Rwanda Economic Update Inclusiveness of Foreign Direct Investment in Rwanda June 2023 © 2023. World Bank Group This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. 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TABLE OF CONTENTS Acronyms......................................................................................................................................................................................................................... i Acknowledgments ....................................................................................................................................................................................................... ii Abstract ............................................................................................................................................................................................................................ iii Executive Summary...................................................................................................................................................................................................... iv PART I: RECENT ECONOMIC DEVELOPMENTS ............................................................................................................................................... 1 1.1. Global and regional context ........................................................................................................................................................... 2 1.2. Recent economic development .................................................................................................................................................... 2 1.3. Rwanda’s economic outlook and risks.......................................................................................................................................... 10 PART II: INCLUSIVENESS OF FOREIGN DIRECT INVESTMENT IN RWANDA...................................................................................... 13 2.1. Introduction........................................................................................................................................................................................... 14 2.2. Rwanda provides a favorable environment for FDI ................................................................................................................ 15 2.3. Rwanda has received substantial inflows of foreign direct investment .......................................................................... 17 2.4. FDI projects are concentrated in a few sectors and regions ............................................................................................... 19 2.5. FDI boosts job creation and sales in Rwanda............................................................................................................................ 21 2.6. Conclusion and policy implications and recommendations ............................................................................................... 25 References ....................................................................................................................................................................................................................... 29 Annexes............................................................................................................................................................................................................................ 31 LIST OF FIGURES Figure 1.1: Headcount poverty rates in disaster affected districts........................................................................................................... 3 Figure 1.2: Heavy rains have led to significant infrastructure damage and losses............................................................................ 3 Figure 1.3: Stunting levels in disaster affected districts .............................................................................................................................. 3 Figure 1.4: Private consumption and services continue to drive GDP growth ................................................................................... 4 Figure 1.5: Rwanda’s labour market.................................................................................................................................................................... 6 Figure 1.6: Rising domestic food prices led to inflation pressures .......................................................................................................... 8 Figure 1.7: Rwanda’s yield curve, January 2022–April 2023....................................................................................................................... 8 Figure 1.8: Decomposition of public debt changes, 2017–22................................................................................................................... 10 Figure 1.9: FY2023/24 budget allocation by NST1 pillars ........................................................................................................................... 10 Figure 2.1: Percentile rank (0 to 100), selected governance indicators, Rwanda and SSA average............................................. 16 Figure 2.2: FDI inflows as a share of Total investments ............................................................................................................................... 17 Figure 2.3: Stock of FDI as a share of GDP......................................................................................................................................................... 17 Figure 2.4: FDI inflows (US$ million) in Rwanda............................................................................................................................................. 18 Figure 2.5: Growth in the number of registered FDI projects, 2006–2022 ........................................................................................... 18 Figure 2.6: Countries of origin of foreign investment since 2016 ........................................................................................................... 19 Figure 2.7: Sectoral distribution of FDI projects (by 2-digit ISIC codes)................................................................................................. 19 Figure 2.8: Regional distribution of FDI and socio-economic conditions of Rwandan districts................................................... 20 Figure 2.9: Geographic distribution of FDI and socio-economic conditions of Rwandan districts............................................. 21 Figure 2.10: Jobs generated by FDI firms acting as first-time ..................................................................................................................... 21 Figure 2.11: Jobs generated by FDI firms (by sector)...................................................................................................................................... 22 Figure 2.12: Jobs generated by FDI firms (actual vs projected)................................................................................................................... 22 Figure 2.13: Jobs generated by FDI firms (actual vs projected, over time) ............................................................................................. 23 Figure 2.14: Job Creation of Foreign Firms, by Gender (2021)..................................................................................................................... 23 LIST OF TABLES Table 1.1: Employment by selected sectors................................................................................................................................................... 6 Table 1.2: Balance of payments, 2018–2023.................................................................................................................................................. 7 Table 1.3: Rwanda’s Public finance, FY2020/21-FY2023/24...................................................................................................................... 9 Table 2.1: BITs signed by Rwanda....................................................................................................................................................................... 16 LIST OF BOXES Box 1.1: Summary of damages and losses of Rwanda’s recent floods .............................................................................................. 3 Box 1.2: Growth performance in 2022.......................................................................................................................................................... 5 ACRONYMS AfCFTA African Continental Free Trade Area BIT Bilateral Investment Treaties CBR Central Bank Rate CPI Consumer Price Inflation DRC Democratic Republic of Congo EAC East African Community FDI Foreign Direct Investment FPC Foreign Private Capital FY Fiscal Year GDP Gross Domestic Product ICT Information and Communication Technology IMF International Monetary Fund MBRP Manufacture and build to recover program NBR National Bank of Rwanda NISR National Institute of Statistics of Rwanda NLF National Labor Force NST National Strategy for Transformation OECD Organisation for Economic Co-operation and Development PAYE Pay As You Earn RDB Rwanda Development Board Rwf Rwanda Franc SDR Special Drawing Right SEZ Special Economic Zones SSA Sub-Saharan Africa UNCTAD United Nations Conference on Trade and Development US$ United States Dollar VAT Value-added tax Rwanda Economic Update • Edition No. 21 i ACKNOWLEDGMENTS The Rwanda Economic Update (REU) analyzes recent economic developments and prospects, as well as Rwanda’s policy priorities. The REU is intended for a wide audience of policymakers, business leaders, other market participants, analysts of Rwanda’s economy, and civil society. It draws on data reported by the Government of Rwanda and additional information collected by the World Bank Group in its regular economic monitoring and policy dialogue. Published twice a year, each issue has a special feature spotlighting a particular topic. The 21st edition of REU focuses on the Inclusiveness of Foreign Direct Investment in Rwanda. The current edition, led by Calvin Zebaze Djiofack (Senior Economist) and Peace Aimee Niyibizi (Economist), is a collective endeavor and involved staff from several parts of the World Bank. The team includes Bernard Hoekman, Rohit Ticku, Marco Sanfilippo, Daniel Erich Prosi and Erwin R. Tiongson. The team is grateful to Philip Schuler (Lead Economist) for invaluable inputs on the structure and messaging of the report. The team also benefited from invaluable support and inputs from Abha Prasad (Practice Manager, EAEM1) who supervised the preparation of different aspects of the report. Rolande Pryce (Country Manager, Rwanda) and Keith E. Hansen (Country Director for Kenya, Rwanda, Uganda, and Somalia) provided overall guidance. The team is grateful to Cesar Calderon and Cindy Audiguier for their comments and advice on earlier drafts. The team benefited from the support provided by Alice Umuhoza (Team Assistant) on logistics, Rogers Kayihura (External Affairs Officer) on communications and dissemination, and Robert Waiharo on the design and layout of the report. The REU team is grateful to the Ministry of Finance and Economic Planning (MINECOFIN), the National Statistics Institute of Rwanda (NISR), the National Bank of Rwanda (NBR), the Rwanda Development Board (RDB), and the Rwanda Revenue Authority (RRA) for providing the data which made this work possible, and for their insights and comments. Views expressed in the REU are those of the authors and do not necessarily reflect the views of the World Bank Group, its Executive Directors, the countries they represent, or the Government of Rwanda. ii Rwanda Economic Update • Edition No. 21 ABSTRACT The Rwanda Economic Update No. 21 reviews the country’s macroeconomic performance and prospects and includes a special section focusing on the impact of foreign direct investmeent (FDI) on the domestic economy. After growing by 8.2 percent in 2022, Real GDP expanded by 9.2 percent in the first quarter of 2023. However, this growth momentum may have been halted by disastrous flooding and landslides from the recent rains. Inflation has eased but remained well above the National Bank of Rwanda (NBR) target range in the first half of 2023, despite a tightening of monetary policy since January 2022. Rwanda’s current account deficit improved in 2022, with higher export revenues and remittances outweighing rising import prices. The fiscal deficit narrowed in FY2022/23 thanks to a large decline in public spending, and strong growth which combined to reduce Rwanda’s debt as a share of GDP. Prospects for continued high growth are good, and the fiscal and debt positions are expected to improve over the next few years. The special topic emphasizes the large size of FDI inflows, encouraged by a favorable regulatory environment and improvements in governance. FDI in Rwanda appears to generate significant employment benefits, both in terms of job creation by FDI firms and related increases in hiring by domestic firms. FDI firms also appear to have strong linkages with local firms, particularly domestic suppliers, and tend to provide higher-quality jobs than domestic firms, in terms of access to social security. However, forecasts of the volume of inflows and of employment provided when registering with the Rwanda Development Board turned out to be highly optimistic, raising concerns on both limits on FDI firms and the potential for misrepresentation to gain access to incentives. FDI projects tend to be concentrated in Kigali and surrounding districts, which have much lower poverty rates than the national average, and in general there is a negative association between the level of poverty and FDI inflows. Policies to improve the impact of FDI on inclusiveness could involve encouraging FDI projects in poorer districts, promoting greater participation by women and youths, enhancing corporate social responsibility initiatives, strengthening the monitoring and expost performance assessment of FDI, improving linkages between FDI projects and domestic suppliers, and encouraging the home country of investors to enforce mandatory standards that enhance the sustainability and inclusivity of FDI. Rwanda Economic Update • Edition No. 21 iii EXECUTIVE SUMMARY Recent Economic Developments inflation (computed excluding fresh food and energy Rwanda’s economy was performing well before the items) above the inflation target. The National Bank recent floods. GDP increased by 9.2 percent in the first of Rwanda (NBR) raised its benchmark rate—the quarter of 2023 (year-on-year), after increasing by 8.2 central bank rate (CBR)—from 4.5 percent in January percent in 2022. This growth momentum continued 2022 to 7 percent in February 2023, resumed its mop to be fueled by strong private consumption as well as up operations in June 2022, and raised the reserve some improvement in net exports, as export growth requirement ratio back to 5 percent effective January outpaced import growth. By contrast, the pace of 1, 2023. Market interest rates have been trending investment declined as the government curtailed upward, in line waith the CBR increases. As fiscal its capital spending to support fiscal consolidation. and monetary tightening takes effect, inflation is On the supply side, the services sector continued to expected to gradually return within NBR’s target of 5 lead the growth with contact-sensitive services, i.e. percent over the medium term. trade, transport and hospitality services, expanding at brisk rates. Industrial growth increased in the first Rwanda’s international trade flows continued quarter as growth in construction activities returned to rise in the first quarter of 2023, with a into positive zones and manufacturing growth widening current account deficit linked to strengthened on account of the extension of the weakening secondary income. The narrowing Manufacture and Build to Recover Program (MBRP). current account deficit in 2022 was linked to The agricultural contribution to GDP remained higher export growth, especially higher re- moderate due to unfavorable weather conditions. exports and travel services (linked to tourism) Employment indicators improved in the first quarter as well as larger secondary incomes, both of 2023, with the greatest improvement among remittances and external grants. Overall, exports women and the youth. This strong momentum of goods and services increased by 41.9 percent, might have been weakened by heavy rainfall in late largely outpacing a 27.6 percent expansion in April and early May that caused loss of life, flooding, import payment. Thus, the current account deficit landslides and significant damage to infrastructure fell from 11.1 percent of GDP in 2021 to 9.8 percent in and agricultural production. The report estimates 2022. While export and tourism earnings continued that total losses (e.g., production flows) and damages to rise in Q1 of 2023, there was deceleration in (assets destruction) would result in the 2023 real secondary incomes, due to fewer external grants, GDP growth rate falling to 5.8 percent, against a pre- leading to the widening current deficit. disaster forecast of 6.2 percent. The government reduced spending to cut the fiscal Despite some decline from the unprecedented deficit in FY2022/23. Total government spending is high levels in 2022, inflation remains well above estimated to have fallen by 3.7 percentage points the central bank’s upper-bound inflation target of GDP in FY2022/2023 compared to the previous of 8 percent. Headline inflation (the change in the year. This improvement was due to declines in urban consumer price index) peaked at 21.7 percent subsidies and in domestically financed capital in November 2022, before moderating to 14.1 expenditure, reflecting the completion of major percent in May 2023. The bad harvest has boosted infrastructure projects in the previous year. Tax food prices, while the passthrough of internal oil revenues are estimated at 15.2 percent of GDP prices and franc depreciation maintained a core in FY2022/23, thus 0.6 percentage points below iv Rwanda Economic Update • Edition No. 21 Executive Summary their level in the previous year. The fiscal deficit is expected to gradually return within NBR’s target of 5 estimated to have narrowed to 6.2 percent of GDP percent over the medium term. The current account in FY2022/23, 1.3 percentage points lower than in deficit is projected to widen to 11.3 percent of GDP the previous fiscal year. in 2023 and start narrowing thereafter, but remain at around 10 percent of GDP over the medium term In 2022, strong growth coupled with some due to continued private sector investment growth, reduction in the fiscal deficit led to an easing supported by the extended Manufacture and Build of Rwanda’s debt position. Rwanda’s public to Recover Program (MBRP). Concessional borrowing and publicly guaranteed debt increased from and Foreign direct investment are expected to be 34.4 percent of GDP in 2015 to 73.3 percent in 2021, sufficient to cover Rwanda’s external financing needs. driven by borrowing to meet development needs Expenditure rationalization as well as the recent tax and the robust COVID-19 response, but then fell to reform are anticipated to reduce the fiscal deficit to 67.1 percent in 2022. However, most of Rwanda’s 3.2 percent of GDP by FY2025/2026. external debt is owed to multilateral donors on concessional terms. The World Bank-IMF debt This outlook is subject to substantial downside sustainability analysis of December 2022 maintained risks. Commodity prices could be higher or more the moderate debt risk rating. volatile than anticipated due to supply shocks generated by geopolitical tensions and conflict. Rwanda’s outlook remains one with strong Global economic activity could decelerate by more prospects for growth. Accounting for a potential than forecast, softening demand for Rwanda’s impact of the recent floods, GDP growth is expected exports. And an increasing frequency of droughts to moderate to 5.8 percent in 2023, against a pre- and floods could reduce agricultural output and disaster forecast of 6.2 percent. Economic activity lead to higher food prices. Downside risks could is expected to regain momentum in 2024, driven pose significant challenges to maintain Rwanda’s by some improvement in global tourism demand macroeconomic stability which will need to be met and a pickup in construction with the new airport. with a credible policy response. Inflation is likely to remain elevated in 2023 but is Rwanda Economic Update • Edition No. 21 v The Benefits of Foreign Direct Investment FDI projects are concentrated in richer districts. Rwanda has received substantial inflows of foreign The districts of the Kigali region (Gasabo, Kicukiro direct investment (FDI). While FDI slowed during and Nyarugenge) accounted for 81 percent of FDI the pandemic, FDI inflows at their peak equaled projects, 72 percent of investments, and 82 percent of almost a fifth of gross fixed capital formation projected jobs over the period 2016–22. By contrast, (GFCF), similar to that of South-East Asian countries only 23.5 percent of total establishments were based (e.g., Thailand and Vietnam), and well above the in these three districts. The average headcount average of SSA and the EAC countries. Information poverty rate in the three districts in 2016–17 was on registered FDI projects provided by the Rwanda 13 percent, compared to a national average of 39.3 Development Board (RDB) also show a consistent percent. As such, districts that received the largest increase in the number and estimated size of FDI shares of FDI are also those with the lower poverty in Rwanda, although below that projected by firms rates in the country. in their initial registration with the RDB. Policy reforms, including favorable regulatory treatment FDI has a significant impact on employment and (e.g., corporate tax income exemptions, duty- sales. FDI firms employ 170 percent more workers free imports of inputs, no restrictions on foreign in Rwanda and their sales are approximately 370 ownership, and one of the most open visa regimes in percent larger, compared to domestic private sector the region) as well as improvements in governance firms. Employment in FDI firms tends to increase in (particularly in comparison to most other countries the first three years from start up, although these in Sub-Saharan Africa) have encouraged FDI average employment figures are driven by a few inflows. Rwanda also has entered into 14 bilateral large firms. However, the number of jobs generated investment treaties (6 of which are now in force), as by FDI projects is a fraction of what was initially double taxation treaties (DTTs) with 15 countries, projected when foreign firms registered with RDB. It and investment provisions are included in broader is important to understand whether these inaccurate trade agreements with regional partners, the United forecasts (along with similar inaccuracies concerning States, and the European Union. the size of anticipated flows) reflect policy-driven constraints on FDI projects or data constraints of even firms’ misreporting in order to gain the fiscal incentives offered by the RDB. vi Rwanda Economic Update • Edition No. 21 FDI firms may also provide higher-quality jobs. have a much larger number of corporate suppliers Compared to domestic firms, an FDI firm is 11 than comparable local firms, and do not tend to percentage points more likely to have a social have fewer domestic buyers than domestic firms. security fund for its employees, and FDI firm social This analysis, however, provides no direct indication security contributions were more than 3 times larger of the types of goods and services traded and the than those provided by domestic firms. However, volume of these transactions, and the VAT data used there is no significant difference between the share in the analysis is available only for 2020, so the results of casual workers in FDI firms compared to domestic were likely affected by the impact of the COVID-19 firms, although only about one-fifth of the firms in pandemic. the ‘pay as you earn’ database provide compositional details of their employment. The analysis of FDI projects indicates some areas where policy initiatives could improve the impact FDI appears to encourage job creation by domestic of FDI on growth and development in Rwanda: firms. For example, increases in employment due • Encouraging FDI projects in areas outside the Kigali to FDI in a district may increase the demand for area could increase the impact of FDI on poverty goods and services from domestic firms in that reduction. This would require an assessment of district, thus stimulating hiring by local firms. This the factors that underlie successful FDI projects in multiplier effect is most likely to be driven by the poorer regions. One approach would be to create entry of (domestic) migrant workers and by more special economic zones with the availability of educated workers, and is greatest for manufacturing higher-quality infrastructure and human capital FDI. On the other hand, there is no evidence of a in the poorer districts of Rwanda, which is in line significant relationship between increases in FDI with the Government’s current plans. jobs and women- or youth-specific employment in the district, and there is evidence of an increase in • The inclusiveness of FDI could be improved by informal jobs following FDI jobs. modifying the incentive framework to encourage investments in women-led startups, to provide FDI firms appear to have substantial connections ancillary services that facilitate greater female to local firms, thus increasing the benefits of FDI employment (e.g., childcare and more flexible to the economy. On average, Rwandan FDI firms work conditions), to expand training for women Rwanda Economic Update • Edition No. 21 vii Executive Summary and youths, or to encourage investment in sectors • Policies could focus on improving linkages that tend to employ more casual workers, an between FDI projects and domestic suppliers. A important source of employment for women. The more in-depth assessment of the linkages between government could encourage foreign firms to FDI and domestic firms, using an expanded enhance corporate social responsibility initiatives, database, would help identify how different types to support better working conditions and health of FDI projects (by location, sector, activity) affect and safety in the workplace. domestic firms and the districts they are located • Efforts to strengthen the monitoring and ex post in, thus providing a robust basis for developing performance assessment of FDI would contribute policy recommendations. to the evaluation of the incentives regime and to • Cooperation with home governments is a potential improving government policies towards FDI firms. channel to encourage sustainable FDI projects, A targeted survey of FDI firms would support this perhaps through the imposition of mandatory effort. The results of such evaluations could be standards that are enforced in the home country used to condition additional incentives based on of investors. inclusion-related metrics. viii Rwanda Economic Update • Edition No. 21 Recent Economic Developments PART ONE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Rwanda Economic Update • Edition No. 21 1 Recent Economic Developments 1.1. Global and regional context1 1.2. Recent economic development Uncertainties and poor growth prospects continue Preliminary Post-disaster impacts of the April–May to beset the world economy. A confluence of 2023 floods on Economic Activity factors—the repercussions from Russia’s invasion The disasters resulted in significant loss of life and of Ukraine, persistent inflationary pressures and destruction of infrastructure, and are expected aggressive monetary policy tightening to curb to have a significant impact on output growth in them, recent banking sector stress in the United 2023. GDP growth is likely to be impacted directly States and Europe, and natural disasters stemming and indirectly by the floods. The direct effect of the from climate change—continues to loom over the flooding was to reduce production by an estimated global economy. According to the World Bank’s June at US$31.1 million, resulting in an estimated decline 2023 Global Economic Prospects, while the risks of in GDP (relative to the pre-disaster forecast for the global stagflation have now abated, global demand year) of about 0.17 percent based on an input- continues to be soft. After growing 3.1 percent in output model.2 The indirect effect on GDP reflects 2022, the global economy is set to slow substantially the interruption in economic activity resulting from in 2023, to 2.1 percent, before a tepid recovery in the massive damage to key assets and infrastructures 2024 to 2.4 percent. (road, bridges, land, factory, etc.), which are estimated at US$156 million in 2023. This is equivalent to Growth in Sub-Saharan Africa (SSA) is projected to the destruction of about 0.55 percent of the total slow to 3.2 percent in 2023, as external headwinds, capital stock. A computable general equilibrium persistent inflation, higher borrowing costs, and (CGE) model estimate shows that, in the absence of increased insecurity weigh on activity. Recovery a timely response, the destruction of capital caused from the pandemic remains incomplete in many by the flooding would likely lead to a reduction of countries, with elevated costs of living tempering the GDP by 0.23 percent in the first year of the disaster. growth of consumption. Fiscal space has narrowed Consequently, total losses (e.g., production flows) further, while surging import bills and higher debt and damages (assets destruction) would result in burdens have heightened financing needs. Growth the 2023 real GDP growth rate falling to 5.8 percent, in SSA is expected to slow from 3.7 percent in 2022 to against a pre-disaster forecast of 6.2 percent. 3.2 percent in 2023, with a moderate improvement to 3.9 percent in 2024. Although the baseline The disaster is expected to affect food prices. The decline in the supply of food crops caused by projection for 2024–25 envisions a pickup in growth, the disasters could have a significant impact on price per capita incomes are expected to expand much increases, as food and non-alcoholic beverages account more slowly than what is needed to reduce extreme for 39.0 percent of the consumer price index (CPI). poverty. Risks to the baseline remain tilted to the downside. These include a deeper-than-expected Poverty, inequality, and human capital levels global economic slowdown, deteriorating terms of are at risk of deteriorating due to the disasters. trade, higher inflation along with further domestic Persistently high food price inflation could delay or and international monetary policy tightening, even reverse poverty gains in the next few years.3 renewed financial distress in advanced economies, Seven of the nine disaster-affect districts exhibited and more adverse weather events. Materialization headcount poverty rates greater than the national of these risks would not only dampen growth but average of 38.2 percent in 2016/17 (Figure 1.2) prior to also exacerbate poverty and limit the ability of many countries to strengthen climate resilience. 2 The approach to estimate the direct effect – e.g., the impact of the losses of production flows on real GDP – is based the Input-Output matrix. The approach to estimate the indirect effects – e.g., the impact of the damages to infrastructure on real GDP – is generated by a CGE model used for the Rwanda CCDR published in September 2022. This section draws on World Bank (2023). 1 3 Macro-Poverty Outlook, April 2023, page 2, The World Bank. 2 Rwanda Economic Update • Edition No. 21 Recent Economic Developments Box 1.1: Summary of damages and losses of Rwanda’s recent floods Rwanda expereinced climate-related shock that led to life losses in the night of May 2 and 3, 2023. In late April and early May 2023, particularly on 2–3 May, heavy rainfall hit the northern, western and southern provinces of Rwanda, causing floods, triggering landslides and leading to casualties and damage. The districts most severely affected by the flood include Rutsiro, Nyabihu, Rubavu, and Ngororero in the Western Province; Burera, Gakenke, and Musanze in the Northern Province; and Nyamagabe in the Southern Province. According to the Government of Rwanda, 135 people have died across the affected provinces, 110 injured people and one still missing.4 In the aftermath of this disaster, the Government of Rwanda started response interventions and coordinated efforts to ensure rescue, evacuation and provision of humanitarian assistance to affected communities as well as expediting initial rehabilitation of damaged in infrastructure to ensure business continuity. More than 20,300 people were evacuated to 83 temporary accommodation sites as nearly 6,000 houses were destroyed.5 There were also significant damages and losses in Figure 1.1: heavy rains have led to significant infrastructure terms of assets and infrastructure. Key damaged damage and losses (Total disaster effect, in percent) assets and infrastructure include 5,963 houses, 58 schools, 2 health centres, 29 bridges, many national Education Water and Sanitation 0.8% 1.5% Communications and district roads, numerous voltage lines as well as 0.4% Agriculture and Livestock 2.6% 12 power stations. In agriculture, disasters caused Health 7.7% tremendous damages and losses in both crop and Trade and Industry Energy livestock farming. Landslides and floods affected 0.7% 2.3% Water Resources & 3,115.9 hectares (ha) of land, including 1,037.2 ha for Disaster Risk Management Environment 11.6% cereal crops; 1,076.0 ha for pulses; 59.7 for oil crops; 1.0% 658.3 ha for vegetables and root tubers; 166.5 ha for Transport fruits and 118.03 ha for cash crops plantations. There 59.6% were livestock losses (4,255 animals, of which 79 cattle, Housing and Human Settlements 3,605 chickens, 15 turkeys, 144 pigs, 133 goats, 91 11.8% sheep and 188 rabbits). This is likely to reduce access Source: Ministry in charge of Emergency Management (MINEMA) to food and income among the affected households in the short-term. Early estimates indicate that damages estimated are about Rwf184 billion (approximately US$160 million). Additionally, the storm is estimated to have caused Rwf39 billion (about US$33.6 million) in material loss. Early estimates of total recovery needs for the physical damages and economic losses are at Rwf629.38 billion (US$547.29 million). Figure 1.2: Headcount poverty rates in disaster affected districts Figure 1.3: Stunting levels in disaster affected districts (percentage) (percentage) 2016/17 Poverty rates per Districts 2019/20 Stunting level 80 60 50 60 40 30 40 20 20 10 0 0 Kirehe Rwamagana Kamonyi Gasabo Bugesera Gatsibo Nyarugenge Kayonza Huye Rulindo Nyagatare Rusizi Kicukiro Gisagara Karongi Nyanza Nyamagabe Muhanga Ngoma Nyamasheke Ruhango Nyaruguru Gakenke Rubavu Burera Gicumbi Rutsiro Musanze Nyabihu Ngororero Nyamasheke Gisagara Rulindo Karongi Nyaruguru Burera Rutsiro Nyamagabe Ngororero Nyabihu Nyanza Nyagatare Kirehe Gatsibo Musanze Bugesera Huye Ruhango Ngoma Rubavu Gicumbi Gakenke Rusizi Muhanga Kayonza Kamonyi Rwamagana Gasabo Nyarugenge Kicukiro Most a ected districts National poverty level Most a ected districts 2019/20 National stunting level Source: World Bank staff estimates based on 2016/17 Integrated Household Living Source: World Bank staff estimates based on 2019/20 Demographic and Health Survey Conditions Survey (EICV) 4 MINEMA, “Latest Updates on 2–3 May Disaster,” https://www.minema.gov.rw/updates/news/latest-updates-on-2-3-may-disaster 5 “MINEMA,” accessed May 25, 2023, https://www.minema.gov.rw/. Rwanda Economic Update • Edition No. 21 3 Recent Economic Developments the heavy floods and severe landslides, and poverty data of the Q1 of 2023 indicated that the investment could increase significantly if adequate support is deflator has averaged 29.3 percent for the last not provided quickly to affected communities and three quarters (Q3 and Q4 of 2022 and Q1of 2023). households. Production losses and damages are Public consumption also declined, for the second concentrated in economic activities that provide consecutive quarter, thus exerting a drag on GDP livelihoods and basic services to the poor and growth. The contribution of net exports to GDP vulnerable, such as health, agriculture, wholesale remained in positive zones, for the third consecutive and retail trade, and transport. Moreover, the crisis quarter as real export growth continued to outpace is likely to accentuate stunting challenges. Some the real import growth. of the affected districts are also the ones with the highest level of stunting and rely on own agriculture From the supply side, services continue to drive activities for their nutrition. growth, aligned with strong private consumption 45 (Figure 1.4B). Services have been the biggest driver Strong growth momentum continued in early 2023, of the post-COVID growth, in line with the pre-crisis despite weaker investment trends. Expanding by 13.4 percent, the services sector Rwanda’s economy continued to stage a strong contributed the most at 6.1 percentage points (more growth momentum in early 2023 fueled by than 65 percent) to the 9.2 percent GDP growth in robust private consumption. Real GDP expanded Q1 of 2023. Growing at 20.0 percent in Q1 of 2023, by 9.2 percent in Q1 2023, up from 7.9 percent in contact-sensitive services such as trade, transport the same period of 2022. This strong growth came and hospitality services led the expansion of the after a two-year average growth of 9.5 percent (10.9 services sector. Property-related services, i.e. real percent in 2021 and 8.2 percent in 2022, see Box estate activities, the second largest services after 1.2). Despite high inflation pressures since mid- trade services, have registered strong growth since 2022, real GDP growth was powered by robust Q2 of 2019. Industrial growth recovered as growth in private consumption (Figure 1.4A). Robust private construction activities returned into positive zones consumption reflects some improvements in the and manufacturing growth strengthened on account labour market (see the labour market section). On of the extension of the Manufacture and Build to the other hand, investment declined for the third Recover Program (MBRP). Growth in mining and consecutive quarter, as most infrastructure projects quarrying sectors remained strong in early 2023. undertaken as part of the post-COVID recovery plan Meanwhile, the growth contribution of agriculture were completed in the first half of 2022 and inflation remained moderate, likely due to unfavorable continued to push up business costs. Quarterly GDP weather conditions. Figure 1.4: Private consumption and services continue to drive GDP growth A. GDP demand components B. GDP sectoral decomposition (Percent y/y; percentage points) (Percent y/y; percentage points) 15 15 10 10 5 5 0 -5 0 -10 2019 2020 2021 2022 2023Q1 -5 Government consumption Private Consumption Gross capital formation 2019 2020 2021 2022 2023Q1 Net exports GDP growth Agriculture Industry Services Net taxes GDP growth Source: WBG staff computation based on National Institute of Statistics of Rwanda (NISR) 4 4 Rwanda Economic Update • Edition No. 21 5 Recent Economic Developments Box 1.2: Growth performance in 2022 In 2022, Rwanda’s economy shows a strong post-pandemic recovery amidst uncertain global and domestic conditions. After a strong recovery in 2021, Rwanda’s economy encountered multi-faceted challenges. Externally, the economy experienced setbacks stemming from the slowdown in global growth, and rising global inflation exacerbated by spillovers from the war on Ukraine. The war on Ukraine has triggered a slowing global recovery from the pandemic-induced recession of 2020 and elevated inflation—driven by a combination of surging commodity prices and persistent supply disruptions. Rwanda’s economy was hit by higher oil prices, which are not only increasing the import bill for energy products, but also raising transport costs for all other imported items, including food items. Domestically, agriculture underperformed due to unfavorable weather conditions coupled with less use of inputs like fertilizers as a consequence of higher prices linked to global supply chain disruptions. Despite these challenges, Rwanda’s economy has shown some resilience by growing at 8.2 percent in 2022. Domestic demand was the main driver on the 2022 real GDP growth, despite mixed picture. Growth in private consumption was robust, especially in the second half, despite high inflation pressures (Figure 1.4). However, following declines in capital spending in 2022, investment declined. Most of infrastructure projects undertaken as part of the post-COVID recovery plan were completed in the first half of 2022. The contribution of net exports to real GDP growth turned slightly positive on account of high export growth. Contrary to the first half of 2022, the contribution of net exports (i.e., external demand) to real GDP growth turned negative in the second half, while remaining slightly positive for the entire year overall. On the production side, 2022 real GDP growth was mainly driven by the services sector, primarily boosted by the rebound in tourism activities. While the growth continued to be broad-based in the second half, services sector growth was driven by wholesale and retail trade, hospitality, transport, and information and communications, as well as by public-led services (public administration and education). These six sub sectors generated more than 85 percent of the overall services growth and more than 60 percent of real GDP growth in the second half. In 2022, the number of tourist arrivals more than doubled compared to the previous year—a reversal of a 2-year declining trend—but remained at about 70 percent of pre-pandemic levels. This trend has boosted output in hotel and restaurants services—increasing by 87.3 percent in 2022—with about 60 percent of growth happening in the first half due to the June 2022 Commonwealth Heads of Government Meeting (CHOGM) meeting. Industrial and agricultural contribution to growth were benign throughout the year. The industrial growth decelerated, weighed down by contraction in the construction sector—the important driver of the post-COVID recovery—in the second half of 2022 as most infrastructure projects were completed. The agriculture sector experienced poor performance in 2022, undermined by high costs of inputs due to trade disruptions as well as unfavorable weather conditions. Food crop production was the most affected, leading to food price pressures. Source: WBD Staff based on NISR GDP database. labor market showed some improvement in the fact that most of new jobs were created in urban early 2023 areas. In Q1 of 2023, 35.5 percent of the employed The labor market improved significantly in Q1 of population were in urban areas, up from 24.0 percent, 2023, with some shifts in the labor market towards on average, in 2022 (Figure 1.5B). According to the urban jobs (Figure 1.5A). The employment-to- labor force survey (LFS) of February 2023, the decline population ratio increased by 3.3 percentage points in unemployment was also more evident among while the unemployment rate plunged by over 7 youth (-9.3 percentage points) and women (-9.0 percentage points, on average. The decline was more percentage points). The employment-to-population in the urban area with a 4.4 percentage points, versus ratio has reached its highest quarterly post-COVID 2.6 percentage points in rural areas. This reflects the level, driven mainly by female employment. Rwanda Economic Update • Edition No. 21 5 Recent Economic Developments Figure 1.5: Rwanda’s labour market A. Unemployment rates B. Share of jobs: Urban area vs Rural area (Employment-to-population ratio(%) (Percent) 30 100 80 20 60 40 10 20 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2019 2020 2021 2022 2023 2020 2021 2022 2023 Urban Rural National Yearly average Urban Rural Source: Rwanda Labor Force Surveys, various issues In Q1 of 2023, improvements in the labor market by 82.1 percent, 119.2 percent and 32.3 percent were in line with real sector activities. The respectively. On the other hand, there were declines employment expansion was driven by contact- in some export items, such as tea (-0.4 percent), related services, i.e., trade, transport and hospitality cassiterite (-38.0 percent), wolfram (-32.1 percent), services as well as the manufacturing industry, in and hides and skin (-79.1 percent), driven mainly line with their contribution to the real GDP growth by falls in their prices. Expanding by 24.8 percent, in that period (Table 1.1). There were job declines imports increased across most categories except in agriculture and construction activities, reflecting for intermediate goods. Preliminary data indicate a trends in the respective output. narrowing current account deficit in Q1 of 2023 on account of declining external grants. In Q1 of 2023, Table 1.1: Employment by selected sectors (percent changes) external grants were less than 1 percent of GDP 2023 Q1 vs compared to 4.3 percent of GDP in the same period 2022 Q1 of 2022. Employed population 6.1 Agriculture, forestry and fishing -6.4 In 2022, strong export growth and larger Mining and quarrying 48.1 secondary income flows narrowed the current Manufacturing 23.2 account deficit. The substantial increase in global Construction -6.5 prices for oil and other commodities led a 27.6 Contact-related services 37.7 Others 14.8 percent expansion in import payments in 2022. Source: Rwanda Labor Force Surveys, various issues. This was partially offset by a 41.9 percent increase in exports, mainly driven by higher re-exports of Rwanda’s international trade flows continued to rise fuel and food items to the Democratic Republic of Rwanda’s international trade flows maintained Congo (DRC), as well as travel services (linked to the strong momentum in early 2023 with export tourism recovery). Remittance inflows increased by growth, outpacing import growth in the first four 21.8 percent year-on-year to reach US$461 million months of 2023. Exports of goods increased sharply, (equivalent to 3.5 percent of GDP) in 2022. With by 30.6 percent, in the first four months of 2023. these trends, the current account deficit narrowed to Despite this strong growth, performance is mixed 9.8 percent of GDP in 2022, falling below 10 percent across export items. The main drivers of exports were for the first time since 2018. gold exports, coffee and reexports, which increased 6 Rwanda Economic Update • Edition No. 21 Recent Economic Developments Table 1.2: Balance of payments, 2018–2023 (Percent of GDP, unless otherwise indicated) 2020 2021 2022 2021Q1 2022Q1 2023Q1 Current account balance -12.1 -11.2 -9.8 -9.5 -8.4 -12.2 Trade balance (goods and services) -16.2 -16.1 -14.9 -14.0 -13.5 -14.6 Exports 19.0 19.1 22.5 16.0 20.8 22.8 o/w tourism 1.2 1.4 3.0 0.9 1.9 2.9 Imports 35.2 35.2 37.4 30.0 34.3 37.4 Primary income -2.0 -2.0 -2.3 -2.2 -2.8 -1.6 Secondary income 6.1 6.8 7.4 6.8 7.9 4.1 o/w external grants to government 3.0 3.5 3.9 3.8 4.3 0.6 o/w remittances inflows 2.7 3.4 3.5 3.1 3.6 3.4 Capital account balance 3.1 3.4 2.4 3.0 2.5 2.8 Financial account balance 11.0 10.1 5.9 3.9 0.1 12.6 Direct investment 1.5 2.1 3.0 1.5 2.6 2.5 Portfolio investment 0.3 2.5 -0.5 0.0 -0.1 0.0 Loans and other flows 9.5 7.9 2.9 2.4 -2.3 10.1 o/w government borrowing 9.3 8.8 2.8 6.8 4.2 12.1 Net errors and omissions 1.3 -0.9 0.5 -1.7 -0.8 -6.7 Change in reserves (+: increases) 3.2 1.4 -1.0 -4.3 -6.5 -3.5 Source: WBG staff calculation based on NBR and NISR data. Foreign direct investment and government Inflation and monetary policy borrowing partially financed the current account Following the unprecedented high levels of deficit, leading to a drawdown of foreign reserves. inflation in 2022, there has been some easing off Foreign direct investment (FDI) inflows continued in early 2023, but inflation remains well above the to recover, reflecting the improvement in economic NBR’s inflation target (Figure 1.6). After peaking activities. Affected by the COVID pandemic, FDI at 21.7 percent in November 2023, the inflation declined to 1.9 percent of GDP in 2020. Following rate measured by the urban consumer price index, a gradual reopening of economic activities, FDI decelerated to 14.1 percent in May 2023.6 Food had recovered to 3.0 percent of GDP in 2022 but inflation contributed most to inflation trends since still remained below the pre-crisis levels. The other May in 2022, following the poor food harvest in that important source for financing the current account year. In 2023, food inflation remains elevated and deficit is government borrowing, which fell by about the largest contributor to inflation. Reflecting the 4 percent from 2021, largely reflecting the base passthrough of higher international prices of food effect emanating from the Eurobond issuance and and oil, higher credit growth and franc depreciation, SDR allocation in 2021. The small overall balance core inflation (excluding fresh food and energy of payments deficit was financed by drawing on items) also remained above the NBR inflation target. foreign reserves in 2022, after several years of reserve In addition, some services have recently experienced accumulation (Table 1.2). Nevertheless, foreign price increase. These include: i) hotel and restaurants exchange reserves remain at a comfortable level of (due to higher food prices—sugar, rice, cooking 4.2 months of import cover. The level of reserves, oils, cereals and flours—in line with trends in their together with the high demand for imports, has led domestic and international prices); ii) transport (due to 11.3 percent depreciation of the franc against the to fuel prices and the surge in cars’ prices); and iii) US dollars between end-2021 and end-May 2023. 6 Rwanda uses the urban consumer price index as the main inflation indicator for macro-economic policy, especially for monetary policy purposes. Rwanda Economic Update • Edition No. 21 7 Recent Economic Developments Figure 1.6: Rising domestic food prices led to inflation pressures Figure 1.7: Rwanda’s yield curve, January 2022–April 2023 (percent change, year-on-year, and contribution to percent change) (percent) 25 14 20 12 10 15 8 10 6 5 4 0 2 28 91 182 364 3 yrs 5 yrs 7 yrs 10 yrs 15 yrs 20 yrs -5 days days days days May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Treasury bills Treasury Bonds Domestic prices Import prices Headline Jan-22 May-23 Source: World Bank staff calculation based on NISR data Source: WBG estimates based on NBR Monthly Interest Rates housing related products (driven by gas prices). was in the 182-day treasury bill (TB) rate (+365 basis Pressures from food prices had been more noticeable points), followed by the interbank rate (+252 basis in rural areas, where food items constitute the bulk of points). Overall, TB rates reported large increases the consumption basket (48 percent), thus affecting (+262 basis points in weighted average rate), the poorer households. In May 2023, rural inflation reflecting the fact that the government relied more was 28.2 percent, down from the recent high of 42.9 on domestic options to finance the fiscal deficit in percent, mainly due to declines in the price of cereals the first half (July-December) of FY2022/2023. With a and vegetables. This reflects the start of the Season B small increase in lending rate (+15 basis points), the green harvest in mid-April. interest rate spread (between deposit and lending rates) has declined below 7 percent in Q1 of 2023, a NBR tightened monetary policy in 2022 as inflation level last seen in May 2013. reached historical records. From January 2022 to February 2023, NBR has raised its benchmark Fiscal Sector and Debt Sustainability rate—the central bank rate (CBR)—by a cumulative The government made large spending cuts in 250 basis points, from 4.5 percent to 7.0 percent. FY2022/23 that contributed to narrowing the Furthermore, the NBR resumed, in June 2022, its budget deficit. Both revenue and expenditure mop-up operations, which were last done before declined as a share of GDP. However, the decline the COVID pandemic and which were replaced by in revenues was less than the one recorded in injection operations to provide enough liquidity expenditure. Overall, total government spending to the economy during that time. The reserve is estimated to decline to 28.9 percent of GDP in requirement ratio was also raised back to 5.0 percent FY2022/2023, which is 3.7 percentage points lower effective January 1, 2023. With these actions, the real than in the previous fiscal year. This was mainly driven growth of the credit to the private sector, measured by declines in the use of goods, capital expenditure, as the nominal credit growth minus the headline and subsidies. In FY2022/2023, the government inflation, has been in negative zones since July 2022. of Rwanda undertook spending rationalization With this negative credit growth, one could argue measures focusing on improved efficiency of that the monetary policy actions has been to some government services, limits to subsidies, more extent effective. efficient capital expenditure, and general public finance management (PFM) reforms. Fiscal revenues Interest rates have been trending upward, in are also expected to have declined to 22.7 percent line with the CBR increases (Figure 1.7). Between of GDP in FY2022/23. The government has recently January 2022 and April 2023, the largest increase started implementing changes to the tax code, which 8 Rwanda Economic Update • Edition No. 21 Recent Economic Developments Table 1.3: Rwanda’s Public finance, FY2020/21-FY2023/24 (percent of GDP) FY2022/23 FY2023/24 FY2020/21 FY2021/22 End year proj. estimates REVENUE 23.4 25.1 22.7 21.8 Taxes 15.7 15.8 15.2 15.4 Taxes on income, profits, and capital gains 6.8 6.8 6.6 6.6 Taxes on goods and services 7.6 7.6 7.1 7.0 Taxes on international trade and transactions 1.2 1.2 1.3 1.5 Other taxes 0.0 0.2 0.2 0.3 Other revenues 3.0 3.8 2.5 2.6 Grants 4.7 5.5 5.0 3.8 EXPENDITURE 31.3 32.6 28.9 27.1 Expenses 20.3 20.4 19.1 18.1 Compensation of employees 2.8 2.9 2.5 2.7 Use of goods and services 6.1 6.1 4.8 4.4 Interest 1.5 1.8 2.3 2.4 Subsidies 2.7 2.5 2.0 1.8 Grants 5.3 5.3 6.4 5.7 Social benefits 0.3 0.4 0.3 0.3 Other expense 1.5 1.3 0.8 0.8 Net Investment in nonfinancial assets 11.0 12.2 9.8 9.0 Foreign financed 5.8 6.7 5.3 5.6 Domestically financed 5.2 5.5 4.5 3.4 Net lending borrowing Including grants -7.9 -7.5 -6.2 -5.3 Excluding grants -12.6 -13.0 -11.2 -9.1 Primary balance -6.4 -5.8 -3.9 -2.9 Net financing 7.9 7.5 6.2 5.3 Domestic -2.3 1.1 0.3 -1.1 Foreign 10.2 6.4 5.9 6.4 Source: WBG staff computations based on various budget executions reports and budget framework papers. may reduce the growth of revenues (an exemption Fiscal consolidation and strong economic growth of value-added tax (VAT) on rice and maize flour, reduced Rwanda’s debt burden in 2022 for the first reduction of the corporate income tax rate, limits on time since 2013. Public and publicly guaranteed excise duties, and some reduction in property taxes), (PPG) debt fell by 6.2 percentage points in 2022 to but also included steps to broaden the tax base, 67.1 percent of GDP, reversing the trend that saw improve tax compliance and curb tax evasion. This PPG debt almost double as a share of GDP during underlines the need for strong implementation of the 2015–2021, driven by borrowing to finance public latter reforms going forward. However, reductions investment but also from the robust COVID-19 in revenue were less than the one recorded in response. 7 Most of Rwanda’s external debt is owed expenditure. Thus, the fiscal deficit is estimated to to multilateral donors on concessional terms. The narrow to 6.2 percent of GDP in FY2022/23 from 7.5 percent of GDP in FY2021/22. 7 The government’s response to the pandemic added about 16.5 percentage points of GDP to Rwanda’s PPG debt in 2020 and 2021. Rwanda Economic Update • Edition No. 21 9 Recent Economic Developments share of concessional borrowing accounted for over other areas, the focus will be on: a) increasing 80 percent of total public external debt by the end agricultural and animal productivity and postharvest of 2022. The debt sustainability analysis (DSA) of management to ensure national food and nutrition December 2022 maintained the moderate debt risk security; b) scaling up access to infrastructure, rating. In terms of drivers of debt declines in 2022, high improving their efficiency, and ensuring their economic growth, the exchange rate depreciation as maintenance; and c) enhancing disaster prevention well as favorable interest rates have more than offset and response measures. A share of about 30 percent the impact of the primary fiscal deficit that had been of the FY2023/24 budget is allocated to the social leading recent increases (Figure 1.8). transformation pillar, with the overarching objective Figure 1.8: Decomposition of public debt changes, 2017–22 of developing Rwandans into a capable and skilled (Percent of GDP) people with quality standards of living and a stable 20 and secure society. The transformational governance 15 pillar is allocated about 14 percent of the budget 10 with the overarching objective of consolidating 5 good governance and justice as building blocks for 0 equitable and sustainable national development. -5 Figure 1.9: FY2023/24 budget allocation by NST1 pillars -10 -15 Transformational 2017 2018 2019 2020 2021 2022 2023e governance 14% Primary de cit Real interest rates Real GDP growth Real exchange rate depreciation Residual, including asset changes Change in public sector debt Source: WBG staff estimates based on DSA data Economic transformation 56% The FY2023/2024 budget envisaged a further reduction of capital spending. According to the Social transformation 30% budget framework paper (BFP) for 2023/24 – 2025/26, the overall spending is expected to decline by 1.7 percentage points of GDP to 27.1 percent Source: Budget Framework Paper 2023/24-2025/26 in FY2023/24. Capital expenditure is expected to decline to 9 percent of GDP, its lowest level since 1.3. Rwanda’s economic outlook and risks the last decade. Recurrent expenditures are also After softening in 2023, Rwanda’s economic growth expected to drop by 1 percentage point. Overall, the is expected to regain momentum in 2024-2025. fiscal deficit is projected to be 5.8 percent of GDP The recent floods are expected to have weighed on (Table 1.3). The fiscal deficit financing for FY2023/24 an already softening growth in 2023, which reflected is mostly from external borrowing. The announced additional fiscal consolidation and monetary policy fiscal consolidation path is expected to reduce the tightening to rebuild policy buffers, as well as weaker accumulation pace of public debt (projected at 69.1 agricultural output. Growth is projected to improve percent of GDP in June 2021). in 2024-2025. The FY2023/24 budget priorities are National In 2024, agriculture is expected to rebound. Strategy for Transformation (NST1) pillars. The Industrial production is expected to continue government has allocated 56.0 percent of the benefiting from the extension of the Manufacture FY2023/24 budget (approximately 16.5 percent of and Build to Recover Program (MBRP). Industrial GDP) to the economic transformation pillar. Among activity is expected to benefit from the pickup in 10 Rwanda Economic Update • Edition No. 21 Recent Economic Developments construction of the new airport and the subsequent affected by the of the April–May 2023 floods. boost to the services sector in line with the global Therefore, the current account deficit is projected growth outlook and the expected decline in domestic to remain at around 10 percent of GDP over the inflation. Inflation is expected to slowly decline in medium term. The level of foreign reserves should 2023, as the NBR envisages to continue monitoring remain adequate as concessional borrowing and it to take appropriate actions. Inflation will remain FDI are expected to continue covering Rwanda’s elevated in 2023 as food prices remain stubbornly external financing needs. Construction activities for higher. As fiscal and monetary tightening takes the Bugesera Airport are expected to lead to a higher effect, inflation is expected to gradually return within FDI increase over 2024–2025. NBR’s target of 5 percent over the medium term. Expenditure rationalization and tax reform is The current account deficit is projected to widen projected to gradually reduce the fiscal deficit to to 11.3 percent of GDP in 2023 and start narrowing 3.2 percent by FY2025/26. Total expenditures are thereafter. Rwanda had been running structural projected to decline by 1.6 percentage points to 27.4 external deficits consistent with its high investment percent of GDP between FY2022/23 and FY2025/26 needs, where this investment is financed with foreign as the government continues its expenditure savings. While the government is expected to reduce rationalization measures, on both recurrent non- its expenditure over the medium term, it is expected wage and capital spending. In April 2023, the that investment momentum will continue, led by the government adopted a number of tax reforms to private sector and supported by the extended MBRP broaden the tax base, improve tax compliance, and and foreign direct investment inflows related to the curb tax evasion. Designed as part of the Medium- construction of the new airport. This is expected Term Revenue strategy (MTRS), these reforms are to lead to larger import bill amid declining foreign expected to increase tax revenues by 1 percentage grants. The import bill is expected to be enlarged point of GDP by FY2025/26. With a credible fiscal due to the recovery needs for the physical damages consolidation, the debt trajectory is expected to and economic losses in the sector that are mostly remain sustainable. Rwanda Economic Update • Edition No. 21 11 Recent Economic Developments The outlook is subject to uncertainty about worsen—for example, because of intensifying developments in global commodity markets, the geopolitical tensions or conflicts. The main risk on the degree of additional global and domestic policy domestic front is linked to the increasing frequency tightening needed to subdue persistent inflation, of weather and climate shocks (e.g., drought and and the resilience of the world economy and global floods), which could harm agricultural output and financial system to a prolonged period of tight thereby impact many farms and households in monetary policies. Commodity prices may remain Rwanda. Decreased production could also lead unusually volatile and vulnerable to further shocks to higher food prices to the detriment of poor if disruptions to the supply of major commodities households. 12 Rwanda Economic Update • Edition No. 21 PART TWO INCLUSIVENESS OF FOREIGN DIRECT INVESTMENT IN RWANDA Rwanda Economic Update • Edition No. 21 13 Inclusiveness of Foreign Direct Investment in Rwanda 2.1. Introduction Empirical analysis that is granular enough to Foreign direct investment (FDI) is an important account for the heterogeneous features of FDI source of finance for economic development and projects that may influence their potential to contributes to domestic employment, capital generate spillovers has been limited in the formation and diffusion of external knowledge African context. Only a handful of studies provide to the local economy. Evidence from two decades evidence on the consequences of domestic firms’ of empirical research points to growth-enhancing exposure to FDI. Most of the literature focuses on effects of FDI at the macroeconomic level (Alfaro and horizontal, intra-industry effects.9 Evidence on Charlton, 2013; Alfaro, 2017; Javorcik, 2019), higher vertical spillovers in African contexts is particularly levels of employment, particularly for the more highly limited. Newman et al. (2020) use survey data to skilled (Hoekman et al., 2023) and improvements in investigate the prevalence of backward and forward the performance of domestic firms, especially those vertical linkages associated with FDI and conclude that benefit from the establishment of direct linkages these are rare in Africa, but argue that conditional with foreign investors (e.g. Alfaro-Urena et al., 2022). on establishing a linkage, spillovers and technology A key motivation underlying investment promotion transfers are likely to be strong.10 policies is that FDI may give rise to a mix of vertical and horizontal spillover effects on domestic firms (Farole Investigating the implications of attracting FDI and Winkler, 2014). The incidence and magnitude is important for Rwanda given the national of FDI spillover effects operate through a range of development objective of promoting economic different channels, each of which may be influenced growth by fostering private sector development. by the business environment, macroeconomic The National Strategy for Transformation (NST) conditions, political and governance variables, and highlights the promotion of public and private differences in managerial ability, access to finance investment as a key strategic goal. The institution and absorptive capacity of firms, among other in 2017 of the “National Investment Policy” in place factors.8 The benefits of attracting FDI may extend of the “National Public Investment Policy” is a clear beyond purely economic effects. Attracting “quality” sign of attention to the role of the private sector. FDI can help improve living standards along several Increases in domestic savings and, especially, the dimensions of well-being, including Sustainable attraction of foreign capital in the form of FDI are at Development Goal (SDG) 9, by supporting inclusive the core of NST.11 and sustainable industrialization, fostering innovation and development of infrastructure. 9 In an analysis of Zambian manufacturing firms, Bwalya (2006) finds no support for horizontal productivity FDI spillovers. Waldkirch and Ofosu (2010) find that FDI has a negative association with average total factor productivity of a sample of domestic competing firms in the manufacturing sector. Also focusing on horizontal spillovers, a firm level analysis of FDI spillovers by Demena and van Bergeijk (2019) finds evidence for competition spillover effects but not for learning and mobility spillover effects. Demena and Murshed (2018) use firm- level surveys for eight sub-Saharan Africa countries over the period 2006-2014, finding evidence for demonstration (learning) spillovers, but not for labor mobility-related technology diffusion or competition effects. Similarly, using an ad-hoc survey on a cross-section of African countries, Sanfilippo and Seric (2016) find evidence of agglomeration spillovers when foreign firms co-locate in the same cities as domestic firms. Abebe et al. (2021) in contrast find that the entry of large scale FDI in manufacturing activities in Ethiopia has pro-competitive effects on domestic incumbents. 10 Bwalya (2006) provides evidence for vertical spillovers from FDI on Zambian firms in the manufacturing sector. 11 FDI represents about 74% of total foreign capital flows in Rwanda, See, e.g., Javorcik (2019), Lay and Tafese (2020) and Godart et al. (2020). 8 according to the last census by the National Bank. 14 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda Recent data demonstrate the benefits of FDI by foreign investors in Rwanda. Finally, the conclusion inflows for Rwanda. The data show a consistent draws some policy implications suggested by the increase in the number and estimated size of findings and the broader literature on FDI policies for FDI in Rwanda, which is driven by projects in the inclusive development.13 manufacturing, construction, and services sectors. The analysis shows that registered FDI firms are an 2.2. Rwanda provides a favorable important source of employment in the country. environment for FDI 12 Jobs offered by foreign investors are increasing The government of Rwanda has promoted a series during the period considered, with job creation not of reforms to improve the investment climate and only at the year of entry of FDI projects but also in encourage private investment, especially FDI. The subsequent years of operation. On a less positive latter includes a range of favorable regulations, e.g., note, the analysis reveals that the number of jobs corporate tax income exemptions, duty-free imports generated by FDI projects is a fraction of what was of inputs, no restrictions on foreign ownership and initially projected when foreign firms register with one of the most open visa regimes in the region RDB. There is some evidence of a “multiplier” effect (NBR, 2023). While it is difficult to assess whether of FDI on employment generated within the district and to what extent the provision of fiscal incentives in which a project occurs. This role of FDI as a local is a driver of FDI inflows, the establishment of employment multiplier is stronger for manufacturing a business environment that is supportive of projects. The analysis also provides suggestive private sector activity has been emphasized in the evidence that FDI firms have a strong capacity to empirical literature as a main determinant of FDI involve domestic suppliers and customers in their (Bloningen and Piger, 2014). Rwanda’s good track supply chains. Although data limitations preclude in terms of governance is therefore an important identification of detailed linkage effects, the factor influencing potential entry by foreign literature on FDI noted above finds that these types investors. Over time, the country has made visible of relationships can be expected to be associated improvements in some of the dimensions of with spillovers on the economic and employment governance that are found by the literature to be performance of domestic firms, in turn influencing valued by foreign investors. For instance, data from the impact of FDI on inclusivity. the World Bank’s World Governance Indicators (WGI) show that over the last 20 years Rwanda moved to The remainder of the section is structured as the highest percentiles of the world’s distribution follows. First, a descriptive overview of the size and in terms of control of corruption, effectiveness distribution of FDI in Rwanda is provided. Next, an of the government, political stability, regulatory assessment of the inclusiveness of FDI in Rwanda is quality, and the rule of law (Figure 2.1). Importantly, conducted by combining project-level FDI data with this makes Rwanda a regional outlier, closer to the firm-level data to investigate the extent to which values recorded by East Asian countries. Over the foreign investors contribute to job generation in same time span the sub-Saharan African region did Rwanda both directly and indirectly, using nationally not improve accordingly. representative data on the labor force. The analysis also provides a snapshot of firm-to-firm relationships, This section analyzes the role of FDI in Rwanda by exploiting granular 13 identifying the supply chain relationships settled up project-level information on registered FDI projects provided by the Rwanda Development Board (RDB) to (1) describe the pattern of FDI projects into the country over time, industries and location; and (2) assess the consequences of the entry of FDI in terms of (direct and indirect) employment generation, relationships with domestic firms and potential implications for inclusiveness. As foreign firms must register to be eligible for fiscal incentives provided by the Government, this dataset provides a representative picture of foreign investments in In this paper we use the term ‘FDI firm’ to denote an inward foreign 12 the country. The analysis focuses on the most recent years when the investment project. number and the size of FDI projects in Rwanda increased substantially. Rwanda Economic Update • Edition No. 21 15 Inclusiveness of Foreign Direct Investment in Rwanda It is therefore not surprising that in the annual The investment climate is also influenced by Foreign Private Capital (FPC) conducted by the international treaties to protect foreign investors National Bank of Rwanda, foreign investors in after they have established operations. Rwanda has Rwanda report a favorable opinion about several so far signed 14 bilateral investment treaties (BITs), dimensions related to doing business in the 6 of which are currently in force (including one with country. The most recent census (National Bank the U.S., South Korea, and Singapore; see Table 2.1). of Rwanda, 2023) shows an overall high level of Provisions on investment are also included in broader satisfaction by foreign firms, especially in relation trade agreements with other regional partners (EAC, to specific dimensions such as the legal framework COMESA). Rwanda has adopted the Investment (almost 90 percent report satisfaction), governance Protocol of the African Continental Free Trade Area (82.7 percent) and tax incentives and the investment (AfCFTA) that aims to help member states put in place framework (81.6 percent). rules to protect investors from regulatory risks and improve their investment competitiveness by setting up dispute prevention and grievance mechanisms. Figure 2.1: Percentile rank (0 to 100), selected governance indicators, Rwanda and SSA average (percentage) 80 70 60 50 40 30 20 10 0 Rwanda SSA Rwanda SSA Rwanda SSA Rwanda SSA Rwanda SSA Control of Corruption Gov E ectiveness Political Stability Regulatory Quality Rule of Law 1996 2000 2010 2021 Source: Elaboration based on World Governance Indicators (WGI), the World Bank Table 2.1: BITs signed by Rwanda Status Signature Entry into force Democratic Republic of the Congo – Rwanda BIT Signed 2021 Central African Republic – Rwanda BIT Signed 2019 Qatar – Rwanda BIT Signed 2018 Singapore – Rwanda BIT In force 2018 2020 Rwanda – United Arab Emirates BIT In force 2017 2020 Rwanda – Turkey BIT Signed 2016 Morocco – Rwanda BIT Signed 2016 Korea, Republic of – Rwanda BIT In force 2009 2013 Rwanda – United States of America BIT In force 2008 2012 BLEU (Belgium-Luxembourg Economic Union) – Rwanda BIT Signed 2007 Mauritius – Rwanda BIT Signed 2001 Rwanda – South Africa BIT Signed 2000 BLEU (Belgium-Luxembourg Economic Union) – Rwanda BIT In force 1983 1985 Germany – Rwanda BIT In force 1967 1969 Source: Investment Policy Hub (UNCTAD) 16 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda Rwanda has been a leader in its focus on Thailand and Vietnam), and well above the average investment facilitation to complement the of SSA and the EAC countries (Figure 2.2). While the investment protection focus of BITs. By providing stock of FDI to GDP has increased and exceeds the a one-stop shop for registering and addressing EAC average, this ratio remains below the average applicable requirements relating to business level observed in SSA (Figure 2.3) and is less than that registration, environmental protection and other in comparator countries, e.g., Uganda or Ethiopia, regulations, as well as investment incentives, where the ratio currently is above 30 percent. Rwanda’s investment promotion regime embodies Figure 2.3: Stock of FDI as a share of GDP many of the best practices that have been identified (percent) by organizations like UNCTAD, the OECD, and the 120 World Bank Group. BITs are increasingly subject 100 to critical global scrutiny by both developing and 80 developed countries because of their potential to undercut the legitimate policy space of governments 60 to revise regulations that reflect domestic goals and 40 apply equally to national and foreign investors.14 An illustration is the adoption of the 2016 Pan- 20 African Investment Code that shifted emphasis from 0 2000 2003 2006 2009 2012 2015 2018 2021 investment protection to investment facilitation Rwanda SSA SEA EAC (Berger and Sauvant, 2021). Source: Elaboration based on UNCTADSTAT 2.3. Rwanda has received substantial inflows FDI inflows slowed because of the pandemic of foreign direct investment (2020–21). According to the 2022 edition of the FDI FDI in Rwanda has played an increasingly inflows amounted to US$399 million in 2021. This important role as a source of private investment. At represents a 45.7 percent increase over the previous its peak, the share of FDI inflows in gross fixed capital year (Figure 2.4).15 This increase was driven by both formation (GFCF) was almost 20 percent, a value the debt and equity components associated with FDI similar to that of South-East Asian countries (e.g., inflows. Figure 2.2: FDI inflows as a share of total investments (percent) 30 25 20 15 10 15 The 2021 figures from the National Bank of Rwanda (NBR) differ from those provided by the latest World Investment Report (UNCTAD, 2022). 5 According to UNCTAD, Rwanda received US$212 million in 2021, 23% less than the previous year. Note that the figures for all the other years 0 (2016 to 2020) are exactly the same in both sources. To the best of 2000 2003 2006 2009 2012 2015 2018 2021 our knowledge, details explaining such differences are not available. Rwanda SSA SEA EAC The NBR figures were published more recently (May 2023) and might be more updated compared to those published by UNCTAD, whose Source: Elaboration based on UNCTAD STAT (United Nations Conference on Trade report came out in July 2022. A surge in FDI in 2021 is also consistent and Development statistic database). Note: SSA: Sub-Saharan Africa, SEA: South- Eastern Asia, EAC: East Africa Community with project level data presented elsewhere in this report. Note that for reasons of comparability with other countries and regional aggregates, in the remaining of this Section we use UNCTAD data to report the trends in FDI compared to GFCF and GDP. In light of what discussed, while we are cautious about discussion of the 2021 drop, 14 For discussion on the growing scrutiny of BITs, see Dietz et al. (2019), the discussion about longer term trends should not be affected as they Kurtz (2012) and Monebhurrun (2017). are consistent with the National Bank’s data. Rwanda Economic Update • Edition No. 21 17 Inclusiveness of Foreign Direct Investment in Rwanda Figure 2.4: FDI inflows (US$ million) in Rwanda The initial investment that firms report when they (percentage) register with RDB tend to be significantly greater 399.3 381.9 than the realized inflows. Similarly, foreign investors 356.4 353.8 342.3 tend to overestimate the number of jobs they expect 274.1 to create when registering their FDI projects with the RDB. As discussed subsequently, the reasons for the discrepancy are unclear and call for further investigation, as they are likely to have policy implications. These are important to understand and will differ depending on the underlying cause. If the cause reflects untapped capacity caused 2016 2017 2018 2019 2020 2021 by unforeseen constraints, it suggests a focus on NBR. 2022 Foreign Private Capital survey determining whether and how the constraining Rwanda has received a large number of FDI factors can be addressed. If the difference reflects projects. Between 2008 and 2022, the Rwanda efforts by investors to access specific tax or other Development Board (RDB) recorded 1,279 incentives provided by the investment code that investment projects in the country (Figure 2.5).16 depends on the magnitude of the investment (the These projects were projected to involve a total estimated magnitude of the investment and number value of investment of about US$13.5 billion and of jobs that will be created (e.g., under Article 8 of to create some 200,000 jobs. Projected investment the Investment Code), it may be important for policy inflows grew from an average of US$530 million in makers to revisit the design of the incentives.17 2008-2015 to US$1.3 billion in 2016-2022. The sources of FDI in Rwanda are quite Figure 2.5: Growth in the number of registered FDI projects, concentrated. According to the detailed FDI project 2006–2022 information, 41 percent of registered FDI projects 300 in Rwanda during 2016–2022 were financed or 250 co-financed by investors from China, India, and number of rgistered projects the United States. Most of the investors from the 200 region were from Nigeria, Eritrea, and Egypt, which 150 together financed 7 percent of projects (Figure 2.6).18 100 For global investors, this ranking approximately corresponds to the largest sources of investment 50 by registered investment volumes in U.S. dollars 0 contributed by the foreign investor with China, India 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 and the United States responsible for 36 percent Source: Calculations based on FDI data from the RDB and tax register data. of projects (see Appendix Figure 1). For regional investors, focusing on investment volumes yields the 16 This analysis relies on project-level information from the Rwanda DRC and Nigeria as the largest sources of investment, Development Board (RDB). The database covers all foreign investors but these figures are driven by few very large registered with RDB and includes information on the sector, the year of entry and the estimated value of each investment (in U.S. dollars), as well as the number of jobs that the project is expected to generate. An important feature of the data is that they provide anonymized taxpayer identification number (TIN) codes, allowing them to be merged with financial and employment information from the Corporate Income 17 See https://rdb.rw/wp-content/uploads/2022/02/Investment- Tax (CIT) and Pay As You Earn (PAYE) databases. Although this provides code-2021.pdf information on the economic activity and employment associated 18 Since some projects are co-financed by investors from various with FDI, because firms are not required to register with RDB, the countries, the number of projects by country of origin does not sum resulting dataset does not cover all FDI in the country. up to the effective number of projects actually counted in the country. 18 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda investment projects.19 The ranking of the largest 2016–2022 (geographical and sectoral information countries of origin contrasts to data on origins of FDI is not available consistently for earlier periods) stocks that are based on Balance of Payments, i.e., indicate that most of the estimated registered those provided by the National Bank. The balance of investment was in construction, real estate and payments statistics shows that about three-fifths of utilities (Figure 2.7).21 the stock of FDI originates in other African countries Figure 2.7: Sectoral distribution of FDI projects (by 2-digit (principally Mauritius, Kenya and South Africa), the ISIC codes) US and India.20 Construction of buildings Real estate activities Electricity, gas, steam, a/c supply Figure 2.6: Countries of origin of foreign investment since 2016 Other energy Crops and animal production China Financial services except insurance India Wholesale trade except motor vehicles United States Manufacture of non-metallic mineral poducts United Kingdom Accommodation Eritrea Manufacture of other transport equipment Nigeria Manufacture of basic pharmaceuticals Egypt Other mining and quarrying Ethiopia Education Kenya Manufacture of chemical products France Warehousing Tanzania Manufacture of food products South Africa Human health activities Germany Computer programming and consultancy Turkey Other accomodation and food Belgium Civil engineering Burundi Cameroon 0 200 400 600 800 1000 1200 1400 1600 1800 United Arab Emirates Reported investment in million US$ Syrian Arab Republic Canada Source: Calculations based on FDI data from the RDB and tax register data. Sectoral 0 50 100 150 decomposition of the Rwandan FDI stock accumulated since 2016, 2-digit ISIC codes correspond to tax-register entries of the company registering the FDI. Only Number of registered projects ISIC codes with at least US$25 million investment are reported. Source: Calculation based on FDI register data from the RDB. FDI projects are concentrated in richer districts 2.4. FDI projects are concentrated in a few sectors and regions Most FDI projects are located in and around Kigali (Figure 2.8). The districts of Kigali City FDI is concentrated in a few sectors (Gasabo, Kicukiro and Nyarugenge) accounted for FDI inflows in Rwanda are dominated by few 81 percent of projects, 72 percent of investments sectors in services and industry. Data on the and 82 percent of projected jobs over the period sectoral distribution of FDI differ by the source. The 2016–2022. By contrast, according to the latest National Bank of Rwanda’s Foreign Private Capital establishment census,22 in 2017 only 23.5 percent of (FPC) census indicates that aggregate FDI inflows total establishments (of any type, including informal are spread among the financial sector, construction, ones) were based in these three districts. tourism and the manufacturing sector. Along with ICT, these are also the sectors that are important in FDI tends to be concentrated in districts with low terms of the accumulated stock of foreign capital poverty rates. There is a strong negative association in the country. By contrast, data on the sub-sample between total FDI received by districts over the of investment projects registered during the years period 2016–2022 and their poverty rate at the beginning of the period (Figure 2.9, left panel), as 19 For the DRC, investment volumes are driven by a joint hydropower project with Rwandan investors as part of a Private-Public-Partnership well as between the change in investment across with self-reported investment volumes of US$120 million. For Nigeria, districts and their poverty rate (Figure 2.9, right a single project in the real estate sector with self-reported investments of US$250 million drive the results. 20 The Foreign Private Capital (FPC) census undertaken by the National Bank of Rwanda indicates that FDI inflows mostly originated in Mauritius, India and China. Due to lack of specific data, it is not possible to identify causes of discrepancies on composition of FDI reported 21 This information is based on the detailed codes that firms report in in the different datasets. One potential explanation is that countries their tax declarations. In terms of number of projects the top sectors like Mauritius, which has a double taxation treaty with Rwanda, are real estate; wholesale trade excl. motor vehicles, and crop and are a conduit for some investments made by foreign nationals (e.g., animal production. investment of Indian origin). 22 https://www.statistics.gov.rw/publication/1719 Rwanda Economic Update • Edition No. 21 19 Inclusiveness of Foreign Direct Investment in Rwanda Figure 2.8: Regional distribution of FDI and socio-economic conditions of Rwandan districts (post-2016) Number of projects by district Investment volume by district (mio USD) (150,500] (1500,5000] (60.150] (500,1500] (20,60] (100,500] (10,20] (25,100] (1.9,10] (5,25] (.99,1.9] (1,5] [0,.99] [0,1] No data No data Moderate poverty rate 2010/11 (in %) Moderate poverty rate 2016/17 (in %) (70,80] (70,80] (60,70] (60,70] (50,60] (50,60] (40,50] (40,50] (30,40] (30,40] (20,30] (20,30] [10,20] [10,20] Source: FDI data is compiled from the RDB and RRA tax register data. Poverty data is sourced from the fifth Integrated Household Living Conditions Survey (EICV5). Moderate poverty rate is obtained by comparing real consumption per adult equivalent to the poverty line (RWF 159,375 per year). panel).23 Poorer districts not only attract less FDI but projects in the Rwamagana Industrial Area, some of their attractiveness as an investment destination which produce advanced products like syringes for does not appear to improve by the end of the sample medical use. period. Rural areas with higher poverty rates are This agglomeration of foreign investors in a more likely to attract FDI in energy, agriculture, few, more prosperous locations is a common agricultural manufacturing, or tourism. In terms characteristic of FDI. Concentration is often related of investment inflow, few projects in capital- to the need to gain access to public goods (e.g., intensive industries such as the energy sector are infrastructure, connectivity) and human capital complemented with large investments in agriculture. that in developing countries is often concentrated In terms of number of investment projects, the around major urban areas (Sanfilippo and Seric, agricultural and tourism sectors are predominant, 2016). In the Rwandan context, it becomes evident indicating that these sectors may be able to induce that manufacturing projects outside of Kigali are economic benefits that are less concentrated in situated in industrial areas of urban centers in other single central locations (see Appendix Figure 3).24 parts of the country. Examples include a cement factory in Muhanga Industrial Park and various 24 An example is FDI in the coffee sector, which have recently increased in Rwanda, and are sparse around the country. Recent empirical analysis The within-district change in investment is computed for 2017–2022. 23 by Macchiavello and Morjaria (2022) shows that foreign acquisitions of We do not use 2016 as the initial year because we do not have the coffee mills have brough improvements in production capacity, and corresponding information on the location of the investment for that year. hence in their performance and employment. 20 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda Figure 2.9: Geographic distribution of FDI and socio-economic conditions of Rwandan districts (FDI and poverty rate) (FDI Change and Poverty Rate) 24 20 Gasabo Log (FDI change 2022 vs 2017) 22 Kicukiro Musanze Nyarugenge Bugesera 18 Kirehe Kicukiro Rwamagana 20 Karongi Bugesera Log(Total FDI) Muhanga Musanze Rwamagana Rubavu 16 Nyarugenge Rubavu 18 Rusizi Kirehe Ngoma Kamonyi Kayonza Nyamasheke Kayonza Rulindo 16 Karongi 14 Ngoma Ngororero Rusizi 14 Huye Rulindo Nyagatare 12 Gicumbi 12 Gicumbi Burera Burera 10 10 0 20 40 60 80 0 20 40 60 80 Moderate poverty rate (2016-17) Moderate poverty rate (2016-17) Source: Calculations based on FDI and poverty headcount data. FDI data is compiled from the RDB and RRA tax register data. Poverty data is sourced from the fifth Integrated Household Living Conditions Survey (EICV5). Moderate poverty rate is obtained by comparing real consumption per adult equivalent to the poverty line (RWF 159,375 per year). 2.5. FDI boosts job creation and sales 2016–2022. A firm that enters after 2018 cannot be in Rwanda observed for months more than three years after FDI creates jobs directly entry. However, focusing on a time span roughly FDI has a substantial impact on employment two–three years after entry, the analysis reveals a and sales.25 Foreign firms tend to be larger than total creation of approximately 12,000 employees domestic firms globally (Helpman et al., 2004), and in Rwanda, the majority of which took place in the in Rwanda FDI firms employ 170 percent more manufacturing sector (see Appendix Figure 2). workers (Appendix Table 4, column 1) and their sales Figure 2.10: Jobs generated by FDI firms acting as first-time are approximately 370 percent larger, compared to 80 12000 domestic private sector firms (Appendix Table 4, column 2 and Appendix Box 1. 60 10000 Employment change Total jobs created 8000 Employment in FDI firms tends to increase in the 40 6000 first three years from start-up: on average, foreign 20 investors employ 60 workers three years after 4000 registering their investment. Figure 2.10 displays 0 2000 employment creation by firms that registered an -20 0 20 40 60 Months from investment FDI project as a function of the time in months to Interquartile range Mean Median Total creation (right axis) the registration of the FDI project with RDB. As the Source: Elaboration based on RDB and PAYE data median company employs only around 10 people after three years, so; the total employment figures are driven by employment generated by a few large The amount of employment creation varies firms. The decrease in employment towards the end considerably across sectors. The manufacturing of the sample can be explained by the short time sector accounts for about 8,000 of the 12,000 jobs span of observation comprising data for the period created directly in the long term (Figure 2.11). The large spread between mean and median 25 The analysis in this section comprises mainly descriptive exercise employment generated in manufacturing shows that to identify the potential spillovers of FDI in Rwanda. The focus is on some outliers in terms of employment creation drive the labor market, for which we can measure changes in relation to two main sources: (1) the Pay As You Earn (PAYE) database, reporting these results. Two projects are particularly important, information at the level of the firms on all workers employed; and (2) the National Labor Force (NLF) surveys, which provide nationally accounting for approximately 5,000 employees in representative data on individuals’ employment conditions. Rwanda Economic Update • Edition No. 21 21 Inclusiveness of Foreign Direct Investment in Rwanda Figure 2.11: Jobs generated by FDI firms (by sector) Manufacturing Construction 2000 4000 6000 8000 500 1000 1500 2000 2500 50 100 150 200 250 20 40 60 80 Employment change Employment change Total jobs created Total jobs created 0 0 0 0 -20 0 20 40 60 -20 0 20 40 60 Months from investment Months from investment Real Estate Agriculture 400 10 20 30 40 50 80 200 400 600 800 Employment change Employment change Total jobs created Total jobs created 300 60 200 40 100 20 0 0 0 0 -20 0 20 40 60 -20 0 20 40 60 Months from investment Months from investment Source: Elaboration based on RDB and PAYE data the PAYE data: one is in the apparel industry and the the red line, implying that the majority of firms that other is engaged in the manufacturing of products registered FDI projects in Rwanda overestimated the related to tea. amount of employment they would create at the time they registered the project with the RDB. Construction, the second largest sector in terms of Figure 2.12: Jobs generated by FDI firms (actual vs projected) observed employment generation, follows a very 10,000 different dynamic over time. In the construction sector employment created by foreign investors 1,000 Jobs created (log scale) peaks between 12 and 24 months after investment 100 and decreases thereafter. Similar, shorter-term, 10 employment generation effects are found from 1 projects in the real estate and agricultural sectors. 0 The PAYE employment data indicate that the 0 1 10 100 1000 10000 employment creation projections from the RDB’s Jobs projected (log scale) Firms 45 degree line One-Stop Centre FDI register are substantially Source: Elaboration based on RDB and PAYE data overestimated. Figure 2.12 compares employment data for all 410 firms that are included in PAYE and The discrepancy between projected and actual for which employment projections are available, employment by FDI firms is not mainly due to with the red line representing the case in which both the fact that firms’ employment creation takes figures correspond.26 Most observations lie below time to manifest. Figure 2.13 compares firms’ employment projections on registration with RDB with their employment levels at different time 26 For the PAYE data, the study uses the average figure of employment creation (including full-time and casual employees and employees intervals (from six months to two years) following with multiple jobs) covering all observed periods after investment. 22 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda Figure 2.13: Jobs generated by FDI firms (actual vs projected, over time) jobs created (log scale) 6 months ahead 1 year ahead 100 1000 jobs created (log scale) 100 1000 10 10 10 50 100 500 1000 10 50 100 500 1000 jobs projected (log scale) jobs projected (log scale) 1.5 years ahead 2 years ahead jobs created (log scale) jobs created (log scale) 100 1000 100 1000 10 10 10 50 100 500 1000 10 50 100 500 1000 jobs projected (log scale) jobs projected (log scale) Source: Elaboration based on RDB and PAYE data registration. Although some firms transition above FDI has also contributed to the creation of jobs the 45-degree line, implying they meet their for women. Data from the 2022 FPC Census by the projections after an implementation period, most National Bank of Rwanda show that female workers FDI projects keep reporting employment levels represented 40.2 percent of total employment below the 45-degree line. in foreign firms (Figure 2.14, left panel). This is an improvement compared to the pre-2020 value, Job quality within foreign firms which was around 30 percent.28 The share of women FDI firms also improve the type and quality of jobs is relatively higher in administrative positions, where in Rwanda by offering better non-remuneration they count for about 49 percent of the total (Figure benefits or full-time employment.27 Compared 2.14, right panel). to domestic firms, an FDI firm is 11 percentage Figure 2.14: Job creation of foreign firms, by gender (2021) points more likely to have a social security fund 50 16 for its employees (column 1 of Appendix Table 5), and an FDI firm’s social security contributions were 40 12 more than 3 times larger than those provided by Thousands of jobs Thousands of jobs 30 domestic firms (Column 2 of Appendix Table 5). By 8 contrast, there is no statistical difference between 20 the share of casual workers in FDI firms compared 4 10 to domestic firms (column 3 of Appendix Table 5). The third result should be interpreted with some 0 0 Managerial Administrative Skilled Casual caution since only about one-fifth of the firms in Total Technician Male Female Male Female the PAYE database provide compositional details of Source: Elaboration based on FPC 2022 Census their employment. 28 In 2020, the share went up to 51%, due to a large increase in the 27 These results reflect a simple estimation in which a dummy variable number of casual work by women. The data seem to show that this identifying foreign investors is regressed on outcomes measuring the jump was specific to 2020. For casual workers, the 2021 numbers are in share of quality jobs within the firm. fact closer to the pre-2020 values. Rwanda Economic Update • Edition No. 21 23 Inclusiveness of Foreign Direct Investment in Rwanda The finding that FDI does not have a positive a high potential to stimulate the demand for local association with female and youth employment non-manufacturing products, most likely services, a raises concerns. While the evidence is inconclusive key source of employment (World Bank 2022). on whether women and the youngest in the population are positively affected by the entry Linkages between FDI and domestic firms of FDI, current investment promotion policies do A key motivation for attracting FDI is to increase the not appear to target such dimensions of inclusion, opportunity for local firms to interact with foreign instead targeting specific sectors (e.g., financial investors through supply chain relationships. This services, energy, transport), activities (e.g., start-ups; can directly generate local demand, improve the philanthropy) or locations (e.g., special economic quality of domestic firms’ products and lead to the zones [SEZs]). These types of investment and projects sharing of good practices with local businesses. are all very relevant from a sustainable growth and development perspective, but the current On average, Rwandan FDI firms have a much framework that is defined in the law on investment larger number of corporate suppliers compared to facilitation and promotion does not specifically call domestic firms (Appendix Table 7). They also rely on firms to consider how their activities can be made on a larger number of corporate buyers locally, even to be more inclusive. In some respects, the priorities though the evidence in this case is less statistically reflected in the law are likely to further increase significant (Appendix Table 8).29 The analysis also concentration, e.g., the goal to make Kigali a hub for indicates that FDI firms interact substantially with innovative startups reflected in the Kigali Innovation local firms, but the findings are subject to important City in the Kigali SEZ. limitations. The analysis provides no direct indication of the types of goods and services traded and the FDI creates jobs indirectly, as well volume of these transactions. This information Increases in employment by FDI firms—the was only available to the team for 2020, which direct impact of FDI on employment—tend to prohibited an assessment of the role FDI plays as a stimulate employment increases in other firms in driver of domestic firm performance over time. The the district receiving the investment. The indirect cross-section analysis is also not ideal in assessing impact of FDI on employment is estimated using the potential sectoral patterns of FDI-associated procedure described in Appendix Box 2. Increases spillovers on domestic firms because 2020 was not in employment due to FDI in a district may increase a representative year, given the heterogeneous the demand for goods and services from firms in sectoral repercussions of the COVID-19 pandemic. that district, thus stimulating hiring by local firms. Thus, the estimation of the relationship between FDI This multiplier effect is likely to reflect the entry of and local firm performance should be interpreted as (domestic) migrant workers and by more educated indicative only. It serves, however, to illustrate the workers (columns 4 and 6 of Appendix Table 6). There importance of such analysis using panel data that is no evidence of a statistically relevant relationship cover a longer time period. between increases in FDI jobs and either women or youth employment in the district (Appendix To investigate whether FDI firms integrate into local supply chains, 29 we compare the number of corporate customers, and suppliers, Table 6, columns 2 and 3), and some evidence of an of FDI firms using transaction-level VAT data that are available for increase in informal jobs following FDI (column 5). approximately 22,000 Rwandan firms. We regress the number of firms supplying to (i.e., suppliers) and buying from (i.e. customers) any firm The impact of jobs created by manufacturing FDI in our sample on a dummy variable indicating whether the firm is a new FDI entrant in 2020. We also account for some firm characteristics, on employment in non-manufacturing sectors is including firm age and size (corporate income from CIT data and/or greater than that shown in Appendix Table 6. Thus, the number of employees from PAYE data). We include fixed effects for the industry (at the 2-digit level of the International Standard Industrial every new job created by FDI in manufacturing has Classification (ISIC)) and the district in which firms are located 24 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda 2.6. Conclusion and policy implications and and several EU and bi-lateral partnerships, such as recommendations with Turkey, South Africa, and Mauritius. Rwanda has been able to attract a large number of foreign investment projects. The country’s It is critical to invest in SEZ infrastructure and conducive business environment and an investment integrate SEZs into national logistic infrastructure, promotion and facilitation regime is internationally such as the new Bugesera Airport, to increase recognized as representing best practice in many investment and leverage their export potential (Steenbergen and Javorcik, 2017), coordinated by aspects. The 2021 revised investment law provides a the Special Economic Zone Authority of Rwanda. range of services and innovations to investors. The country provides a strong institutional environment Leverage trade policy and treaties to attract more and is highly ranked by foreign investors in the FDI. Trade policy is critical to create economies of country. The contribution of FDI to capital formation scale needed by foreign firms looking for market is higher than the regional average and comparable opportunities. The creation of the African Continental to some Asian countries in the 1990s. FDI is a source Free Trade Area (AfCFTA) is likely to enhance FDI of net job creation, both directly and indirectly, entry into Africa by enabling foreign firms to access generating new jobs not just when FDI projects are the common market. Rwanda can attract potential initially launched but also over time. The prevalence investors by liberalizing trade in services, in digital of sustained increases in employment varies across activities, and implementing AfCFTA investment sectors and is mostly observed in manufacturing. protocol, competition policy, and intellectual Projects involving construction or investment in property rights, which are key drivers for FDI. utilities are more likely to generate jobs in the months following entry. Relative to domestic firms, ii) Policy for FDI firms to achieve their job creation foreign investors tend to have a larger share of potential in Rwanda their workers covered by social security. However, a It will be essential to establish an investment new generation of reforms is required to boost FDI tracking system to understand company by inflows in Rwanda, allow FDI firms to achieve their company why FDIs cannot achieve their potential. job creation potential; and enhance inclusive FDI. Understanding why this is the case is important from a policy perspective. On the one hand, if the i) Policy to boost FDI in Rwanda reason relates to firms seeking to obtain greater tax Efforts to attract FDI could be strengthened. or other incentives, this suggests that the incentive Attracting FDI through deal accelerator and regimes may need to be reconsidered. On the other investment marketing should be continued, hand, if firms would in fact want to expand their selecting some of the priority sectors by phases. operations closer to levels originally envisaged when Investor outreach efforts could be expanded. projects were registered, then action to understand RDB’s recently deployed investor relationship what drives the difference between expected and management system (CRM) could be used to realized investments is very important as it can then compile all challenges reported by potential be determined to what extent the reasons can be investors. This would help the RDB in identifying affected by government policies. Ascertaining the systemic issues to be addressed by legal/regulatory underlying reasons calls for a targeted survey of FDI reforms or changes in government conduct. firms complemented by structured interviews with local managers and corporate headquarters of the Ensuring that signed investment treaties enter investors. The Chief Investment Office at RDB was into full force is essential. These include the tasked to create an investment tracking system at Economic Partnership Agreement between the EAC the firm level that will help with tracking investors’ Rwanda Economic Update • Edition No. 21 25 Inclusiveness of Foreign Direct Investment in Rwanda performance, especially for those who benefit from potential for greater inclusion in that they lend performance-related incentives. However, this themselves to participation by women and youth, system has not yet been developed. An efficient and to investment in poorer districts. Examples tracking system at firm level will also make it possible include tourism activities (hotels, adventure and to apply the investment code accurately by rigorously agrotourism, and skills development, e.g., ICT- linking incentives to actual performance.30 related digital skills training and facilities to help offset training costs more generally). Such activities iii) Policy to make FDI more inclusive in Rwanda are included in the law, to be sure, but it may help to The following discusses policy recommendations add an explicit focus on fostering greater inclusivity to strengthen the inclusiveness of FDI in Rwanda, through the allocation of incentives. focusing on three dimensions: i) incentives measures; ii) institutional reforms; and iii) infrastructure Conditioning additional incentives for ex post investments need. performance on inclusion-related metrics could be considered as a complementary (additional) Reforms incentives to ensure FDI job creation for element of the investment promotion and women, youth, and in disadvantaged areas incentive framework in Rwanda. There are two It is essential to amend incentives in the law to types of approaches towards promoting FDI. In one, encourage investors to consider how they might investors report on a periodic basis how much has increase participation by women and youth been invested and/or jobs have been created in or to locate in more disadvantaged regions of the country, and what has been done to enhance the country. Integrating these dimensions more inclusion and achieve development impacts and centrally into the incentive framework could based on this, get “red carpet services” or access to help to promote more inclusive FDI. Some of the fiscal or other types of incentives. In the other, which activities that are highlighted in the law will benefit is more common, investors commit to contribute women and youth, but the point is that this is not resources and associated job creation that makes a specific objective, nor are there specific incentives them eligible to benefit from investment incentives to encourage performance on these dimensions. and related benefits. The first model can be more Examples would include incentives that target effective in inducing realization of sustainability goals. women-led startups, training for women and youth, measures to encourage participation of women or Investment promotion policies should target youth, e.g., by encouraging investors to provide activities that are more likely to create jobs for ancillary services to address constraints that impede women, and to benefit youth. Policy instruments participation by women (e.g., childcare and more to do so could help offset the pattern of high flexible work conditions), or training for youths. concentration of FDI (by value) in construction, real These could be integrated into the implementation estate and energy, and focus more on manufacturing. of the provisions of the law. Many of the activities In addition, promoting investment in sectors that and sectors prioritized in the law provide significant tend to employ more casual workers (see Figure 2.14), an important source of employment for women, To apply the preferential CIT rates based on share of turnover coming 30 provide another mechanism to bring more women from exports in particular, a firm-level investment tracking system is needed. The new Investment Code (Law no. 006/2021 of 05/02/2021) into the workforce through foreign investment. enacted in 2021 determines different preferential corporate income tax (CIT) rates based on the share of the total turnover coming from export of goods and services. Registered investors having between 30% and 50% of their total turnover coming from the export of goods and services are charged a 25% CIT, while a 15% CIT is applied to investors exporting at least 50% of their production. These incentives are applicable to eligible investors for a maximum of five years commencing from the first year of exporting. 26 Rwanda Economic Update • Edition No. 21 Inclusiveness of Foreign Direct Investment in Rwanda Institutional reforms to reinforce the Infrastructure development efforts to boost inclusiveness of FDI in Rwanda the inclusiveness of FDI in Rwanda A greater emphasis on corporate social The inclusiveness of FDI could be increased by responsibility (CSR) by foreign firms would measures to encourage greater investment in complement the observed higher spending on activities that are more likely to benefit poorer social security benefits by FDI firms. This would districts. Creating SEZs in the poorer districts of support better working conditions, and health and Rwanda, and offering higher quality infrastructure safety in the workplace, benefiting more vulnerable and human capital inputs, could alleviate the segments of the workforce. Appointing more women lopsided concentration of FDI and improve foreign to decision-making roles in foreign firms could be investment’s capacity to create inclusive growth. This another mechanism to improve female participation is in line with government planning. The revised SEZ in their workforce. policy of 2018 explicitly states the aim of “further developing secondary cities and strategic locations Bolstering dialogue between government (RDB), around the country.”31 A first step is to assess the investors, and home country governments is factors that underlie successful FDI projects in poorer another channel for enhancing the sustainability regions as well as the constraints to such investment. and inclusivity of FDI. The focus of investment This would inform the design of support activities promotion efforts in Rwanda, as in other countries, to replicate and expand successful investments, is to improve the transparency and predictability and to learn from those that are less successful of investment measures, simplify and speed up by highlighting factors that have impeded the administrative procedures, and offer investment development and growth of projects that are deemed incentives. The potential role of action by home by investors to be viable and profitable in principle. country governments should be considered in This will call for interaction and consultations with investment promotion efforts as source country the investors that have undertaken such projects, governments do more to strengthen regulation of the local stakeholder communities, and groups that outward FDI and implement production process are important from an inclusivity dimension. standards for the supply chains used to produce goods and services for export by firms located in Increase the linkages with domestic firms by developing countries. Cooperation with home encouraging supplier development programs governments is a potential channel to encourage to expand the number and capacity of qualified inflows of sustainable FDI, i.e., projects that are both local enterprises that can contract with foreign commercially viable and contribute to the economic, affiliates as well as supplier databases to help social, and environmental development, through investors identify potential subcontractors. The mechanisms that go beyond voluntary corporate literature on FDI has documented that policies can social responsibility initiatives by imposing be effective in increasing the contribution of FDI mandatory standards that are enforced in the home to sustainable development through increased country of investors. The effectiveness of this channel linkages with domestic firms. Moran (2014) in enhancing inclusivity will depend on policies summarizes the experiences of Costa Rica, Malaysia, in source countries. Fortunately, policies in high- the Czech Republic, and Morocco, showing that income countries, notably the EU, a major source of active engagement of the government through FDI for Rwanda, are moving in this direction. their investment promotion agencies was mostly The revised SEZ policy indicates the following zones: Bugesera, Huye, 31 Kicukiro SME Park, Muhanga, Musanze, Nyabihu, Nyagatare, Rusizi and Rwamagana. https://www.minicom.gov.rw/fileadmin/user_upload/ Minicom/Publications/Policies/SEZ_Policy_-_January_2018_v2.pdf Rwanda Economic Update • Edition No. 21 27 Inclusiveness of Foreign Direct Investment in Rwanda targeting the establishment of public-private around the world recommends combining incentives partnerships for specific training of local workers to source domestically with interventions to reduce and firm, as well as improving infrastructure, as information barriers among the local suppliers and a way to provide investors with the possibility to to invest in their capacity (Sabha et al., 2020). 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Washington, DC: World Bank 30 Rwanda Economic Update • Edition No. 21 APPENDICES Appendix Table 1: Rwanda’s gross domestic product Real growth in percent, year-on-year 2021 2022 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GROSS DOMESTIC PRODUCT (GDP) 3.5 20.6 10.1 10.3 7.9 7.5 10.0 7.2 Agriculture 6.7 7.3 6.3 5.2 0.7 2.0 1.5 2.3 Food crops 7.1 7.1 6.6 6.6 -1.3 -1.3 -0.5 -0.5 Export crops 3.7 -4.0 2.3 -6.7 -14.3 16.7 -2.2 11.9 Livestock & livestock products 10.2 8.2 7.9 6.2 9.2 10.6 7.4 7.2 Industrial growth 9.6 30.0 11.8 5.3 9.9 6.2 -1.3 5.3 Mining & quarrying 3.3 86.4 30.0 5.7 16.1 7.3 5.1 27.0 Manufacturing 8.2 22.7 7.0 6.3 11.1 9.5 9.3 13.6 Construction 14.1 32.8 15.3 4.0 6.5 0.0 -17.7 -10.6 Services growth -0.4 24.0 11.3 14.4 10.8 11.9 16.6 9.5 Maintenance & repair of motor vehicles 27.3 150.0 15.4 14.3 14.3 6.7 6.7 0.0 Wholesale & retail trade -0.5 34.4 3.8 14.7 6.9 16.7 19.9 11.6 Transport -13.9 48.5 19.1 18.6 19.4 27.6 25.5 14.9 Hotels & restaurants -35.0 33.3 63.2 70.8 80.8 190.0 93.5 36.6 Information & communication 17.0 29.6 15.5 16.1 16.4 7.1 32.8 20.0 Financial services 11.5 19.2 10.9 30.2 12.1 11.3 6.6 9.8 Real estate activities 2.6 6.8 4.5 2.5 5.2 1.9 0.0 -0.6 Taxes less subsidies on products 3.4 26.5 11.2 13.0 9.9 3.2 23.4 12.3 Expenditure side Government -0.3 19.9 28.4 8.5 24.7 0.9 18.5 12.4 Households and NGOs 0.8 25.1 -1.6 14.9 1.8 18.7 21.2 0.6 Gross capital formation 4.5 6.7 55.7 -5.7 2.8 -8.5 -30.4 -2.8 Exports of goods & services -18.5 38.7 -21.2 33.2 39.1 27.1 37.1 20.1 Imports of goods & services -15.4 27.6 -6.0 16.6 15.4 27.1 21.2 1.7 Source: WBG staff computation based on NISR database Rwanda Economic Update • Edition No. 21 31 Annex Appendix Figure 1: Countries of origin of foreign investment since 2016, U.S. dollars China United States United Kingdom DRC Nigeria India Poland Germany Burundi Kenya Canada France Uganda United Arab Emirates South Africa Spain Turkey Netherlands Singapore Belgium Egypt Sudan Ethiopia 0 200 400 600 800 1000 1200 Registered investment in million US$ Note: Values are self-reported by investors upon registering their project with RDB. Appendix Figure 2: Jobs created by FDI firms in Rwanda since 2016 Manufacturing Construction Arts and Entertainment Agri, Fish and Forest Energy Health and Social Food and Accomodation Finance Administration Support Science and Technical Communication Mining Real Estate Other Services Transportation Education Water and Waste Management Wholesale, Retail, Repair 0 1000 2000 3000 4000 5000 6000 7000 8000 jobs created Note: For each firm, jobs created are taken as the maximum of employees reported in the PAYE by an FDI firm at any point after investment. 32 Rwanda Economic Update • Edition No. 21 Annex Appendix Figure 3: Sectoral breakdown of FDI in all districts excluding Gasabo, Kicukiro, Nyarugenge, and Bugesera Crops and animal production Accommodation Wholesale-trade except motor vehicles Real estate activities Other agriculture Manufacture of beverages Other mining and quarrying Manufacture of food products Agricultural manufacturing Travel agencies and tour operators Other mining 0 2 4 6 8 10 12 14 16 Projects registered Appendix Figure 4: Discrepancy between jobs projected and jobs created by industry Other energy Crops and animal production Manufacture of non-metallic mineral poducts Accommodation Fishing and aquaculture Other mining Travel agencies and tour operators Warehousing Management and management consulting Agricultural manufacturing Other manufacturing Sports and recreation services Wholesale-trade except motor vehicles Manufacture of food products Manufacture of basic pharmaceuticals Manufacture of chemical products 0 50 100 150 200 250 300 350 400 450 500 Investment registered in million USD Note: Jobs created by an FDI project are the maximum value of employees reported in the PAYE data in any period after investment. Job projections are self-reported in the RDB dataset. Rwanda Economic Update • Edition No. 21 33 Annex Appendix Figure 5: Ratio of casual workers (By ISIC Code-2 Description) Architectural and engineering activities; technical testing and analysis Libraries, archives, museums and other cultural activities Accommodation Manufacture of coke and re ned petroleum products Manufacture of beverages Activities of membership organizations Construction of buildings Manufacture of food products Wholesale trade, except of motor vehicles and motorcycles Wholesale and retail trade and repair of motor vehicles and motorcycles 0 0.5 1 1.5 34 Rwanda Economic Update • Edition No. 21 Annex Appendix Table 3 (1) (2) (3) (4) (5) (6) employment women youth educated insurance Domestic migrant FDI employment 6.584*** 0.838 -0.295 2.262*** -1.556*** 6.769*** (1.660) (0.814) (0.776) (0.727) (0.338) (1.155) N 62 62 62 62 62 62 R square 0.79 0.77 0.79 0.78 0.80 0.76 * p<0.10, ** p<0.05, *** p<0.01 Notes: The outcome variables are the change in jobs in non-manufacturing sectors in a district between 2017 and 2019 excluding jobs generated in FDI firms. For columns (2) through (6) the outcome is the change in jobs for the subset of the population indicated. The explanatory variable is jobs created in FDI firms in the manufacturing sector. District-clustered standard errors in parentheses. All columns include year and geographical district fixed effects. Appendix Table 4. The size premium of FDI firms Variable (1) Employees (2) Sales FDI-firm 1.715*** 3.764*** (0.154) (0.626) Firms 9044 33726 N 391652 988642 Notes: * p<0.10, ** p<0.05, *** p<0.01. Standard errors are clustered at the firm-level in parentheses. All columns include industrial sector, month and geographical location fixed effects. The dependent variable in column (1) is the log of the average number of employees in a firm in a month. The dependent variable in column (2) is the log of sales in a firm in a year. Employment data is sourced from the Pay As You Earn (PAYE) database. Sales data is obtained from the Corporate Income Tax (CIT ) database. Firm-location and sector information is obtained from RRA’s tax registry. Appendix Box 1 : Estimates of employment and sales of FD I firms The analysis combines information on the foreign firms in our sample with PAYE data, which are available on a monthly basis for the period 2010–2022. While it is only possible to match slightly less than 50 percent of the firms in the sample (410 of 833), in aggregate they represent 73 percent of the FDI projects by value and 66 percent of the projected number of jobs. The analysis estimates the relationship between a dummy variable taking 1 if the firm is foreign owned and zero otherwise and measures of the size of each firm in our sample (either total employment or sales, both reported in log). Estimates are conditional on the sector, the month in a given year in which observations are measured and location of projects (the district). To estimate the direct contribution of FDI on employment, the study focuses on employment creation by first-time investors since these are unconfounded by pre-existing employment. A first-time investor is defined as a firm that was registered in Rwanda’s tax register up to five years before the first FDI project that can be observed in the RDB’s One-Stop Centre register. Two-thirds of first-time investors according to this definition were registered the year before investment registration, and 90 percent within three years before FDI investment. The analysis treats all employment by first-time investors as directly created by FDI and reports results for employment defined as the sum of full-time employees, employees with multiple jobs and casual employees. The results are qualitatively robust to focusing on full-time employees only. Overall, about 80 percent of the reported employment created by FDI firms comprises full-time employees. Rwanda Economic Update • Edition No. 21 35 Annex Appendix Table 5: The quality of jobs (FDI vs domestic firms) (1) (2) (3) Variable NSF Dummy NSF contribution Casual emp. ratio FDI-firm 0.112*** 3.176*** 9.801 (0.019) (0.380) (26.129) Firms 9236 9236 1684 N 415810 415810 32093 Notes: * p<0.10, ** p<0.05, *** p<0.01. Standard errors are clustered at the firm-level in parentheses. All columns include industrial sector, month and geographical location fixed effects. The dependent variable in column (1) is a binary variable that equals one if a firm reported social security (NSF) contributions in a month. The dependent variable in column (2) is the log of NSF contribution reported by a firm in a month. The dependent variable in column (3) is the share of casual employees within the total employment of a firm in a month. Employment data is sourced from Pay As You Earn (PAYE) database. Sales data is obtained from Corporate Income Tax (CIT ) database. Firm-location and sector information is obtained from RRA’s tax registry. Appendix Table 6: FDI multipliers (6) (1) (2) (3) (4) (5) Variable Domestic employment women youth educated insurance migrant FDI employment 4.313*** 0.573 -0.194 1.104* -1.344*** 4.484*** (1.274) (0.643) (0.562) (0.637) (0.282) (0.957) N 62 62 62 62 62 62 R square 0.82 0.78 0.79 0.78 0.80 0.76 * p<0.10, ** p<0.05, *** p<0.01. Notes: The outcome variables are the change in jobs in a district between 2017 and 2019 excluding jobs generated in FDI firms. For columns (2) through (6) the outcome is the change in jobs for the subset of the population indicated. The explanatory variable is jobs created in FDI firms. District-clustered standard errors in parentheses. All columns include year and geographical district fixed effects. Appendix Box 2: Estimating the indirect impact of FDI on employment The study combines information on FDI with district-level data from the NLF surveys implemented in 2017 to 2019.32 NLF surveys are representative surveys run to monitor the trend in employment and labor underutilization at the national, province and district level. Samples in each year are constructed using a two-stage sampling procedure. In the first stage, a stratified sample of enumerator areas from the latest population census is drawn with probabilities proportional to size. In the second stage, a fixed number of households is selected with equal probability from each sample area. All qualifying household members in the sample households are then selected for survey interviewing. The individual-level information is aggregated to obtain a district-level panel dataset on a sample restricted to the working-age population. This information is used to investigate the existence of local multipliers effects from attracting FDI. Following Moretti (2010) and Toews and Vezina (2022), it is evaluated whether each job created by new FDI projects stimulates the creation of additional jobs. The study estimates the local multiplier by correlating the number of new jobs created by foreign firms in a given district using variations cumulated over the sample period (from 2017 to 2019). All specifications account for district and time (last year) fixed effects, with standard errors clustered at the district level. Given the richness of the information available in the NLF surveys, the analysis can run this exercise considering a range of different measures related to job creation: total number of employed individuals; women employment; youth employment; employees with high levels of education; employees with social insurance; and domestic migrants. 32 Data are available for 2020 but are excluded since employment levels were affected by the COVID pandemic. 36 Rwanda Economic Update • Edition No. 21 Annex Appendix Table 7: Firm-to-firm relationships (demand) (1) (2) (3) (4) Customers Customers Customers Customers FDI-firm 25.129** 9.171 8.591* 7.024 (10.492) (5.598) (4.848) (6.044) Employees 0.032*** 0.021** (0.006) (0.009) Business income 0.002*** 0.002*** (0.000) (0.000) Firms 21729 6021 20375 5608 N 110894 58085 102631 54448 * p<0.10, ** p<0.05, *** p<0.01. Notes: The outcome variable is the number of corporate customers that a firm had in 2020 based on transaction-level VAT data. FDI-firm is a dummy-variable for firms that are registered as having received FDI. Employees is the number of employees of the firm in 2020 according to the PAYE dataset. Business income is taken from Corporate Income Tax data. Industry-clustered standard errors in parentheses. All columns control for firm age and include ISIC2-level industrial sector and geographical district fixed effects. Omission of these fixed effects does not qualitatively change the results. Appendix Table 8: Firm-to-firm relationships (supply) (1) (2) (3) (4) Customers Customers Customers Customers FDI-firm 37.951*** 33.739*** 33.717*** 29.340*** (5.679) (5.736) (5.095) (5.404) Employees 0.083* 0.064 (0.046) (0.039) Business income 0.003*** 0.003*** (0.001) (0.001) Firms 21729 6021 20375 5608 N 110894 58848 103499 55175 * p<0.10, ** p<0.05, *** p<0.01. Notes: The outcome variable is the number of corporate suppliers that a firm had in 2020 based on transaction-level VAT data. FDI-firm is a dummy-variable for firms that are registered as having received FDI. Employees is the number of employees of the firm in 2020 according to the PAYE dataset. Business income is taken from Corporate Income Tax data. Industry-clustered standard errors in parentheses. All columns control for firm age and include ISIC2-level industrial sector and geographical district fixed effects. Omission of these fixed effects does not qualitatively change the results. Rwanda Economic Update • Edition No. 21 37 Photo credits: Rwanda Development Board