Rwanda Economic Update Resilience in the Face of Economic Adversity Policies For Growth With A Focus On Household Enterprises TABLE OF CONTENTS ACKNOWLEDGEMENT I ACRONYMS II PREAMBLE III EXECUTIVE SUMMARY IV Part 1: Recent Economic Developments 1 1.1. Real Sector Trends 2 1.2. Infla�on Trends 4 1.3. External Sector Trends 6 1.4. Monetary Policy and Credit Trends 8 1.5. Fiscal Trends 11 1.6. Outlook and Risks 14 Part 2: Employment Crea�on and Poverty Reduc�on in Rwanda -- The Role of Household Enterprises 15 2.1. Introduc�on 16 2.2. Households Enterprises and the Na�onal Economy 16 2.3. Why is Growth and Sustainability of Household Enterprises Important to Rwanda? 19 2.4. Who Operates an HE and why – A Sta�s�cal Picture of the HE Sector 21 2.5. Constraints and Risks to HEs 24 2.6. Policy, Ins�tu�onal and Support Environment 25 REFERENCES 38 LIST OF ANNEXES Annex 1: Development in Financial Services 30 Annex 2: Transport and Communica�on Trends 31 Annex 3: Trends in Food Produc�on 32 Annex 4: Budget Execu�on by En�ty 33 Annex 5: Main Data Sources and Methods for the HE Analysis 34 Annex 6: Examples of HE Ac�vity By Sector 35 Annex 7: Determinants of Household Enterprise Manager’s Earnings 36 LIST OF FIGURES Figure 1: Rwanda’s real growth compared to the EAC and SSA iv Figure 2: The economy expanded by 5.3 percent in the first half of 2011 iv Figure 3: Households added income sources between 2000 and 2006; they did not switch sources vi Figure 4: Economic growth in Rwanda remains higher than for its neighboring countries 2 Figure 5: However, growth slowed down in the first half of 2011 2 Figure 6: Industry sector drove growth in the first half of 2011 3 Figure 7: In services, financial services were the most dynamic 3 Figure 8: Agriculture slowed down due to erra�c rains in Season A 4 Figure 9: Infla�on was moderate, but remained significant for food 4 Figure 10: Food staple price trends 5 Figure 11: Balance of Payments Trends 6 Figure 12: Trends in primary exports (2000-2010) 7 Figure 13: Tourism is providing two thirds of foreign exchange earnings 8 Figure 14: The Rwandan Franc was affected by major currency fluctua�ons 9 Figure 15: Trends in interest and monetary aggregates 10 Figure 16: The fiscal s�mulus widened the deficit 12 Figure 17: The overdra� facility and the issuance of treasury bills were used to finance expenditure 12 Figure 18: Development expenditure are absorbing an increasing budget share 12 Figure 19: Government’s Budget Priori�es 13 Figure 20: Trend in GDP Composi�on, real GDP per capita, and poverty 18 Figure 21: Family farming shrunk as a share of primary employment, 2000-2006 18 Figure 22: Agricultural wage employment was the largest contributor to new job growth, 2000-2006 18 Figure 23: But in 2006 women were s�ll concentrated in the agricultural sector, which s�ll dominates 18 the structure of primary employment Figure 24: Households added income sources between 2000 and 2006; they did not switch sources 19 Figure 25: HEs by area 19 Figure 26: Distribu�on of earnings by source, 2006 20 Figure 27: Higher quin�les are more likely to have an HE in Rwanda 21 Figure 28: Most of the labor force is poorly educated 22 Figure 29: Most of the poorly educated labor force work on family farms 22 Figure 30: Close to half of all HEs are operated by people in the 20-34 year old age bracket 22 Figure 31: The majority of HE owners find their business rewarding 23 Figure 32: HE owners more likely to have training especially a�er comple�ng primary educa�on 23 Figure 33: FGD respondents were pre�y dissa�sfied with their working environment 24 Figure 34: Owners report several challenges to star�ng up an HE 24 LIST OF TABLES Table 1: Simula�on assump�ons 6 Table 2: Informal cross border trade (Million US$) 8 Table 3: Government budget 2009/10 - 2011/12 (Percent of GDP) 11 Table 4: Most unincorporated micro enterprises in Rwanda are HEs 17 LIST OF BOXES Box 1: Food Price Trends 5 Box 2: Simula�on Scenario: Foreign Aid Decrease 6 Box 3: Exchange Rate Trends 9 Box 4: Informal Enterprises and HEs 17 ACKNOWLEDGEMENT This Economic Update reports and synthesizes key economic developments in the past six months in Rwanda’s economy. It places them in a medium-term and regional context, and will increasingly assess the implica�ons of these developments and policies for the outlook of Rwanda’s economy. In this way, these reports contribute to the implementa�on of the Bank’s Africa Development Strategy. The Economic Update reports will cover in each edi�on a special feature on a selected topic. It is intended for a wide audience, including policy makers, business leaders and other market par�cipants, and the community of analysts engaged in Rwanda’s economy. The Rwanda Economic Update was prepared and compiled by the Poverty Reduc�on and Economic Management team at the World Bank Country Office in Rwanda, under the leadership of Birgit Hansl (Senior Economist) with inputs on the economic update sec�on from Peace Aimee Niyibizi (Economist). Louise Fox (Lead Economist) is the main author of the sec�on on household enterprises, which provides a preview of the findings on a joint-report of the World Bank and the Rwanda Ins�tute of Policy Analysis and Research (IPAR). The report benefited from advice provided by Wolfgang Fengler (Lead Economist), Humberto Lopez (Sector Manager), Omowunmi Ladipo (Country Manager), and Roger Sullivan (Consultant). In addi�on, the report received valuable inputs from the following peer reviewers: John Speakman (Lead Private Sector Development Specialist), Gabriel Demombynes (Senior Economist), and Anton Dobronogov (Senior Economist). For more World Bank informa�on on Rwanda: For more informa�on about the World Bank and its ac�vi�es in Rwanda, please visit: www.worldbank.org/rw If you would like to be included the email distribu�on list for this semi-annual series and related publica�ons, please contact singabire@worldbank.org. For ques�ons and comments related to this publica�on, please contact bhansl@worldbank.org. Second Edi�on | November 2011 i ACRONYMS BIF Burundian Franc BNR Banque Na�onale du Rwanda (Central Bank of Rwanda) BoP Balance of Payments CET Common External Tariff DRC Democra�c Republic of Congo EAC East African Community EDPRS Economic Development and Poverty Reduc�on Strategy EICV Enquête Intégrale sur les Condi�ons de Vie des ménages FGD Focus Group Discussion FIAS Foreign Investment Advisory Service GDP Gross Domes�c Product FDI Foreign Direct Investments FY Fiscal Year HE Household Enterprises ICT Informa�on and Communica�on Technologies IPAR Ins�tute of Policy Analysis and Research KRR Kay Repo Rate MSEs Micro and Small Enterprises NGO Non-Government Organiza�on MINECOFIN Ministry of Finance and Economic Planning NISR Na�onal Ins�tute of Sta�s�cs of Rwanda PSTA Strategic Plan for Transforma�on of Agriculture RCA Rwanda Coopera�ve Agency RDB Rwanda Development Board REU Rwanda Economic Update Rwf Rwandan Franc SACCOs Saving And Credit Coopera�ves SMEs Small and Micro Enterprises SSA Sub-Saharan Africa US United States VTCs / CFJS Voca�onal Training Centers / Centre de Forma�on des Jeunes WDA Workforce Development Authority ii Second Edi�on | November 2011 PREAMBLE R wanda’s economy has demonstrated remarkable resilience in �mes of regional and global turbulence. In 2011, growth will reach an expected 8.8 percent, infla�on has been so far contained below 10 percent, and the exchange rate remains stable to date. This economic resilience reflects on sound macroeconomic management, which has enabled Rwanda to steer clear of the substan�al challenges that the regional and global scene have presented in 2011. But Rwanda remains dependent on domes�c consump�on, which is fueled by imports and partly financed by substan�al donor inflows. Rwanda seeks to transi�on to a more diversified economy, based on services and light industry. As a land-locked and fuel dependent economy, it is always vulnerable to external shocks, such as the rapid rise of fuel prices in the first half of 2011. But as the economy grows, Rwanda should be able to produce goods for the expanding domes�c market, and for some of its neighbors. Household Enterprises (HEs), the special focus of this issue, have been a pillar of Rwanda’s resilience, growing rapidly in tandem with the economy. HEs are the smallest set of small and micro enterprises. They are operated from households, usually run by an individual or with assistance from family members. HEs have grown rapidly over the last decade and are s�ll mostly a rural phenomenon, reflec�ng the agrarian nature of the Rwandan economy. HEs have taken off in response to the demand for addi�onal services and goods generated by Rwanda’s growth, and the rela�vely limited supply capacity of the formal sector. The income generated by rural HEs has strengthened family security by augmen�ng farm incomes. Though HEs are usually not the main source of family income, they provide a second source of income in rural areas that can help cushion shocks brought on by bad weather and declines in agricultural produc�on. Urban HEs usually provide an addi�onal source of income to formal wages, enabling greater consump�on and investment within these families. HEs also provide supplemental income which can be important in paying school fees and educa�ng a child who would otherwise be kept at home for domes�c labor, or covering medical care that might otherwise be forgone. The growth of HEs contributes to Rwanda’s economic resilience, and is a clear pathway to greater income security for the rural poor. The Government of Rwanda acknowledges the role HEs can play in achieving future development goals, but there are s�ll constraints limi�ng the growth and performance of HEs. These include: regula�ons, especially those enforced by local authori�es, that limit HE access to good market loca�ons; limited ins�tu�ons geared to providing micro-credit to HEs; and, the lack of associa�ons that could help HEs address their business needs and provide for growth in output. Second Edi�on | November 2011 iii EXECUTIVE SUMMARY Resilient Economic Performance in 2011 in early 2011, when agricultural produc�on shrunk. Similarly good weather condi�ons contributed to a R wanda is expected to grow at over 8 percent in 2011, led by strong growth in the agricultural, industrial and services sectors in the second half of the year. This strong crop season from mid-2011. But the agricultural story is more than just one of weather. Produc�on has steadily benefited from a number of far reaching solid performance follows on a slow start, which saw na�onal agricultural programs, which have improved agricultural growth nega�vely impacted by irregular overall produc�vity. In addi�on to agriculture, prices rains. Star�ng with favorable weather condi�ons for for Rwanda’s mineral exports more than tripled in 2011, agriculture, the economy has performed extraordinarily and prices for its two main agricultural exports, tea well in the second half of 2011, growing at a rate of and coffee also increased. Tourism remained vibrant, 10 percent or higher, an unusually good performance and construc�on con�nued its growth trajectory as given regional and global condi�ons. As a land-locked government undertook a number of infrastructure country, dependent on fuel imports, Rwanda has li�le programs. But Rwanda’s resilience also depended control over its imports of strategic commodi�es, on the favorable flow of donor resources which have which makes it par�cularly vulnerable to global price enabled the country to manage its current account increases. Nonetheless, strong fiscal management and deficit, and s�ll undertake an ambi�ous development careful monitoring of the various channels through program. Government also increased revenues and which infla�on might be transmi�ed, enabled price used monetary policy and other instruments to keep increases for the year to remain in check. infla�onary pressures in check. Con�nued global shocks, par�cularly if they lead to a substan�al price Rwanda’s growth prospects for 2011 compare favorably decreases for exports, a reduc�on in donor assistance, with others in the region. (Figure 1) Rwanda’s 2011 or repeated adverse weather condi�ons in the country growth will be stronger than forecast growth for all Sub- and the region, would test Rwanda’s resilience. Rwanda Saharan Africa (SSA) countries, and greater than for the will need to rebuild its fiscal buffers, mostly depleted countries in the East African Community (EAC). following the 2009 crisis and subsequent s�mulus Figure 1: Rwanda’s real growth compared to the EAC program, to be ready for the next big global shock. and SSA. 12.0 The main drivers of Rwanda’s growth for the first 10.0 GDP Growth half of 2011 were the industrial and services sectors. RWA (Figure 2) The industrial sector regained its role as a 8.0 leading growth sector as a result of strong mining and EAC construc�on ac�vi�es. The tail end of the fiscal s�mulus Percent 6.0 4.0 funded construc�on, and con�nued expansion in public 2.0 SSA administra�on, educa�on and health services. Services 0.0 Figure 2: The economy expanded by 5.3 percent in the 2008 2009 2010 2010 2011 first half of 2011. 16.0 Year-on-Year Growth Projec�on RWA SSA EAC 12.0 Source: World Economic Outlook, Authori�es and staff es�mates. Percent Rwanda has demonstrated economic resilience at a 8.0 �me when regional and global shocks have had serious consequences for many neighboring EAC countries. A 4.0 number of factors underpin Rwanda’s resilient economic performance. The country remains dependent on 0.0 agricultural produc�on which puts it somewhat at the 2007 2008 2009 2010 H1-2011 mercy of weather condi�ons. Irregular and delayed Agriculture (36.4) Industry (15.5) Services (48.1) GDP rains in late 2010 had serious consequences for Rwanda Source: Na�onal Ins�tute of Sta�s�cs of Rwanda (NISR). iv Second Edi�on | November 2011 growth was robust as financial services con�nued prices while their produc�on remained modest. Tourism to grow significantly. However, manufacturing grew con�nued its posi�ve trend, becoming the single largest modestly, reflec�ng the small size of the domes�c foreign exchange earner. At the same �me, high priced market. Overall, economic growth proved resilient, energy products, accoun�ng for 17 percent of Rwanda’s especially in view of recent adverse global and regional imports (this alone exceed the value of Rwanda’s economic developments, characterized by increasing agricultural exports), have risen sharply in 2011. food and fuel prices, and drought in neighboring countries. Rwanda pursued moderate monetary and fiscal policies in order to keep the economy from overhea�ng, Increased agricultural produc�on in the second half while not s�fling growth. Monetary policy remained of 2011 follows the excellent rains in the second accommoda�ve, though the Central Bank raised its plan�ng season (March-June). Food produc�on in policy rate by 50 basis points to 6.5 percent effec�ve 2011 is es�mated to be 10.6 percent higher than a October 7, 2011. Despite high interest rates, lending year ago, due to plen�ful rainfall, but also because ac�vi�es con�nued to pickup. At the same �me, of government’s concerted efforts to modernize the 2010/11 public development spending increased to new agricultural sector. As discussed in the First Rwanda heights. The increased spending was funded by donors’ Economic Update �tled, Seeds for Higher Growth, the inflows, but the Government also had to maintain high Government’s Strategic Plan for the Transforma�on overdra� levels at Central Bank, and also sell a large of Agriculture is beginning to pay dividends. Programs amount of domes�c security instruments to finance to address soil fer�lity and soil erosion - the result priority expenditures. Overall, donor support covers of Rwanda’s dense popula�on and over cul�vated 40 percent of the government’s budget, introducing a smallholdings - are leading to per hectare produc�vity poten�al risk if donors reduce their foreign assistance gains. A bumper harvest for cereals, roots and tubers is in light of their own macroeconomic troubles. External expected, though this will be marginally offset by lower debt has increased, though remaining at manageable outputs of pulses (bean, peas, soya and groundnuts). levels, and foreign exchange reserves s�ll exceed the Food security condi�ons are an�cipated to remain minimum 4 month import cover. Rwanda has depleted stable, as households replenish their food stocks with its fiscal buffers, responding to the 2009 global crisis the harvest from the 2011 plan�ng season. and pu�ng the economy back on a strong growth path. Now it will need to replenish them, while it is enjoying Infla�on resurfaced, but remained in single digits. strong growth. Food prices, the key driver of local infla�on, trended upwards, driven by high interna�onal food prices Household Enterprises and their and moderate produc�on in the first plan�ng season. Since August, food prices for locally produced cereals Contribu�on to Rwanda’s Resilience have eased slightly, reflec�ng the excellent harvest. In September 2011, food price infla�on stood at 6.3 percent. For imported foods, the infla�on rate was 17.5 R wanda has ambi�ous plans to transform from a largely agrarian economy, to one led by a vibrant modern non-agricultural private sector, providing percent and for locally produced foods, 4.5 percent. The goods and services to meet growing internal and increase in local food produc�on enabled consumers regional demands. Achieving this transi�on in an to opt for lower-cost local food products over imports. inclusive manner is a key goal. Rwanda is s�ll at the early Overall, infla�on remained moderate compared to stage of this transi�on, but one of the signs of such a other countries in the EAC, which suffered more directly shi� is the emergence of Household Enterprises (HEs), from the drought affec�ng the Horn of Africa. as an important contributor to the na�on’s economy. By 2006, more than 30 percent of households in Rwanda Rwanda’s current account reflects a structural relied on HEs as a source of income. The special focus imbalance: imports exceed exports by a wide margin, of this report will highlight the role that HEs are playing leading to a significant trade deficit. In 2011, coffee, in Rwanda’s economy and poverty reduc�on efforts, tea and minerals, which accounted for 72 percent of and indicate areas where government policies can spur Rwanda’s export earnings, con�nued to a�ract be�er growth. Second Edi�on | November 2011 v Household Enterprises (HEs) are ac�vi�es providing majority of HE owners had only some primary educa�on goods and services that are run out of the household, in 2006, and are not likely to qualify for higher paying usually by one family member although they may non-agricultural wage and salary jobs outside the incorporate other family members in their opera�on. household. So they need to improve their business to They do not employ non-family wage laborers or improve their income. have employees. The majority of them are located in rural areas, with farming households accoun�ng for Although the micro and small enterprise sector is a large percentage of Rwanda’s households. Between recognized in the Government of Rwanda’s policy 2000 and 2006, the number of households repor�ng framework, there is no coherent strategy for the HE more than one source of income doubled, and the segment. The Government’s development policies and addi�onal source was most likely to be non-agricultural. programs clearly recognize that enterprise crea�on, In some households in rural areas, one member of growth, and sustainability are crucial to achieving the household le� the family farm to go for wage poverty reduc�on and economic growth objec�ves. employment in commercial farms (18 percent of all two However, very li�le a�en�on is given to HEs, reflec�ng income households in 2006), but for many households, a general lack of understanding of their poten�al to an extra income meant adding an HE to their other make a significant contribu�on towards achieving these income earning ac�vi�es (60 percent of all two income objec�ves. Also, while suppor�ve of the informal sector households have an HE). Figure 3 illustrates how income in general, HEs are not recognized, yet they are key sources per household have changed between 2000 and economic actors. The government needs to develop a 2006. Farming remained an income source for about specific policy framework that encourages HEs’ growth, 90 percent of all households in 2006 and it is in these and removes some of constraints which currently holds households where a vast majority of HEs were located. these enterprises back. Figure 3: Households added income sources between 2000 and 2006; they did not switch sources. This Update concludes with a series of policy recommenda�ons for developing HEs which could Wage public have a major impact on increasing the output and produc�vity of this important, but neglected, sector Wage private of the economy. The key priori�es for government’s considera�on include: Wage agriculture 2000/1 2005/6 • Review and revise legisla�on on planning and zoning Household enterprise regula�ons, in consulta�on with HEs. • Support the development of financial products and Family farm services, that suit the needs of poorer households 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 with HEs. % of Households with income source • Encourage and support the Workforce Development Source: EICV 2000/1 and 2005/6. Authority in developing and offering short “rule of thumb” courses on financialaccessandmanagement, Most HE owners in Rwanda who were interviewed as these have been proven to increase earnings. last year for a joint World Bank and Ins�tute of Policy • Encourage the development of local associa�ons as Analysis and Research (IPAR) study, reported that well as the Rwanda Coopera�ve Agency, to engage they found running a HE to be a sa�sfactory way of directly with HEs, to understand their needs and making a living, and a majority were sa�sfied with develop crea�ve approaches to support them. their earnings. This is not surprising, as HE earnings • Evaluate Government programs and policies that were on average higher than those in agriculture, which have implica�ons for HEs to make sure that they is usually the alterna�ve economic ac�vity for HEs. But are effec�ve in reaching their targets, and actually many HE owners would like to do be�er. Reflec�ng improving the welfare and sustainability of HEs. the low level of educa�on in the Rwandan labor force, vi Second Edi�on | November 2011 PART ONE Recent Economic Developments This part of the Rwanda Economic Update (REU) focuses on macroeconomic developments during the first half of 2011. Growth was moderate at 5.3 percent. If Rwanda was to achieve the Government’s target of more than 8 percent in 2011, the second half of 2011 would need to reach a very high growth, of more than 10 percent. However, it is expected that Rwanda’s GDP will increase a�er rela�vely low growth in the first half, given a very successful second agriculture season since then. Growth turn-out for 2011 is expected to be 8.8 percent, exceeding Government’s original target of 7.0 percent. This reflects an overall picture of remarkable resilience, and puts Rwanda’s growth performance at the top of the EAC countries. For the first �me since 2008, industrial sector growth overtook growth in services due to soaring performance in mining and construc�on. Services’ growth remained strong due to con�nued high growth in financial services. Agriculture growth was disappoin�ng, reflec�ng the outcome of poor rains in the first season. Externally, Rwanda’s exports con�nued to benefit from high commodity prices, especially for minerals. Infla�on has been spiraling upwards since December 2010, reflec�ng global price increases in imported fuel and food. The economic outlook for the second half of the year is op�mis�c, as the economy is going strong, but might be at risk of overhea�ng. Significant external risks related to another poten�al global slowdown remain, in regard to Rwanda’s high aid dependency and reliance on a few key export commodi�es. Second Edi�on | November 2011 1 1.1. REAL SECTOR TRENDS rest largely on a very successful Season B¹ in agriculture, and agriculture is expected to post growth for quarter R wanda is likely to conclude 2011 with a growth of over 8 percent, even higher than the 7.5 percent in 2010. This would be a remarkable result, given the 3 and 4 in the range of 7 to 9 percent. Industry and services are expected to con�nue to grow at healthy rates due to an�cipated spill-over effects from the good difficult external environment namely, increasing global agriculture ou�urn, and benefi�ng from buoyant credit food and fuel prices, a regional food shortage due to to the private sector. However, risks remain, especially as drought in the Horn of Africa, and the looming crisis in some of Rwanda’s key export markets in Europe and the the Euro area, which created uncertainty in the global region have experienced an economic slowdown, which market. This projected growth is nearly double the might lower the demand for imports from Rwanda. If average projected growth rate for Sub-Sahara Africa of growth of over 8 percent is going to materialize, there is 4.7 percent. (Figure 4) This expected good ou�urn will also the risk that the economy will overheat, leading to Figure 4: Economic growth in Rwanda remains higher than infla�onary pressures for its neighboring countries. 12.0 GDP Growth In the first half of 2011, growth slightly slowed to 5.3 percent compared to 6.1 percent in the first half 10.0 of 2010. (Figure 5) This is directly a�ributable to the 8.0 lower than expected performance in agriculture a�er a disappoin�ng Season A. Industry came back as Percent 6.0 4.0 construc�on ac�vi�es accelerated, aided by con�nued large publicly funded infrastructure investment projects. 2.0 Mining ac�vi�es benefited from record world mineral 0.0 prices. In services, the financial sector registered 2008 2009 2010 2010 2011 further business expansions and public administra�on, RWA SSA EAC Projec�on health and educa�on services benefited from the tail Source: World Economic Outlook, September 2011. end of the Government fiscal s�mulus. Figure 5: However, growth slowed down in the first half of 2011. Year-on-Year Growth Half Year Growth Rates 16.0 14.0 12.0 12.0 10.0 10.0 8.0 Percent Percent 8.0 6.0 6.0 4.0 4.0 2.0 2.0 0.0 H1 H2 H1 H2 H1 H2 H1 - 2007 2008 2009 2010 H1-2011 2008 2009 2010 2011 Agriculture Industry Source: NISR. ¹ Rwanda’s agriculture is rain-fed and agricultural seasons are determined by the rainy seasons: the short rainy season lasts from mid September to mid December (followed by a short dry season las�ng un�l February) and the long rainy season stretches from the middle of March to the beginning of June. Thus, there are: (i) Season A (plan�ng from September to October, harves�ng from November to January/February). (ii) Season B (plan�ng from February to March, harves�ng from May to July) and (iii) Season C (July-September), the la�er matches the long dry season and for which cul�va�on takes largely place in marshlands. Harvest results from Season A feed into growth numbers for the quarter 1 and 2 of each calendar year, while harvest results for Season B are reflected in quarter 3 and 4 growth rates. 2 Second Edi�on | November 2011 Industry regained its role as Rwanda’s key growth for 2010/11 as part of Government’s s�mulus package. engine two years a�er the global crisis had a devasta�ng Hotels and restaurants growth was a modest 3.2 impact on the sector. (Figure 6) Mining recorded in percent, compared to 8.7 percent in the first half of the first half year, the highest growth of 46.7 percent 2010. The number of tourist arrivals increased by 26.0 among the industrial subsectors.² This followed a weak percent in the first half of 2011, compared to a 14.0 performance in the previous year - a decrease of 20.4 percent drop in 2010. Most of the visitors, 84.0 percent, percent in the same period of 2010 - and was achieved con�nue to arrive from Africa, 8.1 percent of arrivals due to interna�onal prices for minerals climbing to were from Europe, 4.6 percent from the Americas, and record levels, and modest output increase. Construc�on 3.5 percent from Asia. In transport and communica�on gained momentum, especially for non-residen�al services, growth slowed to 1.5 percent as compared to construc�on, growing at 21.7 percent, compared to 3.9 9.1 percent in the first half of 2010. Transport suffered percent in the first half of the previous year. This growth from high fuel prices. In ICT, the number of mobile phone was fuelled by large construc�on material imports and subscribers grew in the first half of 2011 by only 10.2 newly approved loans for the sector.³ Manufacturing percent, compared to 30.6 percent in the same period grew at a modest rate of 3.0 percent, compared to 10.1 last year, poten�ally reflec�ng a gradually maturing percent in the same period last year.⁴ Produc�on cost market. Operators also heavily subsidized calling rates increased for industries that depend on imported raw as a result of a more compe��ve environment, and in materials due to higher import costs, especially for oil. an a�empt to absorb the market share of Rwandatel, whose mobile operator license was revoked in April In services, the pa�ern of high growth con�nued, 2011 (Annex 2). fuelled by soaring financial services growth. (Figure 7) Services grew by 7.1 percent in the first half, slightly less A rapidly expanding banking sector led to financial than in the first half of 2010 (7.6 percent). Educa�on, services growth of 31.3 percent, as compared to 10.2 health and public administra�on services grew at 8.0 percent in the first half of 2010. Reported profits in percent, as compared to 12.8 percent in the same period the sector were three �mes higher, than over the same a year ago, reflec�ng con�nued high public expenditure period a year ago. New bank branches opened across Figure 6: Industry sector drove growth in the first half Figure 7: In services, financial services were of 2011. the most dynamic. Year-on-Year Growth Year-on-Year Growth Finance, Insurance Educ., Health & Pub. Admin. Mining H1- 2011 Wholesale & retail trade H1 -2011 Real estate business H1 -2010 Construc�on H1 - 2010 2010 Hotels & restaurants 2010 2009 Manufacturing Transport, storage, comm. Other personal services -30.0 -10.0 10.0 30.0 50.0 Percent -10.0 0.0 10.0 20.0 30.0 40.0 Percent Source: NISR. Source: NISR. ² The increase was more spectacular in the first quarter (109.4 percent) when mineral exporters were rushing to sell their stocks before the US Congress bill against conflict minerals became effec�ve on April 1, 2011. ³ Key construc�on projects underway include: the New Century Hotel, the Kigali City Council Office, the City Tower and the City Market buildings, the Kigali Conven�on Center, road rehabilita�on and construc�on and numerous private commercial structures. The Na�onal Social Security Fund, CSR, is construc�ng new offices in all districts. During the first half of 2011, new credits for construc�on and public works doubled compared to the same period in 2010. ⁴ Sector growth was mainly based on good performance in the brewery industry with BRALIRWA, the country’s main brewery company, pos�ng a 40.1 percent growth in net profits. BRALIRWA’s produc�on increased by 26.5 percent due to higher demand for beer and so� drinks. Second Edi�on | November 2011 3 the country and credit to the private sector increased output increased substan�ally in the second half of (Annex 1). Furthermore, commercial banks con�nued to 2011. Overall, food produc�on in 2011 is es�mated to clean up bad loans on their books, reducing the numbers be 10.6 percent higher than a year ago (Annex 3). of non-performing loans. The insurance subsector also improved performance doubling gross premiums from 1.2. INFLATION TRENDS Rwf31.0 billion in June 2010, to Rwf64.8 billion in June 2011. R wanda was the only country in the EAC with moderate infla�on in the first half of 2011. (Figure 9) While infla�on resurfaced in tandem with rising Agricultural growth in the first half of 2011 was weak as late rains resulted in a disappoin�ng Season A outcome. global food prices and spikes in oil prices, it remained (Figure 8) Growth for crops was 0.5 percent, compared in single digits. Like in its neighboring countries, to 4.1 percent in the first half of the previous year. Export food⁵ and transport have been the leading drivers of crops growth contracted by 8.1 percent, compared to a infla�on. Infla�on increased nearly uninterrupted for 12.1 growth in the same period a year ago, despite high 8 consecu�ve months, from December 2010 to August prices on interna�onal markets. Livestock con�nued to 2011, when it peaked at 7.5 percent. Core infla�on, report a modest growth. Following good rains at mid- which excludes food and energy prices increased, year, and a successful Season B harvest, agricultural from below 1 percent in December 2010, to almost 8.2 percent in August 2011. Despite this rela�vely moderate Figure 8: Agriculture slowed down due to erra�c rains in Season A. picture as compared to its neighboring countries, this Year-on-Year Growth is the highest rate of infla�on Rwanda has seen since H1-2011 July 2009. A concern is that high infla�on, driven by an Livestock H1-2010 increase in food and fuel prices, is likely to affect the 2010 poor dispropor�onately. 2009 Consumer prices started to ease off slightly to 6.7 Food crops percent in September 2011, but the core infla�on remained high at 8.9 percent. This was due to lower food infla�on beginning in September, as good weather Export crops condi�ons in Season B, combined with ongoing public investments in agriculture, led to a good domes�c -20.0 -10.0 0.0 10.0 20.0 harvest outcome (Box 1). Percent Source: NISR. Figure 9: Infla�on was moderate, but remained significant for food. 30.0 Infla�on trends 60.0 Food infla�on Trends RWA KE 40.0 RWA KE UG TZ 20.0 P ercent 20.0 10.0 0.0 0.0 -20.0 Source: Banque Na�onale du Rwanda (BNR) and EAC Countries Sta�s�cs Offices. ⁵Food infla�on trended upwards, following the path of global food prices accompanied by limited growth in domes�c food produc�on in Season A. 4 Second Edi�on | November 2011 Box 1: Food Price Trends. Food prices, though the key driver of infla�on in Rwanda, remained moderate rela�ve to food prices in the EAC region. Food prices increased in 2011 by 10.6 percent through July, a�er which they started declining, reaching 6.3 percent in September, similar to the rate a year ago. Despite predicted increases in food produc�on of 10.6 percent for 2011, food prices in Rwanda for several main staples, such as maize and rice are s�ll at high levels, similar to neighboring countries. (Figure 10) In the first half of 2011, in Uganda and Kenya, food prices increased by 50.4 percent and 23.2 percent respec�vely through September 2011, compared to the same period a year ago. Rwanda’s moderate levels of food prices are the result of measures undertaken by the Government since 2008 in recogni�on of the significance that local food prices have on infla�onary trends (accoun�ng for almost 30 percent of the CPI). Measures consisted of the launch of the Crop Intensifica�on Program which includes land consolida�on, improved input provision and a fer�lizer subsidiza�on scheme with the goal to increase fer�lizer use and agricultural produc�vity. Government is also rapidly building up a Strategic Grain Reserve, which is expected to reach 60,000 tons by the end of the current fiscal year. To make local food produc�on less dependent on irregular rains, Government accelerated the roll-out of an Immediate Ac�on Irriga�on Program. It is worth no�ng that these measures started showing results: as of June 2011, food imports decline by almost 20 percent in volume compared to the same period in 2010. Figure 10: Food staple price trends. 300 Maize Wholesale Price, April 2010=100 250 200 150 100 50 J un-10 May-11 Apr-10 Oct-10 J ul-11 F eb-11 Mar-11 Aug-11 S ep-11 May-10 J an-11 J un-11 J ul-10 Aug-10 S ep-10 Nov-10 Dec-10 Apr-11 KE: Nairobi Rw: Kigali Ug: Kampala TZ: Dar es salaam 300 Rice Wholesale price, April 2010=100 250 200 150 100 50 Mar-11 May-10 F eb-11 J ul-10 Nov-10 Dec-10 J an-11 Apr-11 J un-11 Oct-11 Aug-10 S ep-10 May-11 Apr-10 J un-10 Oct-10 J ul-11 Nov-11 Aug-11 S ep-11 KE: Nairobi Rw: Kigali Ug: Kampala TZ: Dar es salaam Source: www.ra�n.net. Second Edi�on | November 2011 5 The year 2011 is projected to end with infla�on at about Box 2: Simula�on Scenario: Foreign Aid Decrease. 9 percent. The persistently high level of core infla�on prompted the Central Bank to �ghten monetary policy The simula�on scenario assumes maintaining the momentum of exports and import trends of the last by li�ing its policy rate from 6.0 percent to 6.5 percent three years accompanied by a five percent decrease in October 2011. However, this was a rela�vely small in foreign aid inflows (equivalent to U$42.6 million in increase and came a bit late, given the signs of build-up in budgetary and capital/project grants) (Table 1). A few aggregate demand and underlying infla�onary pressures. financing alterna�ves are laid out below, together with The economy is very liquid. Credit to the economy has the associated risks: already risen to almost 30 percent in 2011. Reserve (1) Central Bank could sell gross official reserves to finance money growth for 2011 is projected at around 20 percent, the deficit. This would lead to a 20 percent reduc�on substan�ally exceeding nominal GDP growth. Eventually in reserves, from 5.3 percent in 2010 to 4 months of government will need to �ghten monetary policy, to imports. However, this would s�ll require alterna�ve absorb some of the liquidity and fight aggregate demand Government budget financing or equivalence budget pressures. cuts. (2) Government could borrow from the domes�c market, 1.3. EXTERNAL SECTOR TRENDS by selling treasury bills or use the overdra� facility at R the Central Bank. Selling treasury bills would increase wanda’s Balance of Payments (BoP) con�nues to Government debt, but also reduce credit to the private be posi�ve as current transfers remain high. (Figure sector.⁶ Making use of the overdra� facility would 11) Net current transfers are mainly driven by donor’s increase infla�on. budgetary grants. They are projected to remain in 2011 (3) Otherwise, the Government would borrow externally at around 15 percent of GDP, higher than in 2010, and to finance imports and to realize its ambi�ous growth higher than the previous five year average of 9.8 percent goal. However, this alterna�ve is also associated with of GDP. The overall contribu�on of net remi�ances is low, risk of an apprecia�on in the exchange rate, damaging about 1.0 percent of GDP over the past five years. The the compe��veness of the trade goods sectors and capital account, consis�ng of capital grants and technical increasing the external debt burden. assistance, has averaged 4.3 percent of GDP over the same period. Combined, these high level of foreign aid Table 1: Simula�on assump�ons. inflows mi�gated the need for large external borrowing. Growth (%) Scenario The financial account averaged 2.4 percent of GDP over Exports 21.9 Average growth for the last three years the recent five years, consis�ng of two thirds private Imports 24.5 Average growth for the last three years Figure 11: Balance of Payments Trends. Services 32.3 Average growth for the last three years Incomes 14.8 Average growth for the last two years 25.0 Percent of GDP Current transfers 20.0 4.4 4.9 Private 11.8 Average growth for the last two years 6.3 4.9 2.8 2.3 1.7 15.0 2.5 4.5 3.8 3.5 Public -5.0 Assump�on 4.5 10.0 Capital grants -5.0 Assump�on 13.4 15.3 5.0 12.3 11.0 11.5 10.6 Financial inflows 37.7 Average growth for the last three years 0.0 -5.0 -10.0 -10.8 -13.1 -14.1 -3.7 -14.7 -15.0 -2.9 -17.2 -16.4 -4.2 -5.2 -20.0 -3.3 -6.3 -25.0 2007 2008 2009 2010 2011 Proj. 2011 Scenario Trade balance Net Services & income Net current Transfers Capital Account Financial Account Current Account Source: BNR and REU team (2011 scenario). ⁶Commercial banks hold more than 85 percent of the treasury bills. 6 Second Edi�on | November 2011 sector financing and investment. The overall BoP (tourism, minerals, tea, and coffee), which benefited balance averaged 1.8 percent of GDP over the recent in the first half of 2011 from high interna�onal price. five years. For example, the value of mineral exports has nearly tripled compared to the same period in 2010. However, To illustrate Rwanda’s high aid-dependency and for some products, for example minerals, produc�on high vulnerability to shocks in foreign aid inflows, a was stagnant and for others like coffee, output remains simula�on of the impact of a five percent decrease vola�le. (Figure 12) Imports are gradually increasing in foreign aid inflows on external balances was made and are mostly financed by current transfers, as export (Box 2). This rela�vely small decrease would result in and tourism earnings cover only around 45 percent of a widening of the current account deficit (including imports in goods and services. Import values rose 17.6 grants) from 7.5 percent in 2010 to 12.1 percent of GDP percent in the first half of 2011, as a result of increased in 2011, the highest deficit in the last decade. The BoP demand for intermediary goods and high priced energy would also deteriorate and record a deficit for the first products. Increasing freight and transporta�on costs⁷ �me since 2004. (Figure 11) kept Rwanda as a net services importer. Therefore, any shock in interna�onal commodi�es prices for Rwanda’s external posi�on also remains vulnerable to the Rwanda’s main export or import products would spikes in commodi�es prices. Rwanda’s export earnings severely hamper the BoP and growth outlook. rely heavily on the performance of a narrow export base Figure 12: Trends in primary exports (2000-2010). 520 Average unit value (2000=100) 440 360 280 200 120 100 40 Coffee Tea Tin Coltan Wolfram 1.15 1.13 End Dec 2010=1 1.11 1.09 1.07 1.05 1.03 1.01 0.99 USD EURO 0.97 GBP 0.95 Source: BNR. ⁷Over the last five years, the cost of these services accounted for more than 5 percent of GDP. Second Edi�on | November 2011 7 Recently, one could observe changes in the structure of at the end of the first quarter of 2011 to zero at the end exports and re-exports. Tourism became in the recent of the second quarter. two years the biggest contributor of foreign exchange earnings, overtaking the tradi�onal exports of crops Informal cross-border trade is significant to Rwanda such as tea and coffee. (Figure 13) In the first half of (Table 2). Since 2009, The Ministry of Commerce, 2011, the volume and earnings from other tradi�onal Central Bank and NISR have been conduc�ng surveys on export products, such as pyrethrum, and hides and skin informal cross border trading. With these survey results, increased, reversing a diminishing trend from previous new export products have emerged, such as beans, years. Although s�ll low in contribu�on, new export wheat flour, malt beers, mineral water and livestock. products emerged in official sta�s�cs as illustrated in Informal cross border export earnings represent almost the newly collected data from an informal cross border 20 percent of Rwanda’s total exports. The main trading trading survey. Rwanda’s exports values grew steadily partners in this informal cross border trade are the DRC over the last decade, but they s�ll lag behind other SSA and Uganda. Rwanda is benefi�ng from a posi�ve cross na�ons (11.7 percent of GDP against 29.7 percent of border trade balance. In the first half of 2011, the trade GDP in 2009).⁸ balance increased by 22 percent to US$18.5 million. Figure 13: Tourism is providing two thirds of foreign Table 2: Informal cross border trade (Million US$). exchange earnings. Million US$ 2009 2010 H1-2010 H1-2011 700.0 600.0 Exports 46.6 51.7 24.6 31.0 500.0 Imports 23.5 20.6 9.5 12.5 400.0 Trade balance 23.1 31.2 15.1 18.5 300.0 Source: BNR. 200.0 1.4. MONETARY POLICY AND CREDIT 100.0 TRENDS 2006 Agriculture 2007 Minearals 2008 Tourism 2009 Other Goods 2010 Other Services M onetary �ghtening commenced in October 2011 and needs to con�nue in order to contain infla�onary pressures. Central Bank has li�ed its key Source: BNR. policy rate from 6.0 percent to 6.5 percent. This small The structure of re-exports has been changing. In the (and delayed) change might put the Government’s past three years, minerals imported from the Democra�c infla�on target of 8.7 percent at the end of 2011 in Republic of Congo (DRC) and re-exported mainly to jeopardy. Originally, BNR adopted this policy to keep Switzerland were the main components of re-exported down the costs of funds, thus making credit rela�vely products followed by petroleum products and vehicles cheap and available to the economy. Consequently, re-exported to DRC. In an�cipa�on of the effec�veness the money supply increased in the first nine months of the US Congress’ bill on conflict minerals, which of 2011 by 16.0 percent, compared to 8.4 percent over became effec�ve on April 1, 2011, the Government the same period a year ago. Despite this, the spread in March 2011 adopted and started the immediate between the KRR and lending rates remained high at implementa�on of a law to prevent smuggling of conflict around 10 percentage points. (Figure 15a) minerals, requiring anyone dealing in minerals to have a commercial registra�on. By mid-June the Government Despite persistently high interest rates and heavy announced that it had impounded 30 tons of minerals, interven�ons on the money market, lending ac�vi�es at the main border towns with DRC. Re-exported picked up. In the first half of 2011, lending ac�vi�es minerals declined from US$14.6 million (1,603.9 tons) recorded moderate growth but picked up in the third ⁸WDI database accessed on June 20, 2011 8 Second Edi�on | November 2011 Box 3: Exchange Rate Trends. The Rwandan Franc (Rwf) has been broadly stable. The Rwf depreciated by only 0.9 percent against the US dollar in the nine months from December 2010 to September 2011 (Figure 14a) and strengthened against other EAC currencies except for the Burundian franc (BIF) as the Rwf depreciated much less against the US Dollar compared to other EAC currencies (Figure 14b). The deprecia�on of the Rwf against the Dollar would have likely been higher in the absence of Central Bank interven�ons to ease the pace of depreca�on. Through the first nine months of 2011, US$261.0 million in foreign exchange was sold to commercial banks, 57.9 percent higher than the amount sold in the same period a year ago. Almost a half of the amount was sold in the third quarter of 2011. As result of the weakening US Dollar, the Rwf depreciated by 4.7 percent against the Euro and 2.5 percent against the Bri�sh Pound. The real effec�ve exchange rate remained broadly stable in the first half of 2011. (Figure 14c) Figure 14: The Rwandan Franc was affected by major currency fluctua�ons. a. but remained broadly stable against the US dollar… 1.15 1.13 End Dec 2010=1 1.11 1.09 1.07 1.05 1.03 1.01 0.99 USD EURO 0.97 GBP 0.95 b. …strengthened against EAC currencies, except the BIF 1.10 End Dec. 2010=1 1.05 1.00 0.95 0.90 0.85 0.80 UGX/Rwf TZS/Rwf BIF/Rwf KES/RWF 0.75 c. and the real exchange rate remained also stable 110.0 Jan 2005=100 Nominal Effec�ve 90.0 Real Effec�ce 70.0 Source: BNR. Second Edi�on | November 2011 9 Figure 15: Trends in interest and monetary aggregates. a. Despite high spread between the KRR and lending rates … Percent 20.0 15.0 Lending rate Key Repo Rate 10.0 9.0 7.5 7.0 6.5 6.0 5.0 b. … lending ac�vi�es picked up 50.0% Year-on-Year Changes 40.0% Broad Money (M3) 30.0% 20.0% 10.0% 0.0% 10.0% c. … with the highest growth for construc�on New Loans, billion Rwf Commerce, restaurant 85.8 & hotels 85.4 Building & public works 61.7 30.8 Not classified elsewhere 33.1 21.8 Manufacturing industries 13.7 19.8 Financial sector 16.5 7.2 Transport, warehouse & 13.5 Sept. 2011 Sept. 2010 communica�on 16.3 Agriculture 10.0 15.0 Community services 5.1 7.0 Energy and water 0.1 0.9 Mining industries - 0.1 20.0 40.0 60.0 80.0 100.0 Source: BNR. 10 Second Edi�on | November 2011 quarter, growing at 32.2 percent, compared to the Indeed, for 2012/13, revenues are projected to decline previous quarter and 43.5 percent, compared to same due to the permanent loss of fuel tax revenue. quarter a year ago. As of September 2011, new loans stood at Rwf239.4 billion, up by 17.2 percent, compared Permanent shi�s in the revenue structure will need to September 2010. Most lending was for commercial to be addressed in further consolida�on efforts. For ac�vi�es, mainly restaurants and hotels, as well as for the fiscal year that ended in June 2011 (FY 2010/11), construc�on ac�vi�es, for which loans doubled between revenues over-performed, growing by 23.7 percent, September 2010 and September 2011. (Figure 15c) owing to higher direct taxes and excise du�es⁹, but as In September 2011, the stock of credit to the private trade shi�s increasingly to the EAC partners, losses in sector rose by 29.7 percent year-on-year, while bank the collec�on of interna�onal trade taxes are expected deposits grew by 26.9 percent year-on-year. to be permanent. In 2010/11, budgetary grants also started to retreat to pre-crisis levels of around 6.7 percent, a�er reaching record levels in 2009/10 of 9.1 1.5. FISCAL TRENDS percent of GDP due to addi�onal crisis support. For the F iscal consolida�on will be difficult in light of increasing external risks. In par�cular, the looming crisis in the Euro area might have adverse affects on current 2011/12, the one-off revenue from the sale of Government assets (including for a telecommunica�on license) is planned to compensate for the permanent the fiscal outlook, since about 40 percent of the budget revenue loss from lower fuel taxes, implemented as remains financed by donor grants. Fiscal consolida�on part of this budget. These revenues are being used will need to be achieved at the expense of expenditure to con�nue to finance higher expenditures and repay cuts, as no new revenue measures are planned for the domes�c debt. current 2011/12, budget and the next 2012/13 budget. Table 3: Government budget 2009/10 - 2011/12 (Percent of GDP). 2009/10 2010/11 2011/12 Revenue and grants 25.6 24.8 25.0 Domes�c revenue 12.5 13.9 13.6 Tax revenue 12.0 13.3 12.9 Direct taxes 4.8 5.2 5.4 Taxes on goods and services 6.2 7.0 6.4 Taxes on interna�onal trade 1.0 1.1 1.2 Non-tax revenue 0.5 0.6 0.7 Grants 13.1 10.9 11.4 Budgetary grants 9.1 6.2 6.7 Capital grants 4.0 4.7 4.7 Total expenditure and net lending 26.1 28.6 27.5 Current expenditure 14.7 15.1 15.1 Wages and salaries 3.4 3.5 3.7 Purchases of goods and services 3.4 3.6 6.2 Interest payments 0.5 0.4 0.4 Transfers 5.7 5.7 3.8 Excep�onal social expenditure 1.7 2.0 1.0 Capital expenditure 10.1 12.6 11.6 Domes�c 5.1 6.3 4.9 Foreign 5.0 6.3 6.7 Net lending 0.9 0.5 0.5 Change in arrears (- net reduc�on) -0.4 -0.3 -0.2 Overall Deficit -0.5 -3.8 -2.5 Source: Ministry of Finance and Economic Planning (MINECOFIN). Second Edi�on | November 2011 11 Figure 17: The overdra� facility and the issuance of Fiscal pressures are increasing and will warrant high treasury bills were used to finance xpenditure expenditure discipline in the coming year. In 2010/11 Billion Rwf higher revenues were offset by higher than projected 100.0 expenditures in all categories except externally financed capital expenditures, resul�ng in a widening of the fiscal deficit to 3.8 percent of GDP, compared to 0.5 percent in 2009/10. (Figure 16) In 2010/11, the Government had to 50.0 maintain high overdra� levels at Central Bank, and also sell a large amount of domes�c security instruments. This happened especially during those periods when aid disbursements for budget support lagged, and at 0.0 the end of fiscal quarters when it was necessary to pay for priority expenditures. (Figure 17) For the current Budget Support Capital/Project Tbills Outstanding Overdra�/end month 2011/12, the fiscal def icit is expected to stay in line Source: MINECOFIN and BNR. with the budget projec�ons at 2.5 percent of GDP, due Transport and communica�on development spending to one-off revenues. focused on road construc�on, including the improvement of the na�onal road network and road rehabilita�on. The 2010/11 budget and its implementa�on were In the produc�ve sector key investments went into largely aligned to the Government priority sectors. It agriculture, which saw its share increase from 4 percent was �lted towards the financing of large infrastructure of total expenditure in 2009/10 to 6 percent in 2010/11. projects, which are planned to remove bo�lenecks In response to the previous food crisis, the Government to economic development.¹⁰ The infrastructure and rapidly extended its flagship programs, including the produc�ve sectors saw their shares increasing from 14.0 Crop Intensifica�on Program and the Immediate Ac�on percent and 6.2 percent in 2009/10 to 21.2 percent and Irriga�on Program, to increase local food produc�on. 11.4 percent in 2010/11 respec�vely.¹¹ Almost 45 percent The Government is also rapidly building up a Strategic of the budget was spent on development expenditure, Grain Reserve. These ac�vi�es resulted in an almost 30 con�nuing a rising trend of previous years. (Figure 18) percent overspending in this sector. Figure 16: The fiscal s�mulus widened the deficit. Figure 18: Development expenditure are absorbing an increasing budget share. Percent of GDP 4.0 80.0 Percent of Budget 3.0 2.0 60.0 1.0 0.9 0.0 -0.5 40.0 -0.5 -1.0 -1.9 -1.9 -2.0 -3.8 20.0 -3.0 -4.0 2006 2007 2008 2009 mini 2009/10 2010/11 - Fiscal balance Foreign Financing Domes�c Financing 2006 2007 2008 2009 mini 2009/10 2010/11 Recurrent expenditure Development expenditure Source: MINECOFIN. Source: MINECOFIN. ⁹ Direct taxes and taxes on goods & services exceeded expecta�ons with growth of over 21 percent and 25 percent respec�vely. ¹⁰ These projects included: road rehabilita�on and new roads in Kigali City, rehabilita�on and extension of the classified paved road network, rehabilita�on and extension of gravel roads, rehabilita�on and extension of rural feeder roads, scaling-up the Land Husbandry, Hillside Irriga�on and Water Harves�ng program, etc. Almost sixty percent of the 2010/11 development budget was spent by only three en��es: MININFRA (27.8 percent), MINICOM (16.5 percent), and MINAGRI (10.3 percent) compared to 37.3 percent in 2010/11. ¹¹ Produc�ve sector include agriculture, trade & industry and environment protec�on while infrastructure includes transport & communica�on, fuel & energy, water & sanita�on and land housing & community ameni�es. 12 Second Edi�on | November 2011 In recogni�on of growing balance of payments budget was 147 percent overspent in 2010/11. The pressures, the Government spending in industry human development and social protec�on, governance and commerce increased by almost 240 percent to and sovereignty sectors con�nued to receive the largest promote economic development, from 2 percent of budget shares, although spending in these categories total spending in 2009/10 to 5 percent in 2010/11. declined. (Figure 19)¹² The educa�on sector’s share These included export and tourism promo�on ac�vi�es, of total expenditure was 17 percent, 4 percent higher promo�on of business support services, including than in 2009/10 in absolute terms, and included the micro-credit schemes (SACCOs), and the strengthening recruitment of 6,000 new teachers. Spending in the of the coopera�ve movement. health sector accounted for 8 percent and for social protec�on, 5 percent of total expenditure. Hikes in interna�onal fuel and food prices influenced Government spending, especially in providing fuel Overall, budget execu�on improved in 2010/11, but subsidies for thermal energy genera�on. As a result remained uneven across budget en��es (Annex 4). of the heavy subsidies for diesel power genera�on, From a budget execu�on rate of 98 percent in 2009/10, transfers and subsidies for the energy sector exceeded the overall execu�on rate increased to 101 percent in projec�ons, but remained within 20 percent of the 2010/11, ranging from 49 percent to 133 percent across previous year’s budget share. Spending on fuel and budget en��es. MINECOFIN was the biggest spender in energy increased from 5 percent in 2009/10 to 7 absolute and rela�ve terms, with more than two thirds percent of total expenditure in 2010/11. More than one of its budget being absorbed by budget prepara�on and third of this amount was used for subsidizing power planning. Districts were the second largest spender, genera�on, by financing rented diesel power generators followed by the Ministry of Infrastructure and the and paying du�es on fuel imports. Overall the energy Ministry of Local Governance. Figure 19: Government’s budget priori�es. Share of Expenditure (Percent) Water & Sanita�on, 1.4% Land Housing & Community Youth Culture & Sports, 1.2% Ameni�es, 1.8% Environmental Protec�on, 0.5% Social Protec�on, 4.5% Industry & Commerce, 4.9% General Public Service, 25.2% Defence, 5.8% Public Order & Safety, 5.9% Agriculture, 6.0% Educa�on, 16.9% Fuel & Energy, 7.1% Transport & Health, 7.9% Communica�on, 11.0% Source: MINECOFIN. ¹²Human development and social protec�on includes educa�on, health, social protec�on and youth, culture & sports sectors. Governance and sovereignty comprises general public service, public order & safety and defense func�ons. Second Edi�on | November 2011 13 1.6. OUTLOOK AND RISKS significant impact on economic growth, as it limited credit to the private sector. It is a mixed blessing that R wanda’s outlook is rela�vely robust, but con�ngent on three essen�al precondi�ons. First, prudent macroeconomic management will con�nue, infla�on is the financial sector in Rwanda remains small, illiquid and not much integrated with interna�onal markets. But the small market size and structural limita�ons keep contained to single digits and the exchange rate remains domes�c financing costs high. Although private sector stable. Second, the global economy will experience credit growth has increased (especially for consumer moderate growth in 2012 and even higher growth in financing and a few large enterprises) financial access 2013, ensuring robust export demand, stable commodity for Small and Medium Enterprises (SMEs) remains prices, increased tourism arrivals and con�nued aid limited, which can stunt growth. Other transmission inflows. Third, fuel and imported food prices con�nue mechanisms of a new crisis are likely to be the same as to moderate, improving the current account posi�on previously, in regard to demand and prices for its key and enhancing growth prospects. export goods and services. Also, Rwanda’s export base did not change much and remains narrow, for example Infla�on expecta�ons con�nue to be moderate based tea, coffee, minerals and tourism. Overall FDI levels are on two observa�ons. First, the Central Bank has started low, but they might even become more suppressed if to �ghten monetary policy and is commi�ed to con�nue another global crisis was to develop. doing so in 2012. Second, food infla�on started to ease off and prices for imported oil and food have started to The most substan�al risk for Rwanda is that its budget come down. is s�ll heavily reliant on grant financing. While in the previous crisis donors came around to provide extra Growth prospects will also benefit gradually from budget support, this is unlikely to happen in the current ongoing strategic public investments in infrastructure. crisis, as many donor countries face fiscal �ghtening. This will lead to an increase in private investment in This would leave the country with only limited and sub- produc�ve enterprises. Consump�on is expected to op�mal alterna�ve financing op�ons. One could also remain high, albeit more controlled, and will be boosted argue that high aid flows, as Rwanda experienced up to by the recent good harvest season. date, could have an adverse impact on macroeconomic outcomes and inhibit export growth, if it leads to The pressure on external balances is easing. Moderate currency overvalua�on. However, in the past Rwanda growth in main donor countries will allow aid levels to managed aid flows well and used it for produc�ve public remain high. This will also help keep commodity prices, investment and public services, mi�ga�ng this risk. for example, minerals and beverage crops high, and guarantee stable tourism revenue. Lower fuel prices The main difference to the previous crisis is that will be key in bringing the Import Bill down. Aggregate Rwanda’s economy appears to be more resilient. demand for imports will be controlled by �ghter Rwanda is now benefi�ng to a much larger extent from monetary policy. There is latent risk from the impact higher regional integra�on, for example, it sources more of the EURO crisis. The 2008/09 crisis had adverse imports from neighboring countries than from Europe, effects on Rwanda as a result of: (a) a trade shock, and has developing export markets in its immediate due to declining external demand for Rwandan goods neighbors. The Government also has established a and services (mainly for tourism, coffee and mineral good track record of prudent macroeconomic and fiscal exports), and a slump in commodity prices, par�cularly management, and the country used its fiscal s�mulus for minerals; and (b) lower financial inflows in the form package to ease constraints in economic development. of Foreign Direct Investment (FDI) and remi�ances. For the future, Rwanda needs to adopt a more cau�ous During the 2008/09 global economic turmoil, Rwanda fiscalstance,despitepoten�aladversegrowthprospects, also experienced low liquidity in the domes�c banking as the fiscal space is now smaller with limited room for sector, unrelated to the external events. This had employing counter-cyclical policies. 14 Second Edi�on | November 2011 PART TWO Employment Crea�on and Poverty Reduc�on in Rwanda -- The Role of Household Enterprises Rwanda wants to transform into a modern, highly produc�ve, export oriented economy. This transi�on faces many challenges as Rwanda is currently a rural agricultural based economy, and there is need for the Government to develop policies which will increase the produc�vity of all sectors in the economy. This includes a part of the economy that is household-based; farms and businesses which are the source of livelihood for more than 80 percent of households. Challenges of increasing the produc�vity of household agriculture was the focus of the previous Economic Update edi�on, whereas this edi�on focuses on rising the produc�vity of household enterprises. Second Edi�on | November 2011 15 2.1. INTRODUCTION to be an essen�al part of development and poverty reduc�on strategy. Before policies and interven�ons W hat are Household Enterprises (HEs)? These are enterprises which engage in non-farm ac�vi�es, o�en operated by an individual (the owner), or are redesigned to incorporate the HE sector, there is need to have a be�er understanding of its dynamics, constraints, and poten�al. supported by family members. HEs are a dis�nct sub- sector within the micro and small enterprise sector The objec�ves of this issue’s special topic are: (i). (MSEs). The difference between the two is that the to locate HEs in the na�onal economy, and provide a la�er operates with hired labor, while HEs do not. Box profile for them by establishing: Who and where they 4 illustrates the determinants of HEs. Data used in this are? What they do? Why they are established? What report has been obtained from the latest household their role is? (ii). to iden�fy the constraints and risks survey of the EICV2 (2005/2006) and complemented faced by HEs; and (iii). to review policies which affect with results from a qualita�ve Household Enterprise HEs, and determine how they can be refined in order to Survey of 2010 (See Annex 5). contribute to the a�ainment of Rwanda’s development targets.¹³ Considering the significant contribu�on HEs have made and can make in the future to create income and employment, the Government could broaden 2.2. HOUSEHOLDS ENTERPRISES AND THE its policy framework to provide specific and targeted NATIONAL ECONOMY R support. Such support would help to ensure that the wanda has been fortunate to achieve high and ambi�ous targets set out in the Vision 2020 and the steady economic growth since 1994. On average, the Economic Development and Poverty Reduc�on Strategy GDP per capita increased by 6 percent annually over the (EDPRS), are inclusive. To date there is no coherent period 1994 to 2009. The industrial and service sectors strategy specifically directed towards the development have grown faster than agriculture, which accounted of household enterprises. This means that there is no for only 34 percent of the GDP in 2009, compared to specific strategy for a sector which was the primary 50 percent in 1994. Most of the decline in the share of employment of 9 percent of the labor force, an important agriculture in the GDP was filled by the service sector; source of income for nearly 30 percent of households in the manufacturing sector is yet to take off. Importantly, 2006. As the labor force becomes more educated and most of the growth in the share of the non-agricultural income rises, the importance of this sector cannot be sectors occurred during the period of recovery a�er the overlooked. genocide. In the past decade, the shares have remained constant, meaning that overall growth in value added This sec�on will illustrate how HEs form an essen�al was driven by increases in produc�on and produc�vity part of Rwanda’s households’ livelihood, where the within the sectors, and not by sectoral shi�s, as would number of people who have a�ained an educa�on be expected during a period of rapid transforma�on. lever higher than primary school is minimal. Even The share of the popula�on under the poverty line with con�nued good growth rates and Rwanda’s declined slightly between 2000 and 2006, even though excellent progress in primary and secondary educa�on, the number the poor increased as the overall popula�on projec�ons show that only about 20 percent of the grew. (Figure 20)¹⁴ labor force will have completed secondary educa�on by 2020 to be able to qualify for paying jobs in modern The structure of employment was also transformed. firms. For the other 80 percent labor force, household Between 2000 and 2006, non-agricultural employment enterprises provide a solu�on to the land squeeze that expanded as a share of the labor force, and within sectors, Rwanda is facing (as described in the previous Economic the type of employment was transformed as well. (Figure Update), and an alterna�ve to underemployment or 21) In agriculture, majority of new primary employment subsistence agriculture. Sustaining the growth and jobs were created in the wage segment, in response to improving the produc�vity of HEs in Rwanda needs ¹³This sec�on of the REU is based on a study of household enterprises in Rwanda, undertaken jointly by the World Bank, The Government of Rwanda, and the Ins�tute of Policy Analysis and Research – Rwanda (IPAR). ¹⁴The latest data on households, including the es�mate on the headcount of poverty in Rwanda comes from the 2005/6 EICV survey. As a result, most of the quan�ta�ve data in this sec�on is from 2006. Annex 6 provides background informa�on on the data sources used for this report. 16 Second Edi�on | November 2011 Box 4: Informal Enterprises and HEs. The informal economy is an extensive term used in many contexts, o�en with different meanings. It refers to a condi�on of employment and a condi�on of firm behavior. Informal employment generally refers to workers who do not have a contract that is in accordance with na�onal labor regula�ons. This type of employment can be found in any kind of firm, those in the formal as well as informal economy. Firms in the informal economy are also commonly referred to as micro and small enterprises. Some�mes the terms are used interchangeably, but some�mes a dis�nc�on is made between formal and informal MSEs (with criteria specified or not). The general characteris�c of informal firms is that they are unincorporated; other criteria include whether they have a registered business name with the some government authority and whether they pay taxes. Enterprises owned by households are normally unincorporated, and are run by self employed persons, which may engage family and casual workers or employ one or more workers and/or appren�ces on a con�nuous basis (up to a specified number which may vary by country). As unincorporated businesses, their legal and financial basis rests in the household, although their ac�vi�es may take place outside the household. Most defini�ons would lump these all together as informal MSEs. This study focuses on the very smallest enterprises in this group, the household enterprises (HEs) as these en��es are the majority of the informal enterprises in Rwanda, and are uniquely situated within the informal economy. They deserve their own category. We define HEs as those unincorporated enterprises which do not employ persons from outside the household. In 2006, according to EICV data, HEs accounted for 95 percent of the unincorporated household businesses tracked in the survey. HEs form an important and dis�nct sub- sector, to be differen�ated from micro-enterprises. While their contribu�on to aggregate economic growth is usually unmeasured, they are important for household livelihoods and poverty allevia�on. The large number of households adding an HE to increase their income signifies the importance of HEs as a livelihood strategy. Table 4: Most unincorporated micro enterprises in Rwanda are HEs. Enterprise defini�on Enterprise type Share of all businesses reported by household HE Owner with no help 80.4% HE Owner with family help 15.1% MSE Owner with employees 4.5% of which • Less 5 than employees 3.6% • 6 to 10 employees 0.4% • more than 11employees 0.5% Source: EICV 2005/6. Second Edi�on | November 2011 17 Figure 20: Trend in GDP Composi�on, real GDP per Figure 22: Agricultural wage employment was the largest capita, and poverty. contributor to new job growth, 2000-2006. 100 90 100000 80 6% 80000 G D P per capita 70 P ercentage 60 27% 60000 50 Wage public sector 40 40000 30 27% 20 Wage private sector 20000 10 (non agriculture) 0 0 Wage agriculture 08 02 04 06 09 98 00 92 96 94 90 20 Household Enterprises 20 20 20 20 19 20 19 19 19 19 Agriculture (% of GDP) Industry (% of GDP) Services (% of GDP) 41% Poverty headcount GDP per capita (constant LCU) (right scale) Source: EICV 2000/1 and 2005/6. Source: Word Development Indicators. Figure 23: But in 2006 women were s�ll concentrated in Figure 21: Family farming shrunk as a share of primary the agricultural sector, which s�ll dominates the employment, 2000-2006. structure of primary employment. Employer 0.2 0.7 Self-Emp/Non- Family Farm -1 wage Wage workers secure contract 4.6 13.8 HE 18 Annual Wage workers without secure contract 1.7 7.8 growth rate Agric. 32 2000 to 2005 Wage Employment 2005 HE without outside HH employees 6.9 10.8 2000 Private 21 Agriculture 86.6 67.0 Public 10 100 80 60 40 20 0 20 40 60 80 Female as % of employment Male as % of employment 0 20 40 60 80 100 ������������������� Source: EICV 2000/1 and 2005/6. Source: EICV 2000/1 and 2005/6. Note: Agricultural wage employment included in the agriculture bar; wage work refers to public and private non-agriculture. increased demand for labor from the restructured tea of responsibili�es, two-third of HEs are operated by estates and other large farming enterprises. Indeed, the female. This suggests that there may be opportuni�es share of the employed repor�ng smallholder agriculture for expansion in this sector by encouraging women to as primary employment declined, as did the absolute get involved. (Figure 23) number. In the non-agricultural sector, by contrast, new primary employment jobs were created in both the A more complete picture of the transforma�on is private wage segment and the household enterprises seen by looking at households’ livelihood, because segment. (Figure 22) households are increasingly engaging in mul�ple income sources. (Figure 24) Nearly half of the Despite the recent growth, both the nonagricultural employed popula�on in 2006 reported to have more wage and the HE segments remain minimal as a share than one source of income, so the above graphs on the of total employment, and are dominated by men. While most commonly used indicator, primary employment, this is o�en explained by the fact that looking a�er the does not provide a complete narra�ve of employment home and children remains a woman’s responsibility and income transforma�on. In par�cular, the in Rwanda, in Ghana where women have the same set importance of both household enterprises and small 18 Second Edi�on | November 2011 Figure 24: Households added income sources between share of households with a HE increased from 15 to 2000 and 2006; they did not switch sources. 26 percent. In Kigali and other urban areas, where HEs were already widespread, there was a modest growth Wage public – basically increasing according to the number of Wage private households. (Figure 25) One would expect HEs to grow in rural areas in tandem with an increase in agricultural Wage agriculture incomes, which provid market opportuni�es for rural- 2000/1 based HEs. Household enterprise 2005/6 Family farm Majority of HEs (86 percent) operate in the service sector, reflec�ng both high growth and the importance 0.0 20.0 40.0 60.0 80.0 100.0 of the service sector. Within this sector, the single most % of Households with income source important ac�vity was wholesale and retail trading. The sector has a high number of female HE operators. Source: EICV 2000/1 and 2005/6. The number of male operators was high in transport, holder farming as a source of income is understated. communica�on, and other service jobs, while both male Between 2000 and 2006, households doubled their and female operate in basic manufacturing fields such source of income, with the increase coming from as making small cra� objects for sale, brewing, selling non-agricultural ac�vi�es. In some rural households, food and beverages, and milling grain. a family member le� the household farm to go for wage employment in a commercial farm (18 percent 2.3. WHY IS GROWTH AND of all two income households in 2006). But for many SUSTAINABILITY OF HOUSEHOLD households, the extra income came from adding a HE as another income earning ac�vity (60 percent of all two ENTERPRISES IMPORTANT TO RWANDA? income households have an HE). By 2006, 30 percent of households in Rwanda relied on HEs as a source of income – more than twice the number of individuals O ne of the key roles of HEs at Rwanda’s stage in development is to to provide addi�onal income earning opportuni�es outside agriculture for reported HEs ac�vi�es as their primary employment. households with an underemployed labor force. In HEs increased more rapidly in rural areas, where the rural areas, as income in the agriculture sector increased, Figure 25: HEs by area. There are more HEs in rural areas in Rwanda. But the prevalence is higher in urban areas. 400,000 40% 350,000 35% P e rc e n t o f h o u s e h o ld s w it h H E 300,000 30% N u m b e r o f H Es 250,000 25% 200,000 2000/1 20% 2000/1 150,000 2005/6 15% 2005/6 100,000 10% 50,000 5% 0 0% Urban Rural Urban Rural Source: EICV 2000/1 and 2005/6. Second Edi�on | November 2011 19 households used their off season labor to earn extra increase, and rarely kick off a growth process. They can cash. Growing income increased the local demand for help to sustain it in low and middle income countries, goods and services, and HEs were created. In urban by providing increased employment, more produc�vity areas, HEs provided income earning opportuni�es to hours per person, and higher income. HEs have played workers who did not have enough educa�on or skills this facilita�ng role in the past in “Asian Tiger” countries. to qualify for regular and stable wage and salary jobs. However, HEs are not a development op�on for remote, Secondary educa�on is the minimum educa�on level chronically poor agricultural areas, as demand will not for almost half of the urban labor force; many did not be adequate to sustain their existence. In addi�on, HEs complete primary educa�on. These workers do not are not the solu�on to lack of wage and salary jobs. qualify for most wage and salary jobs in medium and Even profitable HEs are not likely to grow out of the large enterprises. This is not surprising as experience has nano enterprise sector. Evidence from other regions as taught employers that without the literacy, numeracy, well as Africa shows that few HEs rarely hire employees and problem-solving skills that basic general educa�on from outside the family. provides, on–the-job training is not effec�ve. HEs offer the only livelihood opportunity outside agriculture. And Although HEs are o�en low produc�vity ac�vi�es those who need flexibility in working hours, or want compared to large firms which employ many workers, to be self employed, choose to operate HEs. In urban their earnings are usually higher on average compared areas, HEs tend to be more profitable, and are reported to other available alterna�ves, for example working to be the primary economic ac�vity for most individuals in the lower produc�vity agriculture as a wage or and households, while in rural areas, they are regarded non-wage work. The analysis, in Figure 26 which was as part �me occupa�ons. Rwanda’s development from established in 2006, shows that on average, HE earnings 2000 to 2006 fi�ed into this pa�ern. Not only were HEs were higher than agricultural earnings, but a bit lower more common in urban areas, but most of the owners than non-agricultural wage earnings. Note that the were reported to operate their businesses full �me. bo�om axis in Figure 26 is a log scale; as one moves from le� to right, earnings increase a lot faster. The peak HEs grow and survive because they provide low-cost of each curve is the median earning – what the average goods and services in a growing, but less developed person makes, while the width of the area under the economy which lacks a modern service sector. In curve shows the distribu�on of earnings (variance). urban areas, mobile retail traders subs�tute for While median agricultural earnings were lower than convenience stores, shopping malls, and the internet. non-agricultural earnings in 2006, the variance was also HEs provide services such as barber shops and take- smaller, indica�ng that the risks and rewards are both out food. They manufacture low-quality goods such as lower in this sector. home-made bricks, roof thatching, furniture, and iron Figure 26: Distribu�on of earnings by source, 2006. work; which typically will not be demanded as income 0.5 increases, cheaper mass-produced goods enter into the market, o�en of a higher quality (see Annex 6 for a 0.4 % of earners in segment list of common HEs in Rwanda). Based on this, services tend to dominate the sector, and to persist longer than 0.3 manufacturing ac�vi�es. HEs mostly sell goods and 0.2 services to households - they are not linked to supply chains except in a few cases - where wholesalers use 0.1 informal retail networks to reach consumers. The mobile phone card sales network is an example. 0.0 7 8 9 8,100 10 11 60,000 12 13 1,200,000 14 1,100 Given the retail nature of sales, HEs depend on Income primary job ($RWF, 2006) growth in both agriculture wage and salary incomes Agriculture Wage Household Enterprise to survive. Many HEs are service based, with a high Source: EICV 2005/6. income elas�city of demand. They thrive as incomes Note: “agriculture” includes both agricultural wage earnings and small holder. 20 Second Edi�on | November 2011 People with high educa�on training were able to agricultural wage work, and highly paid modern sector earn high salaries, and were found at the far right jobs. Strong correla�ons between growing HE income end of the earnings distribu�on. Wage earnings were and poverty reduc�on have been found in a number of higher than HE earnings in Asian countries (Haggblade et al, 2010). 2006, and can be expected “When we were farming to stay that way. But there Encouraging the forma�on of HEs, and promo�ng survival was very is a significant overlap in difficult, but now it is a their growth and sustainability, should be part of the distribu�on, indica�ng that li�le be�er because we Government’s policy framework. HEs will form an even when operated as a make some money every essen�al part of Rwanda households’ livelihood, even primary employment, HEs do day so we have some with con�nued high growth rates and excellent progress not earn as much net income cash. This enables us to in primary and secondary educa�on. Projec�ons indicate as the highest produc�vity meet our immediate that only about 20 percent of the labor force will have smallholder agricultural, needs.” completed secondary educa�on by 2020, and thus be while others do be�er than able qualify for high produc�ve jobs in the modern the median earnings in Focus group par�cipant economy. For the other 80 percent labor force, HEs will in the Southern Province private wage employment. remain an important employment alterna�ve. While evidence of the effec�veness of HEs in poverty 2.4. WHO OPERATES AN HE AN D WHY? reduc�on in Rwanda is limited, ownership is posi�vely associated with increased household income. (Figure A STATISTICAL PICTURE OF THE HE 27) HE ownership is concentrated in the upper SECTOR D consump�on quin�les. The posi�ve correla�on between eveloping effec�ve policies and programs in higher consump�on and HE ownership in Rwanda is the HE sector requires first and foremost, an not evidence that HEs reduce poverty, because it is not understanding of ‘who is, and who is not’, in this clear whether HEs make households richer, or whether segment of employment and why. This includes the they are already be�er-off with access to start-up personal characteris�cs of HE owners, their mo�ves for capital. Evidence from other SSA countries suggests the entering the sector, what they earn and how they earn la�er. Studies have also shown that HE owners in rural it, and the constraints and opportuni�es they perceive. households are able to work more hours per month/ This sec�on uses data from the EICV2 household survey year, which is one reason why HEs are a vehicle to of 2006, supplemented by what was gathered from share growth. They create a middle class by filling in the focus group discussions (FGD) around Rwanda held by gaps in the labor produc�vity and income distribu�ons researchers from IPAR, and other sources. between smallholder agriculture or low paying Figure 27: Higher quin�les are more likely to have an The likelihood of people owning a HE increases as HE in Rwanda. they gain more educa�on, but falls drama�cally a�er they complete secondary educa�on. In 2006, the 50 Rwandan labor force was poorly educated. 17 percent 40 never a�ended school, 48 percent had incomplete 30 primary educa�on, and only 27 percent had completed Percent 20 primary or above. (Figure 28) Most of those with less 10 than secondary educa�on declared their primary 0 ac�vity to be in agriculture (either in a wage or non- wage capacity). Educa�onal a�ainment at the level of complete secondary educa�on or above enables people to qualify for wage jobs, which tends to be more desirable, and therefore, most people at this educa�on Share of households in quin�le having an HE level go for jobs in the public or private sector. HE Source: EICV 2000/1 and 2005/6. owners tend to be be�er educated (Figure 28), few are Second Edi�on | November 2011 21 Figure 28: Most of the labor force is poorly educated. Youth in Rwanda tend to be more educated than the 50.0 older genera�on, and are more likely to get be�er 45.0 paying jobs, which explain the low par�cipa�on in HEs 40.0 by the 15 to 24 age group. Reduced compe��veness, 35.0 low educa�on and diminished energy, have been cited Percent 30.0 25.0 as possible reasons for a decline in HEs among the older 20.0 genera�on. 15.0 10.0 Figure 30: Close to half of all HEs are operated by people 5.0 in the 20-34 year old age bracket. 0.0 No Primary, Completed Post Incomplete Completed Above educa�onnot completed primary primary secondary secondary secondary 25 voc. edu. Share of labor force Share of HE owner within educa�on level 20 Source: EICV 2000/1 and 2005/6. 15 Share of Popula�on highly educated (have completed secondary or post- 10 secondary educa�on). Most of the workforce with poor Share of age group educa�on (incomplete primary and no educa�on) work 5 with HE in family farms (Figure 29), while majority of those 0 working in HEs have some educa�on, ranging from 15 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 65 primary not completed - to incomplete secondary. Figure 29: Most of the poorly educated labor force work on family farms. Source: EICV 2005/6. ` 100% Some people think that the growth of HEs in urban Primary employment distribution 90% 80% areas is caused by an influx of migrants, but this is not 70% 60% true. One quarter of HE owners were migrants in urban 50% Wage Public areas in 2006, but this fact mostly indicates the high 40% 30% Wage Private propor�on of migrants in urban areas (24 percent of 20% Household enterprise adults). Majority of migrants in 2006 reported that they 10% 0% Wage Agriculture migrated for family or other reasons, but not to secure Family Farm employment. During the same period, migrants were less likely to start HEs compared to long �me residents, since most of the migrants had secondary educa�on or higher, and were able to obtain wage and salary jobs. Three out of four HE owners were not migrants, which Source: EICV 2005/6. goes to show that migrants are not responsible for Youth are less likely to be HE owners. The probability of growth in HEs. owning a HE steadily increased from age 15 and drops a�er age 30. (Figure 30) Between 20 to 24 years, the Both “push factors” and/or “pull factors” play a role probability of opera�ng a HE is about 15 percent, and in the decision made by households to run their steadily rises to 22 percent between the 30 to 34 age own HEs. The perceived opportunity to earn a be�er group, at which point the percentage starts to decline. living through HEs, the ease of entry into the sector One factor of having a rela�vely low figure in the under (because of rela�vely less capital and less educa�on/ 20 age group is that new entrants in the labor force skills required), and the desire to be one’s own boss, may have trouble ge�ng capital to start a business. are the key mo�va�ng factors which “pull” households Addi�onally, a person in the 15 age group who is already into star�ng HEs. The inability to find any other job in the labor force is most probably poorly educated. op�ons, lack of land, and lack of educa�on and/or skills 22 Second Edi�on | November 2011 are the primary “push” factors. Findings of FGDs held HE earnings. However, less than 10 percent of HE owners in 2010 established that people living in rural areas had gone through these programs. An appren�ceship tend to cite “push” factors, while those in urban areas was a more common form of training and HE owners cited both. Men and women had almost similar reasons with post primary educa�on were more likely to obtain for wan�ng to operate a HE, although the desire to appren�ceships than those with primary educa�on or combine home and work was a greater mo�vator for less. (Figure 32)¹⁵ In 2006, appren�ceship programs women, especially those who were engaged in trading seemed to result in higher earnings for male and those and hawking businesses. Regardless of whether they in urban areas. Findings in country studies as well as entered because of “push” or “pull” reasons, those others research showed that gender is o�en biased on interviewed in FGDs expressed their sa�sfac�on with the enrolment in appren�ceship. In some countries, it is choices made. Most found running a HE a sa�sfactory Figure 32: HE owners more likely to have training especially way to make a living, and majority were sa�sfied with a�er comple�ng primary educa�on. Popula�on aged 15 years old and above Figure 31: The majority of HE owners find their business 50.0 rewarding. 45.0 40.0 100 35.0 Percent 30.0 90 25.0 80 20.0 70 Sa�sfied 15.0 60 10.0 50 4 5.0 40 3 0.0 30 No educa�on Primary, not Completed Post primary Incomplete Completed Above All 2 completed primary voc. edu. secondary secondary secondary 20 10 Dissa�sfied Share of labor force Share of LF with appren�ceship Share of HE owners with appren�ceship 0 Money from HE Development Way of making Source: EICV 2005/6. of HE a living because female tradi�onally train in sectors where the Source: Focus group discussions, 2010. market is saturated or diminishing, such as tailoring their earnings. (Figure 31) (World Bank, 2011). Other factors which contributed to higher earnings Educa�on and business skills play a big role in in 2006 were the type of ac�vity and �me spent on determining HE earnings (see Annex 7 for regression the HE. In rural areas, trading and commerce was by analysis results). HE owners who completed primary far the most lucra�ve sector, but this did not hold in educa�on earned 40 percent more than those who did urban areas, where sectors such as manufacturing and not complete primary educa�on. Those who completed personal services yielded equally high returns. Opera�ng secondary educa�on earned 75 percent more, with the business as a primary ac�vity, all year around was even higher returns for the few who had completed associated with 20 percent higher earnings, but it may secondary and above. Only 12 percent of men and 5 be that only those who made a good living off their HE percent of women reported to have kept any form of operated all year round. However, working 20 hours or books or accoun�ng records, a prac�ce which a�ributed more during the week on HE was not associated with to higher earnings of between 35 to 45 percent. higher earnings. It seems that most HE owners did not work full �me; the median number of hours was 24. Rwanda’s post school technical and voca�on programs Working more than 25 hours per week was the norm appear to have a posi�ve effect on HE earnings. in urban areas, but not in rural areas. The number of According to the 2006 Household Living Condi�ons hours worked showed diminishing returns in the 2006 (EICV2) data, post primary educa�on Voca�onal Training data. This result is completely consistent with HEs being Centers (VTCs, or CFJs in French) had a posi�ve effect on a secondary ac�vity for many. ¹⁵Some appren�ceships may have been provided by the VTCs. Second Edi�on | November 2011 23 2.5. CONSTRAINTS AND RISKS TO HES The main challenges in star�ng up a HE appear to be findingcapitalandge�ngaccessto aloca�ontooperate A lthough HE owners interviewed in the FGDs were overall sa�sfied with their livelihood choice, they also cited a number of factors which they felt from. (Figure 34) Four out of ten HE owners in 2005/ 2006 reported no major problems faced when se�ng up their business. For those who reported difficul�es constrained their opportuni�es for higher earnings during start-up, one out of five reported lack of market and more success. (Figure 33) HE owners discussed the access as the main constraint, and another 20 percent risks associated with opera�ng their businesses. The cited inadequate capital as their main constraint. HE results of the FGD discussions yielded similar results to owners who did not apply for formal credit facili�es did the ones cited by urban microenterprises in the FIAS so because they thought that they could not meet the (2006) report, and those cited by HE owners in the 2006 requirements, or they could not pay the interest. Thus, EICV. This indicates that constraints are longstanding, for their start-up capital, only 2.5 percent of HE owners and have not yet been addressed through policies or used credit from formal lending ins�tu�ons; most relied programs. Note that all of the discussion on constraints on savings or support from family and/or friends. and risks from all sources underes�mated the extent of the problems, especially for a start-up HE, since the In opera�ng and growing HEs, owners con�nued to surveys and FGDs excluded those who would have liked face the challenges of access to opera�ng loca�ons to set up a HE, but have not been able, or have tried and and finance, skill limita�ons, and lack of proper failed. infrastructures. Figure 33: FGD respondents were pre�y dissa�sfied with their working environment. • Access to and cost of financing is the number one 100 constraint to increased income or businesses growth 90 listed by HEs and MSEs. An astonishing 90 percent 80 70 of MSE owners listed finance as a constraint (FIAS, 60 50 Sa�sfied 2006). In the FGD report, they expressed their 40 30 4 willingness to borrow money for business expansion, 3 20 2 but acknowledged the fact that they lacked the 10 0 Dissa�sfied capacity to service the loan in the event that they did not make adequate profit. Other research findings indicate that lack of lending from formal financial ins�tu�ons was due to lack of knowledge by owners, of available lending ins�tu�ons, lack of trust “We have been forced to move from where we Source: Focus group discussions, 2010 in these ins�tu�ons, high work and it has become interest rates, and the difficult to get Figure 34: Owners report several challenges to star�ng short repayment periods customers. It is not a up an HE. market any more. It is (Napier, 2010). Other, • Securing workspace just an open space, rain No damages our goods and 23.0 difficulty, and opera�ng loca�ons the funny thing is that 38.9 close to foot traffic and the local authori�es customers is a pressing con�nue to tax us.” Loca�on, 5.5 constraint for most HEs. Local authori�es are Focus group par�cipant. expected to develop town No market/Access to market, 12.3 master plans with zoning provisions for different Lack of ac�vi�es including marketplaces. But there seems capital, 20.3 to be a shortage of space to be allocated to HEs, and Source: EICV 2005/6. the spaced which is available is o�en not suitable. Local authori�es at �mes arbitrarily move HEs to 24 Second Edi�on | November 2011 poorly constructed or underserviced marketplaces, Government support (for instance, the SME policy is at loca�ons that are far from poten�al customers. limited to enterprises with hired labor). With no explicit Overall, both microenterprises and HEs reported policy framework to promote their development, HEs lack of support from local governments. are largely overlooked and their specific needs le� • Lack of transport infrastructure, high electricity unaddressed. There are a number of ini�a�ves in costs and taxes are also viewed as barriers to HE support of microenterprises and HEs, but not a single opera�ons. MSEs in urban areas surveyed by FIAS in ins�tu�on is tasked with coordina�ng them. 2006 were more likely to cite lack of infrastructure or costs than the HEs who were FGD par�cipants. Two- Although not directly targeted at HEs, development thirds of FGD par�cipants reported that they pay policies and strategies, as embodied in Vision 2020 taxes or fees to local authori�es (mostly patente), and EDPRS, provide a scope for suppor�ng the HE and 90 percent of the MSEs surveyed by FIAS paid sector. Vision 2020 (Ministry of Finance and Economic the local registra�on tax. The common percep�on is Planning 2002a), explicitly promotes private sector that they receive inadequate services despite these development, focusing on highly produc�ve, export- payments, indica�ng their dissa�sfac�on with the oriented enterprises, which provide employment for a local economic environment, for both regula�ons very skilled labor force. It recognizes the role of MSEs in and services provided, par�cularly in the urban Rwanda’s economic development, but without specific areas. objec�ves towards the sector which can be supported. The EDPRS (Ministry of Finance and Economic Planning The main risks to HEs during opera�ons are illness 2007) places strong emphasis on the importance of and poor health, the�, damage to goods and/or crea�ng non-farm employment, and the Vision 2020 equipment, lack of insurance and insecurity. Majority Umurenge Program has the poten�al to s�mulate not of FGD par�cipants reported to have fall back plans in only the crea�on of HEs, but also create demand for the event of the�, fire, or damage to property. None their products and services. A key pillar of EDPRS aims had insurance against property or against accident, to strengthen local government accountability (Imihigo) except among motorcycle operators and taxi drivers, through community mee�ngs and par�cipa�on where for whom it is a legal requirement. Although 95 percent HEs can have their ‘voice’ heard. Despite gaps and had mutual health insurance, the cost of health care weaknesses - as the following discussions shows - many and medicine was s�ll a major concern. As a result, of these policies are oriented towards developing an 43 percent of FGD par�cipants reported that they had environment that is conducive to enterprise growth constantly foregone essen�al medical care, compared and produc�vity, and provide a solid basis on which to 23 percent who some�mes had to do without it. a na�onal HE strategy can be built on. By broadening and strengthening key policy areas, Rwanda can 2.6. POLICY, INSTITUTIONAL AND promote the growth of HEs and reduce their risks, thereby unleashing their poten�al to make a significant SUPPORT ENVIRONMENT contribu�on in mee�ng the country’s objec�ves of D evelopment policies and programs of the Government clearly recognize that enterprise crea�on, growth, and sustainability are crucial to its crea�ng employment and genera�ng income. 2.6.1. ACCOUNTABILITY AND ACCESS TO poverty reduc�on and economic growth objec�ves. However, very li�le a�en�on is given to HEs, reflec�ng LOCATION a general lack of understanding of their poten�al to make a significant contribu�on towards achieving these objec�ves. Rwanda’s development strategies, S tudies done in other countries suggest that the local economic environment is a key factor in HE growth and development (Kweka and Fox, 2011; World Bank, while suppor�ve to informal and small enterprises in 2011). If local authori�es support HEs by ensuring that general, do not recognize HEs as key economic actors. they have the facili�es, infrastructure and services They are either not differen�ated from micro and small necessary to develop and sustain their existence, enterprises (MSEs), or they are excluded en�rely from earnings will be higher, and by extension, poverty lower. Second Edi�on | November 2011 25 Rwanda’s decentraliza�on policy has and opportuni�es for local economic devolved responsibili�es for land use “There are many regula�ons development and poverty reduc�on. that we have to enforce and planning, zoning, and the design and some�mes there is conflict implementa�on of small infrastructure between HE operators and the Policy changes are needed at the investments to sub-na�onal authori�es. While the na�onal level which explicitly recognize governments (districts and sectors). authori�es like to get things the importance of HEs and legi�mizes organized, HE operators are However, the overall development only interested in making their opera�ons. Importantly, the policy agenda is determined at the money without caring about central government needs to make na�onal level. Since sub-na�onal instruc�ons from the these changes and convey them to local administra�ons, both technical and authori�es. The only solu�on is officials. Only a�er this happens can to con�nue sensi�zing them poli�cal are appointed by the central about new laws and there be a conducive environment for government, they are unlikely to deviate regula�ons, and monitor their local authori�es and HEs to resolve major from na�onal policies. This means that implementa�on.” conflicts related to workspace and local local policies and programs are only as Local Authori�es. authori�es’ fee. This requires changes not effec�ve in suppor�ng HEs as na�onal only in planning and zoning regula�ons, policies will allow, and accountability but also in the approach and a�tude mechanisms such as Imihigo have limited effec�veness of local officials who enact and enforce laws. Local in ensuring that the local government support HEs. officials need support and inputs from HEs to develop new policies, regula�ons, as well as in suppor�ng Local authori�es’ ac�ons and ac�vi�es have not been the infrastructure to encourage HE ac�vi�es. HEs can directed posi�vely at HE needs, but rather towards make significant contribu�ons in the development of enforcing restric�ve policies which limit access to public economic programs for the local government. space for their opera�ons. These policies have been set at the na�onal level. District and town regula�ons 2.6.2. ACCESS TO CREDIT AND confine HE ac�vity to designated marketplaces (usually covered markets) for which they collect market (user) FINANCIAL SERVICES charges. However, the number of HEs has outstripped their ability to provide for or maintain these facili�es, S ince lack of capital and poor access to credit and/or high costs are viewed by HEs as the major constraints forcing HEs to operate in substandard condi�ons in to start-up, opera�ons, and expansion, addressing underserviced or poorly serviced marketplaces. Some these constraints is important. The problem is not have been relocated to marketplaces far from actual physical access, it is the fact that HEs o�en do not qualify and poten�al customers, just because higher paying for credit or afford the terms. There is need to introduce business personali�es want the space. Some�mes new financial service products that are affordable and markets are only open for a few days in a week, thus, meet the needs of HEs. The implementa�on of the restric�ng the amount of �me that HEs are allowed to new Umurenge SACCO program, the cornerstone of work. Moreover, since local regula�ons prohibit HEs the Government’s ambi�ous financial sector access from opera�ng in central and savings mobiliza�on strategy, are steps forward in areas such as sidewalks, bus “Lack of access to capital the development of suppor�ng a HE strategy, designed stops, parks, and main roads is a big problem. You to provide financial services to households. Adequate (where, for example, bicycle may have innova�ve a�en�on should be given to monitor the program’s ideas, but there is operators are banned from performance, to ensure that the benefits reach HEs. nothing you can do if you plying), noncompliance can’t afford to get a loan Other possibili�es are to aggressively support the results in police harassment from the bank. It is expansion of mobile banking and mobile money services, or puni�ve punishments difficult to get a loan as these are cheaper ways of reaching households with such as confisca�on of from the bank since you financial services. goods, destruc�on of do not have any security. It is hard.” property (temporary stalls, Providing access to targeted financial products and bicycles, equipment) or steep Focus group par�cipant. services, however, will not be enough. Many HEs fines. This erodes earnings are not able to generate a business strategy worth 26 Second Edi�on | November 2011 inves�ng in. EICV and focus group data showed that and na�onal and global product marke�ng and most HE owners do not have the most basic business distribu�on. The entrepreneurial energy and drive skills; they do not keep wri�en accounts, or separate of one person has made this successful, but it is not their business earnings from household money. It is clear whether it is a replicable model. therefore important to enhance the capacity of HEs in financial management through providing basic training Helping HEs with market access may require new in business. This could be included in the financial approaches, such as working through Non-Government access program. The Workforce Development Authority Organiza�ons (NGOs) or HE associa�ons. Changing (WDA) could include such courses and training as part a�tudes would help as well. If the trading sector is of its mandate. Recent Research suggests that offering supported, large companies would want to use these short “rule of thumb” courses in financial access and informal channels to market their products, just the management is more effec�ve than long principles- way the mobile phone companies currently do. (See based courses (Drexler, Fischer and Schaor, 2010). Monitor Group, 2011, for a discussion of how this has worked in other countries). 2.6.3. ACCESS TO MARKETS Through the SME policy, the Government’s employment B ecause of their small size, HEs struggle with market access. The Government has agricultural, trade, and industrial policies designed to increase market access, policy supports an aggressive infrastructure development program to increase connec�vity. While not designed specifically to support HEs, the program’s but they are not targeted at HEs: comple�on will provide an enabling environment for • The Na�onal Industrial Sector Promo�on Program enterprise growth and development, including HEs. supports the development of medium and large enterprises, primarily to provide secure wage 2.6.4. ASSOCIATIONS OF HES employment to a growing labor force in the urban areas. • The Small and Medium Enterprises Development Policy O ne of the biggest challenges for the government, NGOs, and other stakeholders in suppor�ng HEs is the difficulty to cater for the large number of HEs promotes the development of small enterprises across Rwanda. The importance of organizing them (defined as those with one to three paid employees), into associa�ons cannot be overstated. At the na�onal but leaves out HEs. and local levels, doing this will provide a useful channel • Rwanda’s Agricultural Plan, the PSTA II, offers a through which HEs can have a strong voice to adequately support strategy for non-farm enterprises in rural represent their interests when framing policies that areas, including HEs. However, its focus is mainly on directly affect their interests. At the sectoral level for the development of the agro-processing sector for example, associa�ons for producers, traders, and local and export markets. A livelihood focus would hairdressers. Membership can provide access to support entail a strategy which targets other industry and services such as credit facili�es, training opportuni�es, service sectors, more suited to under-capitalized HEs, market informa�on, and advocacy. and which takes into account the educa�on and skills level of the owners. The na�onal policy on coopera�ves and the Rwanda • The only na�onal sector strategy which clearly Coopera�ve Agency (RCA) are designed to facilitate targets HEs suppor�ng the start-up, opera�ons, the forma�on of HE coopera�ves and/or associa�ons. as well as expansion, is the Rwanda Cra� Industry As a rela�vely new agency, RCA does not have a clear Sector Strategic Plan. This plan has been highly understanding of the dynamics surrounding the successful in encouraging the growth of HEs which HE sector, and the type of organiza�onal structure produce ar�san cra�s like baskets and other ra�an required to suit different subgroups within. Most goods, by forming coopera�ves, and facilita�ng the exis�ng coopera�ves are in the agriculture sector at development of integrated value chain for the supply the local level (as producer associa�ons), with the cra� of raw materials, standardiza�on of product quality, Second Edi�on | November 2011 27 and the mining sectors being the only non-farm sectors district Business Advisory Centers, where Rwanda can to employ this strategy successfully due to favorable draw important lessons from. condi�ons already in place (as in the case of the ar�san cra� producers’ coopera�ve discussed earlier). Rwanda’s policies provide a good founda�on for the They tend to be very compe��ve within a sector, and development of the HE sector, but only if they explicitly might work equally well across sector among local recognize HEs as a key target group for government organiza�ons. The ques�on remains whether this is support. With this recogni�on, the Government can use the best approach as most HEs within different sectors already exis�ng policy frameworks to promote effec�ve do not have the same requirements for shared services programs which will help households set up, operate, - for instance occasional use of equipments. and grow sustainable HEs. Key priori�es should be: • Review and revise legisla�on on planning and zoning To get a be�er understanding of which type of regula�ons, and consulta�on with HEs. The revised associa�ons might work to address HE needs, RCA regula�ons should expand opportuni�es for hawking could conduct a survey that would elicit the views of and trading in urban areas, especially around HEs to iden�fy specific groups which hold the poten�al transporta�on. The central government should for the greatest par�cipa�on by HEs. Alterna�vely, revise the performance contracts of local authori�es with donor support, RCA could provide grants or money to incorporate these recommenda�ons. to finance local experiments in crea�ng HE associa�ons. • Support the development of financial products and It could also engage with the Rwanda Development services which suit the needs of poor households Board (RDB) to find entrepreneurs who see a role for with HEs. HE associa�ons to form part of value chains which • Encourage and support the WDA in developing and would link them to bigger markets and reduce their offering short “rule of thumb” courses on financial transac�on cost. For example, it could help HEs to access and management. connect with poten�al suppliers, command a be�er • Encourage the development of local associa�ons, and price for their products, organize bulk purchases to get RCA to engage directly with HEs to understand their discounts, and/or take advantage of economies of scale needs and develop crea�ve approaches to support. in areas such as equipment leasing. Finally, Ghana is • All programs and policies need to be evaluated to a country with a long tradi�on and history of crea�ng ensure that they address the needs of HEs, in order associa�ons, through its trade union movement and to improve their welfare and sustainability. 28 Second Edi�on | November 2011 ANNEXES Annex 1: Development in Financial Services During the first half of 2011, the following developments took place in Rwanda’s financial sector: • Two microfinance ins�tu�ons (IMF UNGUKA and CFE AGASEKE) were upgraded to the status of microfinance banks and a military coopera�ve (ZIGAMA CSS) became a coopera�ve bank. As a result of these new entrants the banking industry concentra�on declined and compe��on heightened within the banking industry. As of June 2011, the market share of the three largest banks in total assets (Bank of Kigali, BPR and ECOBANK) declined from 57.7 percent in June 2010 to 49.9 percent in June 2011. • In April 2011, two state-owned developing banks (Rwanda Development Bank-BRD and Rwanda Housing Bank-BHR) were merged to which provides long-term loans, housing loans, mortgage re-financing and other financial services. • The Rwanda Stock Exchange was launched in January 2011 and started trading shares of the brewer Brasseries et Limonaderies du Rwanda (BRALIRWA). The Rwandan Government sold (through an Ini�al Public Offer-IPO) 30 percent of its stake in BRALIRWA. The IPO of 128.6 million shares (Rwf 136 per share) raised Rwf 22.1 billion (US$37.3 million). In July 2011, the Government sold 45 percent of its holding in Bank of Kigali. The IPO of 300 million shares (Rwf125 per share) raised Rwf37.5 billion ($63 million). The banking sector con�nued its recovery path from 2009. This was mainly a result of a s�mulus package of Rwf15.9 billion injected into the sector in 2010 in addi�on to Rwf27.4 billion in 2009. The liquidity problem was a result of high growth in credit during 2007 which outpaced the growth in deposits. By mid-2008 this was worsened by the withdrawal of bank deposits by large depositors, such as the Government-run pension and insurance funds, in the amount of about Rwf8 billion in an a�empt to shi� the composi�on of their asset por�olio from savings deposits to more a�rac�ve investment outlets (e.g. real state, stock exchange, etc.). Financial soundness indicators improved as corroborated by the results of the recent joint IMF-Bank Financial System Stability Assessment of June 2011. The sector’s total assets registered a growth of almost 70 percent from Rwf573.1 billion in December 2008 to Rwf990.8 billion in June 2011. In the same period, loans increased from Rwf372.1 billion to Rwf516.9 billion, an increase of almost 40 percent. The capital adequacy ra�o increased from 15.9 percent in December 2008 to 24.6 percent in June 2011. Asset quality improved and as the ra�o of non-performing loans/gross loans declined from 13.8 percent in March 2009 to 9.9 percent in June 2011. The banking network con�nued to expand. As of June 2011, the total number of banks’ branches and sub-branches/counters were 136 and 204 respec�vely across the country, in which Banque Populaire du Rwanda (BPR) holds 18 branches, 100 sub- branches and 72 counters/outlets. This represents 9 new loca�ons opened during the first half of 2011. During the same period, the number of clients accounts for the whole financial sector increased by 14.5 percent with 4.5 percent increase in the banking sector, 13.4 percent in Micro Finance Ins�tu�ons’ subsector and 53.4 percent in SACCOs. Table A1: The number of bank accounts is growing Dec. 2008 Dec. 2009 Dec. 2010 Jun. 2011 Banks Accounts 1,176,140 1,270,654 1,785,744 1,872,812 MFIs Clients acounts 639,000 N/A 1,170,623 1,328,071 SACCOs accounts - - 471,036 723,188 Source: BNR. M obile financial services con�nue also to expand. MTN Rwanda was fully licensed to operate the MTN Mobile Money service as a mobile payment service in Feb. 2010. TIGO was also licensed in May 2011 to do money transfer. The number of subscribers increased by June 2011by around 40 percent from slightly over 200,000 subscribers at end 2010 to 285,527. Within the first six months of 2011, the number of agents/branches doubled from around 300 agents/branches to 647 agent’s country wide. Furthermore, mobile Banking is steadily developing. Launched in September 2010, the BPR mobile banking counted 88,219 users in one year of opera�on. Mobile financial services registered the first half of the 2011 about 220,500 transac�ons in the total amount of Rwf4.7 million. 30 Second Edi�on | November 2011 Annex 2: Transport and Communica�on Trends G rowth in transport and communica�on services slowed down to 1.5 percent in the first and second quarter of 2011, compared to 8.0 percent in 2010. High fuel prices impacted transport businesses, which suffered from diminished turnover. Government increased haulage prices in April 2011, bringing some relief in transport businesses. In April, transport fees (bus and taxis) were reviewed. Other factors also contributed to the slowdown in the communica�on sector: • A gradually maturing market led to low growth in the number of mobile phone subscribers (only 10.2 percent compared to 27.5 percent in the same period in 2009 and 30.6 percent in 2010). • A more contested market saw operators heavily subsidizing calling rates as a result of a more compe��ve environment and in an a�empt to absorb the market share of Rwandatel, whose mobile operator license was revoked in April 2011. This impacted the turnover of the sector. Un�l April 8, 2011 Rwandatel was compe�ng with MTN Rwanda, a unit of MTN Group Ltd of South Africa, and TIGO Rwanda, a unit of Millicom Interna�onal. The market share of Rwandatel was 10.5 percent of around 3.8 million total mobile subscribers. TIGO doubled its number of subscribers within eight months from 695,072 in December 2010 to 1,471,639 subscribers in August 2011 (RURA website accessed in October 2011). In September 2011, Rwanda U�lity Regulatory Agency (RURA) issued a new license to India’s Bhar� Airtel, to operate 2G and 3G GSM mobile services (the second and third genera�on of the Global System for Mobile Communica�ons) in Rwanda. The company may have the op�on of buying the defunct Rwandatel network. Second Edi�on | November 2011 31 Annex 3: Trends in Food Produc�on L ow and irregular rains during the first plan�ng season (Season A) impacted on the seasonal crops, especially in some regions of Eastern and Southern provinces. Maize and beans planted in late October-early November, were hit by the drought and their yields decreased. In the second plan�ng season (Season B), the rain was reported to be sufficient and food produc�on was es�mated to be 16.0 percent higher than during the same season in 2010. For all 2011, the increase in food produc�on is es�mated at 10.6 percent. Favorable harvests for cereals, roots and tubers contributed to the increase and compensated lower output of pulses (bean, peas, soya & groundnuts). Cereal produc�on increased by 15.0 percent primarily on account of an expansion in the area planted, with yield levels comparable to previous years. Produc�on con�nued to benefit from the Crop Intensifica�on Program. In 2011, Rwanda con�nued to be self sufficient as food balance sheet con�nued to improve. There was also an improvement in recommended dietary allowances (RDA) as recommended by the Food and Agriculture With the strong posi�ve second season harvest, Rwanda is likely to be food secure for 2011. According to the latest Global Informa�on and Early Warning System, Rwanda food security condi�ons are an�cipated to remain stable un�l the last quarter of 2011, as households replenish their food stocks with supplies from the second season harvest in 2011. However, given the small size of average landholdings, households’ stocks from own produc�on are expected to last only two to three months, with market purchases contribu�ng, on average, about 52 percent to total household food consump�on. The higher prices of some food crops and reliance on markets are expected to aggravate the food insecurity condi�ons of vulnerable and low- income households as the lean season approaches (FAO, 2011). Rwanda’s Food Balance Sheet 3,700 Kcals per capita per day 2010A 2010A 2010A 2010A 3,300 I. AVAILABILITY =1+ 2+3+4 1,379 1,379 1,379 1,379 1. Stock - - - - 2,900 2. Crop produc�on 1,529 1,529 1,529 1,529 2. Expected Crop produc�on C n.a. n.a. n.a. n.a. 3. Animal produc�on 79 79 79 79 2,500 4. Losses -229 -229 -229 -229 II. NEEDS = 5 1,228 1,228 1,228 1,228 2,100 5. Consump�on 1,228 1,228 1,228 1,228 RDA III. Balance/Deficit = I-II 151 151 151 151 1,700 South West North East Countrywide 100.0 Protein per capita per day Lipids per capita per day 45.0 80.0 30.0 RDA 15.0 60.0 0.0 40.0 South West North East Countrywide South West North East Countrywide Source: Ministry of Agriculture. 32 Second Edi�on | November 2011 Annex 4: Budget Execu�on by En�ty 2010/11 Recurrent Development Total 2009/10 ENTITIES Budget Actual % Budget Actual % Budget Actual % Budget Actual % MINAGRI 11.21 15.38 137 22.87 29.83 130 34.08 45.21 133 31.09 26.29 85 PRIMATURE 6.90 5.52 80 1.26 4.07 322 8.17 9.58 117 6.02 5.32 88 MINECOFIN 111.33 126.74 114 34.90 42.83 123 146.23 169.56 116 132.35 167.61 127 MINADEF 45.06 47.77 106 - - - 45.06 47.77 106 43.61 42.70 98 MININFRA 20.83 32.03 154 70.40 60.80 86 91.23 92.83 102 63.76 63.45 100 MININTER 23.05 23.24 101 0.90 0.80 89 23.95 24.04 100 21.99 21.44 98 MINISTR 0.87 0.87 100 - - - 0.87 0.87 100 1.65 1.61 97 MINISPOC 3.45 4.16 121 1.35 0.56 41 4.80 4.72 98 4.38 3.93 90 MINISANTE 31.38 30.87 98 12.94 12.65 98 44.32 43.52 98 35.97 37.72 105 MINICOM 14.50 11.97 83 34.75 36.05 104 49.25 48.02 97 5.38 4.54 84 MINIFOM 2.08 2.01 97 0.18 0.16 92 2.25 2.18 97 0.75 0.62 83 PRESIREP 19.94 19.69 99 2.11 1.53 73 22.05 21.22 96 45.80 43.73 95 DISTRICTS 112.41 107.91 96 - - - 112.41 107.91 96 99.56 90.27 91 NATIONAL PUBLIC PROSECUTION 3.12 2.99 96 - - - 3.12 2.99 96 3.32 2.95 89 SUPPREM COURT 6.78 6.47 95 - - - 6.78 6.47 95 6.43 6.22 97 MINALOC 38.72 35.87 93 49.74 48.42 97 88.46 84.29 95 75.77 62.68 83 CHAMBER OF DEPUTIES 5.58 5.17 93 0.52 0.44 84 6.10 5.60 92 5.99 5.14 86 PROVINCES 1.17 1.06 90 - - - 1.17 1.06 90 1.06 0.97 91 SENATE 1.92 1.81 94 0.13 0.04 33 2.05 1.85 90 1.76 1.60 91 MINELA 3.44 2.67 78 3.33 3.17 95 6.78 5.84 86 6.86 6.24 91 MINAFFET 13.36 12.10 91 1.98 1.04 52 15.34 13.14 86 12.07 11.27 93 MINIJUST 6.41 5.38 84 - - - 6.41 5.38 84 7.60 6.37 84 MINIYOUTH 2.16 1.80 83 0.11 0.11 100 2.27 1.91 84 2.34 2.03 87 MINEDUC 59.15 54.30 92 15.39 7.18 47 74.54 61.48 82 77.49 69.81 90 MIFOTRA 4.08 3.35 82 0.65 0.42 64 4.74 3.76 79 6.70 5.39 80 MIDIMAR 1.00 0.73 73 - - - 1.00 0.73 73 - - - MINEAC 1.73 0.84 49 - - - 1.73 0.84 49 4.25 3.62 85 Total 551.66 562.70 102.0 253.50 250.08 98.6 805.16 812.78 100.9 703.96 693.51 98.5 Source: MINECOFIN. Note: In Rwf billion, unless otherwise indicated. Second Edi�on | November 2011 33 Annex 5: Main Data Sources and Methods for the HE Analysis T his study used both exis�ng data and literature available in Rwanda, as well as a special qualita�ve analy�cal work commissioned for the report. The approach is based on the framework provided by Steel and Snodgrass (2008) specially developed for analysis of Household Enterprises. The key data sources are: • The quan�ta�ve work mostly relies on the Household Living Condi�ons Surveys (EICV1 and 2) - the two most recent household surveys undertaken in 2000 and 2005 respec�vely. These surveys allowed iden�fica�on of key features of the HE sector in 2005 and its economic role, and determina�on of drivers or constrains to their produc�vity. The two rounds of survey further enabled some understanding of the dynamics in the HE sector in general. • The survey of informal businesses from 2006 (Foreign Investment Advisory Service-FIAS 2006) also provides key insight to the report. FIAS contains more detailed informa�on on the enterprise and registra�on in par�cular, compared with EICV2. EICV2 on the other hand covers both urban and rural areas while FIAS only covers major urban centers. Due to the focus on only urban enterprises and those found in major markets the FIAS sample contain larger enterprises and more Micro and Small Enterprise than the EICV. • These data sources are all almost out of date, however, as the economy has changed substan�ally since 2005-6. To complement the quan�ta�ve data sources, a small qualita�ve study was launched for this report in the third quarter of 2010. Focus group discussions were held with HEs and other key stakeholders e.g. local authority officials and local providers of support to HEs. A small structured survey was also administered to the HE focus group discussants. The flexibility of the open-endedness of qualita�ve research enables us to capture the perspec�ve of HE operators and those they interact with on a regular basis, providing a more nuanced understanding of challenges faced by HE operators including mo�va�ons for star�ng an HE, growth dynamics, the constraints and risks, and importantly the impact of Government policy, intended and unintended, posi�ve and nega�ve. Further details on focus group discussions are available in the field report on the Ins�tute of Policy Analysis and Research’s website (www.ipar-rwanda.org), or the World Bank website on household enterprises. Comparison of Employment over �me from EICV data The EICV 1 and 2 are broadly similar in the way that they both capture individuals’ employment status, employment type, sector of industry sector, and employer. However, ques�ons related to employment status in the last twelve months and last seven days were changed between the two surveys. Specifically, in the employment sec�on of 2000/1 survey individuals are asked for the primary and secondary occupa�on in the last twelve-months, and only primary occupa�on in the last seven days. But in the 2005/6 survey individuals are allowed to list up to five jobs in both last 12 months and 7 days. Unfortunately the importance or rank among the listed jobs is unclear. About 30 percent of the individuals have had more than one job in both 12 months and 7 days based on informa�on in EICV 2. As a solu�on to this the first row of informa�on in EICV 2 is seen as the primary occupa�on, second line is seen as secondary jobs etc. This assump�on also seems to be the approach taken by Na�onal Ins�tute of Sta�s�cs Of Rwanda and other researches that have used this data in the past. 34 Second Edi�on | November 2011 Annex 6: Examples of HE Ac�vity By Sector Trading Manufacturing Services New cloths Tailoring Technician Potatoes Arts and cra�s Cycle taxi Vegetables Paint Hairdresser Fruit Charcoal Bicycle repairs Fish Carpenter Shoe repair Beans Postcards Construc�on Household utensils Silkscreen printer Porter Phone cards Basket weaving Shopping carrier Shoes Weaving Charge ‘phone ba�eries Ground nuts and flour Fabrics Cobbler Charcoal and firewood Kni�ng Motorcycle taxi Charcoal Sculptor Photographer Tradi�onal beer seller Paint and soap Mechanic Cassava flour Miller Welding Milk Builder Hawker Painter decorator Second-hand cloths Taxi Groceries Watch repairer Onions and peanuts Canteen operator Piping Business consultant Car etc. spare parts Computer repairs Sta�onary Electrician Source: IPAR Focus group interviews, 2010. Second Edi�on | November 2011 35 Annex 7: Determinants of Household Enterprise Manager’s Earnings I n order to be�er understand the determinants of HE earnings, we ran mul�variate regressions using the 2005/6 EICV. The dependent variable is the log of hourly earnings of the HE manager¹⁶. We es�mated separate regressions for male and female managers, for rural and urban HEs, as well as one regression for the whole country. To control for regional effects, we used district fixed effects. Below, we show the means of the explanatory variables for each specifica�on, and the regression results. Table A2: Mean of variables He Male HE Female HE ALL Urban Rural Male manager - - 55.4 47.4 57.8 Age of manager 33.9 34.1 34.0 33.3 34.3 Age of manager squared and divided by 100 13.0 13.3 13.1 12.2 13.4 Manager single 27.8 26.6 27.2 27.7 27.1 Manager married 70.1 47.0. 59.8 55.3 61.1 Manager divorced/widowed 2.1 26.4 13.0 17.0 11.8 Manager migrant 13.3 11.5 12.5 23.2 9.4 Never a�ended school 13.2 23.6 17.9 11.9 19.6 Primary, not completed 48.4 42.8 45.9 36.6 48.6 Completed primary 26.1 19.9 23.3 25.8 22.6 Post primary voca�onal educa�on 5.2 7.4 6.2 9.7 5.2 Incomplete secondary 4.8 4.9 4.8 10.7 3.1 Completed upper secondary or above 2.3 1.4 1.9 5.3 0.9 Past appren�ce 23.9 18.7 21.6 23.1 21.1 Months operated last year 9.1 8.6 8.9 9.5 8.7 HE is part-�me 29.1 38.8 33.4 17.2 38.1 Registered with state authority 27.3 11.9 22.4 30.0 17.6 Has accoun�ng system 12.0 5.2 9.0 14.8 7.2 Sector mining, construc�on and energy 7.1 0.6 4.2 2.2 4.8 Sector manufacturing 11.7 10.2 11.0 6.3 12.4 Sector Commerce 61.0 80.4 69.7 70.7 69.4 Sector Transport 6.8 0.2 3.9 6.4 3.1 Sector Services 13.4 8.7 11.3 14.5 10.3 Kigali 9.6 11.7 10.5 46.4 - Other urban 9.8 15.1 12.2 53.6 - Rural 80.6 73.2 77.3 - 100.0 Source: EICV 2005/6. ¹⁶Hourly earnings was es�mated by mul�plying HE profits that belongs to the household (revenue minus cost) by the share of hours worked by the manager (defined as hours worked by manager divided by total hours in household) to give the es�mated total earnings of the manager. This number was then divided by hours worked by the manager to arrive at hourly earnings. 36 Second Edi�on | November 2011 Table A3: Regression results All Male Female Urban Rural Male manager 0.489*** 0.541*** 0.454*** -0.08 -0.13 -0.09 Age of manager 0.02 0.03 0.02 -0.03 0.03 -0.02 -0.02 -0.02 -0.03 -0.02 Age Squared and divided by 100 -0.038** -0.046** -0.03 0.03 -0.047** -0.02 -0.02 -0.03 -0.03 -0.02 Marital status (reference group single) Manager married 0.227** 0.15 0.298** 0.334* 0.212* -0.10 -0.16 -0.13 -0.17 -0.13 Manager divorced/widowed 0.328** 0.14 0.385** 0.414** 0.346** -0.13 -0.25 -0.17 -0.19 -0.17 Manager migrant -0.12 -0.01 -0.19 0.04 -0.223* -0.10 -0.13 -0.14 -0.15 -0.13 Educa�on (reference group no educa�on) Primary, not completed 0.16 0.262** 0.13 0.30 0.10 -0.10 -0.13 -0.14 -0.19 -0.11 Completed primary 0.373*** 0.416*** 0.405*** 0.345* 0.392*** -0.11 -0.15 -0.16 -0.19 -0.13 Post primary voca�onal educa�on 0.454*** 0.704*** 0.297* 0.658** 0.378** -0.15 -0.25 -0.17 -0.29 -0.16 Incomplete secondary 0.720*** 0.788*** 0.712*** 0.979*** 0.535** -0.17 -0.26 -0.21 -0.26 -0.23 Completed upper secondary or above 1.224*** 1.247*** 1.285*** 1.517*** 0.89 -0.31 -0.40 -0.37 -0.37 -0.61 Past appren�ce 0.198** 0.199* 0.18 0.432*** 0.11 -0.09 -0.11 -0.14 -0.13 -0.11 Months operated last year 0.205*** 0.200*** 0.210*** 0.208*** 0.205*** -0.01 -0.02 -0.01 -0.02 -0.01 HE owner works part-�me 0.901*** 0.900*** 0.871*** 0.918*** 0.885*** -0.07 -0.09 -0.11 -0.18 -0.08 Registered with state authority 0.169** 0.09 0.391*** 0.255** 0.163* -0.08 -0.09 -0.12 -0.12 -0.10 Has accoun�ng system 0.374*** 0.321* 0.522*** 0.25 0.392** -0.12 -0.16 -0.17 -0.19 -0.16 Sector of industry (reference group trade) Sector mining, construc�on and energy 0.01 0.06 1.182*** 0.569** 0.00 -0.20 -0.21 -0.23 -0.28 -0.21 Sector manufacturing -0.268** -0.19 -0.357* -0.29 -0.247* -0.11 -0.13 -0.18 -0.22 -0.13 Sector Other services -0.314*** -0.309** -0.360** -0.286* -0.314** -0.10 -0.12 -0.18 -0.17 -0.13 Loca�on (reference group is rural) Kigali 1.002*** 1.089*** 0.614*** -0.16 -0.22 -0.21 Other urban 0.308*** 0.405*** 0.12 -0.10 -0.14 -0.13 Constant 0.32 0.69 0.58 1.807*** 0.37 -0.30 -0.45 -0.46 -0.46 -0.34 District dummies Yes Yes Yes Yes Yes Observa�ons 1587.00 879.00 708.00 531.00 1056.00 R-squared 0.41 0.37 0.44 0.45 0.40 Source: EICV 2005/6 Notes: standard errors are robust standard errors taking correla�on between observa�ons in same EA into account. A part-�me HE is defined as one working less than 20 hours a week. Second Edi�on | November 2011 37 Background papers for the report Background papers for the report: IPAR (2010a). Rwanda Country Study: Raising Produc�vity and Reducing the Risk of Household Enterprises. Fieldwork Report. Kigali: IPAR-Rwanda. IPAR, (2010b). Rwanda Country Study: Raising Produc�vity and Reducing Risk of Household Enterprises. Diagnos�c Report. Kigali: IPAR-Rwanda. Laws: Law No.17/2002 modified by Law No. 33/2003 Establishing the Source of Revenue for Districts and Towns and its Management. Law No 16/2005 of 18/08/2005 On Direct Taxes On Income. Law No 13/2009 of 27/05/2009 Law Regula�ng Labour in Rwanda. Other references: Drexler, Alejandro, Greg Fisher and Antoine�e S. Schoar (2010) Keeping It Simple: Financial Literacy and Rules of Thumb. CEPR Discussion Paper 7994. Foreign Investment Advisory Service (FIAS) (2006) Sources of Informal Economic Ac�vity in Rwanda. Kigali: Na�onal Ins�tute of Sta�s�cs of Rwanda. Processed. Haggblade, Steven, Peter Hazell and Thomas Reardon (2010) “The Rural Non-Fram Economy: Prospects for Growth and Poverty Reduc�on”, World Development, 38(11): 1429-1441. Kweka, Josaphat, and Louise Fox. (2010). The Household Enterprise Sector in Tanzania: Why it Ma�ers and Who Cares. Dar- es-Salaam: World Bank. Ministry of Finance and Economic Planning (2002a) Vision 2020. Kigali: Government of Rwanda, Processed. Ministry of Finance and Economic Planning (2007). Economic Development and Poverty Reduc�on Strategy. Kigali: Government of Rwanda, Processed. Monitor Group (2011). Promise and Progress: Market-Based Solu�ons to Poverty in Africa. (Michael Kubzansky, Ansulie Cooper, and Victoria Barbary). Report, May, Available at: www.monitor.com Napier, P. (2010) Supply Side Study of the Inclusiveness of Rwanda’s Financial Sector. Johannesburg: Genesis Analysis (Pty) Ltd. World Bank (2011). Small is Big: Household Enterprises in Ghana. Washington DC: World Bank, Processed. 38 Second Edi�on | November 2011 Second Edi�on | November 2011 39 The World Bank, Rwanda Blvd. de la Revolu�on SORAS Building P.O. Box 609 Kigali, Rwanda The photographs in this report are by: Cover page and page 15: Ins�tute of Policy Analysis and Research (IPAR) Telephone: +250 252 591 300 Page 1: Peace Aimee Niyibizi. Fax: +250 252 576385 www.worldbank.org/rw Design by Robert Waiharo