## cr17214

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### Overview and Key Message
- Rwanda transformed its economy over the past 15 years by moving workers out of agriculture into mostly services and some industry, supported by strong public investment flows and efficient public investment management.
- Sustaining high growth and attaining middle income status within 20 years depends on:
  - private sector complementing public infrastructure;
  - raising education standards and better matching qualifications to employer demand;
  - lowering electricity and transportation costs.

### A. Structural Transformation and Sector Composition
- Shift in employment:
  - Through 2010 Rwanda experienced a large shift from agriculture to services.
  - Over 2011–14, the annual decline in the employment share in agriculture remained about 1 percent per annum.
  - During 2011–14, jobs created occurred more in industry (0.66 percent) than in services (0.33 percent).
- Sector composition (Table 1, 2010 except where stated):
  - Rwanda (2016): Employment share (Industry) 7.4; Output share (Industry) 17.0; Manufacturing 6.0.
  - Comparative entries: Kenya 18.4/13.5/9.9; Uganda 15.8/24.2/7.5; Tanzania 16.9/18.9/9.5; LIC average 17.1/14.8/7.7; Laos 5.4/40.0/11.0; Bangladesh 10.8/28.2/17.6; Cambodia 11.1/29.4/17.0; Vietnam 14.3/33.3/13.7.
- Manufacturing plays a smaller role in Rwanda than in other East African countries; strategy focuses on agriculture and services given landlocked status.

### B. Productivity, Growth Decomposition, and Prospects
- Growth decomposition (Table 2):
  - Rwanda 2000-2014: Real GDP growth 7.6; Capital stock 3.2; Labor 1.8; TFP 2.7; Adjusted labor 2.8; Education 0.1; Adjusted TFP 1.5.
  - Rwanda 2010-2014: Real GDP growth 6.9; Capital stock 4.2; Labor 1.6; TFP 1.1; Adjusted labor 2.8; Education 0.1; Adjusted TFP -0.3.
- Findings:
  - High-growth non-resource-rich peers showed growth largely from input increases rather than productivity gains, especially in the recent five-year period.
  - Rwanda: productivity contributed more in 2000–10 than in 2010–14; maintaining productivity momentum is a challenge.

### C. Investment, Public Investment Management, and Fiscal Constraints
- Role of public investment:
  - Public sector channeled scarce foreign resources into productive investments.
  - IMF research: in a growth regression for six fast non‑resource growing SSA countries over 1999‑2010, the aid ratio contributed ½ percent to per capita growth in Rwanda.
- Public investment levels:
  - Over 2010‑14, public investment ratio in Rwanda averaged 12 percent (percent of GDP).
  - Public investment accounted for about 7 percent of GDP in 2008 and rose to 11 percent of GDP by 2016.
- Foreign financing and ODA:
  - Rwanda received almost 9 percent of GDP per annum in ODA over the past decade (2010─14 average).
- Fiscal constraint and prospects:
  - Sharp rise in public debt from 18 percent of GDP in 2012 to a projection of 47.1 percent of GDP by 2018 limits room for further government borrowing.
  - Government must rely on the private sector to make use of infrastructure assets.

### D. Effectiveness of Investment Spending and PIM Reforms
- PIM index (Dabla‑Norris et al. 2011):
  - Index varies between 0–4 across four stages: project appraisal, project selection, project implementation and project evaluation.
  - Rwanda ranks high on Public Investment Management practices among developing countries for 2011, ranked above all other LICs in the sample.
- Empirical relationship:
  - Correlation between PIM index and investment outcomes: correlation coefficient of -0.38, significant at the 99 percent level of confidence (negative coefficient reflects ranking construction).
- Recent policy interventions to improve investment quality:
  - Monitoring and evaluation system for public investment projects above US$1 million; investment committee reviews projects monthly and has been operational for 3 years.
  - Local government projects added to appraisal list in FY15/16; District Investment Advisory Committee appraises local projects.
  - Investment committee empowered to approve PPPs and Joint Ventures.
  - Institutional reforms: National Investment Policy before Cabinet; local authority ministry assigned monitoring and evaluation; new autonomous government investment body; project monitoring unit in MINECOFIN transferred to the Minister of State in charge of Economic Planning.
  - Peer learning: Senegal Ministry of Finance staff spent time in Kigali learning Rwanda’s project selection processes.

### E. Agriculture: Progress, Shortfalls, and Targets
- Strategy and targets (EDPRS2 2013–18):
  - Improve agricultural productivity via increased irrigation, seed and fertilizer investment; promote services exports through infrastructure investment.
  - Poverty reduction target: reduce poverty to 20 percent or below by 2020.
- Irrigation and inputs:
  - Irrigation can triple crop production compared to rain‑fed agriculture and allow multiple cropping (two to four crops a year).
  - Up to mid-2016, almost half of the targeted acreage under irrigation was met, with delays due to difficult topography.
  - EDPRS2 target for seed coverage: 70 percent of agricultural land by end 2018; actual about 12 percent of land cultivated with improved seeds as of mid-2016.
  - Fertilizer target: provision of 45 kg per hectare by end 2018 is achievable.
- Crop yields (Table 3, Kg per hectare in 2014 except where noted):
  - Maize: annual change 7.8; level 1575.
  - Sorghum: annual change 0.7; level 898.
  - Cassava: annual change -4.7; level 1644.
  - Pulses/beans: level 797.
- Findings:
  - Yields improved considerably for maize and sorghum, fell for cassava (because of disease), and remained flat for beans.
  - Except for sorghum, yields remain far below the region’s most productive country (Ethiopia in most cases).
- Exports:
  - Hides and skins, meat, dairy and cereals exports amounted to almost US$100 million in 2016; new crops being introduced to diversify production and limit climate change risks.

### F. Services Sector, Tourism, and Human Capital Constraints
- Services strategy and infrastructure:
  - Increase external connectivity and boost exports via RwandAir expansion, MICE strategy, financing for a new airport, new convention center, and three new large hotels (Marriot, Radisson and Zinc).
- Tourism performance:
  - International passenger arrivals doubled over 2010–15 to over 1.3 million visitors.
  - Tourist revenue increased from US$202 million in 2010 to over US$400 million in 2016.
- Education and skills gaps:
  - Primary school completion: Rwanda’s graduation rate at end of primary is below the SSA LIC average of 70 percent; dropout rate higher than desired.
  - Lower secondary school enrollment rate: lower than LIC average of 39.6 percent; far below leaders in SSA such as Kenya and Mauritius (mid 80s).
  - Secondary repetition rate about 11 percent of pupils.
  - Policy response: allowing free flow of labor from other EAC countries, notably Kenya and Uganda, to address skills shortages.
- Education initiatives:
  - Africa Center for Excellence in data science and Africa Center for Excellence in Innovative Teaching and learning Mathematics and Science being established in Kigali (World Bank grant).
  - TVET: strong financial support from German and Swiss development agencies; many trainers need skills upgrading.
  - One laptop per child program: through April 2016, about 11 percent of primary aged children have been covered.
  - Government partnership with Microsoft for digital education solutions; success depends on internet access and electricity availability.

### G. Industry, Export Promotion, Investment Incentives, and FDI Coordination
- Strategy:
  - Focus on agriculture and services, with recognition of stimulating exports including industry; investments in special economic zones and reformulated investment incentives to stimulate export‑oriented activities.
- New Investment Code:
  - Prioritises sectors: exports, manufacturing, energy, ICT, financial services, and construction.
  - Previous VAT exemption replaced by corporate income tax reductions.
  - Investments of US$10 million can exempt a company from corporate income taxes.
  - A US$50 million investment unlocks a seven‑year tax holiday.
  - Special Economic Zone / Economic Processing Zone: company can opt to be part of the Economic Processing Zone, exempting it from VAT, import duties, and corporate tax if it exports a minimum of 80 percent of its production.
- FDI coordination:
  - Notwithstanding a sharp rise in FDI in recent years, coordination problems remain between various Ministries, delaying and discouraging some investments, especially in manufacturing.
  - More efforts needed to ease concerns of potential investors; potential avenue is matching potential private investors with private sector agents.

### H. Sectoral Bottlenecks: Energy, Transport, and Logistics
- Agriculture: low levels of irrigation, fertilizer use and availability of quality seed; administrative problems documented by the Office of the Accountant General (annual report 2015).
- Energy:
  - Availability and cost of electricity remains a severe constraint.
  - Estimated cost of electricity per kW hour at about 30 cents in Rwanda, compared with Uganda (16), Tanzania (17) and Kenya (22).
  - Industrial price reported at 15 cents per kW hour.
- Transportation and trade logistics:
  - High cost of transportation adds to input costs.
  - 2016 World Bank doing business trade logistics component ranks Rwanda 156, below the Sub Saharan average.
  - Reported improvement: days to deliver a container from Dar es Salaam to Kigali down from 22 days one year ago to 6 days currently; delays at Dar es Salaam falling.
  - Government efforts: improving road network, lowering non‑tariff barriers; establishing a dry port in Kigali to ease transit to DRC; one stop border post being finalized in Rubavu.

### I. Financial Sector Structure, Deepening, and Inclusion
- Financial sector size and composition:
  - Total financial sector assets increased from 31 to 54 percent of GDP in December 2016.
  - Banking Sector: 66.9 percent of total financial sector assets; Pension Fund: 17.1; Insurance: 9.7; Nonbank Micro Finance: 6.3.
  - Majority ownership of banks (by assets): Domestic Private 18.0; Domestic Public 36.0; Foreign 46.0.
  - Number of supervised financial institutions: 504 (16 banks; 472 micro‑finance institutions; 15 insurers; 1 public pension scheme).
- Credit deepening:
  - Bank credit to the private sector grew by an annual average of 13 percent in real terms.
  - Credit rose from 11.8 percent of GDP in 2009 to 19.2 percent in 2016.
  - Composition of bank lending to the private sector: mortgage, commercial lending, and loans to the hotel sector constitute 68 percent of banks’ loan portfolio.
- Financial innovation and inclusion:
  - Microfinance assets almost doubled from end-2013 to 2016; deposits increased by 65 percent over the same period.
  - As of end 2016: more than 9.7 million users subscribed to mobile payment systems; nearly one million users subscribed for mobile banking services.
  - Value of total e-payments rose to more than 30 percent of GDP within five years.
  - Evolution in e-payments (selected entries):
    - POS Transactions 2011: Value 6.4 billion; % of GDP 0.2. 2016: Value 41.5 billion; % of GDP 0.6.
    - Mobile banking 2011: Value 5.2 billion; % of GDP 0.1. 2016: Value 37.2 billion; % of GDP 0.6.
    - Internet banking 2011: Value 0.7 billion; % of GDP 0.0. 2016: Value 1,017.1 billion; % of GDP 15.4.
    - Mobile payments 2011: Value 51.0 billion; % of GDP 1.3. 2016: Value 1,040.5 billion; % of GDP 15.7.
    - Total e-payment 2011: Value 63.4 billion; % of GDP 1.6. 2016: Value 2,136.2 billion; % of GDP 32.3.
  - Economist Intelligence Unit’s 2016 Global Microscope ranks Rwanda at the 8th position globally; World Bank FINDEX shows notable improvement between 2011 and 2014.
- Capital markets:
  - Rwanda Stock Exchange market capitalization estimated at about 26 percent of GDP as of end-2016; seven listed companies.
  - Bond market shallow; only two corporate issuances in 2016.
  - Authorities implementing a seven-year capital markets plan to deepen the market.

### J. Banking Sector Soundness, NPLs, and Macroprudential Policy
- Banking soundness and indicators (selected):
  - NPL ratio (Latest): 7.7
  - NPL ratio change (%, annual) (Latest): 28.6
  - Leverage ratio (Latest): 14.3
  - ROA (Latest): 2.7
  - ROE (Latest): 14.9
  - Deposit-to-loan ratio (Latest): 103.1
  - FX liabilities % (of total liabilities) (Latest): 28.5
  - FX loans % (of total loans) (Latest): 11.5
  - Credit-to-GDP gap (st. dev) (Latest): -2.1
  - Growth of credit / GDP (%, annual) (Latest): -1.7
- Stress testing and buffers:
  - BNR uses the Cihak model for stress testing; majority of banks would remain above the regulatory minimum (risk-weighted) CAR requirement of 15 percent after shocks.
  - As of March 2017: capital well above regulatory requirements; system’s net foreign exchange exposure stood at -4.4 percent of core capital.
- Financial cycle assessment:
  - Despite high nominal credit growth, the credit gap over the past ten years does not show signs of credit-fueled financial exuberance; credit gap remained below the two-percent threshold of concern.
  - Financial sector vulnerability risk moved from low to medium during 2016, mainly due to rising NPLs whose ratio to total credit expanded at a rate faster than 25 percent annually.
- Policy responses:
  - Authorities adapting and extending macroprudential tools; creating a Financial Sector Coordination Committee for macroprudential supervision and crisis resolution planning.
  - Recommendations: continue close monitoring of NPLs and credit quality; extend macroprudential framework; balance stability and consumer protection; pursue regional integration to mitigate market size limitations.

### K. Gender Equality: Achievements, Constraints, and Policy Opportunities
- Macro rationale:
  - Reducing gender inequality can enhance economic efficiency and raise growth (Cuberes and Teignier 2016; IMF 2015; McKinsey Global Institute 2015; UNDP 2016).
- Recent growth and gender outcomes:
  - Over the past ten years, economic growth averaged 7.7 percent; per capita income close to doubling to $729 in 2016.
  - Between 2004 and 2014, poverty rate declined by almost 18 percentage points to 39 percent; extreme poverty declined to 16 percent.
- Institutional and legal reforms:
  - Constitutional quota: at least 30 percent for women in decision-making positions.
  - 2015 parliamentary representation: women held 64 percent of Rwanda’s parliamentary seats.
  - Laws introduced include:
    - Law N° 43/2013 of 16/06/2013 governing land management (women’s land ownership at 26 percent compared to 18 percent for men, and 54 percent by both spouses).
    - Law Nº 10/20/2013/OL prohibiting discrimination in political parties.
    - Law Nº 12/2013 instituting gender responsive budgeting.
    - Law Nº27/2016 of 08/07/2016 governing matrimonial regimes and inheritance.
    - Law N° 13/2009 regulating labor: equal opportunities and equal pay, prohibiting sexual harassment.
    - Law N°003/2016 of 30/03/2016 establishing maternity leave benefits: 3 months fully paid maternity leave; up to 1 hour out of official working hours for 12 months to spend time with child; 4 days leave for fathers during wife’s maternity leave.
- Financial inclusion and access to assets:
  - 2013/14 household survey: land ownership by household head type — male-headed households 89.5 percent; female-headed households 88.5 percent.
  - Between 2012 and 2016: gender-focused interventions increased the share of women served by formal financial services by 27 percentage points; share relying on informal mechanisms decreased by 25 percentage points (FinScope 2016).
  - In 2015, almost three-quarters of agricultural credit was extended to men despite women constituting the majority of agricultural workers.
  - Formal banking provides over 80 percent of credit to the economy, but only about 22 percent of which goes to women.
  - Women Guarantee Fund (established 2009); “Access to Finance Strategy for Women and Youth” (approved 2012) guarantees up to 75 percent of loan value through Business Development Fund and decentralized Credit and Savings Cooperatives.
- Political empowerment and social outcomes:
  - Women comprise half of the judiciary and provincial governors; 40 percent of the Cabinet; 32 percent of ambassadors; 44 percent of district advisory council members.
  - Health improvements: maternal mortality reduced to 210 in 2015 (from more than one thousand per 100,000 births in 2000); adolescent fertility halved from 49 in 2000 to 26 percent in 2015.
  - Literacy rates among women above 65 percent in 2015, up some 16 percentage points from 2000; youth literacy 85 percent for females vs. 88 percent for males in 2015.
- Remaining gaps and opportunities:
  - Female labor force participation about 85.5 percent; male participation 86 percent.
  - TVET female enrollment almost 42 percent in 2015, some 16 percentage points lower than male enrollment.
  - Female-headed households more likely to be poor: 44 percent vs. 37 percent for male-headed households; extremely poor: 20 percent vs. 15 percent (EICV4).
  - Policy opportunities: enhance women’s access to quality health and education; improve access to TVET; close the gap in formal banking credit to women; collect sex-disaggregated financial data; ensure informal institutional changes accompany legal reforms.

### L. Conclusions and Policy Priorities
- Summary:
  - Public investment was instrumental in improving infrastructure over the past decade, supported by strong PIM practices, but an unfinished agenda remains.
  - Sharp build‑up of public debt limits future public borrowing; government must choose highest value infrastructure projects in terms of economic return and make optimal use of scarce foreign exchange.
  - Private sector mobilization is essential given fiscal constraints and small, land‑locked economy; regional integration within the EAC is a key lever to lower import and transport costs.
  - Continued improvements needed in education, skills matching, agricultural input uptake (seeds, fertilizer) and irrigation expansion, and in lowering electricity and transportation costs.
- Policy recommendations and priorities:
  - Prioritize highest value infrastructure projects and optimal use of scarce foreign exchange.
  - Mobilize private sector to exploit public infrastructure; ease FDI coordination constraints across Ministries.
  - Invest in education where high returns exist and ensure qualifications match employer demand; leverage specialist universities in Kigali.
  - Improve agricultural inputs uptake and irrigation expansion to boost yields and resilience.
  - Lower electricity and transportation costs to reduce input costs and improve competitiveness.
  - Continue close monitoring of NPLs and extend macroprudential tools; balance financial stability with consumer protection and support financial inclusion, including gender-sensitive measures.
  - Pursue regional integration to mitigate small market size and deepen financial and goods markets.

*International Monetary Fund — content unit cr17214 (References and accompanying sections as provided).*

### References ____________________________________________________________________________ 22

### cr17214 - References ____________________________________________________________________________ 22

### Overview and Key Message
- Rwanda transformed its economy over the past 15 years by moving workers out of agriculture into mostly services and some industry, supported by strong public investment flows and efficient public investment management.
- Going forward, sustaining high growth and attaining middle income status within 20 years depends on the private sector complementing public infrastructure, raising education standards, better matching qualifications to employer demand, and lowering electricity and transportation costs.

### A. Introduction and Context
- Structural transformation: shift from wide-scale subsistence agriculture toward urbanized, enterprise-dominated economy, increasing productivity and higher value-added activities.
- Sub-Saharan Africa (SSA) experienced pronounced employment shifts away from agriculture into higher productivity sectors over 2000–10.

### B. State of Structural Transformation in Rwanda
- Employment shifts:
  - Through 2010 Rwanda experienced a large shift from agriculture to services.
  - Over 2011–14, the annual decline in the employment share in agriculture remained about 1 percent per annum.
  - During 2011–14, jobs created occurred more in industry (0.66 percent) than in services (0.33 percent).
- Sector composition (Table 1, 2010 except where stated):
  - Rwanda (2016): Employment share (Industry) 7.4; Output share (Industry) 17.0; Manufacturing 6.0.
  - Comparative countries listed: Kenya 18.4/13.5/9.9; Uganda 15.8/24.2/7.5; Tanzania 16.9/18.9/9.5; LIC average 17.1/14.8/7.7; Laos 5.4/40.0/11.0; Bangladesh 10.8/28.2/17.6; Cambodia 11.1/29.4/17.0; Vietnam 14.3/33.3/13.7.
- Manufacturing plays a smaller role in Rwanda than in other East African countries; strategy focuses on agriculture and services given landlocked status.

### C. Productivity and Growth Decomposition
- Total factor productivity (TFP) vs. input-driven growth:
  - High-growth non-resource-rich peers show growth largely from input increases rather than productivity gains, especially in the recent five-year period.
  - Rwanda: productivity contributed more in 2000–10 than in 2010–14; maintaining productivity momentum is a challenge.
- Table 2. Output Growth Decomposition (Contribution to annual growth rates):
  - Rwanda 2000-2014: Real GDP growth 7.6; Capital stock 3.2; Labor 1.8; TFP 2.7; Adjusted labor 2.8; Education 0.1; Adjusted TFP 1.5.
  - Rwanda 2010-2014: Real GDP growth 6.9; Capital stock 4.2; Labor 1.6; TFP 1.1; Adjusted labor 2.8; Education 0.1; Adjusted TFP -0.3.
  - Comparative country entries available for Burkina Faso, Ethiopia, Kenya, Uganda, Tanzania in the source.

### D. Role of Investment to Foster Structural Transformation
- Constraints and focus:
  - Rwanda is landlocked; economies of scale in industry are difficult.
  - Strategy focuses on services (business tourism hub) and improving agricultural productivity; some light manufacturing (garments, shoes) and mining are being promoted.
  - Import substitution targets: cement, basic clothing, rice and sugar identified as products with potential to displace imports.
- EDPRS2 (2013–18) objectives:
  - Focus on improving agricultural productivity via increased irrigation, seed and fertilizer investment; promote services exports through large infrastructure investment.
  - Poverty reduction target: reduce poverty to 20 percent or below by 2020.
  - Plan anticipates external donor assistance to decline gradually and aims to increase foreign exchange earnings to place external balances on a sustainable basis.

### E. Agricultural Productivity: Progress and Shortfalls
- Agricultural strategy emphasizes expanded irrigation, fertilizer use, improved seeds, and land consolidation.
  - Irrigation can triple crop production compared to rain-fed agriculture and allow multiple cropping (two to four crops a year).
  - Up to mid-2016, almost half of the targeted acreage under irrigation was met, with delays due to difficult topography.
- Input uptake:
  - EDPRS2 target for seed coverage: 70 percent of agricultural land by end 2018; actual about 12 percent of land cultivated with improved seeds as of mid-2016.
  - Fertilizer target: provision of 45 kg per hectare by end 2018 is achievable.
- Crop yields (Table 3, Kg per hectare in 2014, except where noted):
  - Rwanda (2016) examples:
    - Maize: annual change 7.8; level 1575.
    - Sorghum: annual change 0.7; level 898.
    - Cassava: annual change -4.7; level 1644.
    - Pulses/beans: level reported as 797 (annual change entry not shown).
  - Findings: yields improved considerably for maize and sorghum, fell for cassava (because of disease), and remained flat for beans; except for sorghum, yields remain far below the region’s most productive country (Ethiopia in most cases).
- Export diversification:
  - Hides and skins, meat, dairy and cereals exports amounted to almost US$100 million in 2016; new crops are being introduced to diversify production and limit climate change risks.

### F. Services Sector Development and Human Capital Constraints
- Services strategy:
  - Increase external connectivity and boost exports via RwandAir expansion, Meetings, Incentives, Conferences, and Exhibitions (MICE) strategy, financing for a new airport, new convention center, and three new large hotels (Marriot, Radisson and Zinc).
- Education and skills:
  - Primary school completion: Rwanda’s graduation rate at end of primary is below the SSA LIC average of 70 percent; dropout rate higher than desired.
  - Lower secondary school enrollment rate: lower than LIC average of 39.6 percent; far below leaders in SSA such as Kenya and Mauritius (mid 80s).
  - Secondary repetition rate about 11 percent of pupils.
  - Policy response: allowing free flow of labor from other EAC countries, notably Kenya and Uganda, to address skills shortages.

### G. Conclusions and Policy Implications (from text)
- To sustain historic high growth and achieve middle income status within 20 years Rwanda needs:
  - Private sector participation to complement public infrastructure assets.
  - Continued government efforts to raise education standards and better align student qualifications with employer demand.
  - Policies to lower electricity and transportation costs.
  - Continued improvements in agricultural inputs uptake (seeds, fertilizer) and irrigation expansion to boost yields and resilience.

*International Monetary Fund — content unit cr17214 (References and accompanying sections as provided).*

### 17.      There is a strong push to improve the quality of training in Rwanda because of a

### 17.      There is a strong push to improve the quality of training in Rwanda because of a mismatch between skills provided through the Rwandan education system and the needs of employers

### Education and skills training
- Challenge: mismatch between skills provided through the Rwandan education system and the needs of employers.
- Upper‑end tertiary developments:
  - A World Bank grant is helping to establish in Kigali the Africa Center for Excellence in data science and the Africa Center for Excellence in Innovative Teaching and learning Mathematics and Science.
  - Rwanda is attracting new college level education establishments.
- Technical and Vocational Education Training (TVET):
  - Recent impetus with strong financial support from the German and Swiss development agencies.
  - Significant number of trainers need to have their own skills and experience upgraded to ensure students develop “employable skills”.
- Primary education digital initiatives:
  - One laptop per child program: through April 2016, about 11 percent of primary aged children have been covered.
  - Government partnership with Microsoft to offer digital solutions to the delivery of education.
  - Success of initiatives depends on availability of internet access and electricity which remains an issue.

### Tourism performance and external financing needs
- International passenger arrivals:
  - Have doubled over 2010–15 to over 1.3 million visitors.
- Tourist revenue:
  - Increased each year from US$202 million in 2010 to over US$400 million in 2016.
- Trade deficit and financing:
  - More action needed to cover an ever‑growing trade deficit estimated at US$1.3 billion in 2016.

### Industry, export promotion, and investment incentives
- Government focus:
  - Economic strategy focuses on agriculture and services, with growing recognition of stimulating exports including industry.
  - Investments in special economic zones and reformulation of investment incentives to stimulate export‑oriented activities.
- New Investment Code:
  - Prioritises sectors: exports, manufacturing, energy, ICT, financial services, and construction.
  - Previous VAT exemption replaced by corporate income tax reductions.
  - Investments of US$10 million can exempt a company from corporate income taxes.
  - A US$50 million investment unlocks a seven‑year tax holiday.
  - Tension: lower corporate tax provisions relate to all exports including traditional goods while all investments can unlock generous tax holidays.
- Special Economic Zone / Economic Processing Zone:
  - A company in the Special Economic Zone can opt to be part of the Economic Processing Zone, exempting it from VAT, import duties, and corporate tax.
  - To qualify, the company is obliged to export a minimum of 80 percent of its production.
  - Removal of tax liabilities for an exporting firm compensates for higher transportation costs.

### Sectoral bottlenecks: agriculture, energy, transport, logistics
- Agriculture:
  - Low levels of irrigation, fertilizer use and availability of quality seed.
  - Notable problems of administration as documented by the Office of the Accountant General (annual report 2015).
- Energy:
  - Availability and cost of electricity remains a severe constraint.
  - Recent estimates put the cost of electricity per kW hour at about 30 cents in Rwanda, compared with Uganda (16), Tanzania (17) and Kenya (22).
  - Industrial price reported at 15 cents per kW hour.
- Transportation and trade logistics:
  - High cost of transportation adds to input costs.
  - 2016 World Bank doing business trade logistics component ranks Rwanda 156, below the Sub Saharan average, with cost and time to import goods a major trade deterrent.
  - Government efforts: improving road network, lowering non‑tariff barriers.
  - Reported improvement: days to deliver a container from Dar es Salaam to Kigali down from 22 days one year ago to 6 days currently; delays at Dar es Salaam falling.

### Public investment role, spending, and foreign financing
- Public investment contribution:
  - Public sector played a key role in channeling scarce foreign resources into productive investments.
  - IMF research: in a growth regression for six fast non‑resource growing SSA countries over 1999‑2010, the aid ratio contributed ½ percent to per capita growth in Rwanda.
- Public investment levels:
  - Over 2010‑14, public investment ratio in Rwanda averaged 12 percent (percent of GDP), considerably higher than Kenya and Uganda and comparable to Mozambique.
  - Public investment accounted for about 7 percent of GDP in 2008 and rose to 11 percent of GDP by 2016.
- Private investment and credit:
  - Private sector credit doubled to reach 19 percent of GDP in 2015.
  - Private investment rate fairly flat through 2014 but surged subsequently with large investment outside the central government.
- Official development assistance (ODA):
  - Rwanda received almost 9 percent of GDP per annum in ODA over the past decade (2010─14 average), one of the highest among sampled SSA LICs.

### Effectiveness of investment spending and public investment management (PIM)
- Investment effectiveness depends on public investment management quality.
- PIM index (Dabla‑Norris et al. 2011):
  - Based on four stages: project appraisal, project selection, project implementation and project evaluation; index varies between 0–4.
  - Rwanda ranks high on Public Investment Management practices among developing countries for 2011, ranked above all other LICs in the sample.
  - Comparable performers among SSA low and low‑middle income countries: Zambia and Ghana; Kenya, Tanzania and Uganda rank far down the list.
- Empirical relationship:
  - Correlation between PIM index (effectiveness) and investment outcomes (quality of infrastructure) for the same countries in the same year: correlation coefficient of -0.38, significant at the 99 percent level of confidence.
  - Note: negative coefficient reflects ranking construction; improvements in PIM associated with better infrastructure outcomes.

### Recent policy interventions to improve investment quality
- Monitoring and evaluation system:
  - Comprehensive system for monitoring and evaluating public investment projects above US$1 million.
  - Detailed feasibility study for each project; reviewed by the investment committee on a monthly basis.
  - Investment committee operational for 3 years; local government projects added to appraisal list in FY15/16 and appraised by a new District Investment Advisory Committee.
  - Investment committee empowered to approve PPPs and Joint Ventures.
- Institutional reforms:
  - National Investment Policy before Cabinet creates a more robust framework for oversight and implementation with clear roles and responsibilities.
  - Local authority ministry assigned monitoring and evaluation of local government projects.
  - New autonomous government investment body set up to manage portfolio of public shareholdings.
  - Project monitoring unit in MINECOFIN transferred from the budget unit to the Minister of State in charge of Economic Planning.
  - Expected outcomes: improved monitoring of financial and non‑financial performance and feedback loops into prioritization.
- Peer learning:
  - Rwanda recognized in Sub‑Saharan Africa for project evaluation leadership; Senegal Ministry of Finance staff spent time in Kigali learning Rwanda’s project selection processes.

### Realistic prospects over the next 10 years and regional integration
- Fiscal constraint:
  - Sharp rise in public debt from 18 percent of GDP in 2012 to a projection of 47.1 percent of GDP by 2018 limits room for further government borrowing.
- Private sector mobilization:
  - Government must rely on the private sector to make use of infrastructure assets.
  - Private sector credit reached 19 percent of GDP in 2015; Rwanda’s ratio has risen above Tanzania and Uganda over the past 5 years but remains below Kenya, Cote d’Ivoire, South Africa and Mauritius.
- Regional integration and trade strategy:
  - Stimulating private investment is difficult because of small economy size and land‑locked status; government addressing this through EAC regional integration to lower cost of imports and improve connectivity.
  - Establishing a dry port in Kigali to ease transit to Democratic Republic of Congo (DRC).
  - Export markets and patterns:
    - Rwanda goods imports from Uganda have risen by almost 15 percentage points to 18 percent of the total over the past 15 years.
    - Rwanda has been unable to penetrate Uganda with exports.
    - Exports to Congo (mainly re‑exports) have doubled over the past 5 years and now represent 26 percent of the total (US$172 million).
    - Many exports to Congo are low value‑added (petroleum and used vehicles originating from outside the continent); example of higher value addition: wheat flour where the wheat is currently imported.
  - Border infrastructure and trade facilitation:
    - One stop border post being finalized in Rubavu to require only one inspection of goods between Rwanda and DRC.
    - Development partners financed a program to support traders at the border.
    - Bilateral trade meetings between Rwanda and DRC presidents have started.
    - North Kivu region: population base of over 14 million within 100 miles of the Rwandan border.

### Conclusion and policy priorities
- Public investment achievements and constraints:
  - Public investment instrumental in improving infrastructure over the past decade, but an unfinished agenda remains.
  - Sharp build‑up of public debt limits future public borrowing; government must choose highest value infrastructure projects in terms of economic return and make optimal use of scarce foreign exchange.
- Policy recommendations and priorities:
  - Focus on choosing highest value infrastructure projects and optimal use of scarce foreign exchange.
  - Greater use of business enterprise surveys to identify sectors making progress in productivity and turnover and assess the role of company taxation.
  - Invest in education where high returns exist due to low current education base, but ensure qualifications match employer demand.
  - Leverage new specialist universities being set up in Kigali to align training with labor market needs.
  - Use investment in education to support the business tourism strategy that depends on a labor force able to offer the quality of service demanded by consumers.

*International Monetary Fund — Rwanda country chapter (content unit cr17214)*

### 45.      Notwithstanding a sharp rise in FDI in recent years, coordination problems remain

### 45. Notwithstanding a sharp rise in FDI in recent years, coordination problems remain

### Foreign Direct Investment and coordination
- Notwithstanding a sharp rise in FDI in recent years, coordination problems remain between various Ministries.
- These coordination problems have delayed and discouraged some investments, especially in manufacturing.
- More efforts are needed to find ways to ease the concerns of potential investors in investing in such a small country.
- A potential avenue is to match up potential private investors with private sector agents to help overcome financial constraints and achieve synergies.

### Market access and transport costs
- Because of Rwanda’s landlocked status and small size, continued efforts to gain stronger access to EAC markets and beyond is imperative and well understood by the authorities.
- Lower transportation costs will stimulate trade which, for Rwanda, is most likely to occur along its Western border.

### Gender equality: overview and macroeconomic rationale
- A strong political will to mainstream gender into government programs, underpinned by institutional and policy reforms, has been key to Rwanda’s progress in addressing gender inequality.
- Over the past two decades, socio-economic outcomes have improved significantly, with Rwanda emerging as a regional leader in advancing gender equality.
- Further advancing women’s economic opportunities and endowments could yield a significant growth dividend.
- Globally, reducing gender inequality can enhance economic efficiency, delivering productivity gains and higher growth (Cuberes and Teignier 2016).
- Examples of quantified potential gains cited:
  - Reducing gender inequality in sub-Saharan Africa’s low income countries to levels observed in five fast-growing East Asian countries could boost per capita growth by two-thirds of a percentage point (IMF 2015).
  - Eliminating gender inequality in labor force participation could add up to 11 percent of sub-Saharan Africa’s GDP by 2025 (McKinsey Global Institute 2015).
  - Gender inequality in the labor market alone cost the sub-Saharan Africa region some 6 percent of GDP annually between 2010 and 2014 (UNDP 2016).

### Rwanda’s recent growth and gender achievements
- Over the past ten years, economic growth has averaged 7.7 percent, with per capita income close to doubling to $729 in 2016.
- Between 2004 and 2014, the poverty rate declined by almost 18 percentage points to 39 percent while extreme poverty declined to 16 percent.
- Rwanda’s advances in gender equality include:
  - Advocacy at the highest level and integration of gender equality into development strategy.
  - Dedicated gender institutions: Ministry of Gender and Family Promotion, the Gender Monitoring Office, the National Women Council, and the Forum for Women Parliamentarians.
  - Increased provision of gender disaggregated data (NISR 2016: National Gender Statistics Report).
- International rankings and indicators:
  - World Economic Forum’s 2016 Gender Gap Index ranks Rwanda number 1 among all low- and-middle-income countries in closing the gender gap.
  - Rwanda positioned itself as number 5 worldwide on the 2016 Gender Gap Index and was one of only five countries to have ever reached a score of more than 80 out of 100.
  - Rwanda ranks second in the UN’s 2015 Gender Development Index and has the lowest level of gender inequality in sub-Saharan Africa as measured by the Gender Inequality Index.

### Economic participation and opportunity
- Rwanda outperforms most peers in women’s economic participation and opportunity.
  - World Economic Forum’s 2016 Gender Gap Report ranks Rwanda number 14 globally on women’s economic participation, and number 1 in labor force participation and wage equality for similar work.
- Labor force participation:
  - Female labor force participation is about 85.5 percent; male participation is 86 percent (EICV4 Thematic Economic Activities).
  - Most women work in agriculture, mostly as independent farmers, compared to about two-fifths of men.
- Employment by job type (EICV 2013/14): chart data indicate higher female shares in independent farm and unpaid non-farm categories; male shares higher in wage non-farm and independent non-farm categories.
- Wage and earnings gaps:
  - Rwanda ranks position 1 for wage equality in the 2016 Global Gender Gap, but position 8 with respect to estimated earned income.
  - Women are underrepresented in the non-farm wage sector but overrepresented in independent agriculture, often in lower-valued subsistence agriculture while men are more involved in cash crop production and marketing.

### Human and physical endowments: education and health
- Education:
  - Literacy rates among women were above 65 percent in 2015, up some 16 percentage points from 2000 levels, compared to 76 percent for men (2013/14 EICV; EICV/2000).
  - Youth literacy rates in 2015: 85 percent for females compared to 88 percent for males.
  - Net enrollment of girls in primary school in 2014 almost equaled that of boys; in 2015 girls’ attendance exceeded that of boys at primary and secondary levels.
  - Gender gap remains in Technical Vocational Education and Training (TVET): female enrollment at almost 42 percent in 2015, some 16 percentage points lower than male enrollment.
  - Government policies: Girls’ Education Policy (Government of Rwanda 2008); universal twelve-year basic education; TVET programs with gender-specific goals; signatory of the 2017 Kigali Declaration to close the gender gap in science and technology.
- Health:
  - Maternal mortality reduced from more than one thousand deaths per 100,000 births in 2000 to 210 in 2015.
  - Adolescent fertility (births per 1,000 women aged 15–19) halved from 49 in 2000 to 26 percent in 2015 (compared to 100 in sub-Saharan Africa).
  - Community-based health insurance scheme (Mutuelle de Santé) expanded affordable quality health care to the poor, especially women.
  - Home-grown health solutions: community health workers (abajyanamab’ubuzima), kitchen gardens (akarima k’igikoni), community kitchens, Shisha Kibondo program (fortified blended food supplements for pregnant/lactating mothers and children).

### Access to physical assets and legal reforms
- Recent laws introduced to remove constraints on women’s access to physical assets and enhance economic opportunities:
  - Law N° 43/2013 of 16/06/2013 governing land management guarantees equal rights on land access, ownership and utilization.
    - Women’s land ownership is at 26 percent compared to 18 percent for men, and 54 percent by both spouses.
    - Women’s ability to use land as an economic resource has contributed to halving their financial exclusion.
  - Law Nº 10/20/2013/OL prohibits any form of discrimination based on gender, sex, race, and religion in political parties.
  - Law Nº 12/2013 institutes gender responsive budgeting, enforcing accountability measures for gender sensitive resource allocation across sectors.
  - Law Nº27/2016 of 08/07/2016 governs matrimonial regimes, donations within a family and successions, ensuring equal inheritance rights.
  - Law N° 13/2009 of 27/05/2009 regulates labor, providing equal opportunities and equal pay for, and prohibiting sexual harassment in the workplace.
  - Law N°003/2016 of 30/03/2016 establishes and governs a maternity leave benefits scheme:
    - Allows a mother to take 3 months fully paid maternity leave.
    - Allows up to 1 hour out of official working hours for a period of 12 months to spend time with her child.
    - Provides 4 days leave for fathers during the wife’s maternity leave.

*Source: IMF staff report excerpt (cr17214).*

### 14.      The changes in laws have resulted in a more level playing field. Women are now more

### 14.      The changes in laws have resulted in a more level playing field. Women are now more

### Financial Inclusion
- Legal and property changes have made women more likely to own property and provide loan collateral (UN 2016), enhancing productive and financial access capabilities.
- 2013/14 household survey: land ownership by household head type — male-headed households 89.5 percent; female-headed households 88.5 percent.
- Global context: an estimated 70 percent of female-owned small and medium-size enterprises are under-served in developing economies (Aterido and others, 2013).
- Between 2012 and 2016:
  - gender-focused interventions increased the share of women served by formal financial services by 27 percentage points (FinScope 2016).
  - the share of women relying on informal mechanisms decreased by 25 percentage points (FinScope 2016).
- Comparative indicators (FINDEX 2014 and FinScope 2016):
  - Rwandan women are more likely to save at a financial institution compared to the EAC.
  - Mobile banking: introduced in 2010 and has grown exponentially; a 2014/2015 national survey found less than 40 percent of mobile banking users were female.
- Table 1: Composition of Client Accounts (sector percent)
  - Banking: 2012 56.2; 2015 45.7; 2016 42.6
  - Microfinance: 2012 43.8; 2015 54.3; 2016 57.4
    - o/w Females: 2012 39.5; 2015 38.7; 2016 39.3
    - Males: 2012 54.2; 2015 52.4; 2016 52.3
  - Mix/Groups: 2012 6.3; 2015 8.9; 2016 8.4
  - Source: BNR and IMF staff calculations.
- Remaining gender gaps:
  - Men and women save at broadly similar rates, but men are much more likely to save using formal mechanisms.
  - Almost three-fifths of women continue to rely on informal sources of borrowing because of lower collateral requirements (Gender Monitoring Office, 2017a).
  - In 2015, almost three-quarters of agricultural credit was extended to men despite women constituting the majority of agricultural workers (Gender Monitoring Office, 2017a).
- Main reasons women cite for not opening accounts (Findex 2014), in order: lack of money; lack of documentation; cost of opening/maintaining account; other reasons listed in Figure 10 (exact ranked percentages not provided in the text excerpt).

### Policy Initiatives to Support Financial Inclusion
- Government targets (Financial Sector Development Strategy):
  - increase overall financial inclusion to 80 percent by 2017, and to 90 percent by 2020, with special emphasis on women and youth.
- Women Guarantee Fund (established 2009): aims to increase women’s access to micro-credit and empower entrepreneurial activity.
- Ministry of Gender and Family Promotion’s “Access to Finance Strategy for Women and Youth” (approved 2012): facilitates access by guaranteeing up to 75 percent of loan value through the Business Development Fund and decentralized Credit and Savings Cooperatives.
- Government target within 7-Year Government Program: increase the number of active women in cooperatives, expand their use of loans, and target a share of at least 50 percent of loans from UMURENGE SACCOs, micro finance institutions and banks be used by women.

### Political Empowerment
- Constitutional quota: at least 30 percent for women in decision-making positions.
- 2015 parliamentary representation: women held 64 percent of Rwanda’s parliamentary seats (global average was 21 percent).
- Additional representation figures:
  - women comprise half of the judiciary and provincial governors;
  - 40 percent of the Cabinet;
  - 32 percent of ambassadors;
  - 44 percent of district advisory council members.

### Gender Inequality and Growth
- Analysis approach: decomposition exercise using estimates from a panel of 115 economies (IMF, 2015) to attribute differences in average real GDP per capita growth rates.
- Findings:
  - Rwanda’s GDP growth rate averaged about 2.2 percentage points above the EAC and the sub-Saharan African average over 2005-14.
  - Female legal equity and gender equality in opportunities and the labor market contributed ½ percentage points to this growth differential (Figure 11).
  - Reducing gender inequality in Rwanda to levels observed in benchmark countries in Latin America and ASEAN could boost per capita GDP by nearly ½ percentage point (Figure 12).
- Growth policy context: gender-equality improvements are an additional avenue for development alongside infrastructure and human capital accumulation.

### Institutional and Policy Framework
- Legal framework:
  - 2003 Constitution (revised 2015) enshrines gender equality principles and establishes 30 percent quotas for female representation in decision-making structures.
  - 2013 land law ensures equality in land ownership and inheritance.
  - 2009 labor law ensures equal access and pay for employment.
- Institutional actors (Box 1):
  - Ministry for Gender and Family Promotion: strategic coordination of gender, family, women's empowerment and children's issues.
  - Gender Monitoring Office: monitors gender mainstreaming and trends in gender-based violence.
  - National Women’s Council: represents women at all levels, disseminates information on laws, policies and programs, and builds capacity for gender advocacy.
  - National Gender Cluster: forum for government, development partners, private sector and civil society on gender policies.
  - Forum for Rwandan women parliamentarians (FFRP): oversees and advocates for gender-sensitive laws.
  - “Gender desks” in Ministry of Defense, National Police, National Public Prosecution Authority and the Gender Monitoring Office; Gender and Family Promotion Officer in Local Government; Directors of Planning designated as “gender focal points” in central ministries and agencies.
- Gender budgeting:
  - Implemented since 2002; current process launched in 2008 as part of shift to program budgeting.
  - MINECOFIN leads the process; Ministry of Gender and Family Promotion and Gender Monitoring Office provide oversight and support.
  - 2010 National Gender Policy embeds gender budgeting; 2013 Organic Law on State Finances and Property institutionalized gender budgeting, including mandatory “Gender Budget Statements.”
  - Success factors: MINECOFIN leadership, discretion for line ministries, mandatory reporting and the Gender Monitoring Office’s oversight.

### Social Protection and Poverty
- Social protection strategy objective: build a system to reduce poverty, inequality and vulnerability from shocks.
- Poverty by household head:
  - female-headed households more likely to be poor: 44 percent vs. 37 percent for male-headed households.
  - female-headed households more likely to be extremely poor: 20 percent vs. 15 percent for male-headed households (EICV4, Gender report).

### Role of Informal Institutions
- Cultural and political economy factors influence the effectiveness of gender reforms.
- Studies cited:
  - Debusscher and Ansoms (2013): Rwandan women disproportionately contribute to significant but undervalued care work (household tasks, reproduction, care of family and community).
  - International Development Law Organization (2013): statutory reforms strengthened women’s rights to land, but in rural Rwanda actual ownership and rights are sometimes symbolic and less enforced under customary law and practice.

### Conclusion
- Rwanda has made important advances in promoting gender equality through institutional and policy initiatives and strong political will.
- Key gains include:
  - increased emphasis on gender-responsive budgeting;
  - higher access to finance including through microfinance schemes;
  - improvements in access to health and education services;
  - legal reforms granting women opportunities to participate fully in economic activities and decision-making positions.
- These developments provide a base for enhancing women’s productivity in the economy and eliminating gender-related income inequalities.

*International Monetary Fund — CR17214 (chapter excerpt).*

### 32.      Several opportunities exist to consolidate these gains in making gender equality an

### 32.      Several opportunities exist to consolidate these gains in making gender equality an

### Gender equality: findings and policy opportunities
- Female labor force participation beyond the agricultural sector could be enhanced through further advancement of women’s access to quality health and education services.
- Improving women’s access to technical and vocational training could improve economic participation and opportunities beyond agriculture and informal activities.
- There is room to close the gap in access to credit in the formal banking sector:
  - The formal banking sector provides over 80 percent of credit to the economy, but only about 22 percent of which goes to women.
  - Increased access to credit in the banking sector would support efforts to advance women’s entrepreneurship.
- Recent initiatives by the authorities to collect sex-disaggregated financial data will help in further understanding the gender dimensions of access to financial services and should help in designing targeted policies.
- Underlying all these opportunities is the importance of ensuring that reforms in the formal institutional landscape are commensurate with informal institutional changes (legal, social or cultural) to enable women to exploit their full economic potential.

### Financial sector overview: structure, size, and composition
- Total financial sector assets increased from 31 to 54 percent of GDP in December 2016.
- Economic growth averaged 7.8 percent per year over the same period.
- The financial sector is dominated by commercial banks, which hold two thirds of financial assets.
- Composition of Total Financial Sector Assets (in percent):
  - Banking Sector: 66.9
  - Pension Fund: 17.1
  - Insurance: 9.7
  - Nonbank Micro Finance: 6.3
- Majority ownership of banks, by assets (in percent):
  - Domestic Private: 18.0
  - Domestic Public: 36.0
  - Foreign: 46.0
- Rwanda’s financial sector is composed of a total of 504 supervised financial institutions, comprising:
  - 16 banks (11 commercial banks, 3 micro-finance banks, 1 development bank and 1 cooperative bank)
  - 472 micro-finance institutions (17 limited liability companies and 455 cooperatives of which 416 are Umurenge SACCOs and 39 non-Umurenge SACCOS)
  - 15 insurers (13 private and 2 public)
  - 1 public pension scheme

### Financial sector concentration, interconnections, and capital markets
- Rwanda’s banking system is quite concentrated and dominated by foreign-owned banks:
  - The three largest of Rwanda’s 17 commercial banks hold nearly half of total bank assets.
  - The share of assets held by majority foreign-owned banks is equally high.
  - Despite foreign ownership, bank funding is overwhelmingly domestic and comes mainly from deposits.
- Interconnection between banks and nonbank institutions:
  - Commercial banks are systemically important for nonbank financial institutions, but not vice versa.
  - The pension fund’s asset composition: 33 percent of the pension fund’s assets are comprised of bank deposits (24 percent) and bank equity (9 percent).
  - The pension fund contributes about 10 percent to banks’ deposit funding.
  - Given these orders of magnitude, systemic risk will likely be channeled through the banking system rather than nonbank institutions.
- Capital markets remain relatively undeveloped:
  - The Rwanda Stock Exchange, established in 2005, has stock market capitalization estimated at about 26 percent of GDP as of end-2016.
  - There are seven listed companies (four local companies and three cross-listings).
  - The bond market, introduced in 2008, is shallow; corporate sector participation remains depressed, with only two issuances in 2016.
  - Market shortcomings include lack of intermediaries (primary dealers) and illiquidity, as most investors hold securities to maturity.
  - To deepen the bond market, the authorities are implementing a seven-year capital markets plan including an improved sovereign bond issuance program; measures to encourage retail and foreign investors; and professional capacity building.

*International Monetary Fund — content as provided in the source PDF*

### 5.      The financial cycle has been buoyant in the past seven years. Bank credit to the private

### 5.      The financial cycle has been buoyant in the past seven years. Bank credit to the private sector grew by an annual average of 13 percent in real terms.

### Financial cycle and credit growth
- Bank credit to the private sector grew by an annual average of 13 percent in real terms.
- Over the past two years, credit to the private sector in Rwanda increased at a more rapid pace than in any of its peers in the East African region (figure 2).
- Credit growth exceeded nominal GDP growth, lifting credit from 11.8 percent of GDP in 2009 to 19.2 percent in 2016, the second highest in the EAC after Kenya (figure 3).
- The increased role of credit:
  - Will amplify the impact of monetary policy.
  - Raises the stakes for maintaining financial stability.
- Authorities’ response:
  - Adapting and extending the set of macroprudential tools appropriate for Rwanda’s financial landscape, with a view towards implementing a full-fledged macroprudential framework.
  - In the process of creating a Financial Sector Coordination Committee tasked with macroprudential supervision and planning for crisis resolution scenarios.

### Credit deepening and the credit gap
- Composition of bank lending to the private sector:
  - Mortgage, commercial lending, and loans to the hotel sector constitute 68 percent of banks’ loan portfolio with the private sector.
- Data limitations:
  - Lack of historical data on house prices limits identification of potential asset price bubbles.
- Credit gap assessment (figure 4):
  - Despite high nominal credit growth, the credit gap over the past ten years does not show signs of credit-fueled financial exuberance.
  - Even in the buoyant past two years, the credit gap remained below the two-percent threshold that commonly triggers concerns about a developing financial bubble.
  - With recent cooling of regional financial conditions and lower credit growth across the EAC, Rwanda’s credit gap appears to be closing.
  - Credit growth is returning to a long-term structural trajectory characterized by gradual financial deepening.

### Banking sector performance and soundness
- Overall vulnerability risk:
  - Financial sector vulnerability risk appears well-contained and manageable.
  - Overall financial sector rating moved from low to medium during 2016, mainly due to nonperforming loans (NPLs) whose ratio to total credit expanded at a rate faster than 25 percent annually.
- NPL dynamics:
  - The increase in the NPL-to-credit ratio is consistent with the observed softening of the financial cycle; NPLs reflect past periods’ credit growth.
  - BNR notes: “slowdown of economic activities in the first half of 2016... subsequently affected the debt servicing capacity of some borrowers”.
  - Despite the recent increase, Rwanda’s NPL ratio is still the lowest of all EAC countries (table 2b).
- Stress tests and buffers:
  - Since 2016, BNR has used the Cihak model for regular stress testing applying shock scenarios for credit, exchange rate, and liquidity risks.
  - The most recent round of stress-testing found that, even after applying consecutive credit default shocks, the large majority of banks would remain safely above the regulatory minimum (risk-weighted) CAR requirement of 15 percent.
  - The system displayed satisfactory resilience to liquidity and exchange rate shocks.
  - As of March 2017:
    - Capital was well above regulatory requirements.
    - Balance sheet vulnerabilities from liabilities denominated in foreign currency were low.
    - Per BNR’s regulations, each bank’s foreign exchange net open position may not exceed 20 percent of tier 1 core capital; the system’s net exposure stood at -4.4 percent of core capital as of March 2017.
- Selected indicators (from table 2a):
  - NPL ratio (Latest): 7.7
  - NPL ratio change (%, annual) (Latest): 28.6
  - Leverage ratio (%)(Latest): 14.3
  - ROA (Latest): 2.7
  - ROE (Latest): 14.9
  - Deposit-to-loan ratio (Latest): 103.1
  - FX liabilities % (of total liabilities) (Latest): 28.5
  - FX loans % (of total loans) (Latest): 11.5
  - Credit-to-GDP gap (st. dev) (Latest): -2.1
  - Growth of credit / GDP (%, annual) (Latest): -1.7

### Financial inclusion and innovation
- Microfinance and mobile services:
  - Total assets of microfinance institutions almost doubled from end-2013 to 2016, while deposits increased by 65 percent over the same period.
  - Rapid increase in microfinance activities, particularly through Umurenge SACCOs, has driven financial inclusion.
  - 2016 FINSCOPE survey indicates a significant overall increase in financial access of the adult population over the past four years, overwhelmingly on behalf of access to formal financial services (which includes microfinance) (figure 5).
- Mobile financial services diffusion:
  - As of end 2016:
    - More than 9.7 million users had subscribed to mobile payment systems.
    - Nearly one million users had subscribed for mobile banking services.
    - The value of total e-payments rose to more than 30 percent of GDP within five years.
  - Per BNR and regional developments, part of the increase came from improved national communication infrastructure and regional (EAC) harmonization of mobile money transactions.
- Evolution in financial innovation (table 3; selected entries by year):
  - POS Transactions:
    - 2011: Value 6.4 billion; % of GDP 0.2
    - 2016: Value 41.5 billion; % of GDP 0.6
  - Mobile banking:
    - 2011: Value 5.2 billion; % of GDP 0.1
    - 2016: Value 37.2 billion; % of GDP 0.6
  - Internet banking:
    - 2011: Value 0.7 billion; % of GDP 0.0
    - 2016: Value 1,017.1 billion; % of GDP 15.4
  - Mobile payments (transfers and payment services):
    - 2011: Value 51.0 billion; % of GDP 1.3
    - 2016: Value 1,040.5 billion; % of GDP 15.7
  - Total e-payment:
    - 2011: Value 63.4 billion; % of GDP 1.6
    - 2016: Value 2,136.2 billion; % of GDP 32.3
- Alternative finance:
  - University of Cambridge report documented a doubling in value of financial transactions through innovative online funding and lending platforms from 2013 to 2015.
  - Total amount raised in 2015 through such portals: US$4 million (noted as one thousandth of the overall financial system’s assets).
- Regulatory environment:
  - Economist Intelligence Unit’s 2016 Global Microscope ranks Rwanda at the 8th position of all countries.
  - Rwanda improved eight positions within one year, mainly due to capacity building in operating and supervising municipal savings and credit cooperatives.
  - Compared to thirteen surveyed SSA countries, Rwanda was bested only by Tanzania and Kenya and exceeded the regional average in seven out of twelve sub-indicators (figure 7).
- World Bank FINDEX:
  - Rwanda compares well with the EAC in the World Bank’s Financial Inclusion Index; remarkable progress between 2011 and 2014 is noted.

### Financial development and indicators
- IMF Financial Development Index observations:
  - Rwanda’s performance is distinguished by the high quality of its financial institutions but is dragged down by unsophisticated securities markets.
  - The index likely understates Rwanda’s state of financial development because it does not include data on microfinance or mobile financial services; access parameters (number of branches, ATMs) may be misleading in a mobile-first context.
- Time series and regional comparison:
  - The index suggests improvement over the past decade but shows Rwanda lagging other EAC countries due to size and scale limitations of a tiny national securities market (figure 9).
  - A long-term strategy for gradual regional integration of financial markets within the EAC may help overcome size and efficiency issues.

### Conclusions and policy recommendations
- Summary findings:
  - Rwanda’s financial sector has grown significantly over the past decade across all financial institutions, with structural stability and without major signs of financial exuberance or overheating.
  - BNR strengthened supervisory capabilities and adopted best practices for banking sector stress tests and microfinance regulation.
  - Financial system conditions are sustainable; the financial cycle appears to be cooling in a controlled manner.
  - Nonperforming loans are rising and require continued close monitoring.
  - Financial inclusion indicators are improving across multiple data sources and dimensions.
  - Innovations and a favorable regulatory environment are advancing financial inclusion, but measuring these innovations in standard indices remains challenging.
- Policy recommendations and next steps:
  - Continue close monitoring of NPLs and credit quality as the financial cycle cools.
  - Extend existing macroprudential tools and policies to accompany the financial system’s growing importance in Rwanda’s private sector-led growth strategy.
  - Maintain an appropriate balance between stability and consumer protection while encouraging promotion of new financial techniques and technologies.
  - Adopt a general policy stance gently tilted toward gender and income equality to support wider take-up of new financial products.
  - Pursue a strategy of regional integration to mitigate size and scale limitations for securities markets and to enhance financial development.

*International Monetary Fund staff report (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17214.pdf_