Originally published by the African Development Bank Publications.

Recent macroeconomic and financial developments

Real GDP in Rwanda was estimated to contract by 0.4% in 2020 due to the COVID–19 pandemic, after growing 9.4% in 2019. Trade, transportation, and tourism services have been the sectors most affected by the global pandemic. COVID–19 also hurt investment and exports. Rising food prices, stoked by disruptions to regional and domestic supply chains, contributed to a 6.6% increase in inflation in 2020. That was far higher than the 2.4% in 2019 and breached the central bank’s 5% policy target. The National Bank of Rwanda reduced the key policy rate to 4.5% in April 2020 from 5.0% in 2019 to stimulate growth, but private sector credit remained subdued, expanding by 10.2% in 2020, compared with 12.6% in 2019. Low tax yield and elevated health and social protection spending caused the fiscal deficit to grow to 8.3% of GDP in 2020, compared with 7.3% in 2019. The deficit was financed by COVID–19 budget support loans and grants from cooperating partners. Low exports and reduced foreign direct investment resulted in a current account deficit equivalent to 16.5% of GDP in 2020, compared with 9.3% in 2019. Gross reserves shrank. In 2020 they could cover 2.4 months of imports, compared with 4.5 months in 2019. Low external inflows contributed to a 4.6% depreciation of the Rwandan franc against the US dollar. The financial sector remains stable and well capitalized, with a capital adequacy ratio of 23.7% in June 2020, above the 15% regulatory threshold. The latest available data show an unemployment rate of 22.1% in May 2020, compared with 15% a year earlier. Unemployment growth reflects the virtual shutdown of such major industries as transport, food, and hospitality during the lockdown and is likely to increase the poverty rate —which was 38.2% in 2017, the most recent data available.

Outlook and risks

Growth is projected to rebound in 2021 and 2022, supported by high infrastructure spending on Bugesera airport and a pick up in the tourism sector as the effects of the pandemic dissipate. The implementation of the African Continental Free Trade Area is expected to boost intraregional trade, which will support growth—especially if Rwanda increases its share of intra-regional exports. Inflation is expected to abate within the policy target as reopened borders increase the food supply and domestic containment measures ease further. The fiscal deficit is projected to narrow to 7.8% of GDP in 2021 and to 7.2% in 2022 due to a planned fiscal consolidation in the 2021/22 fiscal year. The current account deficit is projected to narrow to 10.4% of GDP in 2021 and further improve to 9.1% in 2022, mainly because a rollout of COVID–19 vaccines should trigger a rebound in tourism and foreign direct investment. The downside risks to the outlook include trade disruptions due to simmering regional political tensions, a decline in the fiscal space due to a rising debt burden, and a resurgence of the COVID–19 virus.

Financing issues and options

Rwanda’s public debt was 58% of GDP in 2019 due to elevated spending on key infrastructure investment and a decline in aid flows. The COVID–19 crisis caused an increase in health-related spending and a decline in tax revenues, resulting in an increase in public debt to 66% of GDP in 2020, which is expected to reach 72% of GDP in 2021, above the safe debt ratio of 65%. In anticipation, the country’s debt distress was raised from low to moderate by the International Monetary Fund and World Bank, effective in June 2021. An urgent fiscal adjustment to a safe debt ratio of 65% of GDP is required to avoid the risk of slipping into high debt distress. The planned transition to the private sector–led growth, the use of blended finance and de-risking strategies to fund infrastructure projects, drawing on reserves, and renegotiating debt will help avoid overburdening the public balance sheet. Capacity building in the management of fiscal risks from private-public partnerships should be prioritized to support a fiscal consolidation strategy.