January 2020 | Edition No. 15 GDP Growth Double-digit Construction Fiscal Expansion Digital Transformation GDP Irembo Growth Digital Payment Double-digit E-Health Construction Digital Skills Fiscal Expansion Credit in ation Digital Debt CAD Transformation Private Sector Irembo Digital Payment E-Health Digital Skills Credit in ation Debt CAD Private Sector Accelerating Digital Transformation in Rwanda Rwanda Economic Update Accelerating Digital Transformation in Rwanda January 2020 TABLE OF CONTENTS Acronyms..................................................................................................................................................................................................................... i Foreword...................................................................................................................................................................................................................... ii Executive summary.................................................................................................................................................................................................. iii PART I: RECENT ECONOMIC DEVELOPMENTS ........................................................................................................................................... 1 1.1. Global Growth Momentum has Faltered................................................................................................................................. 2 1.2. Rwanda’s Economy in 2019........................................................................................................................................................... 3 1.3. Rwanda’s Economic Outlook and Risks.................................................................................................................................... 13 PART I: ACCELERATING ECONOMIC GROWTH THROUGH DIGITAL TRANSFORMATION....................................................... 15 2.1. A Snapshot of Rwanda’s Digital Development Journey..................................................................................................... 19 2.2. Securing Rwanda’s Digital Future: Critical Reforms, Investments and Innovation Needed ................................. 28 2.3. Conclusion.......................................................................................................................................................................................... 32 References .................................................................................................................................................................................................................. 35 LIST OF FIGURES Figure 1.1: Global and regional economic growth, 2015–21f................................................................................................................ 2 Figure 1.2: Prices for Rwanda’s main exports and imports, 2017–19 ................................................................................................. 2 Figure 1.3: Growth in EAC countries, 2013–18 and 2019f ....................................................................................................................... 3 Figure 1.4: Rwanda’s economic growth, 2016–19...................................................................................................................................... 3 Figure 1.5: Demand and real GDP growth, 2016–19................................................................................................................................. 5 Figure 1.6: Headline inflation, 2016–19.......................................................................................................................................................... 5 Figure 1.7: Changes in interest rates, December 2018–September 2019 ......................................................................................... 6 Figure 1.8: Depreciation of Rwanda franc against the US dollar, 2014–19 ....................................................................................... 9 Figure 1.9: Gross international reserves, 2016–19 ..................................................................................................................................... 9 Figure 1.10: Government spending and revenues, 2009–19.................................................................................................................... 9 Figure 1.11: Drivers of changes in public spending, 2014–19.................................................................................................................. 10 Figure 1.12: Decomposition of public debt accumulation, 2009–18..................................................................................................... 12 Figure 1.13: Tax years needed to repay public debt, 2006–18 ................................................................................................................ 12 Figure 1.14: Decomposition of Rwanda’s public debt, 2007–18 ............................................................................................................. 12 Figure 2.1: Institutional framework for digital development................................................................................................................. 19 Figure 2.2: Access to international bandwidth - capacity and speed.................................................................................................. 20 Figure 2.3: Length of national transmission network and population within reach..................................................................... 20 Figure 2.4: Mobile broadband coverage........................................................................................................................................................ 21 Figure 2.5: Households possessing mobile phone, Rwanda and East Africa.................................................................................... 22 Figure 2.6: Mobile Internet subscriptions by technology, 2019 and affordability of 1GB of data, 2017................................ 22 Figure 2.7: Digital skills benchmarking.......................................................................................................................................................... 24 Figure 2.8: Regional benchmarking: Share of population that is unregistered............................................................................... 25 Figure 2.9: The logistics performance index 2018: Rwanda profile..................................................................................................... 25 Figure 2.10: Penetration of financial institution accounts versus mobile money accounts.......................................................... 26 Figure 2.11: Venture capital raised by African startups and amount of startup funding raised by select African countries 28 Figure 2.12: East Africa is the 9th largest global market by population................................................................................................. 31 LIST OF TABLES Table 1.1: Composition of new loans .......................................................................................................................................................... 6 Table 1.2: The current account balance and financing ......................................................................................................................... 8 Table 1.3: Rwanda’s public finances, 2015/16 to 2019/20 ................................................................................................................... 11 Table 1.4: GDP growth, 2016–21f ................................................................................................................................................................. 13 LIST OF BOXES Box 1.1: Drivers of Rwanda’s public and publicly guaranteed debt and fiscal space.............................................................. 12 Box 1.2: Major economic reforms in 2019............................................................................................................................................... 13 Box 2.1: Creating single digital market .................................................................................................................................................... 32 ACRONYMS ATM Automatic Teller Machine NPLs Nonperforming Loans B2C Business-to-Consumer NST National Strategy for Transformation BNR National Bank of Rwanda P2P Person-to-Person DAP Digital Ambassadors Program PKO Peace-Keeping Operations DFS Digital Financial Services PP Percentage Points EAC East African Community PPP Public-Private Partnership EMDEs Emerging Markets and Developing REPO Repurchase Agreement Operations Economies REU Rwanda Economic Update FSP Financial Service Provider RMB Rwanda Mines, Petroleum and Gas Board FY Fiscal Year RRA Rwanda Revenue Authority GDP Gross Domestic Product RURA Rwanda Utilities Regulatory Authority ICT Information, Communications, and Technology Rwf Rwandan Franc ID Identification SSA Sub-Saharan Africa IMF International Monetary Fund TTL Task Team Leader KTRN Korean Telecom Rwanda Networks TVET Technical and Vocational Education and Training MINECOFIN Ministry of Finance and Economic Planning UN United Nations MNO Mobile Network Operator UNCTAD United Nations Conference on Trade and Development MSMEs Micro Small and Medium Size Enterprises US$ United States Dollar NAEB National Agricultural Export Development Board WEF World Economic Forum NISR National Institute of Statistics of Rwanda Y-O-Y Year-on-Year Rwanda Economic Update • Edition No. 15 i FOREWORD T he Rwanda Economic Update (REU), published twice a year, analyzes recent economic developments and prospects and Rwanda’s policy priorities. It is intended for a wide audience of policymakers, business leaders, other market participants, analysts of Rwanda’s economy, and civil society. The REU draws on data reported by the Government of Rwanda and additional information collected by the World Bank Group in its 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 helpful cooperation. Each issue also has a special feature spotlighting a particular topic, in this case Rwanda’s digital economy; it discusses the country’s digital transformation journey to date and identifies policy challenges and proposes key policy options to support continued growth of the sector. The current REU, the 15th, was prepared by the World Bank Group Rwanda team, the Macroeconomics, Trade and Investment Global Practice, and the Digital Development Department. The report was drafted by Aghassi Mkrtchyan (Senior Economist, TTL), Peace Aimee Niyibizi (Economist, co-TTL), Casey Torgusson (Senior Digital Development Specialist), and Isabella Hayward (Digital Development Specialist). The work was guided by Abebe Adugna Dadi (Practice Manager, Macroeconomics, Trade, and Investment), Michel Rogy (Practice Manager, Digital Development Africa and Middle East), Felipe Jaramillo (Country Director for Kenya, Rwanda, Uganda, and Eritrea), and Yasser El-Gammal (Country Manager, Rwanda). The team is grateful to Naoko C. Kojo (Senior Economist, EMFTX), Tim Kelly (Lead Digital Development Specialist, IDDO2), Caroline Chepkorir Koech (Digital Development Specialist, IDDO2) and Philip Schuler (Lead Economist, EA1M1 for their comments and advice on earlier drafts. The team benefitted from support from Nancy Umwiza (Office Assistant) 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, the countries they represent, or the Government of Rwanda. ii Rwanda Economic Update • Edition No. 15 EXECUTIVE SUMMARY Recent Economic Developments and Outlook the 5.2 percent projected. Capital spending and net lending grew by 25.4 percent, reaching about 15 In the first three quarters of 2019, Rwanda’s growth continued to accelerate supported by strong investment. The economy expanded by 10.9 percent of GDP—the highest level since FY2015/16. Total revenues reached 24 percent of GDP; solid tax revenues were offset by the shortfall in external percent in the first nine months of 2019 compared to grants. By the end of FY2018/19, payment delays 8.2 percent growth in the same period of 2018. Fiscal expansion through public investment pursuant to amounting to 0.6 percent of GDP were accumulated. the National Strategy for Transformation (NST1) was The overall deficit for the calendar year 2019 is much wider than expected playing a key role. Non- expected to reach 8 percent of GDP. government sector investment, including private investment, also contributed to this acceleration. External imbalances are widening, reflecting Credit to the private sector picked up, especially on the one hand wider fiscal deficits and heavy in the manufacturing sector which experienced demand for imports and on the other weaker than double-digit growth for the second consecutive expected exports. The impressive growth in goods year. Fiscal expansion and strong domestic exports in 2017 proved to be a one-off phenomenon; demand have led to widening of Rwanda’s external in US dollar terms, since 2018 the growth rate of imbalances deteriorated. Rwanda continues to rely exports has slowed, and the trend continued into largely on concessional financing of the deficit 2019. International prices for the commodities and its tight monetary discipline reduces the risks Rwanda exports were low, and export volumes of associated with fiscal expansion. coffee, tea, and minerals stagnated or declined. Imports grew by 19 percent in US dollar terms in On the production side, construction grew fastest H1, driven by capital and intermediate goods. In in 2019. Supported by investment, construction the 12 months ending in June 2019, the current activities expanded by nearly 31 percent in the account deficit (CAD) widened to 8.9 percent of GDP. first three quarters of 2019; services expanded by The surge in import demand has put pressures on 10.7 percent; and manufacturing by 12.3 percent. foreign exchange reserves. Agricultural growth was 5.8 percent. On the demand side, growth was supported by domestic demand Credit growth is accelerating, supported by fueled by fiscal expansion. In the first three quarters a positive growth outlook, accommodative of 2019, government consumption and investments macroeconomic policies, and improved financial grew by more than 25 percent. Private consumption sector balance sheets. Bank balance sheets grew 8.5 percent. The contribution of net exports improved substantially in 2018-19 as the BNR to growth was again negative—exports were less launched a new regulation on credit classification than expected and demand for imported goods, and provisioning. Having peaked at more than 8 especially capital goods, was strong. percent in 2017, nonperforming loans (NPLs) fell to 5.3 percent of total loans in September 2019; this The fiscal expansion that Rwanda embarked on in reduced risks in the financial system and helped to FY2018/19 to implement the NST1 has been wider accelerate credit growth to 20.1 percent, compared than expected. On an accrual basis, the deficit to 8.2 percent average annual growth in 2017–18. reached 6.4 percent of GDP in FY 2018/19, against The banking sector continues to be well-capitalized. Rwanda Economic Update • Edition No. 15 iii Executive Summary This edition’s forecast of Rwanda’s economic Despite continuing efforts, the ineffectiveness growth for 2019 is revised upward from the 7.8 of the private sector remains a major risk to percent projected in the REU14 to 8.5 percent. Rwanda’s growth outlook--growth projections for The stronger growth is driven mostly by the the medium to long term depend on the ability unexpected magnitude of the fiscal expansion. of the private sector to take the lead. As the fiscal Medium-term growth also looks strong with annual expansion for NST1 subsides in the medium term, growth projected to be about 8 percent. Although it will become increasingly difficult to keep the the current public investment push will continue growth rate at 8 percent without increased private in the medium-term, this issue’s high growth sector investment. Now, to achieve sustainable and scenario assumes that the role of the private sector productivity-led growth, attention must turn to in investment will grow; public investments alone improving allocation of economic resources through may not sustain growth at 8 percent over the better market functioning. medium-term. There are also weather-related and external The medium-term outlook assumes that debt will risks. The baseline projections assume normal accumulate faster than was projected in REU14. rain patterns over the medium term, but Rwanda The primary explanation is the large fiscal expansion remains vulnerable to climatic shocks like drought of 2019. Fiscal deficit for 2020 will continue to or erratic rains. Externally, the main risk relates to a be well above the historical average. Despite the more severe slowdown in global economic growth increasing indebtedness, reliance on concessional than is currently expected and to persisting regional financing will help keep Rwanda’s debt sustainable. tensions. A disappointing global economy will In the medium term, the CAD will again stay high, depress prices for the commodities Rwanda exports. hitting 10 percent of GDP. Monetary policy will The risk of capital outflows from EMDEs in search of remain accommodative, although with the return safer havens has also increased. Rwanda’s economic of inflation to the “normal” range and continuing prospects can also be affected if regional tensions pressures on the exchange rate and reserves, the persist—or intensify. policy space has narrowed. Special Focus: Digitalizing Rwanda T The risks to Rwanda’s economic outlook, both he special focus topic reviews the key building domestic and external, have risen. The main blocks of Rwanda’s digital economy and risk is the growing reliance on public-sector- identifies key progress made so far and challenges led investments. Fiscal expansion to achieve the that lie ahead. government’s targets for expanding access to infrastructure raises the debt, widens external Despite its small size, Rwanda has distinguished imbalances, and may crowd out access of the itself as a country that has “bet big” on digitization, private sector to finance, thus undermining long- as means to accelerate growth and reduce term growth. If the reliance on the public sector poverty. The National Strategy of Transformation persists, Rwanda may have difficulties in financing (NST1) recognizes ICT as a cross-cutting enabler its growth model. Rwanda’s commitment to for development. Greater digital adoption and concessional borrowing and monetary stability ICT-driven innovation is seen as instrumental to reduces the risks to macroeconomic stability, but supporting productivity gains across both primary overall fiscal risks has gone up because of the and non-primary sectors. Meanwhile, use of digital reliance on the public sector for achieving NST1 tools and platform can help spawn growth in growth targets. services (financial, hospitality), expand access to iv Rwanda Economic Update • Edition No. 15 Executive Summary new markets through e-commerce, as well as offer a internet services. Broadband remains unaffordable range of benefit to users, including means to enhance to the average consumer, and Rwanda thus trails its household income-generation. Government has peers in terms of broadband penetration and usage, adopted an ambitious digital agenda articulated as well as uptake of foundational digital services by a suite of five-year strategies to support the such as mobile money. progressive roll-out of digital infrastructure, public e-service, increase digital skills and position Rwanda Secondly, Rwanda needs to invest more in human as a regional ICT hub, underpinned by strong capital to build the nation’s digital skills base, government institutions and leadership. leveraging both traditional and non-traditional approaches. A large basic digital literacy gap still Rwanda’s digital development thus far has been prevents a sizable part of the population from characterized by a substantial public investment adopting digital technology altogether. Efforts to push, in areas such as digital infrastructure and build basic digital skills will need to be paired with digital public service delivery. This has helped the interventions that also boost the perceived value country achieve some of the highest 3G and 4G of broadband and other e-services to bring more network coverage rates on the continent, bringing Rwandans online. Building the nation’s digital skills virtually all Rwandans within range of mobile base, beyond basic digital literacy, will be key to broadband. Expansion of government’s e-service digitally-enabled innovation as well as supporting offering as well as enabling regulatory reform, has access to new jobs in new sectors. The need for helped Rwanda emerge as a top African performer intermediate digital skills is likely to become in both global ‘e-government’ and ‘doing business’ ubiquitous for formal sector employment. Ultimately, rankings. Moreover, government has launched a boosting the nation’s digital skills base will require series of innovative partnerships to expand digital interventions and innovative partnerships that go literacy and create support infrastructure for tech- beyond fixing gaps in the delivery of digital skills based start-ups. Nevertheless, moving forward through the basic education system. Here, Rwanda concerted efforts will be needed in the following has already been at the forefront of piloting new five areas, to sustain further digitization of the wider schemes – yet, these need to scale to have impact, Rwandan economy: and there is scope to do more to crowd-in the private sector in support of related interventions. Firstly, digital adoption still needs to improve on the back on further interventions that help Thirdly, more private sector led digital economy increase affordability and remove other barriers to growth needs to be encouraged, starting with uptake, creating greater local demand for digital greater digital adoption among MSMEs. As services. Accelerating digital transformation will noted above, a large part of the country’s digital only be possible if more users are brought online and development to date has been driven by substantial become ‘digitally enabled’ through greater access to public sector investment and government adoption digital devices and connectivity. However, presently, of ‘digital’. While further public investment in the domestic demand for digital tools and services expansions of key enabling public e-services and remains muted, which in turn adversely impacts the digital skills will be needed moving forward, the expansion if new digital platforms. While uptake private sector will need to play a far greater role of mobile devices, basic mobile communications in spearheading digitization to sustain growth and digital financial services has been steadily momentum, through both increased technology increasing, there is a lingering digital divide in terms adoption and support for innovation that can of access to handsets and uptake of high-speed enhance productivity and create new off-farm jobs. Rwanda Economic Update • Edition No. 15 v Executive Summary While ICT emerges as the fastest growing sub-sector, Rwanda a more attractive investment destination, digital transformation is yet to permeate key sectors where Rwanda would be well-positioned to offer an such as agriculture, and adoption of digital tools attractive launch-pad for companies targeting the and services among MSMEs has largely been muted. East African market, as Rwanda is widely considered Greater digital adoption among MSMEs could help to be an easy place to start a business. Regional support both growth in local e-commerce and market integrations will require efforts to harmonize facilitate greater export. However, like the wider legislation that help foster a single connectivity, private sector, Rwanda’s digital entrepreneurship data and digital services market. ecosystem remains nascent, and while investment in tech-based startups is on the rise, there is limited Finally, as digital adoption increases, building a support for these firms beyond a certain growth more secure online and ‘trust’ environment will stage and a weak pipeline of tech start-ups poised be key to creating a virtuous cycle of increasing for expansion. Meanwhile, weak local demand for digital adoption and demand for digital platforms digital services has a dampening effect on digital and services. Rwanda needs to build on its robust entrepreneurship, where Rwanda’s small market foundational identification system to offer a next size emerges as a major deterrent to private sector generation digital ID, providing a critical platform for investment in digital innovation, despite Rwanda’s enabling safe online transactions. There is still also favorable ‘doing business’ rating. scope to expand Rwanda’s cybersecurity capacities, increasing local capacity to prevent, detect, respond Rwanda thus needs to be at the forefront of efforts and mitigate emerging cyber threats, leveraging to create a regional single digital market. Rwanda greater regional collaboration. A more robust yet needs the scale of a larger integrated digital market measured data protection and privacy regime is also to succeed in the digital economy and for its tech- required, which protects users yet still enables data based start-up to thrive. Economies of scale not only to be stored and shared across borders, enabling help bring down prices for consumers but make greater digital market integration. PART ONE RECENT ECONOMIC DEVELOPMENTS Rwanda Economic Update • Edition No. 15 1 Recent Economic Developments 1.1. Global Growth Momentum has Faltered Recovery in growth in Sub-Saharan Africa will to T he 2019 global economic environment is less favorable for developing countries. In 2019 H1, global economic activity softened because of trade be slower than was expected at the start of the year. The growth outlook is hampered by persistent uncertainty in the global economy and the slow tensions, the prolonged uncertainty about Brexit and pace of domestic reforms, as noted in the 20th a weakening of financial market sentiment because edition of Africa’s Pulse of October 2019. Overall of high and rising debt in emerging markets and growth in Sub-Saharan Africa is projected to rise developing economies (EMDEs). These events have to 2.6 percent in 2019 from 2.5 percent in 2018, weighed on global industrial activity and the goods which is 0.2 percentage points lower than the April trade. Activity in major advanced economies— forecast (Figure 1.1). There is significant divergence particularly in the Euro Area—has been less than in performance between resource-intensive and expected, holding back activities in China and non-resource-intensive countries in SSA. Among some other large developing economies. Moreover, the latter, fixed investment has continued at a solid heightening trade tensions are increasingly pace, particularly public investment in infrastructure. undermining prices of coffee, tea, and tin, Rwanda’s In contrast, growth was worse than expected in main export products (Figure 1.2). That is why the resource-intensive Nigeria, South Africa, and Angola, World Bank’s Global Economic Prospects (June 2019) the region’s three largest economies. Moreover, has downgraded global growth to 2.6 percent, which rising public debt, due to either deterioration in fiscal is 0.3 percentage point (pp) below previous forecasts balances or currency depreciation, is an increasing and its slowest pace since 2016 (Figure 1.1). Growth source of vulnerability throughout SSA. According in advanced economies was also downgraded, to the October 2019 Africa’s Pulse, the number of from 2.1 to 1.7 percent for 2019. In fact, the report countries in debt distress or at high risk of external downgraded 2019 growth forecasts for more than debt distress has almost doubled. However, the 40 percent of countries. However, global GDP is region’s growth is projected to rise to 3.1 percent in projected to pick up to 2.7 percent in 2020 and 2.8 2020 and 3.2 percent in 2021, supported by stronger percent in 2021. domestic demand even though the external environment is expected to be less supportive. Figure 1.1: Global and regional economic growth, 2015–21f Figure 1.2: Prices for Rwanda’s main exports and imports, (Percent) 2017–19 5 200 100=2016 180 4 160 3 140 120 2 100 1 80 60 0 2015 2016 2017 2018 2019f 2020f 2021f 40 World (June 2019f) World (Jan. 2019f) SSA (June 2019f) Jan-17 May -17 Sep -17 Jan-18 May -18 Sep -18 Jan-19 May -19 Sep -19 SSA (Jan. 2019f) EMDEs AEs Co ee arabica (kg) Tea (kg) Tin (kg) Crude oil, average (bbl) Source: World Bank Group (WBG) 2019. Source: World Bank Commodity Price Data (The Pink Sheet), October 2019. Note: AEs: Advanced economies; EMDEs: Emerging markets & developing economies; SSA: Sub-Saharan Africa. 2 Rwanda Economic Update • Edition No. 15 Recent Economic Developments Most countries in the East African Community it would be critical to ensure fiscal and external (EAC) are expected to grow above both their own sustainability. medium-term averages and the SSA average (Figure 1.1 and Figure 1.3). Although average GDP 1.2.1. Rwanda’s growth momentum has continued growth in the EAC is projected to decelerate from Rwanda’s economy is estimated to have grown 5.6 percent in 2018 to 5.4 percent in 2019, that will by 10.9 percent in the first three quarters of be high relative the average of the last six years, 2019, driven by robust performance in industry and to SSA’s growth in 2019. Growth is projected and services (Figure 1.4). The performance of to moderate in 2019 compared to 2018 in Kenya, the agriculture sector, which is the major source Uganda, and Burundi; to accelerate in South Sudan of Rwanda’s employment, was largely in line with and Tanzania; and to stay about the same in Rwanda. historical averages. Nominal GDP grew in parity with Over the medium term the region as a whole is real GDP as a result of a near-zero GDP deflator in the expected to grow about 5.5–6.5 percent annually. first nine months of 2019. 1.2. Rwanda’s Economy in 2019 Growth in industry, led by construction, was R wanda’s economic growth was very strong in 2019. Growth accelerated to 10.9 percent in the first three quarters of 2019 driven mostly by both exceptionally strong. In the first three quarters of 2019, industrial output grew by 17.5 percent, (y-o-y) up from 9.5 percent in the same period of 2018. In public and private sector investment. Credit to construction, growth surged from 12.1 percent in the private sector picked up, reflecting the strong the first three quarters of 2018 to 30.2 percent (y-o-y) economic activity in the real sector, especially in in the first three quarters of 2019 —the highest the manufacturing sector which is experiencing growth rate in a decade. It was supported by large- double-digit growth for the second consecutive scale public infrastructure projects like Kigali Arena, year. Fiscal expansion that the Government has Bugesera airport, and the roads. Government’s embarked on played an important role in fueling capital expenditure has increased by 26 percent in H1 domestic demand, but this has also led to widened of 2019. The private sector is also contributing to this external imbalances and heightened fiscal risks. momentum: in the first nine months of 2019, bank As Rwanda continues to implement its National lending to the private sector credit for construction Strategy of Transformation (NST1) objectives, activities increased by 31 percent (y-o-y). Figure 1.3: Growth in EAC countries, 2013–18 and 2019f Figure 1.4: Rwanda’s economic growth, 2016–19 (Percent) (Percent) 12 20 18 17.5 10 8.5 16 8 5.9 6.1 14 5.2 5.6 6 12 10.3 10.9 10.3 10.7 4 3.2 10 9.5 6.9 8.6 8.2 8.8 1.8 5.6 5.5 7.9 8.2 2 8 6.7 7.2 6.6 6.6 6.0 6.1 5.9 5.8 3.8 1.1 5.7 6.8 6.5 5.2 6 0 4.5 -2.7 3.9 4 -2 2 -4 0 EAC Burundi South Sudan Kenya Rwanda Tanzania Uganda GDP growth Agriculture Industry Services Average 2013-2018 H1 of 2019 2019f 2016 2017 2018 3Qs of 2018(yoy) 3Qs of 2019 (yoy) Source: World Bank, Macro and Poverty Outlook. Source: National Institute of Statistics of Rwanda (NISR). Notes: “f” = forecast. Rwanda Economic Update • Edition No. 15 3 Recent Economic Developments Economic activity in other industrial subsectors services were introduced in Rwanda in 1998, by 2008 was also remarkable, except for the mining sector. penetration had grown to 1.3 million subscribers—13 Strong growth in manufacturing reflects heavier subscriptions for every 100 people in Rwanda. By demand in the subsectors that feed into construction 2018, subscribers numbered 9.7 million—82 for as well as the overall progress in “Made in Rwanda” every 100 people. Expansion of mobile phones initiative. Manufacturing output grew by 12.3 plateaued more recently as Rwanda reached high percent in the first three quarters of 2019. Strong level of penetration. The use of mobile phones has growth momentum in manufacturing was reflected facilitated digitalization of other services, among in bank lending to the sector, which almost tripled in them financial (mobile money, mobile banking the first nine months of 2019. Growth was particularly services), agriculture (e-Soko), health (Mobile strong in wood, paper, and printing, where output e-Health), and administrative services (Irembo), as expanded by 50 percent, while non-metallic mineral discussed in the special topic elsewhere in this issue. products grew 38.5 percent, chemicals, rubber & Currently, the ICT sector represents about 1.4 percent plastic products grew 25 percent, and metal products, of Rwanda’s GDP. machinery, and equipment expanded 17.2 percent. These four manufacturing sub-sectors accounted for Agriculture grew at a healthy rate. The sector about 65 percent of the manufacturing growth in the expanded by 5.8 percent in the first three quarters first three quarters of 2019. The performance of food of 2019, down from 6.6 in the same period of 2018. and beverage industries, the two largest sub-sectors Food crops went up by 4.3 percent, one percentage of Rwanda’s manufacturing sector, was lower than point less than the average for 2014–18. The Seasonal in the previous year. After a modest growth in 2018, Agricultural Survey indicates a mixed picture: maize output in the mining sector contracted in 2019 (by (–0.1 percent), pulses (–0.1 percent), cooking bananas -0.7 percent) in the first three quarters, mainly due (+12.4 percent), Irish potatoes (+6.7 percent), sweet to declining prices on international markets. In spite potatoes (+1.9 percent), and cassava (+7.5 percent). of the potential Rwanda has long had difficulties in The performance of export crops as a whole was sustaining consistent growth in the mining sector. lower than in 2018 as a result of lower prices on international markets. Growth in services was above the average for 2014- 18. Recent strong trends continued, with double- Growth acceleration was supported by robust digit growth in trade (19 percent), transport (16 percent), professional and administrative services domestic demand, especially investment. After (13.1 percent), and financial services (11.9 percent). decelerating in 2016 and 2017 as a result of The hospitality sector (hotels and restaurants) also Government’s adjustment program to reverse performed quite well expanding 10.6 percent in the growing external imbalances, investment picked up first three quarters. in 2018 and further accelerated in 2019. Investment grew by around 29 percent, y-o-y, in the first three In the decade through 2018, information and quarters of 2019, higher than the 25 percent growth communication technology (ICT) was the fastest- in 2018, and well above the average growth in growing services subsector and has rejuvenated 2016-2017 which was less than 9 percent. The surge other sectors. However, in the first three quarters in investments was supported mainly by public of this year its output contracted. The dynamism investments, which have elevated the share of gross during the previous decade was mainly driven by capital formation in GDP to 26 percent, above the mobile phone penetration: after mobile phone average of 24.1 percent in 2016–18. 4 Rwanda Economic Update • Edition No. 15 Recent Economic Developments In addition to domestic investment, consumption was led mostly by higher prices of vegetables was in an upswing in 2019. Total consumption (especially beans), flour and cereal products, which grew by 11.6 percent, in the first three quarters of are important staple food in Rwanda. Core inflation 2019, from 5.4 percent in 2018 the same period. (excluding fresh food and energy products) was Government consumption grew by 25.6 percent lower at 3.4 percent in November. in the first three quarters of 2019, while private consumption growth was 8.5 percent. As in 2018, Figure 1.6: Headline inflation, 2016–19 (Percent) the contribution of net exports to GDP growth was 20 negative. Exports grew by 10 percent in real terms, 16 but that was more than counter-balanced by the 12 25.8 percent growth in imports, which was largely 8 driven by construction and manufacturing demand 4 for intermediary and capital goods. 0 -4 Figure 1.5: Demand and real GDP growth, 2016–19 -8 (Percent) -12 20 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Headline in ation Core in ation Food in ation 15 Upper bound Lower bound 10.9 Source: NISR. 10 8.6 8.2 6.0 6.1 5 Fluctuations in food prices have a significant 0 impact on rural welfare. Food dominates the rural -5 consumer price index with a ratio of 48 percent which is significantly higher than for the urban CPI -10 2016 2017 2018 Q1-Q3 of 2018 Q1-Q3 of 2019 (YoY) (YoY) for which the ratio of food products is 27.4 percent. Gov't consumption Private consumption Gross capital formation Net exports Real GDP growth Consequently, rural inflation is highly volatile. As Source: NISR. of November, rural inflation stood at 15.5 percent compared to 6.8 percent urban inflation. The rural 1.2.2. Monetary Policy and the Financial Sector: Inflation has remained Low but Gradually food inflation rate stood at very high level of 27.4 Rising percent. Low-inflationary environment came to an end with inflation picking up rapidly since September 2019. Sustained low inflation in 2017-2019 enabled the The headline inflation was below the target band Central Bank to lower the policy rate but the situation for almost a year until mid-2019 (Figure 1.6) as the has rapidly changed. The policy rate currently stands recovery of the region from the droughts of 2016-17 at 5 percent, reduced from 5.5 percent in May 2019 helped to suppress the food price inflation. Inflation against the background of persistently low inflation resumed in Q3 of 2019 exacerbated by high food of 2018 and early 2019. However, with rapid reversal prices as the weather outlook in the region worsened in inflation the space for the monetary policy has because of excessive rains. It reached 14.9 percent narrowed. The quarterly Monetary Policy committee in December 2019 in Rwanda pushing the overall (MPC), convened in November, maintained the policy inflation to 6.7 percent. High food price inflation rate at 5 percent. Rwanda Economic Update • Edition No. 15 5 Recent Economic Developments Credit to the private sector picked up, reflecting the first three quarters of 2019, the average 364-day the strong economic activity in the real sector. As treasury rate was 8.2 percent, more than 100 basis points of September 2019, credit growth accelerated to (bp) higher than in 2018. Similarly, the average 182-day 20.6 percent, y-o-y, more than double the growth in treasury rate was 61 bp higher in 2019 than in 2018. The 2017–18. Approved loans increased 41.1 percent in upward trend was also observed in the average 28-day the first three quarters of 2019, compared to almost treasury rates. In contrast, commercial banks’ lending zero growth in new loans in the same period of 2018. and deposit rates were lower than in 2018 with the Commerce and hospitality sectors received 27.5 lending rate averaging 16.5 percent in the first 9 months percent of the new loans, while construction-related of 2019 and the deposit rate at 8.8 percent. activities, i.e. public works and building received Figure 1.7: Changes in interest rates, December 2018–September 23.8 percent (Table 1.1). But in terms of growth 2019, (Percentage points) rates, manufacturing sector experienced the highest Lending rate -0.57 growth in bank lending, 173.7 percent, and saw its share in banks’ portfolio of new loans rising from 5.2 Deposit rate -0.03 percent as of September 2018 to 14.1 percent as of 364 day-TB 1.03 September 2019. Deposits grew 14.3 percent which 182 day-TB 0.61 is less than the growth rate in bank credit, leading to 91 day-TB -0.02 an increase in loan-to-deposit ratio from 84 percent 28 day-TB 0.23 of September 2018 to 90 percent in September 2019. Interbank rate -0.14 REPO rate 0.18 Interest rate for government borrowing -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 domestically has increased (Figure 1.7). During Source: BNR data. Table 1.1: Composition of new loans (Billion of Rwf, unless otherwise) Jan-Sept. Jan-Sept. Jan-Sept. 2014 2015 2016 2017 2018 2017 2018 2019 Agriculture, fisheries & livestock 8.8 13.9 11.5 8.8 11.2 7.1 9.0 9.8 Mining activities 0.2 0.3 1.8 0.8 0.4 0.6 0.3 0.1 Manufacturing activities 72.5 51.2 63.9 60.3 70.6 41.9 44.5 121.7 Public works and building 138.4 237.3 195.0 230.8 252.9 166.7 156.9 205.5 Commerce restaurant and hotel 272.1 279.7 348.6 310.9 333.9 239.2 225.6 257.0 Transport & warehousing & communication 42.2 53.8 37.7 73.6 141.1 50.9 59.0 65.9 Financial and other non-financial services 4.5 14.8 5.8 9.4 4.7 8.7 2.3 11.4 Services provided to the community 26.1 22.6 21.8 19.5 29.5 13.7 19.8 27.2 Non classified activities 88.1 68.4 102.4 110.8 122.0 80.3 93.4 163.4 Total of new loans 653.0 742.1 788.5 824.9 966.5 609.2 610.8 861.9 Memorandum Stock of credit to the private sector, end period Billion of Rwf 906.3 1,178.6 1,285.4 1,464.2 1,622.1 1,408.9 1,510.4 1,814.0 % of GDP 16.6 19.7 19.3 19.3 19.8 19.1 18.8 20.4 Source: BNR. 6 Rwanda Economic Update • Edition No. 15 Recent Economic Developments Rwanda’s banking sector remains well-capitalized Low international prices depressed Rwanda’s and adequately liquid. It has kept the required Basel traditional exports.1 Traditional exports accounted III capital adequacy ratio well above the required 10 for 24.3 percent of goods exports in H1 of 2019; in percent and the statutory liquid asset ratio (liquid dollar terms, exports of tin, wolfram, and coltan fell by assets/total deposits) well above the statutory 22.8 percent, y-o-y. The contraction was attributable minimum of 20 percent. Bank balance sheets are in mostly to unfavorable international commodity better shape; by September 2019 nonperforming prices, which have long been a serious vulnerability loans (NPLs) had fallen from 7.3 percent of total loans for Rwanda. Exports of coffee and tea fell by about a year ago to 5.3 percent. This reflects the effect of 6.3 percent, again mostly due to lower prices. In H1 regulations BNR issued in January 2018 on credit of 2019, the average price of coffee dropped 8.2 classification and provisioning; they also require percent, after a 4.8 percent drop in 2018. Moreover, banks to promptly identify and monitor NPLs coffee exports were down by 4.1 percent despite a and better manage credit risks. By June 2019, the 4.5 percent rise in the volume exported. The average banking sector has written-off Rwf 29 billion of bad price of tea declined by 11.8 percent, responding to a loans. Rapid increase in bank lending, however, may drop of tea prices at the Mombasa Auction. lead to increased risk of -performing loans especially in the sectors of commerce and hospitality, which Fortunately, performance of nontraditional has historically shown tendencies to overborrow exports and reexports was strong. After declining and overinvest. by 2.5 percent in 2018, in H1 of 2019 export values of nontraditional exports expanded by 25 percent, 1.2.3. External position: The Current-account Deficit y-o-y, with exports of nonmineral items up by 67.4 has Widened percent, mainly driven by agricultural products, Rwanda’s external imbalances have deteriorated as including processed food.2 However, for the second a result of weak goods exports and strong import consecutive half-year exports of nontraditional demand. In the 12 months through June 2019, the minerals (e.g., beryllium, unwrought lead, and current-account deficit widened to 8.9 percent of gemstones) declined, this time by 30.5 percent, with GDP, compared to 7.8 percent for the calendar year shrinking volumes and volatile prices. Reexports, 2018 (Table 1.2). The widening of the current deficit which account for about 30 percent of good exports, account deficit was largely driven by the deficit increased by 18.9 percent in H1 of 2019. of goods and services, which rose to 12.2 percent of GDP, combined with a reduction in secondary Strong imports of investment-related import incomes to 6.3 percent of GDP compared to a year goods drove increases in import bill. In H1 of 2019, ago. In a year end June 2019, exports of goods led capital goods, which account for about 32.4 percent the way down, falling by 0.1 percent (compared of formal goods imports, rose by 40.3 percent; and to a 38.4 percent growth in FY2017/18), offset by intermediary goods, 27.9 percent of formal goods services exports which grew by 11.1 percent. Total imports, expanded by 20.6 percent. These two imports, however, expanded by 9.1 percent in the components accounted for almost 90 percent of 12 months through June 2019 from 6.4 percent a increases in import bill in H1 of 2019. Imports of year earlier. consumer goods were up by only 4.3 percent and accounted for 7.4 percent of the expansion in total 1 Rwanda’s traditional exports are coffee, tea, cassiterite (tin), coltan, and wolfram. Edible vegetables, roots and tubers and products of the milling industry (maize, wheat, and cassava flours). 2 Rwanda Economic Update • Edition No. 15 7 Recent Economic Developments import bill, reflecting minimal growth in private previous fiscal year. Government’s net borrowing consumption. Imports of energy products rose by amounted to 3.9 percent of GDP, largely through 5.2 percent, much less than the 22.8 percent in 2018, budgetary loans. Portfolio and other private loans due to lower international oil prices as imported totaled about 0.4 percent in FY2018/19. External quantities increased. financing flows allowed to increase the central bank’s foreign exchange reserves by close to US$60 million FDI inflows and capital transfers financed more to about US$1,132 million as of June 2019. These than half of the current account deficit (Table gains in accumulation of foreign exchange reserves 1.2). Net FDI slightly rose to 3 percent of GDP in reversed in the following months reflecting the scale FY18/19, and together with capital transfers totaled of fiscal pressures. 5.6 percent of GDP, compared to 5 percent in the Table 1.2: The current account balance and financing (Percent of GDP) FY14/15 FY15/16 FY16/17 FY17/18 FY18/19 Current account balance -11.9 -13.3 -9.7 -7.6 -8.9 Goods and Services -16.5 -17.1 -13.2 -10.8 -12.2 Exports of goods and services 17.5 18.2 19.7 21.9 21.9 o/w Minerals 2.1 1.1 1.1 1.6 1.3 o/w Coffee and Tea 1.5 1.6 1.5 1.7 1.5 o/w PKO 1.6 1.9 1.8 1.6 1.8 Imports of goods and services 34.0 35.3 32.9 32.7 34.1 o/w Capital goods 7.7 9.0 7.0 6.7 8.3 o/w Intermediary goods 8.5 7.5 6.3 6.7 7.5 o/w Energy products 4.0 3.0 2.8 3.0 3.2 Primary income (net) -2.0 -2.2 -2.1 -3.5 -3.0 Secondary income (net) 6.6 6.0 5.6 6.7 6.3 o/w Remittances receipts 1.4 1.2 1.2 1.9 2.1 o/w Government budgetary grants 4.7 4.2 3.8 4.1 3.0 Capital account balance 4.2 3.6 2.2 2.1 2.6 Financial account balance 8.1 9.4 11.9 6.4 7.4 Direct investment (net) 3.4 4.2 2.9 2.9 3.0 Portfolio investment (net) 0.0 0.0 0.0 0.4 0.1 Loans and other investments (net) 0.0 0.0 0.0 0.0 0.0 o/w Government loans, net 4.7 4.2 4.3 4.2 3.9 Disbursement 4.9 4.5 4.6 4.9 4.8 Repayment 0.3 0.3 0.3 0.7 0.9 Net errors and omissions 3.1 0.9 0.4 -0.8 -0.2 Overall Balance 1.7 0.7 1.8 1.4 0.6 Source: BNR, Annual Reports 2018/19. 8 Rwanda Economic Update • Edition No. 15 Recent Economic Developments Figure 1.8: Depreciation of Rwanda franc against the US dollar, Figure 1.9: Gross international reserves, 2016–19 2014–19, (Percent) 12 1,400 1,319 1,200 1,166 1,171 10 9.4 1,132 1,001 975 1,000 8 800 6 5.6 5.7 5.4 4.4 600 4 3.6 400 2 200 0 0 2014 2015 2016 2017 2018 2019 Dec. 2016 Sept. 2017 Dec. 2017 Sept. 2018 Dec. 2018 Sept. 2019 Year-on-year change Period Average Source: BNR data. Source: BNR data and WB staff calculations. The Rwandan franc continued to depreciate in in FY18/193 (Figure 1.10). This was higher than response to increasing external imbalances, projected in the budget, which targeted a deficit of and there was pressure on the country’s foreign 5.3 percent of GDP. The deficit was also the highest in exchange reserves in the second half of 2019. As of the last 10 years. The primary deficit has widened to November 2019, the franc depreciated by an average 5.2 percent of GDP. The deficit was driven by higher of 4.4 percent, y-o-y, in nominal terms against the US than projected spending while revenue performance dollar, after a 3.6 percent depreciation in 2018 (Figure was strong. Total spending, including net lending, 1.8). As of August 2019 the franc’s real effective expanded nearly 20 percent to reach 30.4 percent of exchange rate depreciated by 2.6 percent, y-o-y. While GDP, Rwanda’s historical highest. Total revenues were still committed to its flexible exchange rate regime, up in nominal terms by 13.4 percent in FY2018/19, BNR increased foreign exchange interventions to reaching 24 percent of GDP, one pp higher than in smooth volatility in the foreign exchange market. the previous FY. Gross international reserves dropped from the high Figure 1.10: Government spending and revenues, 2009–19, of US$1,319 million in December 2018 to US$1,171 (Percent of GPD) million in September 2019. While Rwanda’s foreign 40 -7 -6.3 exchange reserves typically demonstrate seasonality -6 during a given year because of the patterns of 30 -4.9 -4.9 -4.6 -4.6 -5 concessional financing (declining throughout the -3.9 -4 year before replenishments in the last quarter), the 20 -3.3 -3.1 -3 decline in January-September of 2019 was more -2 10 pronounced than in the previous years (Figure 1.9). -1.2 -1 -0.1 0 0 1.2.4. Fiscal expansion under the FY2018/19 budget 0 1 2 3 4 5 6 7 8 9 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 was much wider than projected 09 10 11 12 13 14 15 16 17 18 20 20 20 20 20 20 20 20 20 20 Revenues Expenditures Fiscal De cit (RHA) In accrual terms, the fiscal deficit widened from Source: Ministry of Finance and Economic Planning. Note: The fiscal deficit is on an accrual basis. 4.6 percent of GDP in FY2017/18 to 6.4 percent 3 Rwanda’s fiscal year is July 1 to June 30. Rwanda Economic Update • Edition No. 15 9 Recent Economic Developments Government spending recorded the highest growth a ratio matching the level targeted for FY2021/22 in rate since 2013, with the capital and exceptional the Rwanda Revenue Authority five-year strategic spending categories taking the lead (Figure 1.11). plan.4 The increase in tax revenues was broad-based: Expanding by 26.1 percent, capital spending were the direct taxes up 14.6 percent, taxes on goods and main drivers of the rise in government spending. This services up 12 percent, and taxes on international was mainly driven by large projects, notably the Multi- trade up 13.8 percent. The last was mainly fueled by Purpose Indoor Stadium (Kigali Arena) and District fast growth in imports of goods, especially beyond the Stadiums at Bugesera, Ngoma, and Nyagatare; road EAC region. Non-tax revenues were up an estimated rehabilitation and construction; and construction 20.5 percent and exceeded the revised budget of border markets at Nyaruguru, Rubavu, Karongi, target for FY2018/19, thanks to improved collection Burera, and Rusizi I to facilitate cross-border trade. The of administrative fees and charges. External grants, domestically financed component represented 58.2 however, fell short of expectations (Table 1.3). percent of capital spending. Net lending, of which the majority goes to Rwandair, totaled 2.3 percent of GDP A larger than expected fiscal deficit has been in FY2018/19. In FY2018/19, having to equip and send accompanied by payment delays. That external additional troops and police personnel for peace- funding went up from 4.5 percent of GDP in 2017/18 keeping operations (PKO), the government made to 5.2 percent in 2018/19; domestic financing held some additional front-loaded reimbursable payments at 0.6 percent (Table 1.3). Some invoices of suppliers which affected fiscal accounts in a magnitude of 0.4 and contractors were not paid before the end of the percent of GDP. Over the last five fiscal years, PKO fiscal year, so that payment delays amounting to 0.6 receipts averaged 1.7 percent of GDP (Table 1.2). percent of GDP accumulated. Rwanda has made big strides in improving public financial management Figure 1.11: Drivers of changes in public spending, 2014–19 (Percentage points) in recent years. While accumulation of arrears in 19.4 FY18/19 was driven not only by increased financing 20 requirements for the new investment push but 15 11.9 12.6 also by some transitory factors, such as shortfall 10 10.0 in external grants and spending needs for PKO, it illustrates the risks associated with fiscal expansion 5 2.3 for implementing NST1. 0 Rwanda’s public debt has been rising steadily since -5 FY2014/15 FY 2015/16 FY2016/17 FY2017/18 FY2018/19 Wages and salaries Purchases of goods and services Interest payments 2013; as of December 2018, it (including public Transfers Exceptional expenditure Capital expenditure Net lending Total expenditures (growth) sector guarantees) amounted to 53.1 percent of Source: Ministry of Finance and Economic Planning. GDP (Figure 1.14). It is estimated that the public debt reached at least 58.5 percent of GDP as of the Tax revenues exceeded their revised official target. end of 2019. More than 80 percent of Rwanda’s debt Total revenues were at Rwf 1,670.2 billion, up by 13.2 is external public and publicly guaranteed debt, percent from the previous FY and well above the including commercial loans and Eurobonds. Rwanda growth in the nominal GDP. Tax revenues were 1.6 has also provided guarantees for state-owned percent more than the revised budget specified. As a enterprises in strategic sectors that amounted to result, the tax/GDP ratio rose from 15.9 to 16.5 percent, about 5 percent of GDP as of end 2018. 4 Rwanda Revenue Authority (2019). 10 Rwanda Economic Update • Edition No. 15 Recent Economic Developments Table 1.3: Rwanda’s public finances, 2015/16 to 2019/20 2018/19 2016/17 2017/18 Revised Actuals 2019/20 %GDP %GDP budget Rwf Proj. %GDP billion Rwf billion %GDP Revenue and grants 22.7 23.0 2,061.2 2,065.0 24.0 23.3 Total revenue 18.0 18.5 1,635.8 1,670.2 19.4 19.1 Tax revenue 15.5 15.9 1,396.9 1,418.8 16.5 16.1 Direct taxes 6.6 6.8 602.6 617.1 7.2 7.2 Taxes on goods and services 7.6 7.8 684.9 690.0 8.0 8.0 Taxes on international trade 1.3 1.2 109.4 111.7 1.3 1.3 Non–tax revenue 2.5 2.6 238.9 251.4 2.9 2.6 Total Grants 4.6 4.5 425.4 394.8 4.6 4.2 Budgetary grants 2.6 2.4 192.3 161.7 1.9 1.5 Capital grants 2.0 2.1 233.1 233.1 2.7 2.7 Total expenditure and net lending 27.3 27.7 2,518.8 2,611.5 30.4 30.4 Current expenditure 15.0 14.9 1,301.2 1,343.5 15.6 15.0 Wages and salaries 4.2 4.1 367.5 366.2 4.3 4.4 Purchases of goods and services 2.7 2.7 230.9 229.9 2.7 2.4 Interest payments 1.0 1.2 103.0 102.5 1.2 1.6 Domestic Int (paid) 0.5 0.6 55.4 54.6 0.6 1.0 External Int (paid) 0.5 0.5 47.6 47.9 0.6 0.6 Transfers 4.9 4.6 398.7 407.2 4.7 4.2 Exceptional social expenditure 2.2 2.3 201.1 237.7 2.8 2.2 Capital expenditure 10.7 10.8 1,027.6 1,071.7 12.5 12.0 Domestic 5.9 5.9 625.3 623.7 7.3 7.3 Foreign 4.8 4.9 402.3 448.0 5.2 4.7 Net lending 1.6 2.0 190.0 196.3 2.3 3.4 Overall deficit (Accrual basis) Including grants -4.6 -4.6 -457.6 -546.5 -6.4 -7.1 Excluding grants -9.2 -9.2 -883.0 -941.3 -11.0 -11.3 Change in arrears (net reduction–) -0.3 -0.3 -27.3 55.2 0.6 -0.6 Overall deficit (Cash basis) Including grants -4.9 -5.0 -484.9 -491.3 -5.7 -7.7 Excluding grants -9.5 -9.5 -910.3 -888.1 -9.8 -11.9 Financing 4.9 5.0 484.9 491.3 5.7 7.7 Foreign financing (net) 4.5 4.5 435.7 448.3 5.2 5.9 Domestic financing 0.3 0.5 49.2 43.0 0.6 1.8 Source: Ministry of Finance and Economic Planning & NISR. Rwanda Economic Update • Edition No. 15 11 Recent Economic Developments Box 1.1: Drivers of Rwanda’s public and publicly guaranteed debt and fiscal space High primary deficits have been fueling debt, as have real exchange rate depreciation and government guarantees (Figure 1.12). As debt accumulates, interest payments have also been going up, having now reached 1.2 percent of GDP. Although domestic debt is a small fraction of the total stock, it accounts for 54 percent of the interest burden because the interest rates are higher. Rwanda’s fiscal space has narrowed. Fiscal space is “room in a government’s budget that allows it to provide resources for the desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy.”5 Operationally, fiscal space indicates the number of tax years it would take to repay outstanding public debt, which is computed as the ratio of public debt to the tax base.6 For Rwanda, the number of tax years has gradually risen from 1.7 in 2012, the lowest recent level, to 3.4 in 2018 (Figure 1.13), signaling that the fiscal space is narrowing. Figure 1.12: Decomposition of public debt accumulation, Figure 1.13: Tax years needed to repay public debt, 2006–18 2009–18 (Percent of GDP) (Percent) 12 4 10 8 6 4 3 2 0 -2 2 -4 -6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Primary de cit Real interest rates Real GDP growth Real exchange rate depreciation Other identi ed debt-creating ows Residual, including asset changes 1 Change in public sector debt 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: MINECOFIN and DSA data. Source: MINECOFIN, IMF, and World Bank Group. Note: Government guarantees are reflected in “residual, including asset changes.” Data included public and publicly guaranteed debt. Figure 1.14: Decomposition of Rwanda’s public debt, 2003–18, (Percent of GDP) 120 98.4 HIPC 100 Eurobond issuance 91.0 80 66.8 60 53.1 48.9 44.2 40 35.5 28.6 30.4 23.9 23.7 21.4 21.5 20.1 19.6 20.4 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Domestic debt External debt Public & Publicly Guaranteed Debt Source: MINECOFIN. Note: HIPC = Highly Indebted Poor Countries Initiative. 5 Heller, P. S. 2005. “Understanding Fiscal Space.” IMF Policy Discussion Paper PDP/05/4, International Monetary Fund, Washington, DC. 6 Aizenman, J., and Y. Jinjarak. 2010. “De Facto Fiscal Space and Fiscal Stimulus: Definition and Assessment.” NBER Working Paper No.16539, National Bureau of Economic Research, Cambridge, MA. 12 Rwanda Economic Update • Edition No. 15 Recent Economic Developments 1.3. Rwanda’s Economic Outlook and Risks current public investment push will continue in the 1.3.1. Medium-term growth prospects are robust but medium term, though at a lower scale—in 2019 fiscal risks have intensified many projects were frontloaded. While medium- T his edition forecasts very strong economic growth for Rwanda for 2019 - 2021. In an upward revision from the last edition’s projection of term growth is expected to replicate the patterns in the first year of the NST1, public sector investment alone would not be able to sustain 8 percent annual 7.8 percent, in 2019, economic growth is projected growth through 2021. The high growth scenario of to duplicate the 2018 level of about 8.5 percent. this REU assumes that the private sector will provide However, the impetus is mainly the larger than much more investment in response to reforms expected fiscal expansion (Table 1.4). For the underway to build up the private sector (Box 1.2). medium-term, growth should remain strong as the Table 1.4: GDP growth, 2016–21f (Percent) 2016 2017 2018 2019e 2020f 2021f Real GDP growth, at constant market prices 6.0 6.1 8.6 8.5 8.0 8.0 Inflation (consumer price index, annual average) 5.7 4.8 2.4 4.7 5.0 5.0 Current account balance (% of GDP) –16.0 –6.8 -7.8 -10.5 -9.7 -8.9 Overall fiscal deficit (% of GDP, calendar year basis) -3.3 -4.6 -4.7 -8.2 -5.9 -6.3 General Government Debt (% of GDP) 44.2 48.9 53.0 59.2 62.2 64.6 Source: IMF data Box 1.2: Major economic reforms in 2019 Financial sector. The National Bank of Rwanda, BNR, continued to make progress on a wide range of policies to fortify Rwanda’s financial system. Introduced in October 2019 were (1) a directive on loan-to-value limits to prevent the systemic risks associated with economic cycles in property markets; (2) a regulation governing shareholding, acquisition, and amalgamation of banks to ensure that acquisition or ownership does not expose the banking system to undue risks or hinder effective supervision; (3) a regulation on major investment and placements by banks to minimize risks related to excessive investment in real estate and equities—the two assets whose value is most affected by changes in market sentiments; (4) creation of the Insurance Sector Anti-fraud and Related Crimes forum; and (5) enhancement of the regulation on bank internal controls and audits. These reforms respond to the main recommendations of the Joint Government/World Bank Group report on Future Drivers of Growth, “Preserve and Strengthen the Stability and Performance of the Financial Sector.” Mining sector. The government has recently issued a series of regulations to maximize mining sector gains. The Prime Minister’s Order determining the structure and functioning of the committee charged with assessing applications for licenses and resolving disputes related to mining and quarry operations is intended to streamline committee activities and attract investments. Other regulations introduced by the Rwanda Mines, Petroleum and Gas Board (RMB) cover (1) provision of services relating to mining and quarry operations; (2) the content of mineral processing and trading licenses and modalities for granting them; (3) the format and content of mineral licenses and the content of agreements with holders of a mining or industrial quarry license; (4) determination of potential mining areas, criteria for categorizing mines, and modalities and requirements for mineral license applications and tenders; (5) the volume of mineral ore samples; and (6) categories of quarries, requirements for acquisition of quarry licenses, and reporting. Domestic resource mobilization. The government has amended the requirements for exempting an industry from the value-added tax on machinery, capital goods, and raw materials. Rwanda Economic Update • Edition No. 15 13 Recent Economic Developments The medium-term outlook assumes that debt will With the return of inflation to the “normal” accumulate faster than REU14 projected. This issue range and current pressures on the exchange projects that in 2020 public and publicly guaranteed rate and reserves, the space for monetary policy debt will transcend 60 percent of GDP and continue has narrowed. Rwanda’s flexible exchange rate on up in 2021. This is higher than projected in REU14 regime will help it absorb external shocks and and is driven by the large fiscal expansion of 2019. keep its economy competitive. The current IMF Reliance on concessional financing will help keep Policy Coordination Instrument is supporting BNR’s Rwanda’s debt sustainable even as it goes up. The forward-looking monetary policy operations, e.g., Government will not use BNR financing directly or through building up the financial markets and indirectly to cover its financing requirements, which widening access within the economy to financial reduces the risk to macroeconomic stability arising resources. from the fiscal expansion. Despite its clear strengths in macroeconomic and debt management, Rwanda 1.3.2. Risks to the Outlook is now confronted by the difficulty of financing Both domestic and external risks to Rwanda’s its ambitious public investment objectives, which economic outlook have worsened somewhat. highlights the limits of the public-sector-led model The main risk to the economy is the growing to deliver sustained growth over the long-term. reliance demonstrated in 2019 on growth in public investments and fiscal stimulus. In the medium term, Growth in industry will continue to be strong, the scaling-up of public-sector-led investments is boosted by large-scale infrastructure projects. both an opportunity and a challenge. While fiscal The Budget Framework Paper for 2019/20–2021/22 expansion is necessary to achieve the government’s outlined the scope of public investments (e.g., roads, targets for expanding access to infrastructure, it airport, industrial parks in secondary cities). The can raise the debt, widen external imbalances, demand for construction materials is expected to crowd out access of the private sector to finance, boost growth in manufacturing subsectors that feed and undermine long-term growth. Sustaining high into construction. Growth in services is projected growth has required a larger than expected increase to remain stable at about 8 percent in the medium in the public debt, and long-term productivity gains term. Agriculture is projected to growth by 5 percent, from the scaling up of investments may be less than tracking the 2015–18 average of 5.4 percent. expected. If the trend continues, Rwanda may have difficulties in financing its growth in the medium term. In the medium term, the CAD will remain elevated. Rwanda’s commitment to concessional borrowing Because of expected higher imports for large-scale and monetary stability significantly reduces the investments, in 2019–21 the CAD is projected to risks to macroeconomic stability, but reliance on again hit 9–10 percent of GDP. Both nontraditional the public sector for achieving the growth targets of and traditional exports are projected to strengthen NST1 raises the fiscal risks. over the medium term, but they will be offset by strong domestic demand for capital and intermediate Despite continuing efforts, the ineffectiveness of goods. Higher productivity in coffee production, the private sector is still a major risk to Rwanda’s construction of new tea factories, new investments growth outlook. As the fiscal expansion for carrying in horticulture, and a revamped mining sector should out NST1 gradually subsides, it will become difficult further support Rwanda’s exports. to sustain high growth through 2020 and 2021 14 Rwanda Economic Update • Edition No. 15 Recent Economic Developments without more private investment. Rwanda’s growth eastern part of the country floods; pose major risk ambitions for the medium to long term thus depend in the northern and western parts. Investing in rural on the ability of the private sector to take the lead. infrastructure to help make Rwanda’s agriculture The government has tried to prioritize public more resilient must be given a high priority. investments that can crowd-in private investments, but more effort is required to improve allocation of The main external risks are a more severe economic resources through the markets and thus slowdown in global economic growth than is achieve sustainable and productivity-led long- currently projected and persistence in regional term growth. tensions. A weaker than expected global economy will depress prices for the commodities Rwanda There are also weather-related risks, such as the exports. The heightened probability of global droughts and floods that can depress agricultural turmoil has also exacerbated the risks of capital production. The baseline projections assume that outflows from EMDEs in search of safer havens. normal rain patterns will continue over the medium Rwanda’s economic prospects may also be affected if term, which should sustain growth in agricultural regional tensions persist or intensify. Impediments to production that is largely in line with the average regional integration are major obstacles for Rwanda’s of the past decade. Nevertheless, Rwanda is quite sustained development because greater integration vulnerable to climatic shocks, such as drought into regional markets is crucial to propel the needed and erratic rainfall. Droughts most threaten the structural transformation and growth. Rwanda Economic Update • Edition No. 15 15 PART TWO ACCELERATING ECONOMIC GROWTH THROUGH DIGITAL TRANSFORMATION Rwanda Economic Update • Edition No. 15 17 Accelerating Economic Growth Through Digital Transformation W ith rapid digital transformation now re- shaping our global economy, permeating virtually every sector and aspect of daily life, chart an ambitious course for achieving rapid digital transformation.11 This includes investing heavily in the roll-out of digital infrastructure, piloting investment in the foundational building blocks innovative schemes and partnership with non-profit that underpin digital economy growth will and for-profit organizations to boost the nation’s help determine a country’s ability to succeed digital skills base, expanding its public digital service in the global market place, harness emerging capability and creating an enabling environment for opportunities and ultimately offer its citizens a digital service and business innovation. Rwanda’s better quality of life. Disruptive technologies are ICT sector has been growing rapidly over the last already altering traditional business models and five years, witnessing a 12.7 percent value-added pathways to development, yielding significant increase in 2014-2018.12 The World Economic Forum’s efficiency and productivity gains, increased Networked Readiness Index subsequently rated convenience, as well as better access to services. Rwanda first among East African nations in terms of Globally, growth of the digital economy is quickly its readiness to exploit the opportunities offered by outpacing the growth of the overall economy. Well- ICT to boost growth and competitiveness.13 functioning digital economies are thus expected to achieve much faster economic growth, offer more However, there is room to do more in terms of innovative services, as well as create more jobs. capitalizing on progress and investments made so There is a mounting body of evidence that illustrates far. For Rwanda to leverage digital transformation as the capacity of digital technology adoption to a driver of growth, job creation and greater service significantly boost productivity and support poverty delivery, digital adoption needs to markedly improve. reduction.7 Access to broadband and digital financial Rwanda will need to tackle the affordability of digital services have, for example, been associated with devices and services, but also bridge the lingering significant GDP and per capita income growth, with basic digital skills gap, to increase uptake of digital access to innovative digital services such as mobile tools and services among both individual users and money helping to pull thousands out of poverty.8 businesses, creating a virtuous cycle of demand that can help propel further expansion and application of Despite its small size, Rwanda has distinguished digital products and services. However, a lingering itself as a country that has “bet big“9 on digital skills gaps emerges a key cross-cutting digitization, as means to accelerate growth and barrier to increasing digital adoption and expanding reduce poverty.10 Rwanda has already begun to digital innovation. For Rwanda’s digital evolution to 7 See, for example: Jorgenson, Dale, W., Mun S. Ho, and Kevin J. Stiroh. 2008. “A Retrospective Look at the U.S. Productivity Growth Resurgence.” Journal of Economic Perspectives, 22 (1): 3-24. DOI: 10.1257/jep.22.1.3; Lions Go Digital: The Internet’s Transformative Potential in Africa, November 2013; Qiang, Christine Zhen-Wei, George R. Clarke, and Naomi Halewood. 2006. “The Role of ICT in Doing Business.” In Information and Communications for Development. Washington D.C.: World Bank. 8 In 2016, research was conducted in neighboring Kenya on the long-term impact of M-PESA on Kenyan households, which found that increased access to M-PESA agents significantly reduced both extreme poverty (income lower than US$1.25 per day) and general poverty (US$2). M-PESA availability was correlated with proximity of agents. Access to DFS was directly associated with lifting 194,000 Kenyan households, or 2 percent, out of extreme poverty. 9 Sizable public investments have inter alia been made in the national backbone (US$40 million), roll-out of e-government infrastructure and services, as well as new digital skills schemes. Commitment to ‘digital’ is also evident in the many high-level strategies produces and leadership demonstrated on the pan-African level. 10 Kigali is, for example, home to the Smart Africa Secretariat, which hosts the annual Transform Africa Summit – an initiative that seeks to accelerate Africa’s development by increasing access to broadband and usage of information and communications technology (ICT) along with efforts to create a single digital market across the continent to enable free flow of digital communications, services and e-commerce. See: https://smartafrica.org/ 11 Beginning as early as 2000, the National Information Communications Infrastructure (NICI) policy sought to facilitate increased digitization, through a series of five-year plans. 12 National Institute of Statistics of Rwanda. 2019. “Gross Domestic Product – 2018”. http://statistics.gov.rw/publication/gdp-national-accounts-2018 13 WEF. 2016. Networked Readiness Index. 18 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation become truly transformational, the private sector harness the power of the digital economy to propel also needs to play a far greater role in spearheading economic growth. digitization, alongside the ambitious initiatives launched by government, through both increased 2.1. A Snapshot of Rwanda’s Digital technology adoption and support for innovation Development Journey that can enhance productivity, spawn new services A Government deeply committed to ‘digital’! and create new off-farm jobs. However, for the private sector’s contribution to the digital economy R wanda’s digital development journey to date has been spearheaded by a government deeply committed to leveraging ICT as a cross-cutting to increase and for areas like e-commerce to thrive key enablers need to be in place, including greater enabler of economic growth, innovation and adoption of broadband, digital payments and access service delivery. This commitment is reflected in to a larger market of digitally savvy consumers that the sheer number of related strategies and policy allow digitally enabled new companies to quickly plans that the Government has adopted over the scale. Given its small market size, Rwanda will need to years, as well as sizable investments and ambitious be at the forefront of efforts to create a larger, more initiatives launched that have sought to create an integrated regional digital market to help decrease enabling environment for ICT adoption, expand the costs for digital services for consumers and create digital infrastructure, digital platforms and services, room for digitally-enabled firms to quickly scale. promote further digital skills development, foster a Finally, as digital adoption increases, Rwanda will national culture of innovation and position Rwanda also need to do more to secure online transactions as a regional digital hub.14 In addition to articulating and protect users to create a virtuous cycle of further an ambitious strategic agenda pertaining to digital adoption, through balanced data protection digital development, Rwanda has also created an provisions and stronger cybersecurity capabilities. enabling public institutional framework that is often emulated as best practice, which inter alia includes This special focus synthesizes the key findings the line ministry charged with policy and strategy and recommendations of the ‘Rwanda Digital and a dedicated implementation and coordination Economy Assessment’, carried out by a multi- agency (Figure 2.1). disciplinary team of World Bank experts in early Figure 2.1: Institutional framework for digital development 2019. The assessment was based on primary research, key informant interviews, as well as RISA consultations with stakeholders across government, Implementer RISA Regulator and Co-ordinator the private sector and civil society, using an integrated research methodology that examines MINICT the five foundational building blocks that underpin Policy Maker and Leadership Rwanda’s digital economy ecosystem, namely: (i) Digital Infrastructure; (ii) Digital Skills; (iii) Digital Platforms; (iv) Digital Financial Services; and (v) Digital Development PSF-ICT Chamber Partners Entrepreneurship. The sections that follow provide (Private Sector) a brief snapshot of Rwanda’s digital development Note: The Ministry of Information and Communications Technology and Innovation journey so far, but also details key areas where Rwanda (MINICT); the Rwanda Utilities Regulatory Authority (RURA); the Rwanda Information Society Authority (RISA); Private Sector Federation (PSF)–ICT Chamber. should focus its efforts moving forward, if it wants to Source: National ICT Hub Strategy. 2018. 14 Notable examples include the National Information Communications Infrastructure (NICI) Policy, 2020 SMART Rwanda Master Plan, the 2019-2024 ICT Hub Strategy and 2018-2024 ICT Sector Strategic Plan, National Broadband Policy. Rwanda Economic Update • Edition No. 15 19 Accelerating Economic Growth Through Digital Transformation 2.1.1. Digital infrastructure mile access to broadband for a majority of Rwanda’s access to international bandwidth has existing users. 3G network coverage is now at grown ten-fold over the last five years, on the 93.5 percent, compared with a regional average of back of new cross-border terrestrial links that 76 percent. Moreover, Rwanda has also achieved allow Rwanda to access undersea cables landing impressive 4G network coverage, by leveraging in neighboring Kenya and Tanzania (Figure 2.2). a public-private partnership (PPP) between the Meanwhile, the roll-out and expansion of a national Government of Rwanda and Korean Telecom to fiber optic backbone network, leveraging sizable support the launch of a 4G wholesale network - government investment, has helped distribute said resulting in the establishment Korean Telecom connectivity across Rwanda, bringing a growing part Rwanda Networks (KTRN) Today, Rwanda’s 4G of the population within closer proximity to high- coverage officially stands at 96.6 percent – an speed internet (Figure 2.3). unprecedented level of coverage for a country with Rwanda’s level of socio-economic development Rwanda has set the bar regionally in terms of (Figure 2.4). mobile network coverage, which provides last- Figure 2.2: Access to international bandwidth - capacity and speed Rwanda, International Bandwidth (Mbps) International bandwidth (bits per person), 2018 60,000 54,874 Kenya 50,000 40,000 Rwanda 30,000 25,370 20,000 Uganda 10,362 10,000 5,737 6,332 4,997 Burundi - 2013 2014 2015 2016 2017 2018 - 5,000 10,000 15,000 20,000 25,000 Source: RURA and regional regulators. 2019. Figure 2.3: Length of national transmission network and population within reach Transmission network length (Route kilometres) Population within reach of transmission networks (%) 7,000 100 2 90 6,000 21 16 80 47 5,000 70 60 4,000 40 45 50 40 25 3,000 30 2,000 50 20 15 33 32 1,000 10 14 0 0 Rwanda Tanzania Uganda Kenya 2013 2014 2015 2016 2017 2018 10-KM 25-KM 50-KM Source: ITU. 2019. 20 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation Figure 2.4: Mobile broadband coverage Rwanda, mobile coverage (% of population) Mobile broadband coverage (% of population) 100 99.9 97 98 100 96.6 100 93.4 86 80 80 35 60 68 60 90 46 97 40 40 13 20 20 0 0 2014 2015 2016 2017 2018 Tanzania Kenya Rwanda Lesotho South Africa 2G 3G 4G 3G 4G Total Note: Data for Rwanda and South Africa refers to December 2018 and to March 2018 for Kenya, Lesotho and Tanzania. Source: RURA, Safaricom and Vodacom. 2019. While Rwanda’s expansion of digital infrastructure percent of current Rwandan mobile subscribers has been impressive, big gaps in the uptake of therefore continuing to rely predominately on 2G high-speed internet services remain. Official services that have limited practical application or figures put internet penetration at 58.3 percent15, use beyond voice and SMS based services (Figure yet actual use is estimated to be lower, based on the 2.6). Government is committed to addressing the number of active subscribers reported by mobile issue, through ongoing discussions with mobile network operators (MNOs).16 A mix of barriers operators and manufacturers, including through the related to digital literacy (discussed further below), launch of new schemes.18 To date, efforts to boost affordability, services quality and perceived relevance local manufacturing, including the recent launch of and value currently appear to be hampering uptake the Mara Group’s local smartphone production and of broadband, and along with it access to other digital assembly, is yet to target or bring down the cost of services that require users to first be connected.17 smart phones for those at the base of the pyramid.19 Affordability of broadband services is also a key Notably, the affordability of devices and factor that adversely affects internet consumption. broadband remains a key barrier. The present While Rwanda has some of the lowest absolute cost of handsets prevents some 37 percent prices in the region, broadband services remain of households from owning a phone, which expensive relative to average incomes and below typically also stops them from accessing mobile global affordability target.20 The average monthly and broadband services altogether (Figure 2.5). price of 1GB of data was US$0.56 in 2018, equivalent Moreover, weak access to smart phones and 4G to 5.1 percent of the median monthly income21,22 compatible devices restricts access to basic 2G and more than double the Alliance for Affordable or slower 3G internet services, with some 74.3 Internet (A4AI) target of 2 percent. (Figure 2.6) 15 RURA. 2019 See: https://rura.rw/fileadmin/Documents/ICT/statistics/ICT_Statistics_report_as_of_September__2019.pdf 16 For example, MTN reported that at the end of 2018, just 27 percent of its subscriptions were active. 17 For example, focus group discussions carried out in 2017 among non-Internet users across Rwanda cited illiteracy and language skills, affordability, and a limited awareness of the related benefits to be the three main constraints, according to RIA. The latter was a particular issue in rural areas. 18 For example, the MINICT recently began collaborating with MTN on the ‘#connect Rwanda Challenge’, which has sought to supply the unconnected with smart phones. See: https://www.ktpress.rw/2020/01/connect-rwanda-challenge-rdb-hands-over-smartphones-to-park-rangers/ 19 See: https://www.weforum.org/agenda/2019/10/rwanda-launches-first-made-in-africa-smartphones/ Phones on offer range from between $130- 190USD. 20 See: Alliance for Affordable Internet (AFAI). 2018. “UN Broadband Commission Adopts A4AI ‘1 for 2’ Affordability Target.” News, January 23, 2018. https://a4ai.org/un-broadband-commission-adopts-a4ai-1-for-2-affordability-target/ 21 Cable, 2018. 22 4G remains more expensive than 3G, despite the fact that the wholesale price for 4G has been falling and appears to be in line with, or lower than, the retail price for 3G. Rwanda Economic Update • Edition No. 15 21 Accelerating Economic Growth Through Digital Transformation Figure 2.5: Households possessing mobile phone, Rwanda and East Africa Households possessing a mobile telephone (%) Households possessing a mobile telephone (%, latest avaiable data) 100 88 100 86 90 82 80 82 72 80 74 60 63 60 56 63 60 54 56 42 40 51 47 40 40 35 20 13 20 0 8 2008 2010 2013 2015 2017 0 Total Urban Rural Burundi Rwanda Uganda Tanzania Kenya Note: In the right chart, data for Rwanda, Burundi and Tanzania refer to 2017, data for Uganda to 2016 and for Kenya to 2015. Source: Recent Integrated Household Living Conditions Surveys. Despite Government’s large investment in 4G resulted in lower than expected 4G penetration and impressive coverage, the network remains (Figure 2.6). The Government is actively looking to underutilized. The two main MNOs appear to have address these bottlenecks as part of its wider efforts taken the business decision to invest in upgrading to ensure a conducive environment for broadband their own 3G networks and promoting their market development. proprietary 3G services, over promoting re-sale of 4G services utilizing the KTRN wholesale network. 2.1.2. Digital skills The MNOs are prevented from further upgrading Government has sought to embed digital skills their own networks to offer 4G services due to the training in the national education system. Basic KTRN 4G license exclusivity. 4G service offerings digital skills are now included in the national and active promotions are therefore mostly competency-based curriculum (CBC) at both coming from smaller internet service providers primary and secondary school level, which spans (ISPs) utilizing the KTRN network. While these ISPs from “befriending” the computer and learning are growing quickly, they still cover only a small basic usage in lower primary school, all the way consumer base. These factors, combined with still to teaching optional and specialized classes in limited affordability of 4G capable devices have programming and database management at upper Figure 2.6: Mobile Internet subscriptions by technology, 2019 and affordability of 1GB of data, 2017 Mobile Internet subscriptions by technology, September 2019 1 GB moble data per month (% of median monthly income), 2017 4G 2.1% 5th Quintile 2.6% 3G 4th Quintile 5.0% 25.9% 3rd Quintile 7.7% 2nd Quintile 8.5% 2G 72.0% 1st Quintile 11.0% Rwanda 5.1% 0.0% 5.0% 10.0% 15.0% Source: RURA. 2019.23 Source: NISR 2018 and MTN 2019. 23 The total number of mobile internet subscriptions in September 2019 where 7,038,123, of which 147,054 where on 4G and 1,820,292 on 3G. 22 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation secondary level. Moreover, schemes such as One enrollment at secondary level30, particularly in Laptop per Child (OLPC)24, launched in 2008, and STEM-related subjects31, also affect digital skills the more recent SMART Classrooms25 initiative have attainment, including the pipeline of graduates sought to boost access to devices.26 In 2017, some that can proceed to access more advanced digital 44 percent of primary schools, and 60.2 percent of skills training. secondary schools thus reportedly had access to ICT for teaching and learning.27 As it stands, Rwanda is not producing the number of digital specialists needed, nor of the requisite However, a lingering basic digital skills gap emerges caliber, to propel the kind of cross-sectoral digital as a key cross-cutting barrier to increasing digital transformation that Rwanda aspires to achieve.32 adoption and expanding digital innovation. While ICT courses are offered by most types of TVET Government estimates that computer literacy is a institutions, few are considered to be at digital mere 8.4 percent28, which hampers usage of even specialist level. Moreover, few TVET students choose the most basic digital devices and applications, but to study advanced-level ICT course and even less also dampens demand for more advanced tools and graduate.33 Meanwhile, courses available through services. Government has thus launched a plethora public and private universities focus primarily on of initiatives aimed at tackling this issue head-on computer maintenance, software development, (more on this below). However, gaps in access to programming, information management and key enablers in schools, including connectivity, networking. Available training thus restricts the digital devices, reliable electricity, digital content breadth and depth of digital skill available locally. and adequate teacher capacity, continue to While a handful of universities do offer courses in adversely affect both the integration of ICT in the cutting-edge technology, few students can afford to classroom and delivery of digital skills training. For access this training. Some 2,544 students were thus example, a mere 25.1 percent of primary schools estimated to be graduating with a degree in ICT in and 41.3 percent of secondary schools reportedly 2016. However, these graduates typically lack hands- had access to the internet in 201729, which meant on experience, due to limited opportunities for that ICT was predominately being taught in an practical training, as well as misalignment between offline environment, or in theory, with limited skills taught and those demanded by prospective practical application. More broadly, issues related employers. An ‘inadequately educated workforce’ to the current quality of education and weaker thus emerges as one of the barriers to doing business 24 The scheme has sought to provide primary school students with XO computers, targeting a minimum of 5 schools per district. 25 This scheme has sought to provide secondary schools with two computer laboratories (labs), each equipped with 50 computers. According to MINEDUC, about 52 percent of public and government-aided secondary schools now each have two computer labs. 26 Ministry of Education. 2016. ICT in Education Policy. 27 Ministry of Education 2017. Rwanda Education Statistics 2017. 28 Referenced in the Digital Talent Policy and 2018-2024 ICT Sectors Strategy. 29 Ministry of Education. 2017. 30 While both primary and lower secondary school is mandatory, upper secondary school is not. While enrollment is near universal at primary level, it markedly drops at secondary school level. In 2017, a mere 38.13 percent of the school age population was enrolled at secondary level, based on 2017 UNESCO figures. 31 Some 119,092 upper secondary students were enrolled in science, technology, engineering, and mathematics (STEM) subject in 2017, according to the Ministry of Education. However, figures for computer science majors are not readily available. See also Ministry of Education and AIMS. 2018. 32 Ministry of Information Technology and Communications and Innovation. 2017. National Digital Talent Policy. 33 Based on 2017 enrollment figures for TVET, on average, only 11 percent of all TVET students were studying ICT – which would be equivalent to 9,901 students. Yet, according to the Ministry of Education, only 327 students were graduating with a certificate, diploma or advanced degree in ICT from polytechnics in 2016 – equivalent to 16 percent of the total graduating cohort. Rwanda Economic Update • Edition No. 15 23 Accelerating Economic Growth Through Digital Transformation Figure 2.7: Digital skills benchmarking Digital skills in Sub-Saharan African Countries Social Media Graphic Design Digital Literacy Relative penetration scaled by row for Web Development Decrease in prevalence of skill in SSA countries comparison across Development Tools countries Data Storage Technologies Data Science Computer Networking Technical Support Software Development Life Cycle (SDLC) Cyber-Security Computer Hardware Note: Gray box Mobile Application Development denotes skill Human Computer Interaction penetration = 0 Scienti c Computing Animation Enterprise Software Arti cial Intelligence Software Testing Cloud Computing Game Development %) ) da ) Ke % ) Ug (5%) ) Za 2%) iop ) ) ) c o (1%) Rw (1%) %) Gh %) bw ) d R ’Ivoi ) mb 4%) a F %) ) bia ) %) %) Ma ) ga %) %) ) ) (4% % (4% Eth (14% (1% tsw (1% % (3% (2% % 1% 7% (2% 17 l (5 (4 r (1 6 Zim a (7 1 Na e (2 Ma la (2 24 3 (12 (1 a( 1 Bu t he ( o( ( n( ia ( ria e re ia n wi li da da a( Ma nin s( ga go sca ca of on ny an iqu mb as bo go Re Mala itiu ge an an an ne To fri Be lic Su ro f ba Ga An mi Ni hA Se ur ub me D kin da bli za Un ote Bo ut ep Ca pu Mo So C ite ic rat oc ia, an em nz eD Ta th o, ng Co Decrease in overall Digital Skill adoption (Country [LI % of working age pop_]) Source: World Bank. 2019. Future of Work in Africa. Note: WB staff calculation using LinkedIn data. Note that Rwanda only has a small population of LinkedIn users, which skews the sample. Data is notably also based on self- reporting. However, digital skills can be considered a pre-requisite for using LinkedIn, which make related data indicative of current digital skill acquisition levels. Here Rwanda emerges near the bottom of the ranking, with an estimated 2 percent overall digital skills penetration among the working age population, and clear gaps in more advanced digital skills competencies save for mobile application development. in Rwanda34, identifying by some 28 percent of Government has also partnered with for-profit employers.35 Rwanda is thus outperformed by many training provider such as Andela37 to offer rapid other African nations in relation to overall digital advanced digital skills training in coding, and sought skills acquisition in the workforce (Figure 2.7). to attract world-renowned academic institutions such as Carnegie Mellon University, which established To address this, Government has sought to its Africa campus in Rwanda in 2011. In early 2019, spearhead a series of innovative partnerships to the Government launched the Rwanda Coding expand access to basic and advanced digital skills Academy, targeting TVET institutions.38 Meanwhile, training – both within and outside the formal donor funding has helped launch a series of other education system. In 2017, it launched the flagship smaller schemes such as WeCode39. While the private Digital Ambassadors Program (DAP), in partnership sector has also contributed to informal basic digital with the World Economic Forum (WEF) and the skills training40, there is scope to do more in terms Digital Opportunities Trust, which aims to deliver of crowding in the private sector, but also to expand basic digital skills training to some 5 million people.36 existing schemes such as the DAP41. 34 World Bank. 2018. Doing Business Survey. 35 World Economic Forum. 2018. The Future of Jobs and skills in Africa. 36 The program aims to train 5,000 young Rwandans to serve as ‘digital ambassadors’, equipping them to deliver basic digital skills training in rural communities. Ministry of ICT & Innovation. 2018. How Digital Ambassadors Program (DAP) Is Increasing Citizens’ Digital Literacy. 37 See: https://andela.com/; KT Press. 2019. Andela Kigali – Build Software Engineering Talents To Suit Particular Local Needs. 38 The Initiative was launched in Nyabihu District, targeting the TVET institute in the district and top-performing lower secondary school leavers in STEM. The Academy seeks to boost the number of digital specialists in areas where there is perceived to be weak supply – e.g. cyber security and software development. 39 WeCode has sought to close the gender gap in the IT sector, by offers an 11-week programming bootcamp to young women and girls. The scheme is funded by the German Government. See: http://www.wecode.rw/ 40 One such example is Tigo, which launched the Mobile Internet Skills Training Toolkit (MISTT) with GSMA in June 2017. Over the course of three months the project trained 80,000 customers, through their network of sales agents and using freelancers, across 11 of Rwanda’s 30 districts. 41 As of June 2019, some 41,307 beneficiaries had been targeted by the scheme, trained by some 115 ambassadors. 24 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation 2.1.3. Digital Platforms Rwanda thus emerges as one of Africa’s top ten Rwanda has put in place many of the key building performers in global e-Government rankings.44 blocks needed to support government digitization, Today, the Government’s Irembo platform provides which has allowed it to quickly scale its e-service access to a growing array of public Government-to- offering from a very low base.42 Rwanda has person and Government-to-business e-services.45 made marked progress in terms of digitalizing Moreover, several back-end systems are improving public records, expanding the use of management the delivery of key government functions in areas information systems and rolling-out shared such as financial management, public procurement, cloud-based infrastructure, enabling greater data education and health. Rwanda has also introduced exchange between various government entities. a foundational legal and institutional framework The development of Rwanda’s e-government related to cybersecurity,46 and has begun to revise its ecosystem has also benefitted from a robust and framework for data protection. centralized institutional framework, the application of an innovative PPP with Online Rwanda Ltd to roll Nevertheless, uptake of public e-services remains out new digital services, and development of critical rather modest, with most existing users preferring enabling platforms such identification (ID). Rwanda to access Irembo’s services via agents and paying has developed one of the strongest foundational in cash for services rather than using the platform’s ID systems in Africa, which today provided near digital interface and digital payment options.47 A universal (98 percent) ID coverage (Figure 2.8).43 mere 1,500 users were accessing services via Irembo, Figure 2.8: Regional benchmarking: Share of population that is Figure 2.9: The Logistics Performance Index 2018: unregistered Rwanda profile % of people that are unregistered LPI 60 5 53 49 4 50 47 44 Timeliness Customs 3 40 2 30 30 27 24 1 19 20 20 18 Tracking & tracing Infrastructure 10 4 1 0 South Sudan Burundi Uganda Tanzania Rwanda Kenya Logistics competence International shipments Total population Population above cut-o Source: World Bank. 2018. Identification for Development (ID4D) dataset. Source: World Bank. 2018. 42 E-services offered have increased from only five in 2015 to some 89 in 2018. 43 National Identification Agency. 2019. Stakeholder interview. 44 Rwanda ranks among Africa’s top 10 performers, and is outperformed only by small island states, such as Mauritius, Seychelles and Cabo Verde, as well as upper and lower middle-income countries such as South Africa, Tunisia, Ghana and Egypt in the United Nations’ E-Government Development Index (EDGI). 45 Services offered inter alia include online visa/residency permit applications, online land management and ownership administration, and civil registration. 46 A new cyber security law was introduced in 2018, which followed the introduction of a National Computer Security and Incident Response Team (Rw-CSIRT) in 2014, the adoption of a National Cyber Security Policy, and establishment of a National Cyber Security Authority (NCSA) in 2017. 47 Some 54 percent still prefer to access the platform through an agent than via the web or mobile-based interfaces offered and 35 percent prefer to pay in cash. Rwanda Economic Update • Edition No. 15 25 Accelerating Economic Growth Through Digital Transformation on a daily basis, in 2018.48 Issues noted above, related border e-commerce is also growing but relies to weak mobile phone ownership, limited internet mostly on large foreign platforms such as Alibaba usage, and gaps in digital skills, all help explain the and Ali Express.53 relatively low usage figures, and dampen the use of platforms more broadly – particularly among those 2.1.4. Digital Financial Services at the base of the pyramid who could benefit the While usage of digital financial services (DFS) most from access to critical public services. has been growing rapidly over the course of the last five years54, led primarily by the adoption The local e-commerce ecosystem is growing, but of MNO wallets, much of the potential remains from a small base, with Rwanda ranking 19th in untapped. Overall uptake of DFS remains rather low, Africa in the 2018 UNCTAD Business-to-Consumer when compared alongside neighboring Kenya and E-commerce Index.49 Harnessing e-commerce as a Uganda (Figure 2.10). According to Findex, only 31 more significant driver of growth will require tackling percent of adults owned a mobile money account in a number of interrelated challenges. Micro small and 2017. MNO wallets are currently offered by the two medium size enterprises (MSMEs), which dominate main operators, MTN and Airtel55, which are mainly the local commercial landscape, have generally restricted to basic transactions.56 MTN leads the been slow to adopt online business practices. way in terms of spearheading further innovation, Many businesses and consumers remain wary of partnering with the Commercial Bank of Africa to conducting business electronically, and often fail Figure 2.10: Penetration of financial institution accounts versus to see the potential benefits, in terms of facilitating mobile money accounts access to new markets and services. Users are held % of adults over the age of 15 80 back by both economic and knowledge barriers, 73 70 including how to market goods and services 60 56 online.50 Goods-focused e-commerce companies in 51 50 Rwanda also face growth challenges, due to the cost 39 40 37 and reliability of last-mile postage, transportation 31 33 30 and logistics services (Figure 2.9), the absence of 20 21 a national addressing system, the speed and costs 10 7 9 of customs , a culture of face-to-face transactions, 51 0 1 Burundi Kenya Rwanda South Sudan Tanzania Uganda and low transaction volumes. While some ‘native’ Financial institution account Mobile money account e-commerce platforms have emerged, helping to Source: World Bank. 2017. Findex. Note: The latest Findex survey data from Burundi was collected in 2014. Mobile create a nascent online marketplace52, e-commerce money adoption in Burundi is expected to be much higher than figures indicated here as it is known to have grown in recent years. transactions in Rwanda are still minimal. Cross- 48 According to Rwanda Online Ltd. 49 The ranking looks at key enablers for e-commerce and Rwanda’s low ranking is primarily due to limited internet usage, server access, and postage reliability. 50 The New Times. 2018. What is holding back the uptake of e-Commerce in Rwanda?; All Africa. 2018. Rwanda: Why Jumia Rwanda Closed Its E-Commerce Platform. 51 Uwamariya. Rosine. 2018. 52 Insight2Impact. 2019. Africa’s digital platforms database. 53 Export.gov. 2019. Rwanda – Ecommerce 54 National Bank of Rwanda (BNR). 2019. Stakeholder consultation. 55 Who recently bought the third largest MNO, Tigo. 56 Both provide access to as cash in/cash out, person-to-person (P2P) transfers, airtime purchase, bill payments, as well as transfers to and from bank accounts. 26 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation offer mobile savings and short-term loan service – 2.1.5. Digital innovation and entrepreneurship yet, uptake of related services has been limited. There Government plays an active role in supporting is thus ample room to grow MNO wallet adoption, the local innovation and entrepreneurship increase transaction volumes/usage and expand ecosystem, which still remains nascent. This has the existing service offering, which could provide a notably included efforts to build out critical support meaningful way of boosting financial inclusion57, but infrastructure for aspiring digital innovators, resulting also facilitate the expansion of other e-transactions in the introduction of the pre-incubator KLab, its sister- that rely on digital payments such as e-commerce. organization FabLab and the construction of the However, poor consumer awareness and weak Kigali Innovation City complex that seeks to convene merchant acceptance emerge as two critical issues key ecosystems players. While related initiatives that continue to hamper greater usage. have been welcomed by the local tech community, stakeholder consultations revealed that the private Banks are only just starting to enter the digital sector has not yet grown enough to make the payments sector and have been slower to embrace digital entrepreneurship ecosystem independent of digital channels and support innovation. Several government and donor funding. Meanwhile, there banks58 have, however, started offering services in appears to be a limited pipeline of viable start-ups mobile and online banking, and upgraded their that can attract investment. core systems to provide open APIs that enable the development of more innovative products and While Rwanda boasts a handful of successful services. While usage of related services continues digital start-ups, such as Zipline62, existing start- to grow, it is yet to gain scale. For example, in late ups typically face a number of challenges in terms 2016, there were reportedly one million account of scaling their business. Firstly, there is limited holders using mobile banking services, performing support infrastructure for start-ups beyond a certain some 4 million transactions annually. Moreover, growth stage, including incubators and accelerators, although the number of ATMs and card-reading which serve a crucial function in terms of facilitating points of service has grown, a mere 5 percent of access to skills, networks, mentorship, capital, adults reportedly owned a debit card in 2016.59 While technology and digital tools for start-ups. There existing DFS regulation and payments infrastructure, is also weak access to growth-oriented financing including the deployment of an integrated payment for early-stage enterprises. Rwanda lacks many of processing system and pending introduction of a the diverse funding channels available in more national payments switch, have helped level the developed entrepreneurial market, such as venture playing field and boosting interoperability between capital funding, angel investors, and seed stage financial service providers (FSPs)60, a handful of investment. While this appears to be changing63 restrictions specific to banks continue to hinder (Figure 2.11), there is room to build on Rwanda’s banks’ ability to fully participate and compete with favorable reputation for being an easy, safe and other “non-bank” FSPs.61 stable place to do business – encouraging more tech- 57 DFS is considered the most successful means of increasing financial inclusion in emerging markets, as it empowers low-income populations to gain access to formal financial services, without the often costly and time-consuming task of visiting a physical bank branch. 58 Including Bank of Kigali (BK), Equity Bank, Banque Populaire Rwanda (BPR), Ecobank, Cogebanque and Kenya Commercial Bank (KCB). 59 BNR. 2019. 60 Notably, the 2017 Agent Banking Regulation has sought to harmonize the requirements for bank and non-bank agents. For example, both banks and non-banks to become licensed mobile money providers. Moreover, the 2014 Interoperability policy, has helped connect several banks and MNO wallets. 61 These notably include regulation obliging banks to use in-house cloud hosting services and paper-based process for certain types of transactions. 62 Fleming, Sean. 2018. In Rwanda, Drones Are Delivering Blood to Remote Communities. World Economic Forum. 63 For example, Sweden’s Norrsken Foundation — a co-working space and investment fund based in Stockholm — opened up a tech fund and entrepreneurship hub in Rwanda in June 2019 to support ventures across the region. TechCrunch. 2019. Rwanda Economic Update • Edition No. 15 27 Accelerating Economic Growth Through Digital Transformation Figure 2.11: Venture capital raised by African startups and amount of startup funding raised by select African countries Startup investment in Africa Startup funding raised per country (2017, million US$) 600 150 South Africa 167.9 Kenya 147 450 120 Nigeria 114.6 Egypt 36.9 300 90 Rwanda 36.7 Ghana 20.4 Uganda 16 150 60 Senegal 10.7 Morocco 3.9 0 30 2015 2016 2017 Cameroon 2.7 Venture capital raised by African startups No. of funding rounds Source: Partech Ventures. based firm to use Rwanda as their launchpad into need to focus on addressing the following key areas, East Africa.64 Finally, weak local demand for digital building on noteworthy progress made so far: product and services (detailed above), as well as Rwanda’s intrinsic market size offers start-ups limited 2.2.1. Expand interventions that boost demand for digital services room to expand. Rwanda thus emerges as an easy place to set-up a business but a harder place to scale. Rwanda’s digital transformation to date has largely been supply-driven. As seen above, major public 2.2. Securing Rwanda’s Digital Future: Critical investments have, for example, boosted the supply of Reforms, Investments and Innovation digital infrastructure and digital public services. Yet, Needed the adoption rates of broadband and other digital R wanda’s digital development to date has been impressive, but lags in a number of areas which constrains the growth potential associated with services still lag, yielding a lingering digital divide where large parts of the Rwandan population still fail to the reap the digital dividends associated with increasing digital adoption. Rwanda emerges as greater access to broadband as well as other digitally- a top performer on the continent in areas such as enabled platforms and services on offer. Weak mobile networks coverage, e-government service demand also has ripple effects on supply, particularly expansion and access to ID. However, in other areas, on the private sector side, where companies are such as digital skills, broadband and digital services deterred from launching new digital platforms and uptake, as well as e-commerce, progress has been services given the size of the current consumer-base. more modest. Meanwhile, gaps in digital skills Efforts to increase the supply of digital infrastructure, and broadband penetration have spillover effects platforms, services, and entrepreneurship thus need on many other aspects of the digital economy, to be paired with more interventions that help drive and thus emerge as two binding constraints that greater demand. affect prospects for further digitization. Finally, while government has been at the forefront of Increasing demand, and creating a virtuous circle spearheading digitization and innovation, the of digital adoption, will require a multi-pronged private sector’s contribution to Rwanda’s digital approach that tackles both digital literacy, economy has not been as robust. Moving forward, affordability, quality and perceived relevance. efforts to propel further digital transformation thus There is room to grow digital service adoption by 64 Rwanda ranks 5th, among African nation, in the World Bank’s 2018 “Ease of Doing Business” report. 28 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation doing more to educate customers, equipping all that help enhance interoperability and data sharing Rwandans with the requisite basic digital user skills - supporting a whole-of-government approach to needed to participate in the digital economy, but e-services. Related efforts are already underway. also explaining how they can benefit from increased There is also a scope to increase innovation in access and usage. The perceived value of internet services provision and delivery, by crowding in the and digital services needs to be addressed for private sector, through increasing access to open more users to prioritize this as part of their routine data and the creation of a vibrant API exchange household expenditures. Ultimately, both individuals marketplace. and businesses, particularly those with very low incomes or profits, still need a compelling reason to 2.2.2. Invest more in human capital to expand the digital skills base invest their limited incomes into broadband services and smartphones, as well as their time and energy Building Rwanda’s digital skills base will not only be into developing the digital skills to make use of key to accelerating digital adoption, but critical to related services. In terms of affordability, there is harnessing emerging opportunities, including new also scope to do more to lower the cost of devices forms of employment,65 as well as the development and data services. While Rwanda already benefits of new digitally-driven platforms and businesses. from a competitive telecoms market, new service Greater access to advanced and high-end digital packages could be better tailored to low-income skills will, for example, be critical to the development households. Both government and the private sector of new home-growth technology-enabled solutions could also explore means of incentivizing greater that are attractive to local consumers and investors. digital adoption through various schemes, including There is also substantial potential for job creation, greater government usage of government-to-person stemming from greater technology adoption across digital payments etc. all sectors and skill categories, particularly for unskilled and lower-educated workers, according to Increasing adoption of digital services on the a recent World Bank study.66 public sector side will also require greater attention to factors that enhance the user-experience. This However, addressing the basic and advanced includes adopting a more user-centric approach digital skills gap through traditional approaches to e-service design, prioritizing the digitization of and the basic education system alone will be services that are more likely to boost uptake, based insufficient. While government is encouraged on user-feedback. There is also a need to ensure to ensure basic digital skills attainments among full end-to-end digitization. Evidence suggests school leavers, through reforms and investments in that a requirement for physical presence at any the formal education system, it will be imperative stage of service delivery will dramatically reduce to pair said development with other innovative, adoption and the perceived added value of that complementary schemes. Gaps that adversely affect digital service. Similarly, there is a need to adopt the delivery of digital skills training in schools will ‘ask once’ data collection practices. This will need to need to be addressed. However, there is also ample be supported by further consolidation and use of scope to build on existing innovative schemes cloud services, as well as the integration of existing that are already being piloted, as well as explore government IT infrastructure, systems and services new initiatives that crowd in non-profit and for- 65 For example, in the emerging ‘gig economy’ or e-services industry. The service sector is projected to be the main driver of overall employment expansion in developing countries in the years to come, according to the ILO. 66 World Bank. 2019. Future of Work. Rwanda Economic Update • Edition No. 15 29 Accelerating Economic Growth Through Digital Transformation profit providers of digital skills training at all levels. a number of world-class, international accelerators Alternative training delivery models can help would, for example, greatly strengthen the local supplement formal education, by bridging specific entrepreneurship ecosystem, supporting firms skills gaps, supporting skills upgrading for adults, to move from startups to growth. More can also and targeting neglected groups such as out-of- be done to bridge the existing financing gap for school youth. Greater private sector engagement entrepreneurs by establishing alternative financing on the digital skills agenda in Rwanda could result mechanisms through a sovereign wealth fund and/ in a win-win, where training yields greater services or credit guarantee scheme, as well as continuing uptake, and closer links between industry and to engage in proactive outreach to encourage academia helps create a more relevant and demand- increased investments. Key legal and regulatory driven curriculum, expanding access to hands-on frameworks would benefit from further review, training, and ultimately improving the quality of the including those pertaining to investor protection graduate pool with advanced digital skills. and insolvency procedures where Rwanda fairs worse than its peers. Rwanda could also help foster a 2.2.3. Encourage more private sector led digital greater culture and appetite for innovation by doing economy growth more to showcase innovative ideas and celebrating While Government has spearheaded an ambitious entrepreneurs, as well as strengthening the business digital agenda, uptake and development of digital acumen of aspiring entrepreneurs through more products and services among local businesses has opportunities for training. been far more muted. For Rwanda’s digital evolution to become transformational, the private sector Areas that restrict growth in e-commerce will needs to play a far greater role in spearheading also need to be addressed, through an integrated digitization, through both increased technology government strategy. This should ideally support adoption and support for innovation. So far digital modernization of the postage system, creation adoption has been slow to permeate key sectors, of a functioning addressing system, expansion of and uptake among MSMEs has been modest. For existing transportation and logistics networks, as example, greater merchant acceptance of DFS could well as cross-border trade and customs facilitation. help unlock further growth of fintech, and much Agile pro-competition regulation is also needed more can be done to extend the benefits of DFS to support a vibrant platform-based economy. to MSMEs more generally by incentivizing uptake. This is particularly important in smaller markets Where MSMEs typically find access to credit to be a like Rwanda, where foreign firms can more readily significant challenge, DFS can also offer a potential dominate the local market.67 While new innovative solution. Bringing more MSMEs online can also increase opportunities for startups to offer digitally partnerships that seek to enable e-commerce enabled business applications, as well as gradually expansion, such as the Alibaba-led Electronic World increase local e-commerce. Trade Platform, can have positive effects for local MSMEs in the short-term, caution is warranted to Building a more vibrant digital entrepreneurship avoid exclusivity of such arrangements that may ecosystem will be key to supporting digital curtail competition in the long-term. innovation on the private sector side. Attracting Winner-takes-all dynamics are typical in platform-based economies, where network effects benefit first movers and standard setters. See: Rossotto 67 et al., 2018. Digital platforms: A literature review and policy implications for development. Competition and Regulation in Network Industries 1-17. 30 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation 2.2.4. Support regional integration of digital implementing an SMD would create an additional markets US$1 to US$2.6 billion boost in GDP and between Rwanda needs the scale of a larger regional market 1.6 to 4.5 million new jobs across the region.69 to thrive and compete in the digital economy, as well as attract more private sector investment. An integrated digital market could help remove Given that digital platforms become exponentially price differentials between costal and landlocked more valuable the more users and data they countries, lowering prices for Rwandan consumers. generate, there is a strong imperative for digital As a small, landlocked country, Rwanda must rely firms to quickly scale. Accelerating digital market on its coastal neighbors to access international integration within East Africa, and beyond, can broadband capacity, with corresponding mark-ups thus help provide seamless opportunities for both in pricing. The One Network Area (ONA) initiative, Rwandan start-ups and foreign digital firms to which removed roaming surcharges and capped scale, while benefitting from friendly and enabling prices for mobile calls across participating East environment in Rwanda to set up their businesses. African countries in 2015, paints a picture of what is With 180 million citizens, an East Africa Single possible, in terms of digital market integration. The Digital Market (SMD)68 could, for example, provide introduction of ONA prompted a dramatic increase the market size to allow Rwanda to compete and in cross-border voice traffic.70 Expanding the ONA position itself as a regional hub and test-bed for concept to more countries and to more services, such innovation poised for scale-up. An integrated East as mobile money, facilitating cross-border payments, African Digital Market would be the 9th largest could also help increase regional e-commerce. in the world and the World Bank estimates that Figure 2.12: East Africa is the 9th largest global market by population 1,400 1,200 1,000 800 600 400 EAST AFRICA 200 M 200 0 China India E27 USA Indonesia Brazil Pakistan Nigeria East Africa Bangladesh Russia Mexico Japan Philippines Tanzania Kenya Uganda South Sudan Rwanda Burundi Source: A Single Digital Market for East Africa, World Bank, 2018. 68 East Africa is defined as the six member states of the East African Community – Kenya, Burundi, Rwanda, South Sudan, Tanzania and Uganda. 69 World Bank. 2019, A Single Digital Market for East Africa. See: http://documents.worldbank.org/curated/en/809911557382027900/A-Single-Digital- Market-for-East-Africa-Presenting-Vision-Strategic-Framework-Implementation-Roadmap-and-Impact-Assessment 70 The ONA resulted in a nearly 1000 percent increase in calls between Rwanda and Kenya in just a few months. Overall, cross-border voice traffic experienced a threefold increase in Rwanda in the wake of ONA. See: Kelly, T., and C. Kemei. 2016. WDR 2016: Digital Dividends; A Case Study of ONA. ITU. Available at http://pubdocs.worldbank.org/en/499731452529894303/WDR16-BN-One-Network-Area-in-East-Africa-Kelly-Kemei.pdf and https://www.itu.int/dms_pub/itu-d/opb/pref/D-PREF-EF.ONA-2016-PDF-E.pdf. Rwanda Economic Update • Edition No. 15 31 Accelerating Economic Growth Through Digital Transformation Box 2.1: Creating Single Digital Market Creating a Single Digital Market will require efforts to develop three interrelated sub-markets: • A single connectivity market, which would remove barriers to regional telecoms infrastructure and services deployment to encourage investment, improve performance, eliminate pricing and quality differentials between coastal and landlocked countries, as well as expand access to connectivity to all. • A single data market, which would enable secure exchange, storage and processing of data across borders to support regional deployment and access to data-driven services and innovation. • A single online market, which would allow government, firms and citizens to access and deliver both public and private services online, as well as make online purchases seamlessly from anywhere in the region. 2.2.4. Build a secure online environment localization policies71, impeding cross-border data As usage of digital services increase, ensuring exchange, processing and storage that are critical the security of online transactions and safety of to cloud-based services and movement towards an end-users will be key to boosting trust in related integrated regional data market72. Related provisions services, and reinforcing digital adoption. Notably, would limit the attractiveness of Rwanda as a the emergence of the digital economy has created datacenter investment destination as well as raise a need for fully digital identity credentials. These the costs of cloud services and storage for local include digital ID and other ‘trust services’, such as startups and businesses that increasingly rely on e-signatures, which are required to ensure secure related services to go digital. and accurate identification and authentication for transactions over the internet. Rwanda is well- 2.3. Conclusion positioned to capitalize on its robust ‘traditional’ ID ecosystem to develop a ‘next generation’ digital ID system that enables seamless identity verification F ollowing the tested, “traditional” approaches to socioeconomic development will continue to bring steady improvements. While this is important, and online authentication services. given Rwanda’s low starting point, an incremental approach alone will still deny far too many of today’s Moving forward, Rwanda will also need to build on youth from realizing their potential. Instead, the existing cybersecurity capability as well as adopt a country is making a bold bet on a digital future robust data protection regime. This means boosting to accelerate this transformation and is choosing institutional, technical and human resources capacity to champion the ‘digital agenda’ both locally and related to cyber security - possibly through greater on a pan-African level. Government has set out regional collaboration that offer opportunities for an ambitious vision to leverage technologies and cost savings through sharing of threat intelligence digitally-enabled business models to tackle key and human expertise. Pending legal provisions development challenges related to poverty and basic related to data protection and privacy will need to public service delivery in new and more effective ways be finalized and enacted to provide holistic and clear and to harness a unique opportunity to transform guidelines for the safe collection, processing, use and the development trajectory for government, society sharing of data. However, boosting security should and the wider economy. not come at the expense of overly restrictive data 71 That require data on local citizens to be processed and stored physically within Rwanda’s borders. 72 To take one example, in 2017, MTN Rwanda was fined US$8.5 million by RURA (10 percent of its annual turnover) for maintaining Rwandan customers’ data in Uganda. Rwanda has also introduced a law that obliges government MDAs to maintain a cache of their data within national borders. 32 Rwanda Economic Update • Edition No. 15 Accelerating Economic Growth Through Digital Transformation Rwanda can build upon its strengths to achieve its decade has been remarkable but has yet to translate ambitious digital transformation vision, if issues fully into impact for the average citizen or from a highlighted above are addressed. These include wider macro-economic perspective. 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