) ‘Vision 2020’. Economic Development and Poverty Reduction Strategy 2 (EDPRS 2), Government of Rwanda, 10 September 2013, www.edprs.rw.
(18) Ibid.
(19) Karinganire, E., ‘Rwanda: Vision 2020 national targets revised’, The Rwanda Focus, 12 March 2012, http://focus.rw.
(20) Ibid.
(21) ‘Rwanda: Fostering prosperity by promoting entrepreneurship’, World Bank Doing Business 2013 Report, 5 October 2013, http://www.doingbusiness.org.
(22) ‘The Global Competitiveness Report 2012-2013’, World Economic Forum, 20 May 2013, http://www3.weforum.org.
(23) ‘Rwanda: African economic outlook’, African Development Bank (AfDB), Organisation for Economic Co-operation and Development (OECD), United Nations Economic Commission for Africa (UNECA), United Nations Development Programme (UNDP), 9 August 2013, www.africaneconomicoutlook.org.
(24) Ibid.
(25) Ibid.
(26) Ibid.
(27) Ibid.
(28) Leon, J., ‘ICT sector in Singapore’, UK Trade & Investment, 11 April 2013, http://www.uktradeinvestcanada.org; ‘The Global Information Technology Report 2010–2011, World Economic Forum, 13 April 2011, http://www3.weforum.org.
(29) Tafirenyika, M., ‘Information technology super-charging Rwanda’s economy’, United Nations (UN), April 2011, http://www.un.org.
(30) Compiled by the author using data from: ‘Rwanda economic update’, World Bank, 01 May 2013, www.worldbank.org.
(31) Ford, L., ‘UK withholds aid to Rwanda in light of Congo DRC allegations’, The Guardian, 30 November 2013, www.theguardian.com.
(32) Long, N., ‘Congo delays end to Rwandan refugee status’, Yahoo, 23 June 2013, http://news.yahoo.com.
(33) ‘Aid to Rwanda. The pain of suspension’, The Economist, 12 January 2013, www.economist.com.
(34) ‘Rwanda economic update’, World Bank report no. 78229, 1 May 2013, http://www-wds.worldbank.org.
(35) ‘Rwanda budget framework paper’, Ministry of Finance and Economic Planning, Government of Rwanda, 10 May 2013, http://www.minecofin.gov.rw.
(36) ‘Rwanda Vision 2020’, Ministry of Finance and Economic Planning, Government of Rwanda, 7 October 2013, http://www.minecofin.gov.rw.