World Bank Predicts Considerable Growth and Drop in Poverty Rate for Rwanda

On Wednesday, the World Bank released an Economic Update on Rwanda. The World Bank’s projection show economic growth of 7.4 percent for 2015 and 7.6 percent for 2016. Similarly, it anticipates a drop in the nation’s high poverty rates from 63 percent in 2011 to 54 percent by 2016. That would equate to one million people moved out of poverty over the last several years.

On Wednesday, the World Bank released an Economic Update on Rwanda. The World Bank’s projection show economic growth of 7.4 percent for 2015 and 7.6 percent for 2016. Similarly, it anticipates a drop in the nation’s high poverty rates from 63 percent in 2011 to 54 percent by 2016. That would equate to one million people moved out of poverty over the last several years.

Rwanda’s growth rate dipped in 2013 to 4.3 percent, causing the World Bank to doubt the African nation’s ability to maintain this rather admirable rate of growth in the long term. Nevertheless, the rate of growth recovered on the back of Private and government consumption, which in turn caused acceleration in growth for the Rwandan services sectors led the recovery, which is reflected in the accelerated growth of the services sector.

Unfortunately, the World Bank also identified a shift in fiscal policy toward less expansionary measures in recent quarters. Still, this move may be offset by developments in the monetary sector. These developments include a recovery in bank lending to pre-aid shortfall levels, a low inflation rate, and appreciation of the real effective exchange rate (i.e., exchange rate adjusted by inflation and relative importance of trading partners by trade values).

According to the report, in order to achieve high and sustainable growth, Rwanda must garner help from the medium term investment. Although Rwanda’s gross domestic product (GDP) investment of 24% was a little above average for low/medium income countries, it was still mostly financed through foreign savings, including aid. Increasing domestic savings will remain problematic for Rwanda in the next several years; therefore, it must find alternative domestic and external financing sources. Carolyn Turk, World Bank Country Manager for Rwanda predicts that remittances by foreign workers may help to fill this gap.

The World Bank report advises that Rwanda must focus on developing its financial sector for two reasons. First, the financial sector tends to contribute to a nation’s economic growth and government revenues and helps to support the mobilization of domestic savings. Improving access to finance in the medium to long-term will be critical to this objective. Second, a nation’s financial sector tends to facilitate domestic and foreign debt financing and investments, as well as access to international capital markets.

Although commercial banks remain the primary source of financing in Rwanda, the maturity of their liabilities (mostly local short-term deposits) constrain their investments. As such, Gunhild Berg, World Bank Financial Sector Specialist advises that, “As the banking sector has limited capacity to provide long-term financing, domestic, regional, and international institutional investors, such as pension and insurance funds, are natural candidates for investing in long-term projects.”