Lighting Rwanda June 2019 | Edition No. 14 Rwanda Economic Update Lighting Rwanda June 2019 TABLE OF CONTENTS Acronyms..................................................................................................................................................................................................................... i Foreword...................................................................................................................................................................................................................... ii Executive summary.................................................................................................................................................................................................. iii PART I: RECENT ECONOMIC DEVELOPMENTS ........................................................................................................................................... 1 1. Momentum in Global Growth Softens ..................................................................................................................................... 2 2. Rwanda – Taking Stock of Recent Developments............................................................................................................... 3 3. Rwanda’s Macroeconomic Outlook and Risks........................................................................................................................ 13 PART I: ENERGY SECTOR SPECIAL FOCUS: LIGHTING RWANDA.......................................................................................................................... 15 1. A Decade of Rapid Growth for Rwanda’s Power Sector...................................................................................................... 16 2. Ambitions and Challenges for the Coming Five Years........................................................................................................ 21 3. Towards Affordable, Reliable, Sustainable Energy for All................................................................................................... 24 4. Reform Priorities for the Power Sector...................................................................................................................................... 29 References ........................................................................................................................................................................................ 31 LIST OF FIGURES Figure 1.1: Global and regional economic growth, 2013–21................................................................................................................. 3 Figure 1.2: Rwanda’s economic Growth, 2013–18...................................................................................................................................... 3 Figure 1.3: Domestic demand real GDP growth, 2013–18...................................................................................................................... 4 Figure 1.4: Headline inflation, 2015–19 ......................................................................................................................................................... 5 Figure 1.5: Food and energy prices, 2015–19 ............................................................................................................................................. 5 Figure 1.6: Credit growth to the private sector, 2012–18........................................................................................................................ 6 Figure 1.7: Money market interest rates, 2015–19..................................................................................................................................... 6 Figure 1.8: Digital financial services and payments, 1998–2018 .......................................................................................................... 7 Figure 1.9: Gross international reserves, 2013–18 ..................................................................................................................................... 8 Figure 2.1: Growth in installed electricity generation capacity and electricity access in Rwanda 2001-19.......................... 17 Figure 2.2: Progress in the world’s 20 least-electrified countries over the 2010-16 SDG7 tracking period........................... 18 Figure 2.3: Electricity access in EICV4 & EICV5............................................................................................................................................. 18 Figure 2.4: Quality of electricity services in Rwanda in regional comparison, as reported by businesses............................ 20 Figure 2.5: Average weekly frequency of electricity outages in Rwanda.......................................................................................... 20 Figure 2.6: Electricity system losses in Rwanda........................................................................................................................................... 20 Figure 2.7: Power generation mix and greenhouse gas intensity of power generation in Rwanda (2013-18).................... 21 Figure 2.8: Electricity tariff revenue and economic cost of service in regional comparison....................................................... 23 Figure 2.9: Subsidies to the power sector as a percentage of the GDP ............................................................................................. 24 Figure 2.10: Potential escalation in the subsidies to the power sector as a percentage of the GDP ......................................... 24 Figure 2.11: Rwanda’s electricity capacity mix in 2020 and future projections under business as usual and least cost sector expansion..................................................................................................................................................................... 26 Figure 2.12: Electricity tariffs in Rwanda, 2005-18......................................................................................................................................... 27 Figure 2.13: Electricity access targets from 2019 to 2024 in the ESSP.................................................................................................... 28 LIST OF TABLES Table 1.1: Rwanda’s balance of payments, 2014–18 .................................................................................................................................... 9 Table 1.2: Rwanda’s central government finances, FY 2016/17–2019/20............................................................................................. 10 Table 2.1: Rwanda’s objectives for the power sector under EESP (2017/18-2023/24)...................................................................... 22 Table 2.2: Estimated investment needs during 2017/18-2023/24 to achieve ESSP targets........................................................... 22 LIST OF BOXES Box 1.1: Public debt in Sub-Saharan Africa: Recent developments .................................................................................................... 2 Box 1.2: Digital financial services and payments ....................................................................................................................................... 6 Box 1.3: Fiscal outlook: Scaling-up the implementation of NTS1 and its fiscal implications...................................................... 11 Box 1.4: Key constraints affecting Rwanda’s private sector ................................................................................................................... 14 ACRONYMS ATMs Automated Teller Machine LCPDP Least-Cost Power Development Plan BNR National Bank of Rwanda MINECOFIN Ministry of Finance and Economic Planning DRC Democratic Republic of Congo MININFRA Ministry of Infrastructure EAC East African Community MTF Medium term Fiscal Framework EICV Integrated Household Living Conditions Survey MTF Multi-Tier Framework EESP Energy Sector Strategic Plan MW Megawatt EDCL Energy Development Company Limited NDC National Determined Contribution EUCL Energy Utility Company Limited NISR National Institute of Statistics of Rwanda EU European Union NPLs Nonperforming Loans EWSA Electricity, Water, and Sanitation NST National Strategy for Transformation Authority POS Point of Sale FY Fiscal Year PPAs Power Purchase Agreements GDP Gross Domestic Product PPP Public-Private Partnerships GHG Greenhouse Gas REG Rwanda Energy Group GWh Gigawatt Hours REU Rwanda Economic Update ICT Information, Communications and Technology RIPPS Rwanda Integrated Payment Processing System IEG Independent Evaluations Group RURA Rwanda Utilities Regulatory Authority IBMS Integrated Business Management System Rwf Rwandan Franc IPPs independent Power Producers SDG7 Sustainable Development Goal 7 IT Information Technology SSA Sub-Saharan Africa kV Kilovolt U.S. United States kWh Kilowatt Hour UN United Nations Rwanda Economic Update • Edition No. 14 i FOREWORD T he Rwanda Economic Update (REU), published twice a year, analyzes recent economic developments and prospects and policy priorities in Rwanda. It is intended for a wide audience of policymakers, business leaders, other market participants, analysts engaged in Rwanda’s economy, and civil society. The REU draws on available data reported by the Government of Rwanda and additional information collected as part of the World Bank Group’s regular economic monitoring and policy dialogue. The REU team is grateful to the Ministry of Finance and Planning, the National Statistics Institute of Rwanda and the National Bank of Rwanda for their excellent collaboration. Each edition also has a special feature spotlighting a particular topic. This edition focuses on Rwanda’s power sector and discusses country’s impressive achievements in expanding generation of and access to electricity and outlines the main challenges facing Rwanda in achieving its ambitions in expanding the power sector in a low-cost and fiscally sustainable manner. The current REU, the fourteenth edition, was jointly prepared by World Bank Group teams Rwanda Macroeconomics, Trade and Investment Global Practice, and Energy & Extractives Global Practice. The report was prepared by a team consisting of Aghassi Mkrtchyan (Senior Economist, TTL), Peace Aimee Niyibizi (Economist, co-TTL), Joern Huenteler (Energy Specialist), Yadviga Viktorivna Semikolenova (Senior Energy Economist), Norah Kipwola (Senior Energy Economist) and Arun Singh (Consultant). It was undertaken under the overall guidance of Abebe Adugna (Practice Manager, Macroeconomic Trade and Investment), Sudeshna Ghosh Banerjee (Practice Manager, Energy & Extractives), Felipe Jaramillo (Country Director for Kenya, Rwanda, Uganda, and Eritrea) and Yasser El-Gammal (Country Manager, Rwanda). The team is grateful to Philip M. Schuler (Lead Economist), Naoko C. Kojo (Senior Economist), and Sheoli Pargal (Lead Energy Economist) for their comments and advice on earlier drafts. The team benefitted from support from Agnes Yvonne Masaka (Assistant Program) for providing logistical support, Rogers Kayihura (Communication Officer) for managing communication and dissemination, and Robert Waiharo for design and layout of the report. We are also grateful to Anne Grant for editorial support. Views expressed in the REU are those of the authors and do not necessarily reflect the views of the World Bank Group, its Executive Directors, or the countries they represent and the Government of Rwanda. ii Rwanda Economic Update • Edition No. 14 EXECUTIVE SUMMARY Recent Economic Developments and Outlook to be well-capitalized—the ratio of capital to risk- weighted assets is well above the minimum required I In 2018, the economy expanded at a brisk pace— Rwanda’s 8.6 percent growth was the highest on the continent. Growth was broad-based. Recovering and continued to improve. The current account deficit (CAD) was relatively from the droughts of 2016 and 2017, agriculture unchanged in 2018 compared to 2017, as the expanded by almost 6 percent, above the historical widening trade deficit was offset by net incomes. rate of growth of around 5 percent. Industry grew With imports growing faster than exports, the deficit by more than 10 percent, the highest growth since of goods and services balance widened slightly from 2012. It was supported by 14 percent growth in 10.8 percent of GDP in 2017 to 11.3 percent to be construction, where activity resumed after two partly offset by the increase in private transfers. years of compression, and by 11 percent growth in At 7.8 percent of GDP in 2018, the CAD remained manufacturing. Among the key sectors, however, well below the peak of 15-16 percent of GDP in the service sector contributed most combining 2015 and 2016. The CAD was adequately financed its highest share in the economy with a 9 percent by capital and financial flows, and official foreign growth. On the demand side, investments were the reserves increased by 13.2 percent during the year. main driver of growth, expanding by 23.5 percent At yearend foreign reserves were estimated at 4.7 led by strong public investment. After stagnating months of import cover. in 2016 and 2017, private consumption grew by 6 percent. However, the contribution of net exports to In the second half of 2018, Rwanda’s fiscal growth turned negative in 2018 because Rwanda’s performance was characterized by strong exports were not able to maintain the momentum revenues and outlays. Tax revenues grew by 12.3 generated in 2017. percent, well above the growth of nominal GDP, and non-tax revenues and grants were solid. Fiscal Inflation remains low. Headline inflation as of March outlays expanded by 16.5 percent, driven by capital 2019 was 1.2 percent. A supportive macroeconomic spending and transfers. At year-end 2018 public and environment has allowed the National Bank of publicly guaranteed debt had reached 53 percent Rwanda (BNR) to keep the policy rate at 5.5 percent of GDP, around 5 percentage points higher than throughout 2018 and reduce it further to 5 percent in 2017 driven by a higher fiscal deficit during the in May 2019. The Rwandan franc had depreciated calendar year and slower growth than expected in by less than 1 percent in nominal effective terms as nominal GDP in U.S. dollar terms. of April 2019 (year-on-year) while its depreciation against US dollar was about 4 percent as a result Rwanda’s medium-term economic outlook is of strenghtening of the US dollar against main favorable, with growth expected to be in a range currencies. Nonperforming loans continued to of 7.5 - 8 percent. Public sector-led investments trend down in response to a new regulation on will be central; the government plans higher credit classification and provisioning. Credit growth, public investment to achieve its National Strategy however, is still slow: having seen their credit of Transformation (NST1) objectives. The fiscal portfolios deteriorate in 2016–17, banks continue deficit will remain elevated over the medium term to be risk-averse. Although the volume of new to accommodate higher public investment. With loans is larger, the loans are concentrated in several inflation low, monetary policy is expected to remain large-scale projects. The banking sector continues accommodative and support recovery in bank Rwanda Economic Update • Edition No. 14 iii Executive Summary lending while a flexible exchange rate will help Steady growth in access and improvement in the to build external buffers and will facilitate export quality and security of supply are expected to growth. The CAD will be elevated as a result of continue over the next decade. Under the National expected fiscal expansion but will remain around 10 Strategy for Transformation (NST1) for the period percent of GDP over the medium term. 2017/18-2023/24, the Government aims to achieve universal electrification, a more diversified mix of Rwanda’s economic outlook is vulnerable to both energy sources for power supply, and lower system domestic and external risks. Domestically, the main losses, as well as fewer and shorter outages. risks are weather-related, such as droughts and floods that may depress agricultural production. Scaling- However, the cost of electricity supply is among the up of public-sector-led investments is a challenge highest in the region and remains a constraint for as well as an opportunity; it could jeopardize debt Rwanda’s economic and industrial development. sustainability if Rwanda’s investments-growth Household consumers have problems affording nexus does not improve. In addition, with expected electricity at the present tariffs, a problem that will be increase in fiscal pressures from the expansion of aggravated as the rural electrification drive reaches the power sector, maintaining fiscal sustainability ever poorer parts of the population. Especially larger will be of utmost importance, as discussed in the firms report electricity as a binding constraint. special topic of this issue of Rwanda Economic Update. The main external risks are related to a more Caught between the high cost of electricity and severe slowdown in global economic growth than is limited affordability, the Government has stepped currently projected that would affect prices for the in to fill the gap between sector cost and revenues. commodities Rwanda exports. This has created fiscal risks. Under a business-as- usual scenario, the fiscal transfers needed to sustain Special Focus: Lighting Rwanda operations in the sector, already above 1 percent R of GDP, may rise up significantly above 4 percent of wanda’s power sector has grown rapidly in the GDP by 2022/23. Recognizing these fiscal risks, the past decade and outpaced many of its peers in Government has implemented a number of reforms Sub-Saharan Africa. More than half of Rwandans targeting operational efficiency, affordability, have access to electricity in their home, compared and accountability of electricity service, with the to 10 percent in 2009, generation capacity has overarching objective of making electricity service more than tripled in the same period, and outages affordable for the government and consumers and have become shorter and much less frequent. ensure that becomes an engine of economic growth These impressive achievements are the result of and private-sector development. large investments in the sector but also substantial institutional reforms to improve governance of the The following priority measures will be critical to publicly-owned electricity company, the Rwanda reap the benefits of and deepen this reform program Energy Group (REG). The private sector has become over the coming decade: a strategic partner for Rwanda’s power sector. The governance framework in the power sector in • Pursuing sector expansion in line with least-cost Rwanda can become a model for sector governance sector planning if the Government continues the path towards • Putting REG into the driving seat of developing making REG financially independent and the new new PPP investments identified in the least- Public Private Partnership (PPP) Law is implemented cost plan, rather than relying on unsolicited as planned. proposals from the private sector iv Rwanda Economic Update • Edition No. 14 Executive Summary • Accelerating efforts to decarbonize the power • Promoting regional electricity trade through sector and adapting to climate change bilateral contracts to tap lower cost supply • Regularly adjusting tariffs for changes in sources and better integrate variable renewables; cost and, over time, expanding the groups of and electricity consumers that do not need tariff • Doubling down on the modernization of REG’s subsidies and are charged the full cost of service operations. • Providing a state-of-the-art framework for private sector participation in off-grid electrification and targeted incentives to make off-grid solar affordable Rwanda Economic Update • Edition No. 14 v PART ONE RECENT ECONOMIC DEVELOPMENTS Rwanda Economic Update • Edition No. 14 1 Recent Economic Developments 1. Momentum in Global Growth Softens G lobal growth is lessening. After a synchronized upturn in 2017 and the first half of 2018, global economic activity has been moderating since mid- exporters. In 2019, regional growth is expected to rebound to 2.8 percent as the largest economies, Nigeria, Angola, and South Africa, see the start 2018. As a result, global growth declined from 3.8 of a gradual pickup over the medium term. percent in 2017 to 3.6 percent in 2018. Trade tensions Nevertheless, Africa’s Pulse for April 2019 considers are taking an increasing toll on business confidence, the external environment for SSA as well as rising and in both emerging markets and advanced debt levels to be challenging (Box 1.1), as global economies, tightening financial conditions are growth continues to abate, and uncertainty related weighing on global demand. In the Euro Area, to trade tensions persists. consumer and business confidence again eroded somewhat in 2018. China’s 2018 growth rate was 6.6 Growth throughout the East African Community percent, the slowest pace since 1990, as regulation (EAC) is outpacing the SSA-wide average. In 2017, was tightened to rein in financial vulnerabilities and droughts had caused regional growth to decelerate as trade tensions with the United States continued. to 4.5 percent; but in 2018, agriculture in most The U.S. was an exception as its growth stayed strong EAC countries rebounded. Growth for the region throughout 2018 and the first quarter of 2019. in 2018 is estimated at 5.9 percent, well above the SSA average (Figure 1.1). Rwanda’s growth was the Growth throughout Sub-Saharan Africa (SSA) is highest not just in the EAC but in SSA as a whole. expected to recover in 2019. It is estimated that For 2019, average growth for the regional block is in 2018 growth decelerated to 2.3 percent, from projected to reach 6.1 percent as both agricultural 2.7 percent in 2017, mainly because stagnant oil output and aggregate demand recover. production reduced the exports of SSA’s major oil Box 1.1: Public debt in Sub-Saharan Africa: Recent developments April 2019 edition of The World Bank’s Africa’s Pulse highlights growing concerns about public debt in SSA. After a substantial fall in the early 2000 owing to debt relief under the Heavily Indebted Poor Country and Multilateral Debt Relief initiatives, median public debt in SSA reached about 53 percent of GDP by 2018, up from 24 percent of GDP in 2012. Sizable fiscal deficits and exchange rate depreciations were the key drivers of debt accumulation, while low global interest rate environment facilitates countries’ access to commercial borrowing. A growing number of SSA countries has tapped into international bond markets. In addition to the increase in debt, notable changes in debt composition have also taken place with the share of non-concessional debt increasing by 10 percentage points in 2010-17. Rising debt levels coupled with the shift of external debt toward more marked based instruments – sometimes more extensive and riskier– have increased debt vulnerabilities in SSA. As of end-2018, nearly half of low-income countries with available Debt Sustainability Assessments were either at high risk of debt distress or already in debt distress. The number of such countries doubled since 2013. Increased debt service cost across region due to increased non-concessional borrowing crowds out spending on development needs. Source: World Bank Group (2019) Coulibaly, Gandhi, & Senbet (2019) 2 Rwanda Economic Update • Edition No. 14 Recent Economic Developments Figure 1.1: Global and regional economic growth, 2013–21 depreciation of the exchange rate, in U.S. dollar (Percent) terms GDP went up by less than 5 percent in 2018, or 10 about 2.5 percent in per capita terms. On the supply 9 side, growth was driven by agriculture, helped by 8 favorable weather conditions; manufacturing; and 7 6 the recovery in construction. On the spending side, 5 growth was driven by domestic demand, supported 4 by both investments and consumption while next 3 exports contributed negatively to the growth. 2 1 0 2013 2014 2015 2016 2016 2018e 2019f 2020f 2021f Supported by favorable weather, agricultural Rwanda Tanzania Kenya SSA Uganda EAC production in 2018 was above the average of the Source: WBG 2019. Note: SSA: Sub-Saharan Africa; EAC: East Africa Community past decade. Output expanded by 5.9 percent, contributing 1.6 percentage points to GDP growth. Food crops increased by 4.3 percent and export crops 2. Rwanda – Taking Stock of Recent by 9.7 percent. In volume terms, tea production went Developments up 12.2 percent, significantly higher than the 7.5 2.1. Domestic Demand Drove GDP Growth in 2018 percent in 2017, and coffee by 11.95 percent, up by In 2018, GDP growth reached 8.6 percent, the highest rate since 2015 (Figure 1.2). The growth momentum that began in the second half of 2017 was 0.7 percent. Industry’s 2018 growth of 10.3 percent was the carried into 2018. Growth exceeded projections in highest since 2012, supported by construction the previous edition of the Rwanda Economic Update and manufacturing. Construction, accounting (REU) by a large margin. The 8.6 percent growth in for more than 38 percent of industrial output, 2018 was well above the 7.3 percent average for expanded by 14.1 percent, recovering from the 3.1 2008–17. While the 8.6 percent growth surprised on percent contraction in 2017. Growth was driven by the upside, nominal GDP grew by just 7.7 percent resumption of large-scale infrastructure projects, because of a negative GDP deflator. Combined with such as Bugesera airport, the new stadium, and roads. The resurgence of construction also contributed Figure 1.2: Rwanda’s economic Growth, 2013–18 (Percent) positively to several manufacturing subsectors Real GDP growth and sector contribution that feed into construction. Overall, manufacturing 10 8.9 8.6 output grew by 10.7 percent, up from 6.5 percent 8 in 2017. In addition to metals, machinery, and 6.2 6.0 6.1 6 4.7 4.3 equipment, whose production expanded primarily 4.9 4 3.3 3.4 3.8 in response to construction, food and beverages 2.4 1.5 1.8 were the main drivers of manufacturing growth. In 2 0.4 0.8 1.6 1.2 1.9 1.4 1.8 1.6 contrast, mining grew by only 1.9 percent, reflecting 1.0 1.1 0 weak international prices throughout 2018. The -2 2013 2014 2015 2016 2017 2018 volatility of growth in mining, which had been above Agriculture Industry Services Net taxes GDP growth, yoy 20 percent in 2017, continues. Source: National Institute of Statistics of Rwanda (NISR). Rwanda Economic Update • Edition No. 14 3 Recent Economic Developments The growth in Rwanda’s power sector was also 2018, growing by only 0.8 percent, highlighting the robust in 2018. Electricity production increased by risk associated with Rwanda’ external volatility. In 9.8 percent in 2018, up from 7.9 percent in 2017. contrast, imports grew by 9.4 percent in real terms, The electricity production has grown 11.0 percent driven by construction and manufacturing demand per annum on average in 2010-18. The generation for intermediary and capital goods. capacity has more than tripled in the same period Figure 1.3: Domestic demand real GDP growth, 2013–18 allowing large gains in access, as discussed in the (Percent) special topic in the current REU. Contribution to GDP growth yoy (percentage points) 14 12 Services generally performed quite well in 2018, 10 8.9 8.6 but with considerable variation by subsector. 8 6.2 6.0 6.1 6 4.7 Accounting for 47.8 percent of GDP, services grew 4 by 8.8 percent, up from 7.9 percent in 2017. Double- 2 0 digit growth rates were recorded in trade services -2 (15.2 percent), transport (18.3 percent), and ICT -4 -6 (17.9 percent). The hospitality sector (hotels and 2013 2014 2015 2016 2017 2018 Gov't consumption Private consumption Gross capital formation restaurants) also performed quite well as Rwanda Net exports Real GDP growth continued to successfully position itself as an Source: NISR. emerging destination for international conferences and exhibitions, while the sector continued to attract 2.2. Monetary Policy and the Financial Sector both private and public investment. By the end of 2018 annual inflation had hit a record headline low of 1.2 percent, well below After several years of weakness, growth in the lower bound of official target of 5 ± 3 percent private consumption accelerated to 6.5 percent (Figure 1.4). Low inflation persisted into 2019, in 2018. Private consumption grew against the recording 1.2 percent as of April 2019. Recovery background of the recovery in food production from the droughts of 2015 and 2016 has led to low following the regional droughts in 2016/2017 food prices across EAC, including Rwanda. Food and the decline in relative food prices. Public inflation was negative throughout 2018, down to consumption grew by only 3.4 percent, below its -3.1 percent in April 2019. In contrast, energy prices 2016 and 2017 growth rates. were driven up by rising international fuel prices (Figure 1.5). Core inflation, which excludes energy Investment momentum was very strong in and fresh food items, was 1.4 percent in December 2018. Investment grew by 23.4 percent driven by 2018 and 1.2 in April 2019. both government and the private sector. Public investments contributed to gross capital formation With inflation very low, the National Bank of through government-funded construction and large- Rwanda (BNR) continues to keep its monetary scale purchases of machines, devices, and tools. policy accommodative while maintaining adequate external reserves buffers. In its quarterly Contribution of net exports to GDP growth was meeting held on May 3, 2019, the BNR’s Monetary negative in 2018 as export momentum ebbed. After Policy Committee reduced the policy rate by 50 basis growth of about 34 percent in real terms in 2017, points to 5 percent after holding at 5.5 percent for exports of goods and services almost stagnated in 16 consecutive months. Nominal depreciation of 4 Rwanda Economic Update • Edition No. 14 Recent Economic Developments Figure 1.4: Headline inflation, 2015–19 Figure 1.5: Food and energy prices, 2015–19 (Percent) (Percent) 9 Contribution to in ation (YOY) Upper bound 10 8 7 8 6 6 5 Core in ation 4 4 Headline 3 in ation 2 2 0 Lower bound 1 -2 0 -1 -4 Jul-18 Jul-17 Jul-16 Jul-15 Oct-18 Oct-17 Oct-16 Oct-15 Jan-19 Apr-19 Jan-18 Apr-18 Jan-17 Apr-17 Jan-16 Apr-16 Jan-15 Apr-15 -2 Jul-15 Jul-16 Jul-17 Jul-18 Oct-15 Oct-16 Oct-17 Oct-18 Jan-15 Apr-15 Jan-16 Apr-16 Jan-17 Apr-17 Jan-18 Apr-18 Jan-19 Apr-19 Fresh food products Energy in ation Core in ation Headline in ation Source: NISR Source: NISR. the Rwandan franc in the first quarter of 2019 was The repo rate, BNR’s main instrument for managing moderate with less than 1 percent depreciation in excess liquidity, declined from an annual average of its nominal effective exchange rate. Following the 4.6 percent in 2017 to 4.2 percent. external adjustment in 2016 and 2017, BNR has been increasing its foreign exchange reserves and is Slow growth of credit to the private sector holding adequate external buffers. remains a low spot as banks continue to be risk- averse. Bank loan portfolios grew by 10.8 percent BNR continues to refine its monetary policy. in 2018, so that at year-end the credit-GDP ratio In pursuit of price stability, monetary policy has was 19.5 percent of GDP, up from 18.9 percent in historically used monetary aggregates as an 2017 (Figure 1.6). The volume of new bank loans intermediate target. In 2018, BNR announced did rise by 17.5 percent in 2018, from an average of its intention to move to an interest rate based 5.4 percent in 2016–17, but the main drivers were monetary policy framework, with a medium-term new loans to the communication and construction objective of adopting a formal inflation targeting sectors (including syndicated loans to MTN and framework. The shallow and volatile interbank Bugesera Airport), which contributed about 65 market, which may weaken the interest rate pass- percent to the expansion. through, continues to be the main obstacle for transition to the new framework. The health of bank balance sheets has improved, and the banking sector continues to be stable In 2018 money market interest rates converged and resilient. In December 2018, the share of toward the BNR policy rate. The interbank rate nonperforming loans (NPLs) in the loan portfolios of declined on average from 6.1 percent in 2017 to 5.6 commercial banks was 6.4 percent, down from 7.6 percent and the 91-day treasury bill rate from 8.2 to percent in 2016 and 2017. The drop in NPLs followed 5.1 percent. Well-anchored inflationary expectations write-offs of bad loans in response to a new regulation and slow depreciation have contributed to the decline issued in January 2018 on credit classification and in interest rates, even though the government issued provisioning. The capital risk-weighted assets ratio more domestic debt: in 2018, the value of treasury was 25.5 percent in December 2018, well above bills issued was 31 percent higher than in 2017. the 15 percent minimum capital adequacy ratio. Rwanda Economic Update • Edition No. 14 5 Recent Economic Developments Moreover, the banking sector has enough liquidity; 11.2 percent in 2018, up from 6.2 percent in 2017. the Basel III liquidity coverage ratios of all banking Recent development in digital financial services institutions are higher than the minimum required continue to contribute to the access to financial (BNR 2019). Despite minimal credit growth, bank services (Box 1.2). profitability was sound, with a return on equity of Figure 1.6: Credit growth to the private sector, 2012–18 Figure 1.7: Money market interest rates, 2015–19 (Percent) (Percent) 40 10 9 8 30 7 6 5 20 4 3 2 10 1 0 Jul-15 Jul-16 Jul-17 Jul-18 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Oct-15 Oct-16 Oct-17 Oct-18 0 2012 2013 2014 2015 2016 2017 2018 Credit growth, yoy Credit growth, average % of GDP Bank rate REPO rate Interbank rate 91-day-treasury bill rate Source: BNR data. Source: BNR Data Box 1.2: Digital financial services and payments Digitalization is gaining ground in Rwanda’s financial sector, supported by mobile phone penetration. Since 2006, that penetration has been growing very fast. In 2006, 9 years after mobile phone services were introduced in Rwanda, only 6.2 percent of Rwandan households owned a telephone (NISR, 2006), and less than 4 percent of adults had mobile phone service (NISR, 2008). By the end of 2018, there were 9.7 million mobile phone subscribers—82 subscriptions for every 100 people in Rwanda (Figure 1.8A). Between 2010 and 2018, registered mobile money accounts increased 46-fold, from 231,000 to 11.1 million (Figure 1.8B). As a result, the number of mobile money transactions rose steeply, from 829,000 to 300 million, and their value shot up from Rwf8 billion to Rwf1,808 billion (Figure 1.8C). The banking system has also been expanding its mobile banking services, such as remote access to accounts by mobile phone. In 2018, 10 of the 11 banks and one microfinance institution were operating mobile services, and 1,845,584 bank clients conducted 3,206,474 mobile transactions (Figure 1.8D). Other instruments for digital payments are also growing. Transactions at automated teller machine (ATMs) and point of sale (POS) terminals, facilitated by the Rwanda Integrated Payment Processing System (RIPPS), of1 have grown consistently since 2010, with over 9.5 million ATM and 1.5 million POS transactions in 2018 alone. At yearend there were 386 ATMs and 2,801 POS terminals. Similarly, Internet banking transactions have also continued to increase, reaching over 767,000 transactions in 2018. The extensive use of mobile money and banking services resulted in fewer physical points for accessing financial institutions. For instance, the BNR’s Monetary Policy and Financial Stability Statement of February 2019 showed that the number of bank branches had gone down from 522 in 2017 to 517. 1 RIPPS comprises the Automated Transfer System and the Central Securities Depository. 6 Rwanda Economic Update • Edition No. 14 Recent Economic Developments Box 1.2: Digital Financial Services and Payments (cont) Figure 1.8: Digital financial services and payments, 1998–2018 A. Mobile phone penetration B. Registered and active mobile money users 10,000 100 Thousands 12,000 82.1 79.2 77.8 8,000 75.6 80 10,000 Thousands of people 70 per 100 people 63 6,000 60 8,000 53.1 40.6 6,000 4,000 33.4 40 4,000 23.6 2,000 13.2 20 2,000 6.5 0.10.10.50.8 0.91.51.52.43.3 0 0 0 1998 00 02 04 06 08 10 12 14 16 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Mobile cellular subscriptions Penetration rate (right axis) Registered Active C. Number and value of mobile money transactions D. Mobile banking operations 400 2,000 6,000 60 5,000 50 300 1,500 4,000 40 3,000 30 200 1,000 2,000 20 100 500 1,000 10 0 0 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Value (billion)-Right axis Subscribers # of transactions # transactions (million) Value (Rwf billion) - Right axis (thousands) (thousands) Source: BNR (2019), IMF (2019), NISR (2008, 2012, 2016) 2.3. The External Sector the peak of 15-16 percent of GDP in 2015 and 2016, At 7.8 percent of GDP the current account deficit which was driven by government-led investments was almost unchanged compared to 2017. With largely for the MICE infrastructure. imports growing faster than exports, the deficit of goods and services balance widened from 10.8 Growth in goods exports stalled in 2018. In dollar percent of GDP in 2017 to 11.3 percent to be partly terms, exports grew by 7.2 percent, far below the offset by the increase in net secondary incomes. 44.5 percent growth in 2017 highlighting the risks Rwanda was able to accumulate reserves as capital associated with the volatility of Rwanda’s export and financial flows, supported by flexible exchange performance. Two major sources of volatility have rate regime, created a surplus in the balance of emerged–sporadic nature of exports of nontraditional payments. Official foreign reserves went up by 13.2 minerals and fluctuations in international prices of percent to US$1,319 million, about 4.7 months of traditional export commodities, especially coffee and import cover (Figure 1.9). Rwanda continues to enjoy tea. Mineral exports, which mainly drove growth of relatively low current account deficit, down from export earnings in 2017 fell by 7.2 percent as a result Rwanda Economic Update • Edition No. 14 7 Recent Economic Developments of a decline in exports of nontraditional minerals, Rwanda’s balance of payments (BoP) remained in such as beryllium, unwrought lead, and gemstones, surplus (Table 1.1). Supported by flexible exchange from US$248 million to US$208 million. With respect rate regime the current account deficit continues to crop exports, though the volumes of coffee and to be adequately financed by capital and financial tea went up, their unit prices in international markets flows. Capital account, which recovered from a dropped. 3-year decline, rose to 2.6 percent of GDP, while net foreign direct investment reached 3 percent of Maintaining a strong growth trajectory in service GDP. Net government external and government- exports has also proved to be challenging. Driven guaranteed borrowing amounted to 5.1 percent by transport and travel services, exports of services of GDP, up from 3.8 percent of GDP in 2017 driven contracted by 1.8 percent, from US$930 million to by budget borrowing and project financing as well US$913 million. Exports of transport services went as RwandAir’s long-term debt. Rwanda’s official down by 11.6 percent, while tourism receipts grew foreign reserves continued to increase third year in slightly, by 1.6 percent. a row reaching US$1.3 billion or about 4.7 months of imports cover (Figure 1.9). Import growth resumed in 2018 after declining in 2017 as investment demand strengthened. The Exchange rate depreciation continues to value of gross imports in dollar terms rose by 8.1 be modest. BNR continues to adhere to the percent, after having fallen by 7.7 percent in 2017. floating exchange rate regime while prioritizing Imports of energy products grew fastest, by 22 accumulation of foreign exchange reserves for percent, on higher volume (14.1 percent) and higher strengthening Rwanda’s external buffers. In 2018, international prices, but the biggest contributors to the franc depreciated less than 2 percent in nominal import growth were intermediate and capital goods. effective terms, and less than 1 percent as of April Imports of raw materials for manufacturing went up 2019. Because of strengthening of US dollar against by 10.5 percent and for construction by 18.5 percent. other main currencies, franc’s depreciation against Imports of machines, devices, and tools expanded US dollar was more pronounced, about 4.0 and by 23.1 percent. Food imports fell by 1.3 percent, 4.2 percent respectively (Figure 1.10). Franc’s real keeping growth of the largest import item, consumer effective exchange rate depreciated by 2.3 percent goods, to just 2.1 percent. in 2018. Figure 1.9: Gross international reserves, 2013–18 Figure 1.10: Rwanda franc against the US dollar, 2013–18 (US$ Million) (Percent) US$ million Months 1.6 12 1,400 6 1.4 9.6 10 1.2 5 8 5.1 1.0 7.2 1,200 4.7 4.5 0.8 6 4.2 4 4.1 0.6 3.7 4.0 3.1 4 1,000 3.6 0.4 3 2 0.2 1.9 0.0 0 1,070 951 922 1,001 1,166 1,319 Dec. Jun Dec. Jun Dec. Jun Dec. Jun Dec. Jun Dec. Jun. 800 2 2013 2014 2015 2016 2017 2018 2019 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Month-on-month change Period depreciation (right axis) Source: BNR and IMF country reports Source: BNR 8 Rwanda Economic Update • Edition No. 14 Recent Economic Developments Table 1.1: Rwanda’s balance of payments, 2014–18 (Percent of GDP) 2013 2014 2015 2016 2017 2018 Current account balance –7.3 –11.8 –15.3 –16.0 –7.7 –7.8 Goods and services –15.3 –16.7 –18.9 –18.6 –10.8 –11.3 Exports of goods and services 16.9 16.4 17.8 18.2 21.7 21.5 o/w Minerals 5.5 4.8 3.0 2.9 5.3 4.9 o/w Coffee and tea 1.5 1.4 1.6 1.4 1.6 1.7 o/w Travel 3.9 3.8 4.1 4.3 4.0 3.9 Imports of goods and services 32.2 33.1 36.7 36.7 32.5 32.7 o/w Capital goods 7.8 8.0 7.9 8.4 6.8 7.2 o/w Intermediary goods 8.3 9.0 8.3 6.7 6.5 7.1 o/w Energy products 5.1 4.6 3.4 2.7 2.8 3.2 o/w Transport 5.1 5.1 4.9 4.7 4.4 4.7 Primary income (net) –1.7 –2.4 –2.9 –3.6 –3.4 –3.4 Secondary income (net) 9.7 7.2 6.5 6.2 6.5 6.9 o/w Remittances receipts 2.1 2.2 1.9 2.0 2.3 2.7 o/w Government budgetary grants 7.6 5.3 4.7 4.3 4.5 4.0 Capital account balance 3.1 4.2 3.6 2.2 2.1 2.6 Financial account balance 8.8 8.1 9.4 11.9 6.4 7.4 Direct investment (net) 3.4 3.9 2.7 2.6 2.8 3.0 Portfolio investment (net) 0.0 0.0 0.1 0.1 –0.8 –0.2 Loans and other investments (net) 5.4 4.2 6.6 9.2 4.4 4.6 o/w Public debt disbursement 7.1 4.3 5.3 8.1 4.4 5.8 o/w Other long-term debt disbursement 2.2 1.2 1.1 2.2 1.0 1.7 Net errors and omissions –1.6 –1.6 2.0 1.8 0.2 –0.8 Overall balance 3.0 –1.1 –0.3 –0.1 1.0 1.4 Notes: Minerals include the exports of cassiterite, coltan, wolfram as well as nontraditional minerals, such as beryllium, unwrought lead, and gemstones Source: BNR and NISR 2.4. Fiscal Policy Developments spending were a result of higher transfers to local The fiscal deficit was reduced in the first half of governments and other public entities and higher FY2018/19 (H2 of the calendar year 2018) (Table capital spending. Meanwhile, excluding the grant, 1.2).2 The fiscal deficit was 3.1 percent in the first half the fiscal deficit widened by 0.4 percentage points of FY (second half of 2018), lower than in the same to 8.7 percent of GDP in the first half of FY2018/19. periods of 2016 and 2017. Government revenue and spending both increased as a share of GDP. Revenues Revenue collection in first half of the FY2018/19 increased for all the main categories—taxes, nontax was strong. Compared to the same period in revenues, and grants. Increases in total government 2017, total revenues, excluding grants, grew 16.7 Rwanda’s fiscal year runs from July 1 to June 30. This REU-14 reports on the July-December 2018 period. 2 Rwanda Economic Update • Edition No. 14 9 Recent Economic Developments percent; and tax revenues grew 12.3 percent, well tax law; enactment of the law amending excise above the growth of nominal GDP of 7.7 percent, duties on beer, wines and liquors, and mobile data; to reach 15.6 percent of GDP, up from 14.9 percent and implementation of the new transfer pricing a year earlier. Increased tax revenue was mainly guidelines. This follows earlier initiatives such as driven by direct taxes, primarily corporate profit tax, amendments in the VAT law, the law on investment which went up 23.8 percent. Income tax grew at promotion and facilitation, the income tax law, and 13.8 percent, reaching 3.7 percent of GDP. Taxes on new mineral tax and gaming laws. goods and services were 9.9 percent higher and on international trade 10.8 percent higher, reflecting Non-tax revenues and grants were stronger than strong domestic demand and increased imports. expected because of unique factors. Growing at 40.9 This performance was backed up by ongoing policy percent, nontax revenue was the highest-growing and administration reforms including rolling out category; it exceeded the target by about 20 percent the Electronic Billing Machines to selected non- because reimbursements from the UN for peace- VAT registered tax payers; revision of the property keeping operations were higher than expected. Table 1.2: Rwanda’s central government finances, FY 2016/17–2019/20 (Percent of GDP) FY2018/19 FY2017/18 FY2018/19 FY2019/20 FY2016/17 FY2017/18 revised (July-Dec. (July-Dec. budget budget 2017) 2018) Revenue and grants 22.7 23.1 23.1 22.4 24.8 22.5 Total revenue 18.0 18.5 18.3 17.7 19.2 18.3 Tax revenue 15.5 15.9 15.6 14.9 15.6 16.0 Non-tax revenue 2.5 2.6 2.7 2.7 3.6 2.3 Grants 4.6 4.5 4.8 4.7 5.6 4.2 Expenditure 27.3 27.2 27.0 26.9 29.1 28.5 Current expenditure 15.0 14.9 14.8 15.2 16.0 14.3 Wages and salaries 4.2 4.1 4.1 4.1 4.0 4.3 Purchases of goods and services 2.7 2.7 2.8 3.0 2.8 2.4 Interest payments 1.0 1.2 1.1 1.1 1.2 1.3 Transfers 4.9 4.6 4.8 4.3 5.3 4.2 Exceptional social expenditure 2.2 2.3 1.9 2.7 2.7 2.1 Capital expenditure 10.7 10.3 10.1 9.3 10.8 11.7 Domestic 5.9 5.9 5.7 5.4 6.0 7.1 Foreign 4.8 4.4 4.3 3.9 4.8 4.7 Net lending 1.6 2.0 2.1 2.4 2.3 2.4 Change in arrears (net reduction-) -0.3 -0.3 -0.3 0.9 1.2 -0.3 Budget balance Primary deficit -3.6 -3.0 -3.5 -3.4 -3.2 -4.7 Fiscal deficit (cash basis) -4.9 -4.5 -4.9 -3.6 -3.1 -6.3 Financing 4.9 4.5 4.9 3.6 3.1 6.3 Foreign (net) 4.5 4.0 4.2 5.3 5.9 4.6 Domestic (Net, -: deposit build-up) 0.3 0.4 0.7 -1.7 -2.8 1.7 Source: MINECOFIN data (Budget Execution tables) Note: Table 1.2 is reported in Government Finance Statistics Manual (GFSM) 1986 format 10 Rwanda Economic Update • Edition No. 14 Recent Economic Developments There was 27.2 percent growth in grants, which the grid, as discussed further in the special topic on reached 5.6 percent of GDP, following increases in energy sector in Rwanda. grant to health and education sector. The 2018/19 budget was revised in March 2019. The increase in budget outlays was mainly driven Building on the progress in H2, both revenue and by capital spending and transfers. In nominal spending were revised upward (MINECOFIN, 2019). terms, budget outlays grew by 16.5 percent in H2 The nominal spending target went up by 5.8 percent, of 2018 compared to 2017. Transfers and subsidies with a 2.5 percent increase in the recurrent budget grew by 32.8 percent, reaching 5.3 percent of GDP. and an 11.1 percent increase in the development The surge in transfers to local governments reflects budget. Spending is expected to be financed by Rwanda’s continuing efforts in decentralization. higher domestic revenues and grants, but more Capital spending rose by 25.1 percent, reaching external borrowing will have to be made. As a result, 10.8 percent of GDP, compared to 9.3 percent a year the fiscal deficit is now projected to reach 5.4 percent earlier. With an increase of 15.5 percent, energy was of GDP. Furthermore, the 2018/22 budget framework one of the main recipients of public investment. paper was presented to the parliament in April 2019 The energy investments were directed to increasing envisages further increase in fiscal deficit to support access to electricity, expanding transmission as well a scale-up in investments in line with the targets of as generation. Among the results was that in H2 NST (Box 1.3). about 35,000 more households were connected to Box 1.3: Fiscal outlook: Scaling-up the implementation of NTS1 and its fiscal implications The draft budget framework paper (BFP) for 2019/20 – 2021/22, which includes a draft FY2019/20 Budget, is currently under discussion in the Parliament and is expected to be approved by the end of June 2019. The key focus of the budget is on capital spending, which will increase to 11.7 percent of GDP, up from 10.1 percent of GDP projected for FY2018/19. Increased capital spending will be mostly financed by larger fiscal deficit, which will increase to 6.3 percent of GDP, as revenues will not increase substantially as a percent in GDP – projected increase in tax to GDP ratio will be offset by declining external grants as a percent of GDP. Fiscal deficit will remain elevated over the medium-term reflecting Government’s determination to fully implement the investment program identified in NTS1. The key infrastructure projects that will be funded by the budget include: (i) Nyabarongo II Hydro Power Plant of 43.5MW, (ii) Hakan Peat to Power Plant (80 MW) and Rwanda- DRC interconnection substations (220 kV); (iii) two Figure 1.11: External budgetary grants and borrowing 220kV single circuits (Rusumo-Bugesera-Shango and (Percent in GDP) Mamba-Rwabusoro-Rilima); (iv) connecting more than 10 200 Schools and 40 Health Facilities with electricity, etc. 8 The BFP projects that over the medium-term public 6 investments will continue to be increasingly financed by borrowing as external grants continue to decline. 4 This will be a continuation of earlier trends observed since 2013/2014 (Figure 1.11). This highlights the 2 criticality of strategic prioritization of public investments 0 to strengthen Rwanda’s investment-growth nexus and 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19f 2019/20f 2020/21f 2021/22f Grants External borrowing safeguard Rwanda’s debt sustainability. Source: BFP Rwanda Economic Update • Edition No. 14 11 Recent Economic Developments Rwanda’s public debt continued to rise in 2018, growth potential. Government’s recent reform efforts reaching 53.1 percent of GDP. Since 2013 external were focused on some of these areas, including public and publicly guaranteed debt, including education, de-risking agriculture and strengthening commercial loans and Eurobonds, has contributed market institutions. more than 80 percent to Rwanda’s cumulative • Education. Rwanda’s low human capital is one debt. As of December 2018, commercial borrowing the main constraints for long-term growth. represented 12 percent of the nominal external debt. Rwanda scored 0.37 in human capital index Most of Rwanda’s public external debt is in fixed (HCI), which is one the lowest in the region. As terms and is not exposed to interest rate fluctuations. indicated in the special topic of REU-13, one of In addition to public external debt, Rwanda has also the main priorities in the sector is to strengthen provided guarantees for State Owned Enterprises in the professionalism of teachers, instructional strategic sectors, which currently stand at about 5 leaders and their managers. In January 2019, percent of GDP. Most of these guarantees are in foreign the government announced policy reforms exchange. In terms of drivers of debt, high primary to improve teachers’ renumeration and deficits—mainly the result of public investment— pathways for career progression. A 10 percent have fueled debt, in addition to real exchange rate salary increase for primary and secondary depreciation and government guarantees (Figure teachers in government and government- 1.12). Interest payments have also been going up as aided schools came into effect in March 2019, debt accumulates; they are currently at 1.2 percent as part of revision of the FY2018/19 budget. of GDP. Although domestic debt is a small fraction The new policies also introduce incentives for of the total stock of public debt, it accounts for teaching as a career. To attract qualified new the majority—54 percent—of the interest burden teachers, the policies give education courses because its interest rates are higher. higher priority for university scholarships Figure 1.12: Decomposition of public debt accumulation, and provide subsidies for students at Teacher 2009–18 (Percent in GDP) Training Colleges (TTC). 12 10 • Agriculture insurance. The government 8 launched the National Agriculture Insurance 6 Scheme (NAIS) in April 2019. Launched as a 4 2 pilot in 10 districts, NAIS aims at mitigating 0 risks and losses incurred by farmers due -2 to unpredictable natural disasters, pests -4 -6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 and diseases that affect their livestock and Primary de cit Real interest rates crops. The scheme is subsidized up to 40 Real GDP growth Real exchange rate depreciation Other identi ed-debt creating ows Change in public sector debt Residual, including asset changes percent by the Government of Rwanda Source: MINECOFIN and DSA data and is expected to enable the farmers to Note: Government guarantees are reflected in “residual, including asset changes.” access financial services more easily. NAIS is 2.5. Recent Reform Initiatives being implemented through a multi-agency Rwanda continues to implement reforms for framework composed of three local insurance sustained growth. Joint Government/World Bank companies under the overall guidance and Group report on Future Drivers of Growth identified control of the government. several priority areas for maximizing Rwanda’s 12 Rwanda Economic Update • Edition No. 14 Recent Economic Developments • Market institutions. Parliament passed a law in Figure 1.13: GDP growth, 2015–21f, is projected to remain April 2019 to regulate organization, functioning, solid over the medium-term (Percent) licensing and remuneration for insolvency 10 8.9 practitioners. This initiative is expected to 8.6 7.8 8.0 8 address resolution of insolvency which is a weak 7.5 area in business environment of Rwanda. It takes 6 6.0 6.1 2.5 years to resolve insolvency. 4 In addition to these reforms, Rwanda continued to advance in the area of digital financial services and 2 payments. The revised Rwanda National Payment 0 System was approved by the cabinet in November 2015 2016 2017 2018 2019 f 2020 f 2021f 2018, building on the progress in digital financial Source: World Bank estimates Note: ‘f’ denotes forecast services for a faster transition toward “cashless Rwanda” (see Box 1.2). The BNR is expected to maintain an accommodative monetary policy. With inflation 3. Rwanda’s Macroeconomic Outlook and Risks low and a favorable external environment, monetary 3.1. Outlook policy is expected to remain accommodative and R wanda’s economic outlook is strong, with support recovery in bank lending. A flexible exchange economic growth forecast in a range of 7.5 to rate will be conducive for export growth. The 8 percent annually over the medium term (Figure upcoming IMF Policy Coordination Instrument (PCI) 1.13). Projections are revised upward slightly arrangement will also support to the implementation compared to the previous edition of the REU of the BNR’s new forward-looking monetary because of Government’s recent decision to scale-up policy operational framework, including through public investments in 2019-22. On the supply side, development of financial markets and broader access agriculture is expected to sustain strong growth within the economy to financial resources. momentum due to favorable weather at least in the short run. In the medium term, investments The fiscal outlook envisages a higher fiscal deficit in developing progressive terraces, irrigation, and over the medium term to accommodate projected rehabilitation of marshlands and interventions scaling-up in public investments. Revenue for land consolidation and the distribution and mobilization is expected to improve because of application of fertilizers will help to maintain administrative measures to boost VAT and rationalize healthy growth of 5–6 percent. These agricultural exemptions. This will be offset by higher public interventions are also expected to reduce the investment in energy, water and sanitation, education, sector’s exposure to weather shocks. Agriculture is health, roads and agriculture sectors and recurrent also expected to support expansion of the nascent outlays to support the ongoing restructuring of but promising agri-business sector. Construction education and health sectors. Despite the higher of the new airport, several dams, roads, and sports investment, the CAD should not exceed 10-11 infrastructure will continue to boost industrial percent of GDP. activities. Growth in services is expected to average 8 percent over the medium term. Rwanda Economic Update • Edition No. 14 13 Recent Economic Developments 3.2. Risks to the Outlook the power sector, maintaining fiscal sustainability Rwanda’s economic outlook is vulnerable to both will be of utmost importance, as discussed in the domestic and external risks. Domestically, the main special topic of this issue of Rwanda Economic risks are weather-related, such as droughts and floods Update. Weak private sector remains a major risk that may depress agricultural production. Scaling- to Rwanda’s growth outlook (see Box 1.4). The up of public-sector-led investments is a challenge main external risks are related to a more severe as well as an opportunity; it could jeopardize debt slowdown in global economic growth than is sustainability if Rwanda’s investments-growth currently projected that would affect prices for the nexus does not improve. In addition, with expected commodities Rwanda exports. increase in fiscal pressures from the expansion of Box 1.4: Key constraints affecting Rwanda’s private sector Private sector-led growth has been a key priority since the early 2000s. Vision 2020 stressed that “the emergence of a viable private sector that can take over as the principal growth engine of the economy is absolutely key”. Rwanda has made great strides in improving the business environment climbing to the 29th place in global ranking in 2019 Doing Business report, the only low-income economy ranked in the top 50. Rwanda has seen some increase in FDI. However, Rwanda’s private sector remains nascent. Joint Rwanda Government-World Bank Group (WBG) report on Future Drivers of Growth and WBG’s 2019 Country Private Sector Diagnostic identified the key constraints that Rwanda needs to address to stay on the high growth trajectory. Rwanda’s private sector faces an inadequately skilled labor force, especially in non-primary sectors and large businesses. Rwanda needs to aggressively pursue a wide array of interventions that support human development throughout the life cycle. In terms of high cost of finance, the nominal lending rate is high with an interest spread of around 10 percent. After reaching 20 percent of GDP in 2014 bank lending has not grown as a percent of GDP. Low domestic savings and high operational costs in the financial sector are the main factors constraining efficient supply of finance. With respect to logistics, Rwanda remains one of the most expensive places for a container to reach. Inadequate storage facilities severely constraints the agribusiness. Access to and high costs of broadband connectivity remains a challenge for Rwanda. A quasi-monopoly combined with erratic electricity supply place the service beyond the reach of most private users. The uptake of internet is well below the regional average. Limited access to land further affects the private sector. Foreign investors cite access to serviced land as a major constraint. The Special Economic Zone (SEZ) program was intended to address this constraint, but land in SEZs remains costly. Access to agricultural land is a serious constraint for investors looking to undertake large-scale farming and land consolidation for private investors is challenging. The cost of electricity is among the 10 highest in SSA (around $0.25 per kilowatt hour in 2018). The government introduced a large subsidy bringing down the tariff to around $0.10, comparable to the tariffs in EAC, with fiscal implications (see the focus of the current REU). One-third (31.5 percent) of firms report that access to reliable electricity is a challenge to their operations (NISR, 2017). Power outages continue to cripple production and capacity utilization, as well as increases firms’ costs due to low production or generator use. Source: World Bank. 2017, 2019 PART TWO ENERGY SECTOR SPECIAL FOCUS: LIGHTING RWANDA 3 The analysis underpinning this Special Focus was made possible by funding from the Energy Sector Management Assistance Programme (ESMAP) 3 Subsidy Reform Window. Rwanda Economic Update • Edition No. 14 15 Energy Sector Special Focus: Lighting Rwanda Summary consumers and ensure that becomes an engine of R wanda’s power sector has grown rapidly in the past decade and outpaced many of its peers in Sub-Saharan Africa. More than half of Rwandans economic growth and private-sector development. The following priority measures will be critical to reap the benefits of and deepen this reform program over have access to electricity in their home, compared the coming decade: to 10 percent in 2009, generation capacity has more • Pursuing sector expansion in line with least-cost than tripled in the same period, and outages have sector planning become shorter and much less frequent. • Putting REG into the driving seat of developing new PPP investments identified in the least- These impressive achievements are the result of cost plan, rather than relying on unsolicited around a billion USD in public investments over proposals from the private sector the past decade and wide-reaching institutional • Accelerating efforts to decarbonize the power reforms. These reforms have improved governance sector and adapting to climate change of the publicly-owned electricity company, the • Regularly adjusting tariffs for changes in Rwanda Energy Group (REG) and made the private cost and, over time, expanding the groups of sector a strategic partner for Rwanda’s power sector. electricity consumers that do not need tariff The governance framework in the power sector in subsidies and are charged the full cost of service Rwanda can become a model for sector governance if the Government continues the path towards • Providing a state-of-the-art framework making REG financially independent and the new for private sector participation in off-grid Public Private Partnership (PPP) Law is implemented electrification and targeted incentives to make as planned. off-grid solar affordable • Promoting regional electricity trade through Substantial further reforms will be needed to bilateral contracts to tap lower cost supply achieve universal access to affordable, reliable and sources and better integrate variable clean electricity—a prerequisite for Rwanda to renewables; and achieve its vision of becoming an upper middle- • Doubling down on the modernization of REG’s income country by 2035. Steady growth in access operations. and improvement in the quality and security of supply are expected to continue over the next 1. A Decade of Rapid Growth for Rwanda’s decade. However, the cost of electricity supply is Power Sector among the highest in the region and remains a constraint for Rwanda’s economic and industrial R wanda’s power sector has grown rapidly in the past decade and outpaced many of its peers in Sub-Saharan Africa. Generation capacity more development. Caught between the high cost of electricity and limited affordability, the Government than tripled from 88 MW in 2010 to 221 MW in early has stepped in to fill the gap between sector cost and 2019, with hydro at 47 percent, oil (heavy fuel oil and revenues. Recognizing the resulting fiscal pressures, diesel) 26 percent, peat 7 percent, solar 5 percent, the Government has since 2017 implemented a lake methane 14 percent and imports 1 percent (see reform program targeting operational efficiency, Figure 2.1, left). Electricity sales rose from 286 GWh in affordability, and accountability of electricity 2010 to 654 GWh in 2018. The number of consumer service, with the overarching objective of making connections increased over five-fold since 2010, from electricity service affordable for the government and 175,000 to over 900,000 in 2018. The share of grid- 16 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda connected households rose from 11 percent in 2010 was pooled in a single program (the ‘Electricity to 37 percent as of April 2019. Off-grid connections Access Roll-out Program’, or EARP). Multiple donors, reached 14 percent of the population by April 2019, including the AfDB, BADEA, BTC, EU, the Netherlands, taking total electricity access from 11 percent in 2010 Japan, OPEC Fund, Saudi Fund, and the World Bank to 51 percent in February 2019 (see Figure 2.1, right). have contributed to the program. The program is being implemented by a fully staffed EARP housed in The five-fold increase in electricity access within the Energy Development Company Limited (EDCL), ten years is almost unprecedented when compared with targeted technical assistance from development with electricity access expansion in similar partners. From the beginning in 2009, investments countries. Already during 2010-16, prior to the latest have been guided by geospatial analyses to prioritize acceleration, Rwanda stood out among the world’s new grid connections depending on demographic 20 least-electrified countries as the one making the and cost factors, including proximity to the existing fastest progress (see Figure 2.2). The steep progress grid, interhousehold distances, social infrastructure, since 2016 means that Rwanda’s electricity access access to road networks, and the ability of consumers roll-out over the last decade now counts as one of the in each planning cell to afford electricity. The EARP is fastest electrification programs in history. being closely monitored by the Presidency, through the annual leadership retreats. In addition, the Rwanda’s success in expanding access is a result MINECOFIN conducts annual joint sector reviews in of a robust design and implementation of the collaboration with development partners, during grid access program, and is being highlighted which the sector performance is monitored and as best practice globally by the World Bank’s reported to the sector-working group (which includes Independent Evaluations Group (IEG) (The the private sector and all development partners World Bank & IEG, 2014). Rwanda’s institutional active in the sector). approach to electrification follows a ‘Sector- Wide Approach’ (‘SWAp’), which was set up in Rapid increase in electricity access is having a 2008 to execute the government’s electrification measurable impact on household welfare, and program using an inclusive strategy, including access to the grid is finally reaching the poorest government stakeholders, donors, private sector, and and most vulnerable members of society. A recent nongovernmental organizations (NGOs). All funding impact evaluation of the World Bank’s grid extension Figure 2.1: Growth in installed electricity generation capacity and electricity access in Rwanda 2001-19 250 60 Installed Capacity (MW) 200 50 Electricity Access (%) 13 14 150 40 11 100 30 3 50 20 36 37 27 30 10 22 24 0 17 18 20 10 11 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 5 5 5 5 4 4 5 6 0 Hydro including imports (47% in 2018) Thermal (26% in 2018) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* Peat (7% in 2018) Lake Methane (14% in 2018) Solar (5% in 2018) Non-hydro imports (1% in 2018) Grid access O -grid access ** Notes: * as of February 2019. ** Data prior to 2017 is not fully comparable to more recent data. Source: World Bank. Rwanda Economic Update • Edition No. 14 17 Energy Sector Special Focus: Lighting Rwanda Figure 2.2: Progress in the world’s 20 least-electrified countries over the 2010-16 SDG7 tracking period Access deficit, 2016 (million) Access rate, 2016 (%) Annualized increases in access 2010-16 (pp) 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 80 90 100 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Burundi 9.7 7.6 0.38 Chad 13.2 8.8 0.41 South Sudan 11.1 8.9 1.24 Malawi 16.1 11.0 0.38 Central African Republic 4.0 14.0 0.70 Guinea-Bissau 1.5 14.7 1.44 Niger 17.3 16.2 0.58 Congo, Dem. Rep. 65.2 17.1 0.72 Burkina Faso 15.1 19.2 1.01 Liberia 3.7 19.8 2.44 Sierra Leone 5.9 20.3 1.47 Madagascar 19.2 22.9 1.00 Papua New Guinea 6.2 22.9 0.57 Mozambique 21.9 24.2 1.16 Uganda 30.4 26.7 1.99 Zambia 12.1 27.2 0.87 Rwanda 8.4 29.4 3.28 Lesotho 1.5 29.7 1.80 Somalia 10.0 29.9 1.59 Tanzania 37.3 32.8 3.00 World average, 4.32 million World average, 87.35% World average, 0.64 pp Source: World Bank (2018). investments in Rwanda4 found increased income for tutoring children. Further, although access to and consumption spending, improved quality and electricity remains largely concentrated in the value of houses, and accelerated asset creation. two top quintiles, with less than 10 percent of Electrification was also found to decrease household the bottom 40 percent of the population using monthly energy expenditure (excluding electricity) electricity as the main lighting source, grid access is and biomass collection costs and time and increase finally reaching the lowest quintiles and Ubudehe time spent on education by children and time used categories (Figure 2.3). Figure 2.3: Electricity access in EICV4 & EICV5 (Percent) By Ubudehe category By income quintiles 100 100 80 80 60 60 40 40 20 20 0 0 U1 U2 U3 U4 U5 U6 Not Total Q1 Q2 Q3 Q4 Q5 Total found in list 2013 -2014 National Grid Connections* 2013-2014 National Grid Connections* 2016-2017 National Grid Connections* 2016 -2017 National Grid Connections* Note: *Houses that use electricity as their main source of lighting Source: EICV4 & EICV5 4 ‘Impact Evaluation of the Rwanda Electricity Access Rollout Program (EARP) and Sectorwide Approach (SWAp) Development Project’, conducted by REG with the support of the World Bank, is a part of the World Bank’s corporate commitments in IDA17. The baseline survey was completed in 2014 and the follow-up survey was conducted in 2016. The report provides unprecedented information on the use of energy and its impact on socioeconomic welfare. Subsidy Reform Window. 18 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda Rwanda has implemented a suite of restructuring strengthen accountability, streamline operations, measures that have transformed the electricity and create a credible off-taker for electricity supplied utility into a commercially operated, well-governed by the private sector. As a testimony to the success state-owned enterprise. Structural sector reforms of these reforms, Rwanda, a poor, landlocked country accompanying Rwanda’s last five-year plan, the without significant energy resources, has managed Second Economic Development and Poverty to attract direct investment of over 15 independent Reduction Strategy strengthened sector institutions power producers, and the capacity expansion over and clarified roles and responsibilities of different the past decade has been financed to large extent by public entities in implementing the Government the private sector. As of 2018, 52 percent of capacity program. Most importantly, the separation of the is under private ownership, one of the highest shares electric utility from the water utility in 2014 and in Sub-Saharan Africa. In off-grid electrification, too, the formation of the Rwanda Energy Group (REG) the private sector has taken the lead with a dozen or and its two subsidiaries, EUCL and EDCL5, allows for so private companies active in distributing off-grid better governance and clear financial accountability solar products throughout the country under various between revenue-generation service functions and business models. nonrevenue-generating infrastructure development. While the Government retains ownership of the Rwanda’s power sector is now among the top utility holding company, its affiliated companies are performers in the region in the quality of electricity governed under company law as opposed to public services provided to businesses. Among several service law, which entails stricter requirements indicators associated with the quality of electricity in terms of transparency and management services provided to businesses collected under the accountability. Tailoring business procedures, World Bank’s Enterprise Survey of 2011-13, such as operational policies, and information technology the frequency, extent, and impact of outages, and solutions to the new functions and entities is still the cost of getting electricity services, Rwanda was work-in-progress, however, and important steps still among the top performers in east Africa (Figure 2.4). need to be taken to create fully functional, state-of- The performance is expected to improve further after the-art electricity companies. recent measures, such as through the provision of electricity connections free of charge for industrial The private sector has emerged as a strategic consumers (which is expected to spur baseload partner for investment in new energy generation demand), and through the implementation of the capacity and the access agenda. Through utility’s operational improvement plan. System recent measures taken in the sector, Rwanda has losses have also resumed their declining trajectory, established an attractive investment climate in after a period of increase as a result of the rapid power generation. In the latest round of reforms expansion of low and medium-voltage lines— that started in 2014, the Government restructured which are associated with higher losses—under the the key energy sector institutions, with the aim to electrification program, and in 2018 dipped below The restructuring of energy sector institutions aimed at achieving regulatory independence, financial sustainability, and increased private sector 5 engagement. The former Electricity, Water, and Sanitation Authority (EWSA) was split, with Rwanda Energy Group (REG) taking over the electricity utility functions. Two subsidiaries were formed under the holding company REG: (a) Energy Utility Company Limited (EUCL), an electric utility mandated to operate the country’s publicly owned generation, transmission, and distribution assets; provide customer service; and develop the distribution network in the already electrified areas and (b) Energy Development Company Limited (EDCL), an asset development company mandated to develop new generation plants and expand the distribution grid to provide electricity access to new areas. While the Government retains ownership of the corporatized entities, the Government’s role is significantly reduced as the utilities are governed under company law as opposed to public service law. This split of utility operations (EUCL) from energy resource development (EDCL) allows for clear financial accountability between energy development (nonrevenue) and utility operations (revenue-generating electricity business). The policy-setting mandate lies with MININFRA. The Rwanda Utilities Regulatory Authority (RURA) regulates the sector and approves electricity tariffs. Rwanda Economic Update • Edition No. 14 19 Energy Sector Special Focus: Lighting Rwanda Figure 2.4: Quality of electricity services in Rwanda in regional comparison, as reported by businesses A. Percentage of firms experiencing outages B. Number of outages per month 94 89 17 87 86 86 85 83 82 80 63 52 9 8 7 7 6 6 5 4 3 2 Sudan Kenya Madagascar Tanzania Zambia Burundi Malawi Uganda Ethiopia Rwanda Mozambique Burundi Tanzania Ethiopia Madagascar Malawi Kenya Uganda Zambia Rwanda Sudan Mozambique C. Percentage of sales lost due to outages D. Cost of getting connection for businesses (multiples of income per capita) 15 14 450 11 8 7 7 7 158 3 127 117 109 3 2 97 95 70 68 66 1 34 Tanzania Madagascar Uganda Zambia Malawi Kenya Ethiopia Burundi Rwanda Mozambique Sudan Madagascar Burundi Malawi Zambia Tanzania Kenya Ethiopia Sudan Mozambique Uganda Rwanda Source: World Bank Enterprise Surveys (2011-13) Figure 2.5: Average weekly frequency of electricity outages in Figure 2.6: Electricity system losses in Rwanda Rwanda (Percent) 500 40 Average weekly outage frequency 400 35 300 30 25 200 20 100 15 0 Apr-17 Apr-18 Aug-17 10 Oct-17 Nov-17 Mar-17 Jul-17 Mar-18 Jun-17 Jun-18 May-17 May-18 Feb-17 Feb-18 Dec-17 Jan-17 Jan-18 Sep-17 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: REG (2019) Source: MININFRA, REG, RURA, the World Bank 20 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda 20 percent for the first time since 2010. The decline which is largely driven by the share of oil in the fuel in system losses can be attributed to the measures mix in Rwanda, has declined from about 308 gCO2 undertaken by the utility to strengthen the grid and per kWh in the first quarter (Q1) of 2013 to 134 gCO2 to reduce electricity theft. per kWh in the final quarter (Q4) of 2018. As most of the future least-cost power generation is expected As Rwanda’s power mix has decisively shifted away to be from clean sources of power, the GHG intensity from oil, owing to investments in hydro power is expected to improve further. and lake methane-based power, the greenhouse gas (GHG) emissions intensity of the power sector 2. Ambitions and Challenges for the Coming has dropped by more than half. The share of oil Five Years fueled power in Rwanda’s power generation mix has declined from about 45 percent in 2013 to less than 20 percent in 2018 as it has been replaced by cleaner R wanda has set an ambitious sector agenda for the power sector under the National Strategy for Transformation (NST1) for the period 2017/18- lake methane based power6 and to a smaller extent 2023/24. Implementation of the NST1 in the energy by solar power and peat fueled power (Figure 2.7). sector is guided by the Energy Sector Strategic Plan As a result, the GHG intensity of power generation, (EESP; 2017/18-2023/24). The objectives of the ESSP Figure 2.7: Power generation mix and greenhouse gas intensity of power generation in Rwanda (2013-18) 100 90 80 70 Percent 60 50 40 30 20 10 0 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Oil Peat Solar Lake methane Non-hydro imports Hydro 400 350 300 gCO 2/kWh 250 200 150 100 50 - Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 Source: RURA, World Bank estimates Lake methane, which is the naturally occurring methane in Lake Kivu, is considered as a zero-carbon source of energy because, if not burned the 6 methane would gradually emit into the atmosphere. Rwanda Economic Update • Edition No. 14 21 Energy Sector Special Focus: Lighting Rwanda include enough supply to meet growing demand However, the Government will have to overcome a with an adequate reserve margin (see Table 2.1). A number of challenges as it pursues the objectives total of over 500 MW of projects are at various stages under the ESSP. These relate to the cost of electricity of development, including 120 MW of peat power supply, affordability of electricity to consumers, and plants; 125 MW of lake methane power plants; and affordability to the government as well as related 30 MW of diesel-fired generation capacity. Regional fiscal risks. hydro projects being developed include the 80 MW Rusumo project, currently under construction, First, the cost of electricity supply is excessively and the 147 MW Rusizi III project, currently at an high. Rwanda lacks domestic, low-cost energy early project development stage. In parallel, the resources. On top of this inherent disadvantage, as Government is investing in new transmission lines Rwanda pursued rapid expansion of the generation and network upgrades to strengthen the grid. The sector to avoid power deficits and fuel industrial ESSP sets the target of reaching a universal basic level growth, new generation projects were procured of access to electricity (Tier 1)7 by 2024 (52 percent without adhering to least-cost planning principles. on-grid, 48 percent off-grid). Total investment needs Most contracts to develop domestic capacity were to meet these targets are estimated at US$2,813 procured through bilaterally negotiated deals rather million (see Table 2.2). than competitive procurement. Taken together, Table 2.1: Rwanda’s objectives for the power sector under EESP (2017/18-2023/24) ESSP Objectives Baseline (2017) Target (2023-24) Achieve universal electrification 40.7%: 29.7% on-grid, 11% off-grid 100%: 52% on-grid, 48% off-grid Reserve margin n.a. 15% Average number of interruptions per year 265 92 Average total duration of interruptions per year 44 hours 14 hours Reduce transmission and distribution network losses 22% 15% Expand electricity access to productive users 1 72.6% 2020-21: 100% Note: 1 As per the ESSP, productive users utilize energy for activities that enhance income and welfare and include health and education facilities, public infrastructure and industry Source: MININFRA (2018) Table 2.2: Estimated investment needs during 2017/18-2023/24 to achieve ESSP targets ESSP Objectives Investment US$ million Main source Supply security Generation pipeline 1,200 Private Related transmission investments 470 Public Supply security Transmission upgrade & strengthening 111 Public Supply security On-grid, including productive users 745 Public Off-grid 146 Private Street lighting in all national and district roads Street lighting 88 Public System loss reduction Infrastructure and equipment investments 53 Public Total 2,813 Source: MININFRA (2018) The Government’s targets refer to the tiers defined under the Sustainable Energy for All (SE4ALL) Multi-Tier Framework (MTF); see Section 3 for 7 details. Under the MTF, Tier 1 (minimum 12 kWh per day) is defined as providing access up to four hours per day and at least one hour at night and can be used for basic applications such as task lighting, radio, and phone charging (http://trackingenergy4all.worldbank.org). 22 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda these decisions led to rapid sector expansion but at Figure 2.8: Electricity tariff revenue and economic cost of service in regional comparison excessively high unit costs of service (around US$0.28 per Kilowatt hour (kWh) in FY2016/17). A recent World Seychelles Uganda Bank study of 39 countries in Sub-Saharan Africa, Mauritius Tanzania ‘Making Power Affordable for Africa and Viable for Zambia Lesotho its Utilities’ (Kojima & Trimble, 2016), notes that the Benin Ghana revenue gap in Rwanda, in spite of high tariffs, is the Gabon Mozambique Larger gap between full cost of service and average tari revenue collected seventh-highest in Africa (see Figure 2.8). The 39 Swaziland Cameroon assessed countries had a weighted average tariff of Niger South Africa US$0.08 per kWh and a median tariff of US$0.15 per Kenya Zimbabwe kWh, compared to US$ 0.23 and US$0.43 in Rwanda, Malawi Congo, Rep. respectively (data for 2014). Togo Central African Rep. Côte d'Ivoire Sudan Second, even though tariffs are subsidized, the Burkina Faso Mali high cost of electricity service constraints Rwanda’s Senegal Ethiopia economic and private-sector development. Botswana Cape Verde Electricity tariffs are relatively high by global Burundi Nigeria comparison, ranging between US$0.12 and US$0.28 Mauritania Liberia per kWh, which makes electricity unaffordable for Rwanda Madagascar many, especially households and industry. Electricity Gambia, The Guinea access is largely concentrated in urban areas and in Sierra Leone STP the top two quintiles of income. A subsistence level Comoros of electricity (30 kWh per month) is unaffordable - 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 Full cost of service estimate Average tari revenue collected for more than three-quarters of the unelectrified population (comparable only to Burkina Faso and Source: Trimble et al. (2016) Madagascar (Kojima et al., 2016). This problem will consideration as they are an important contributor to become even more evident as the electrification jobs, export, foreign direct investments, and growth. program reaches ever poorer and more rural areas. Even at a subsidized rate, firms pay a higher price Third, caught between the high cost of electricity of electricity compared to neighboring countries, and limited affordability, the Government has making access to electricity among the main stepped in to fill the gap and spend about a tenth constraints to scaling up private investment flows. of its annual budget on transfers to the sector. Total While Rwanda’s rank in the Doing Business indicators budget transfers to the power sector declined from jumped from 41 (out of 190) in 2018 to 29 in 2019, 2.3 percent of GDP in FY2014/15 to 1.35 percent including a sharp improvement in its rank in getting of GDP in FY2017/18, driven down by a lower electricity from 119 in 2018 to 68 in 2019, it still has allocation for investment.8 The Government’s draft one of the highest electricity tariffs in the region, medium-term fiscal framework (MTF) for FY2018/19 impeding further progress on the indicator. Larger to FY2020/21 includes budget allocations for the firms, including manufacturing, report affordability power sector in the order of 1-1.5 percent of GDP per of electricity as a binding constraint, an important 8 Besides covering costs-revenues gap (budget transfers to support REG’s operating expenditures categorized under the Treasury’s “Recurrent Budget”), the Government also provides budget transfers to support sector investments (“Development Budget”). 9 The Government does not publish the allocation of budget to specific investments. Rwanda Economic Update • Edition No. 14 23 Energy Sector Special Focus: Lighting Rwanda year. The draft budget, as laid out in the MINECOFIN increases as electricity is already barely affordable Budget Framework Paper 2018/2019-2020/2021, is for much of the population. These drivers of cost- presented below in Figure 2.9. The budget allocated escalation may push fiscal transfers above 4 percent is expected to see a minor rise to 1.44 percent of of GDP in 2022/23 (Figure 2.10). Thus, without urgent the GDP by FY2020/21.9 However, the Government’s measures, high sector costs may make the expansion medium-term fiscal budget may not fully account of electricity services fiscally unaffordable and will for fiscal risks from anticipated cost escalations in undermine the overall fiscal and debt sustainability the power sector that may arise from (i) planned of the power sector. large-scale investments in grid expansion and densification to meet the electrification targets, Fourth, besides direct subsidies, the Government (ii) excess unutilized electricity capacity in the short- has supported the power sector through sovereign to medium- term with take-or-pay contracts as a guarantees for power purchase agreements result of generation planning that was so far based (PPAs) between REG and independent power on an overestimation of demand and did not follow producers (IPPs), creating contingent liabilities that least-cost principles, and (iii) limited scope for tariff are insufficiently managed and understood. To Figure 2.9: Subsidies to the power sector as a percentage of the encourage private participation in the energy sector, GDP (FY2014/15 – FY2017/18: Actual; FY2018/19 – FY2020/21: Medium- the Government of Rwanda previously provided Term Fiscal Framework) sovereign guarantees to backstop government 2.50 financial commitments for generation projects. 2.00 The World Bank’s PPP Diagnostic (The World Bank, 2017) identified a total of 29 such projects. 1.50 The Government no longer expects to provide 1.00 government guarantees for all privately-owned generation projects. However, existing PPAs will 0.50 represent contingent liabilities for the Government 0.00 for decades to come. To better manage the associated FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 fiscal risks, the Government should institute a process Operating subsidies Public Investment to assess, measure, monitor, and manage contingent Source: MINECOFIN liabilities from the power sector. Figure 2.10: Potential escalation in the subsidies to the power sector as a percentage of the GDP (FY2014/15 – FY2017/18: Actual; FY2018/19 – FY2023/24: World Bank Analysis) 5.0 4.0 3.0 2.0 1.0 0.0 Actual Actual Actual Actual Projected Projected Projected Projected Projected Projected FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 FY2021/22 FY2022/23 FY2023/24 Historical scal transfers to energy sector (% of GDP) Business-as-usual projection: Operating subsidies Business-as-usual projection: Public investment Source: For actual historical data: MINECOFIN; for projection: World Bank Analysis 24 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda 3. Towards Affordable, Reliable, Sustainable that do not require off-taker agreements with the Energy for All public sector. Implementation of the PPP law’s T he government’s vision is for the power sector provisions will be critical to ensure that Rwanda gets to become an engine of inclusive growth. This value-for-money when procuring new generation will require the sector to deliver low-cost, reliable, capacity. However, it will require EDCL to take the and clean power, for the government to get out of lead in identifying resources and preparing the providing subsidies except for the poorest and most feasibility studies for them, a task that will require vulnerable, and for REG to become a world-class additional capacity building in the company. utility with smooth commercial operations, skilled staff at all levels, modern information systems, and This agenda also includes developing regional state-of-the-art infrastructure. hydropower plants and regional interconnections to exploit economies of scale and regional trade. In view of the ambitions and challenges laid out Two projects are currently under preparation: an 80 above, the Government is implementing a number MW regional Rusumo Falls hydropower plant, to be of critical investments and reform measures. equally shared by Rwanda, Tanzania, and Burundi, These are targeting security and diversification of is currently under construction (with the support supply, operational efficiency, affordability, and of World Bank financing) and is expected to be accountability of electricity service. operational in 2020; and a 147 MW regional Ruzizi III hydropower plant project, to be equally shared Balancing demand and supply at least cost by Rwanda, DRC, and Burundi, is under preparation. The Government is institutionalizing least-cost Rwanda is also developing several transmission planning along the value chain so that supply interconnections with neighboring countries in resources are optimally deployed, and demand and anticipation of becoming an electricity-trading supply are in balance. This includes, the adoption partner and potential exporter of electricity to the of a first least-cost generation expansion plan in region. Rwanda is already a member of the East 2018, the preparation of Rwanda’s first sector-wide African Power Pool and the Nile Basin initiative and master plan in 2019, and the least-cost electrification is interconnected to neighboring countries via the plan currently in the final stages of development. following lines: (i) the 200 kV Mirama-Shango line The Government has also given REG the mandate (93.5 km to Uganda) and the (ii) the 220 kV Shango- to update these plans regularly, and the utility has Karongi-Rubavu-Goma line (167 km to DRC). The successfully built up the capacity to do so without possibility of regional trade potentially offers an external assistance. The next step will be to ensure opportunity to tap inexpensive sources of electricity its implementation through better integration of (import limits of 20% of the energy mix have been set system planning and system operation functions in in order to balance energy security objectives). The REG and its subsidiaries. Government is in discussions with Kenya, Uganda, and Ethiopia on power imports. A first transaction The new PPP law of 2016 and the implementation for electricity imports from Kenya, for 30 MW per guidelines approved in 2017 provide a clear year, has been in place since 2015; the Government mandate to the sector to pursue competitive has signed a Memorandum of Understanding with procurement of private sector-owned electricity Ethiopia for additional power imports. infrastructure. The only exceptions are mini-grids Rwanda Economic Update • Edition No. 14 25 Energy Sector Special Focus: Lighting Rwanda Facilitating a clean energy transition business-as-usual. The draft Least-Cost Power Greening Rwanda’s power sector is a key priority in Sector Development Plan prepared by the the country’s Nationally Determined Contribution Government shows that adherence to least-cost (NDC) under the Paris Agreement. Specifically, the sector expansion increases the share of renewable NDC defines Rwanda’s contribution as emission energy in the capacity mix by one fifth and reduces reductions compared to a counterfactual (or emissions by 800,000 tCO2eq by 2030 compared to the business-as-usual) scenario, based on policies and business-as-usual scenario (an 8 percent reduction). actions conditional on availability of international Bulk of the reduction in emissions is achieved by support for finance, technology and capacity higher utilization of hydropower resources and lower building. In the power sector, the NDC prioritizes utilization of peat-based power. There is potential (a) increasing in the share of new grid-connected for solar power to be exploited more aggressively renewable capacity compared to fossil fuels; (b) to achieve the NDC’s objectives. Experience from installing solar PV in rural communities; and (c) countries in the region is that on-grid solar can increasing energy efficiency through demand-side be developed through the private sector at low measures and grid-loss reduction. cost if capacity is procured competitively and with adequate risk mitigation. To scale-up off- The most important priority for the Government grid solar and achieve the targets under the new for implementation of the NDC is improved NST—which puts a much stronger focus on off- sector planning, especially the better utilization grid—the Government needs to finalize the National of the country’s hydro and solar resources, which Electrification Plan and Investment Prospectus and can significantly reduce generation cost and closely monitor the private sectors’ adherence to off- greenhouse gas emissions compared to the grid technology standards. Figure 2.11: Rwanda’s electricity capacity mix in 2020 and future projections under business as usual and least cost sector expansion 2018 2020 2025 2030 1% 7% 7% 4% 14% 1% 0% 0% 26% 27% 27% 28% 20% 20% 5% 24% Business as Usual Scenario 2% 2% 7% 3% 47% 38% 44% 46% 1% 9% 5% 11% 10% 17% 20% 0% 4% 0% 17% 2% 19% 2% LCPDP 29% Optimal Scenario 47% 51% 55% Thermal Peat Hydro Solar Lake Methane Imports Source: World Bank estimates based on REG data 26 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda Further optimizing electricity pricing disaggregating the tariff categories and charging A series of tariff reforms, the latest in August 2018, cost-reflective tariffs to consumer categories that can has helped move tariffs closer to cost-reflective do without subsidies. levels while maintaining affordability of electricity for low-income groups. Since 2015, Rwanda has When calculating effect of these two tariffs implemented a series of changes in electricity tariffs increases on households using the subsidy to gradually recover the price of electricity (see simulation (SUBSIM) model, the results show Figure 2.12). In 2017, the tariff scheme changed from insignificant poverty impact. It is estimated that a flat rate of RWF 182 per kWh (US$0.24 per kWh) to a the direct welfare impact on residential consumers block structure. For residential users consuming less was very small or in the case of the households than 15 kWh, the price was set at RWF 89 per kWh in the first two quintiles, the change in welfare (US$0.11 per kWh); for residential usage between 15 is even positive. This is because 93 percent of all kWh and 50 kWh, the price was set at RWF 182 per households (including 100 percent of households in kWh (US$0.22 per kWh); and for residential consumers the poorest quintile) are within the first two blocks with a per month usage higher than 50 kWh, the price that either paid less or stayed the same because of was RWF 189 per kWh (US$0.22 per kWh). In August the tariff reform of 2017 and stayed the same during 2018, tariffs were adjusted again, blocks 1 and 2 the last tariff reform of 2018. The tariff reform in stayed the same and block 3 increased by RWF 21 per August 2018 also included the approval of a tariff kWh to RWF 210 per kWh (US$0.24 per kWh). Tariffs adjustment mechanism to reduce the sectors’ for selected non‐household consumers that are not financial vulnerability to fuel price or exchange exposed to international competition—commercial rate variations. customers, broadcasters, telecom towers and health facilities—have been brought closer to cost recovery. Bringing both grid and off grid supply solutions within the access paradigm General industrial tariffs have been refined to promote competitiveness while flattening the demand profile In view of falling cost of off-grid solutions and during the day by keeping maximum demand charges increasing cost of grid connections, as well as taking for non‐peak hours substantially lower than that for into consideration positive effects of electrification, peak hours. The government is keen on exercising Rwanda has recently moved to a strategy of additional opportunities for tariff increases by further incentivizing off-grid private-sector investments Figure 2.12: Electricity tariffs in Rwanda, 2005-18 (in RWF, nominal) 240 Commercial (>100 kWh) 220 Households (>50 kWh) 200 Commercial (0>100 kWh) Telecom Towers 180 All industry-evening (until 2016) Households (15-50 kWh) 160 All industry-day (until 2016) 140 120 100 Small industries Households (0-15 kWh) 80 Medium industry (0.4-15kV) 60 All industry-night (until 2016) Large industry (15-33kV) 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: RURA Rwanda Economic Update • Edition No. 14 27 Energy Sector Special Focus: Lighting Rwanda in areas where extending the grid is not financially around supporting Sub-Saharan African countries in viable in the short term. Because of growing cost of their national aspirations of universal access to energy connecting rural households to the grid, low rural services and clean energy transition. In line with residential electricity demand and poor affordability, SDG7, Rwanda’s National Strategy for Transformation the Government’s new ESSP puts a much stronger sets the target of reaching a universal basic level of emphasis on alternatives to grid expansion than past access to electricity (Tier 1)10 by 2024 (52 percent on- strategy documents. Where grid-connections are not grid, 48 percent off-grid). feasible in the short term, the Government aims to expand off-grid solutions in the form of solar home- Promoting service delivery and productive uses of electricity systems and mini-grids (see Figure 2.13). To improve affordability of off-grid solutions, especially for rural The Government’s electrification program during population, the Government is looking for ways to the implementation of ESSP has a strong focus on improve households’ access to affordable finance. For service facilities and productive uses in rural areas. the most vulnerable households that would remain Rwanda’s electrification program has put emphasis out of reach for the commercial off-grid market, the on electrifying facilities that are critical for social Government is exploring the ways to develop and and rural development. As at August 2018, 100 put in place a mechanism to provide those families percent of hospitals, 92.1 percent of health centers, with off-grid solutions. 94.5 percent of administrative offices, and 77.2 percent of primary and secondary schools have Figure 2.13: Electricity access targets from 2019 to 2024 in the ESSP been electrified. Under the ESSP, street lighting is expected to be expanded to cover 100 percent of national and district roads, and 100 percent of productive users are expected to have access to electricity, up from the current level of 69 percent. Connecting productive users away from cities will support rural economic development and, as they have a higher ability to pay for energy services than households, improve the sustainability of the sector. By 2024, 91 percent of productive users are expected to be connected to the national grid, Source MININFRA (2018) with the remaining 9 percent connected via off- grid solutions. Rwanda’s National Strategy for Transformation is consistent with the above targets and aims to Strengthening utility financial management and institutionalize those, including a monitoring operational efficiency framework. The strategy is also aligned with the REG is modernizing its financial accounting global momentum on Sustainable Development and reporting, a reform that is essential to Goals and Sustainable Energy for all and the improve transparency and accountability of REG. Sustainable Development Goal 7 (SDG7) on energy International experience suggests that countries access. The international community has coalesced that reform electricity subsidies without having in The Government’s targets refer to the tiers defined under the Sustainable Energy for All (SE4ALL) Multi-Tier Framework (MTF); see Section 3 for 10 details. Under the MTF, Tier 1 (minimum 12 kWh per day) is defined as providing access up to four hours per day and at least one hour at night and can be used for basic applications such as task lighting, radio, and phone charging (http://trackingenergy4all.worldbank.org). 28 Rwanda Economic Update • Edition No. 14 Energy Sector Special Focus: Lighting Rwanda place solid financial management and accounting and resolution (service restoration) of customers’ systems often risk racking up off-balance-sheet complaints related to outages and other incidents losses and cross-debt between public sector entities. affecting quality of electricity supply, as well as Transparent accounting and reporting improve management of all corporate resources (accounting, financial accountability to a utility’s stakeholders. finances, human resources, procurement, logistics, It also makes the sector more attractive for private corporate planning). finance. Recognizing these benefits, the Government had initiated planning for the transition to IFRS 4. Reform Priorities for the Power Sector when the utilities were separated in 2014. This included: preparation of an action plan in 2016, installation of new Integrated Business Management T he overarching vision—delivering clean and reliable power, phasing out subsidies except for the poorest and most vulnerable, and REG System (IBMS)/information technology (IT) software becoming a world-class utility—is achievable for and hardware in 2016, hiring of an experienced Rwanda. The following six priority measures will professional as the director of finance, completion of be critical to reap the benefits of and deepen the asset revaluation in 2017, and hiring of international government’s reform program over the coming auditing firms to confirm compliance. In 2018, for the decade. first time ever, EUCL published its externally audited financial statements within three months of the end First, pursuing sector expansion in line with least- of the financial year. REG plans to achieve the same cost sector planning. This will require regular soon for EDCL and the consolidated statements on updates of the least cost power development plan, the holding company level. based on reliable demand forecasts, and strict adherence to competitive procurement. REG is implementing an aggressive program to improve its operational performance. The Second, putting REG into the driving seat of underlying principle is to incorporate state-of-art developing new PPP investments identified in tools (information systems and advanced metering the least-cost plan. This will require REG to take on technologies) to support efficient, transparent and feasibility studies and safeguards assessments for the accountable execution of operations in all business indigenous energy resources available for electricity areas, with particular focus on reducing commercial generation, with particular focus on dissolved losses (unmetered consumption) and improving methane in Lake Kivu, and then competitive quality of electricity supply and customer service. Key tendering of these resources under the new Public- activities being carried out for that purpose include Private Partnership (PPP) law. the implementation of a new IBMS to support efficient, transparent and accountable execution of operations Third, accelerating efforts to decarbonize the in all business areas,11 and implementation of the power sector and adapting to climate change. Revenue Protection Program targeting sales to large While the power sector in Rwanda is relatively clean, customers. The plan for the new IBMS includes the with hydropower as the mainstay of the installed full incorporation and systematic use of information capacity, there is potential for further improvements systems to support all commercial functions, by more aggressive utilization of on-grid and off- processes and activities for effective fast attention grid solar power. Experience from countries in the When it was founded after the split of the integrated water and electricity utility, EWSA, in 2013, REG and its subsidiary companies took over 11 several separate IT solutions, based on varied technological platforms and often operating in isolation. These created problems in delivering reliable customer service and a failure to comply with reporting requirements. Rwanda Economic Update • Edition No. 14 29 Energy Sector Special Focus: Lighting Rwanda region is that on-grid solar can be developed at low Sixth, promoting regional electricity trade through cost if capacity is procured competitively and with bilateral contracts to tap lower cost supply sources adequate risk mitigation. The power sector also has and better integrate variable renewables. This a role to play in climate adaptation, through better will require closely coordinating with neighboring planning for hydrology risks and mitigating their countries to ensure the planned cross-border impact on the security of supply by developing transmission infrastructure projects are not delayed alternative energy sources. further to take advantage of the regional energy potential and becoming an active participant in Fourth, regularly adjusting tariffs for changes developing the East Africa Power Pool platform to in cost and, over time, expanding the groups create trust and a consistent framework for trade. of electricity consumers that do not need tariff subsidies and are charged the full cost of service. Seventh, doubling down on the modernization However, implementation of tariff reforms will have of REG’s operations to ensure improvements to be done carefully to ensure continued support to in the quality of electricity supply and reduce low-income consumers. The remaining funding gap technical and commercial losses. This will require between sector costs and tariff revenues will have full integration of the new IBMS into the day-to-day to be filled by transfers from MINECOFIN that are operations of REG and its subsidiaries (EUCL and EDCL) provided in a timely and transparent manner. and transition towards fully digitalized performance monitoring and optimization; strengthening the Fifth, providing a state-of-the-art framework planning function and more closely integrate system for private sector participation in off-grid planning and system operation functions in REG’s electrification and targeted incentives to make subsidiary companies, including by (a) regularly off-grid solar affordable. This will require updating the Least-Cost Power Development Plan; translating the government’s commitment towards and (b) expanding the use of geospatial information using off-grid electrification solutions into a systems and fully integrating them into utility consistent and clearly defined set of targets and operations; building financial, legal and commercial plans that encourage private sector participation capacity in REG’s subsidiary companies and set up a in achieving the government’s target of universal team that can follow the procurement process of new access; a transparent and attractive program of independent power producers (IPPs) from inception government incentives for companies to reach the to plant commissioning; and improving the financial poorest and most vulnerable customers; as well as viability and accountability of the sector, with a view realistic and strictly enforced technical standards to make REG ready to access commercial financing and guidelines. for debt and/or equity in the medium term. 30 Rwanda Economic Update • Edition No. 14 REFERENCES BNR (National Bank of Rwanda). 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