READING THE TEA LEAVES - RWANDA'S ECONOMIC

C O N F I D E N T I A L KIGALI 000158

SIPDIS

E.O. 12958: DECL: 03/09/2018
TAGS: ECON ETRD ENGR EINV PGOV RW
SUBJECT: READING THE TEA LEAVES - RWANDA'S ECONOMIC
PROSPECTS FOR 2009

REF: A. KIGALI 141

B. 08 KIGALI 795

C. 08 KIGALI 871

D. KIGALI 150

Classified By: CDA Cheryl J. Sim for reasons 1.4 (b and d)

1 (SBU) Summary: Rwanda has so far weathered the global
financial crisis with minimal damage. Economic growth in
2008 was an impressive 11.2 percent. The IMF predicts a
slow-down of growth in 2009 to 5.6 percent - above the 3.6
average predicted for sub-Saharan Africa. Liquidity has
tightened significantly over the last six months, in part due
to the crisis, but has now stabilized. Loss of some donor
funds over a December UN report will not have lasting
effects. Strong agricultural growth predictions for 2009,
and a surge of foreign investment in energy and ICT, may give
Rwanda a needed boost in 2009. However, the global economic
downturn and the transitory nature of donor assistance
require government leaders to ensure that all support is put
to the best use in the months ahead. End Summary.


Impact of Global Financial Crisis
--------------


2. (U) The global financial crisis to date has had a
peripheral impact on Rwanda (ref B). Commodity prices,
including Rwanda's top exports tea, coffee and minerals,
declined during the last quarter of 2008, hurting export
earnings. Circumstantial reports indicate tourist revenues
also have been affected. High-end Virungas Lodge reported
that in February it only filled half the bed nights it
recorded last year for the same period. Also in February,
the Rwandan National Park Service offered gorilla trekking
passes to residents at half-price, indicating less than
robust numbers of tourists to the park. Remittances and NGO
transfers slowed during the last three months, according to
government and press reports.


3. (SBU) The Rwanda Development Board (RDB) reported foreign
direct investment (FDI) from Europe and North America
declined from $70 million in 2006 to $12 million in 2008.
This was offset by an increase of FDI from Asia from $5.75
million in 2007 to $241 million in 2008. However, most of
the reported Asian investment is related to Dubai World's
commitment to invest $200 million in Rwanda's tourism
infrastructure. According to credible business contacts,
part of the proposed investment has since been indefinitely
deferred, primarily due to the global financial crisis.


4. (U) While the government reported overall economic growth
for 2008 at 11.2 percent, most economists believe the
country's growth in 2009 will to slow to below 7 percent.
The IMF predicts GDP growth to decline to 5.6 percent in

2009. Although agricultural growth is expected to remain
strong (analysts expect the spring harvest will be 15 percent
stronger than last year, which was a double digit increase
over 2007),non-agricultural growth will likely slow to 3.6
percent, similar to predictions for other countries in
sub-Saharan Africa.


Tighter Liquidity in Financial Markets
--------------



5. (U) One impact of the global financial crisis on Rwanda's
economy is a tightening of liquidity in the financial sector.
The Rwandan Central Bank reported a sharp decrease in
liquidity in 2008. In the last part of 2008 and beginning of
2009 it moved rapidly to pump liquidity into the market. The
Q2009 it moved rapidly to pump liquidity into the market. The
Central Bank reduced the reserve requirement in financial
institutions from 8 to 5 percent, reduced the interbank
lending rate from 3 to 2 percent and repurchased Treasury
Bills from commercial banks. The resulting liquidity
injection (equal to 1.4 percent of GDP) has stabilized the
liquidity shortage, but not eliminated underlying concerns.


6. (C) Mark Plant -- IMF Deputy Director Africa Department
who led a recent IMF mission to Rwanda to assess the impact
of the global financial crisis on the country -- attributed
the liquidity shortage in part to high growth in 2008 and

persistent inflation (inflation in 2008 tripled compared to
2007 and remained over 20 percent as of January 2009). These
developments combined with negative real interest rates that
discouraged domestic savings and enticed some depositors to
transfer funds out of some local financial institutions.
Plant advised that this new macroeconomic dynamic presents a
challenge to the GOR in terms of macroeconomic management and
"will require careful monitoring." Unlike its
recommendations to many other countries that are seeking to
reduce interest rates and stimulate their economies, the IMF
is recommending that Rwanda cautiously increase real interest
rates to attract savings and bring inflation below 10
percent. Plant noted this recommendation runs contrary to
the GOR's strong political push for high growth, but warned
if the economy becomes over stimulated it could lead to even
higher inflation and worsening liquidity problems.


FDI Wild Card for Rwanda in 2009
--------------



7. (SBU) The visiting IMF team said it has not yet completed
an assessment of Rwanda's balance of payments (BOP) profile,
but noted if the BOP continues to deteriorate, downward
pressure will be put on the exchange rate. The IMF predicted
a drop in export revenues, remittances and FDI, partially
offset by lower import prices. Comment: The IMF's prediction
that FDI will drop dramatically appears more related to
estimates for Sub-Saharan Africa than Rwanda specifically.
Contour Global's recent signing of a $325 million energy
investment in Rwanda (ref A) and the surge of investment by
telecom providers MTN, Millicom and Rwandatel expected to
continue into 2009, indicate that Rwanda will fair better
than most for FDI in 2009, and may actually see a substantial
increase over prior years. End comment.



Dutch, Swedes, Canadians cut assistance
--------------


8. (C) Complicating Rwanda's financial management, the
Netherlands and Sweden cut an estimated $15 million in budget
support at the end of 2008 due in large measure to a UN Group
of Experts' report on the Democratic Republic of Congo that
commented on Rwanda's role in the eastern DRC (ref C).
Additionally, Canada recently announced it would limit its
development assistance to just 20 countries. Rwanda, not
included among the 20 countries, stands to lose $7-10 million
annually in Canadian program assistance. While some of this
funding may be restored (the Dutch will review their position
in April),and other donors such as the Japanese have
recently increased program funding, the cuts have had an
impact on the GOR. Given that approximately 50 percent of
the GOR budget is funded by donors, and substantial levels of
public sector support are provided in off-budget program
funds such as PEPFAR, Rwanda can not afford to lose more
donor assistance without abbreviating its Vision 2020
development targets. (Note: The World Bank on announced on
March 7 it would donate an additional $172 million to Rwanda
to help offset the impact of the global financial crisis. End
note)


Kagame - Donor Aid is no Panacea
--------------


9. (SBU) Perhaps anticipating tightening financial support
from donors, President Kagame, as he has done repeatedly over
Qfrom donors, President Kagame, as he has done repeatedly over
the past several years, recently expressed his frustration
with donor support that "comes to us when others decide to
give it to us, and switch it off when they want to." At the
GOR's annual retreat in February he told the senior
government officials assembled "we need to change the status
quo of being dependent on others." Kagame also chastised
government officials for wasteful spending practices (citing
for example "study tours...where we learn nothing" and $37
million spent on consultants..."you can't trace or
understand"). He urged those assembled to "identify
priorities, cost and budget for them." Following the
retreat, three ministers confirmed to DCM that they were
under strict instructions to "make every penny count." All

three were looking for ways to trim expenditures, including
severely limiting discretional travel (including that paid
for by outside entities) and reviewing high-price contracts
for services that could be provided by local organizations.



10. (U) President Kagame is not alone in recognizing the
limitations of donor aid. In a recent East African Community
(EAC) conference in Arusha, government ministers and business
leaders called for reduced dependency on foreign aid, more
vigorous implementation of tax reforms and more effective
mobilization of domestic resources. Conference members also
called on regional governments to intensify efforts to
improve the investment environment in order to attract
private sector capital.


11. (C) Comment: Like most countries, Rwanda is entering
uncharted economic waters in 2009. The global financial
crisis will undoubtedly have a negative impact on the
economy. How much, in which sectors and for how long is
unclear. While agriculture looks to be on track for robust
growth in 2009, other key economic sectors are likely to
suffer. The wild card for Rwanda will be FDI. If Rwanda
sees a surge in new investment in energy and ICT, growth will
likely exceed the 5.6 percent predicted by the IMF, albeit
not the 11 percent in 2008. High inflation, which
disproportionately affects lower income groups, will remain a
key concern for the GOR in 2009. The global economic
downturn actually may benefit the country by lowering import
costs (which are currently more than double export revenues).



12. (C) Comment continued: With 50 percent of the GOR budget
linked to donor support, obviously Rwanda is not in a
position to refuse assistance from any quarter. Nonetheless,
Kagame's recent comments on the nature of foreign assistance
and self-reliance - coupled with a reinvigorated focus on
corruption (ref D) - are a strong message to his senior GOR
leaders that they cannot conduct business as usual in 2009.
The turn-down of the global economy and the transitory, if
not at times fickle nature of donor support, require GOR
officials to take steps to eliminate wasteful spending and
ensure that every Rwandan Franc is put to the best use
possible in the months ahead.
SIM