Reflections on the Economy of Rwanda: Understanding the Growth of an Economy at War During the Last Thirty Years

By Augustin Ngirabatware

The performance figures achieved by the Rwandan economy for the past three decades demonstrate an exceptional growth in real GDP. They are of real interest for economists because Rwanda has been in a state of almost perpetual war during that time, whether through internal conflict or through international wars conducted directly or through proxies and militias. This book examines the accuracy of these figures and asks why, despite such growth, Rwanda remains a country of marked inequality and poverty.

• Language: English
• Publisher: AuthorHouse UK
• Release date: Jun 16, 2022
• ISBN: 9781665597142

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© 2022 Augustin Ngirabatware. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or

transmitted by any means without the written permission of the author.

Published by AuthorHouse 06/15/2022

ISBN: 978-1-6655-9712-8 (sc)

ISBN: 978-1-6655-9713-5 (hc)

ISBN: 978-1-6655-9714-2 (e)

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this book may have changed since publication and may no longer be valid. The views

expressed in this work are solely those of the author and do not necessarily reflect the

views of the publisher, and the publisher hereby disclaims any responsibility for them.

This book is dedicated to my wife, Félicité Mukademali, for

her encouragement before and during the writing of it.

THANKS

I thank many people who helped in reading this long manuscript as the basis of this book. Thanks to David Hooper, QC, James Jackson, and Chiara Loeiro, who helped to transform my writing style in English into something at least acceptable. I owe deep gratitudeto Professor Emmanuel Hakizimana for the French version.Very special thanks to David Hooper and the Arusha UNDF administration, who offered me the most recent economic statistics.

While I alone assume the responsibility for the contents of this book, to all of those people, I am greatly grateful.

REFLECTIONS ON THE

ECONOMY OF RWANDA

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Understanding the Growth of an Economy

at War during the Last Thirty Years

***

The performance figures achieved by the Rwandan economy for the past three decades, demonstrating an exceptional real GDP growth, are outstanding. They are of real interest for economists because Rwanda has been in a state of almost perpetual war during that time, whether through internal conflict or through international wars conducted directly or through proxies and militias. This book examines the accuracy of these figures and asks why, despite such growth, Rwanda remains a country of marked inequality and poverty?

The author, who formerly chaired the ministerial committee of the Structural Adjustment Program (SAP), starts with the Rwandan economy during the war of 1990-1994. He explains how Rwanda failed to implement the economic policies agreed upon with the IMF and the World Bank, and could keep viable only a very few macroeconomic aggregates, such as the inflation rate. Development in rural areas, which was the focus of the Rwandan authorities, was hampered by the economic demands of the conflict. Military expenditures jumped to 36.7 per cent of total public expenditures in 1991 from an average of less than 10 percent in the eighties. Humanitarian assistance to the huge number of people displaced by the war from Byumba and Ruhengeri presented a further stiff challenge.

The economy of the period prior to 1994 and the years following are discussed. The terrible events of 1994 are beyond the scope of this book. The war, genocide, and massive exodus of people into neighbouring countries left the country in a state of trauma, collapse, and almost total ruin. Hundreds of thousands of Tutsis and Hutus perished in the war, creating subsequent genocide during the years that followed.

The first available statistics recommence in 1995, and the author addresses the period 1995-2019. The study, based on the figures displayed by the incumbent Rwandan authorities and international institutions, puts a particular emphasis on the rates of growth of GDP components and on ratios between them. Vision 2020, the name of the socio-economic policy implemented from 2000 to 2019, is visited. Discrepancies in the economic indicators are found; for example, the balance of payments issued by the central bank are different to those issued by other national or international institutions. Of course, such discrepancies are not peculiar to Rwanda but are universally met by economists. They arise due to different parameters, dates, and the regular adjustments made.

It is quite distinct from the accusation that the Rwandan government rigged the economic data related to the reduction of poverty. Known asguteknika, such rigging would not have been exposed if it had not been revealed by the Oxford Policy Management (OPM), a long-term partner of the National Institute of Statistics of Rwanda (NISR), and a former economic adviser to President Kagame, who identified the manipulation of economic figures in 2015 and 2016. Despite that revelation, the figures displayed by the Rwandan authorities were used, with priority being given to the National Institute of Statistics of Rwanda and the Ministry of Finance and Economic Planning. Actually, as the IMF asserted, the quality of economic data in Rwanda is currently among the best in Sub-Saharan Africa (SSA).

The factors of the growth of GDP were of the greatest interest of the study. One of the determining factors is the personal ability of President Kagame to master the metrics of Official Development Assistance from prominent donors. This is the gain that President Kagame calls himself in colourful language in a video "access to the Table d’honneur."From the beginning, he strove to procure the services of Western public-relations professionals. Very significant budgetary grants from abroad were drawn in and were a decisive factor in the high growth rates of GDP. Nevertheless, the performance rates would have been higher in terms of human development if they had been better oriented.

Tax revenue and nontax revenue are other determining factors of GDP growth, with increasingly high ratios to expenditures and to GDP. There are forty-nine countries worldwide that collect less than 13 per cent of their GDP as tax revenue, and twenty of them are in Sub-Saharan Africa. Rwanda is not among those twenty. Perhaps Rwanda has maintained good ratios thanks to the deepening of the digitalization of the tax administration, notably with the help of the UK’sDepartment for International Development (DIFD).

In fact, while the ratio tax revenue to GDP was only around 11.2 per cent in 2003-2005, it continuously increased to 17.2 per cent in 2018-2019. But it is still low because it depends essentially on taxes on profits and taxes on goods and services, although there is a way to expand eligible taxpayers by including more and more big enterprises. The economic policy granting large fiscal exemptions to companies belonging to Rwandan Patriotic Front (RPF) and its partners is a big challenge for the Rwandan economy.

Another main finding is a kind of intersectoral revolution, which led to the agricultural sector being neglected in terms of public, private, and foreign direct investments. President Kagame promised to focus on the tertiary sector. For two decades, the portion of GDP of agriculture, forests, and fisheries varied between 38.6 per cent in 2004 (maximum) and 28.0 per cent in 2018-2019 (minimum), while the portion of industry varied between 12.6 per cent in 2000 (minimum) and 17.2 per cent in 2019 (maximum).The dominant subsectors from 2000 to 2019 were the manufacturing industry (between 7.5 per cent and 5.9 per cent of GDP), the construction industry (from 4.4 per cent to 7.5 per cent of GDP), and mining and quarrying, which experienced the highest growth rate (from 0.2 per cent of GDP in 2000 to 2.5 per cent in 2019), suggesting there a systemic and systematic plundering of Congolese minerals. Services show the same trend as industry. The problem is, investments directed to service sectors are more risky and are not extensive job creators. Moreover, one cannot pretend to reduce poverty in a country when the rural areas are neglected.

Crystal Ventures is classified as a private sector company, whereas it’s a conglomerate of enterprises belonging in its entirety to RPF; this is a great problem when analysts want to assess the contribution of the private sector in this economic growth. Crystal Ventures is essentially a parastatal organisation.

Since the 1990s, various parastatals have been either wholly or partly sold to the private sector. The government sold viable and unviable firms for next to nothing and then leased back different assets by individuals (particularly the refugees); the receipts raised have built up the equity of the new companies. Private sector activities began in Rwanda through the conglomerate Tristar, which was later converted to Crystal Ventures.

The human dimension of Rwandan economic growth finds that some indicators are low in comparison to the grants received and to some other Sub-Saharan countries. The monetary donations to the Genocide Survivors Assistance Fund (Fonds d’Aide aux Rescapés du Genocide, or FARG), equivalent to 5 per cent of the total public expenditures for almost three decades, are highly discriminatory, are unjustified economically or socially, and run counter to national reconciliation.

CONTENTS

Introduction

Part IWhy Was Rwanda’s Economy in Decline, and What Made It Grow as a War Economy?

Part IIAn Economy at War and in Decline

1. Analysis of the Macroeconomic Situation at the Threshold of the October 1990 War

1.1. Increase in Internal and External Imbalances

1.2. Household Consumption and Nonproductive Government Consumption

1.3. Fall in Productive Investment

1.4. Foreign Trade and Other Elements of the Balance of Payments (BoP)

2. Economic Policy Implemented: An Economic Programme for Stabilization and Recovery in the Midst of War

2.1. Devaluation of the Rwandan Franc and Other Measures to Restore External Balances

2.2. Policies to Support Private Investment

2.3. Public Finance Stabilization, Increase of Tax Revenues, and Public Investments

3. Complete Exit from the Agreed Macroeconomic Framework

3.1. Complete Institutional Dysfunction

3.2. Drop in Gross Domestic Product per Capita and Increase in Prices

3.3. Inability to Support the Private Sector

3.4. Overall Fiscal Deficit Aggravated by Military Spending and Humanitarian Assistance

3.5. Insufficient Support to the Balance of Payments

Part III1995-2019. Growth of an Economy at War

1. Analysis of GDP over a Quarter of a Century

2. The Renaissance of Institutions and Reconstruction of Infrastructure

2.1. The Rehabilitation of Administrative and Financial Institutions and the Physical Productive Apparatus

2.3. Strong-Arm Privatization and Capturing of Private Assets

2.4. Reorientation of International Economic Cooperation

3. Economic Policy Implemented: Vision 2020 and Strategy to Reduce Poverty

3.1. Budgetary Choices of the RPF

3.2. Public Indebtedness

3.3. Investment-Boosting Policies

3.3.1. Public Investments and Private Investments

3.3.2. Foreign Direct Investments

3.3.3. Rwandan Stock Exchange Serving Growth

3.3.4. Crystal Ventures Conglomerate and Public Procurement

3.2.4. New Technologies, MICE, and Tourism

3.4. Monetary Policy for Growth

3.4.1. Exchange Rate Policy

3.4.2. Bank Credit for Growth

3.4.3. Microfinance Proliferation Phenomenon

3.5. Persistent Current Account Deficits

4. Growth Factors of the Rwandan Economy

4.1. Increase of Tax Revenues

4.2. Official Development Assistance and Grants

4.3. Concessional External Public Debt

4.4. Economic Sector Revolutions

4.5. Wars and Plundering of Natural Resources in the DRC

5. Human Dimension of Growth

5.1. Rise in Social Inequalities

5.2. Genocide Survivors Assistance Fund (FARG): A Segregated Human Capital Investment

5.3. Economic Growth Proclaimed and Realities on the Ground of the Reduction of Poverty

List Of Figures

List Of Tables

References

Abbreviations

Tables

INTRODUCTION

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The study of the proposed subject matter in this book began in 2004, after the author wrote on unrelated matters.¹ The journey was completed in 2020,a long period that was, unfortunately, interrupted by other events.² The author seeks, first,to demonstrate the difficulties of macroeconomic management that Rwandan officials faced during the 1990-1994 war. Secondly, the author seeksto scrutinize the high growth figures for gross domestic product (GDP) and other macroeconomic aggregates of Rwanda that have been regularly announced since around 2000, not only by the Rwandan authorities, but also by international institutions. Such high growth figures appeared to run counter to expectations, given that Rwanda has been at war for decades in the neighbouring territory of the Democratic Republic of Congo (DRC), including supplying of war materiel and of combatants, and in a perpetual preparation for war against one neighbour or another. Such demands would normally suggest moderate economic growth in terms of GDP, far lessthan the growth rates of the South-East Asian countries.³

This subject attracts a lot of attention. To understand the economic performance and social progress in a country, Nobel Laureates Amartya Sen⁴ and Joseph Stiglitz and many other economists teach us that we must highlight the limits of GDP and give weight to indicators of well-being, in particular the real income of households and income distribution. This is the justification for the last chapter, devoted to the human dimension of the growth of the Rwandan economy and the realities on the ground.

It is important to stress from the outset that statistics from 1990-1994 were difficult to obtain for my research, which spans three decades. This data was needed from that the institutions in charge of the national economy at that time, in this case the Ministry of Planning and the Ministry of Finance, as well as the National Bank of Rwanda. This was not possible. All the same, some essential primary source documents have been examined, in particular the economic policy framework papers prepared by the government of the Republic of Rwanda in collaboration with the staff of the IMF and World Bank in September 1990, November 1990, June 1992, and December 1993.⁵ Some of the 1993 data is only an estimation, but more data was received from the Ministry of Finance and Economic Planning (MINECOFIN) and the National Institute of Statistics of Rwanda (NISR) and analysed. As for the period 1995-2019, statistics from Rwandan authorities and international financial institutions were used. The author also consulted papers provided by outside sources that differed in their view from those of the Rwandan authorities, such as research papers on African economies, newspaper articles on the economy of East African countries, and publications by the Rwandan opposition).

It would have been useful to have had more information on the simulated models of the Rwandan economy, as well as their parameters and their basic assumptions as used by the NISR, in order to get a more accurate representation of certain macroeconomic aggregates as published. Again, this was not possible. This book will therefore limit itself to interpreting the published results as such, without dwelling on the question, often raised by those who look closely at the figures of the Rwandan economy, of their manipulation, particularly regarding the percentages when it comes to reduction of poverty.⁶ This book confines itself to questions concerning the public policies implemented in view of underlying economic and social problems. It was written with this strictly in mind, without detailing all of the issues with the veracity of information from the authorities in Rwanda.

Moreover, the available statistics for the Rwandan economy after 1994 vary depending on their date, because of the adjustments regularly made by MINECOFIN and NISR. This aspect poses a problem for the analyst, but it is universal and not specific to Rwanda. Indeed, when it comes to the consistency of macroeconomic aggregates, the enormous amount of information required to measure GDP creates unavoidable errors when one has to collect and to compute the figures.⁷ In practice, for this reason, the data relating to the three definitions of GDP is subject to checks for consistency.⁸ Of course, the aggregated data, that is, data meant to reflect the economy as a whole, is never perfectly precise or complete.

Generally, developed economies in terms of size of GDP have better performing health and education services than those of poor economies. This is why, despite the limits of this aggregate for measuring the well-being of populations, we use GDP and study growth and marginally human development. In this study, we will therefore make the GDP of the Rwandan economy the central element by focusingon its classic components of overall expenditure, namely public and private consumption, public and private investment, and the net external balance of goods and services.

However, it must be remembered throughout that GDP, as a sum of values added together, is an imperfect measure of the economic activity of a country, especially a country like Rwanda. Indeed, there are two shortcomings that it is important to point out when using the classic method of GDP of a country:

1.°It only includes transactions actually recorded in the market, so nonmarket activities and those which do not use legal channels are omitted (the problem of the underground economy).

2.°The problem of accurately recording the price of goods and services for the purposes of national accounting of GDP. Depending on the sectors and categories of goods and services, it is often not easy to specify the selling price, or the cost of production, or operating costs, due to the goods in question being difficult to quantify (for example, national education, expenditure incurred for the armed forces, etc.)

In the past in Rwanda, the public accounts department tried to take into account all those problems within the macroeconomic model ofUmuganda, in particular the problem of the underground economy. As the Rwandan informal economy is undergoing significant economic ebbs and flows, its consequences on macroeconomic aggregates are obvious and cannot be ignored by institutions in charge of public accounts. Certainly, the NISR estimates the importance of this using various methods to include these fluctuations within GDP, as per the old forecasting model. However, any solution is only an approximation.

Autonomous consumption is a significant characteristic of a poorly developed economy and is difficult to assess statistically. The Rwandan economy is not an exception to this rule. Bearing this in mind, statistics generated should be treated with caution.

Economists often prefer to think in terms of growth rates rather than the level of GDP. This is why preference will be given to reasoning in terms of growth rates (or comparison rates) rather than in terms of absolute values.

Nor will it be a question of carrying out a comparative study of the macroeconomic aggregates of the two periods under review, namely 1990-1993 and 1995-2019. This task would be both useless and impossible, given the very different sizes of the Rwandan economy and the length of time under review. Those with a particular interest in economic performance comparisons of the Rwandan political regimes since 1962 may wish to watch a video by Mr. Sindayigaya that sheds light on certain economic trends.⁹ The authors of this video indicate that there is a continuous trend in the economic performance of the Rwandan economy, with a crucial period of crisis between 1992 and 1995.

The general idea demonstrated in this book is that in order for a government to besatisfied with the growth of the nominal (and even real) GDP of a country (a goal which it not unique to the Rwandan authorities), one must be moderate with regard to the definition of the macroeconomic aggregate.

There is a saying that GDP growth cannot be eaten(or that it can only feed a small handful of the population). GDP growth is not synonymous with job creation, either.Nor does the significance of a country’s growing GDP necessarily reflect greater well-being on behalf of a large number of a country’s inhabitants.¹⁰

To give a more complete picture, many economic studies go beyond household income and its redistribution at the national level, to add indicators of well-being, such as progress in health and education, redistribution of gender incomes,¹¹ and even the imprisonment rate of residents.¹² It should be noted that Rwanda is setting global records for some of these indicators in one direction or another. Over the years, additional indicators have been added, with the aim of identifying the best dimension of human development in a given country and to give a better meaning to GDP.

The objective of this book is both to fit into the perspective of United Nations Development Program UNDP research and to enrich the discourse on Rwanda, particularly given its history of involvement in conflicts. We needto understand how the Rwandan economy was prepared for war and how it was involved in war and military defence from 1990 to 2019. The overall aim is to understand the effects of war on the Rwandan economy during the last thirty years. The analysis will cover the macroeconomic aggregates of GDP and its three major components: consumption, investments, and the external current account during this period, which seemed calm but was, in fact, a troubled period.

Although unemployment, along with inflation, is one of the two greatest macroeconomic evils, it’s not discussed in this book due to a lack of reliable data in a country with a large underground economy. However, it should be noted that Rwanda and Morocco are the only African countries where the size of the informal sector has decreased in terms of employment over the past ten years.¹³

The first part of the book will explain why it’s appropriate to describe the Rwandan economy a an economy during war over the entire thirty-year period, while the two following parts present the evolution of the main macroeconomic aggregates of the country (GDP, tax revenue, military expenditure, indebtedness, and grants), first during the period of an open war on the national territory (1990-1993), and then during the period of open wars by proxy (1995-2019).

The behaviour of these aggregates will occupy a large part of this book. It was the economic policy framed by Vision 2020 that prompted us to complete this study, in order to determine whether the announced human development goals have been achieved or not. Part III of the book deals with the characteristics of human economic development in general and the segregated human economic development between inhabitants of the same country, in particular considering FARG and other growing social inequalities.

PART I

Why Was Rwanda’s Economy

in Decline, and What Made It

Grow as a War Economy?

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During the period under review, the Rwandan economy was either at war or a war economy (i.e., a supplier of war materiel and combatants, in a state of perpetual preparation for a war against one neighbouring country or another). From October 1, 1990, until July 19, 1994, Rwanda was effectively at war, which was recognized as such. Military operations were taking place on the national territory. From July 1994 until 2020, the country was often formally at war, with military operations being carried out by the APR/RDF¹⁴ in Rwanda against rebel groups or in the Democratic Republic of Congo. In addition, the country was perpetually in preparation for a war, sometimes with Uganda, sometimes with Burundi, and for a very short time with Tanzania, while still continuing to recruit and train combatants, deploy them in the Democratic Republic of Congo, and provide military equipment. Hence the term economy at war.¹⁵

Schematically, it would be appropriate to establish three episodes of wars waged by Rwanda in the Democratic Republic of Congo: from 1996 to 2002, from 2002 to 2012, and from 2013 to 2020. However, the chosen delimitation is not absolutely clear, nor very objective insofar as the criteria may overlap, except for one: the admission by the Rwandan government that its army was operating in the DRC. In other words, for two of those three episodes, there is no controversy over the conduct of wars by the RPA/RDF in the DRC since Rwanda officially admitted to having carried out military operations in the DRC from 1996 to 2002 and during the 2010s at the invitation of the Congolese government.

From 1996 to 2002, the Rwandan government recruited official soldiers to conduct fighting in the DRC. After vehemently denying the facts, in October 2002, it admitted this when it issued an official statement announcing the official withdrawal of its troops from the DRC.¹⁶ In reality, it was only an official announcement, no more and no less, since the wars have not stopped. In December 2002, the US Committee for Refugees accused the Rwandan government of using the repatriation of Congolese refugees as a cover for military transport towards Kivu. On March 17, 2003, the MISNA Agency announced the presence of 20,000 Rwandan soldiers crossing the Congo-Rwanda border and arriving in Rutschuru (north of Goma).¹⁷ During this period, the powers in Kigali created rebel forces which were christened the Alliance of Democratic Forces for the Liberation of Congo (AFDL), Rassemblement Congolais pour la Démocratie (RCD), and the National Congress for the Defense of the People (CNDP), with citizens of Congolese origin placed at the head of both the AFDL and the RCD. This was when Hutu refugee camps in DRC were destroyed, power was seized in Kinshasa by driving out Mobutu, and RPA/RDF soldiers were introduced into the official Congolese army.

This episode is punctuated by wars that have been called the first and the second aggressions into Zaire/DRC by Rwanda.¹⁸ The first assault began on September 22-24, 1996, when there was an exchange of mortar fire between Zairian soldiers and Rwandan soldiers in and around Bukavu city. This included the bombing of refugee camps and forced repatriation carried out at the same time as the mission to overthrow the Mobutu regime. The objectives of the attack (destruction of the camps, killing Hutu refugees in the Congolese forests, overthrowing Mobutu) were later unveiled by the main stakeholder himself, President Paul Kagame, in an interview with the Washington Post on July 9, 1997.¹⁹ Initiated by Rwanda, the second aggression against DRC began on August 2, 1998, with the spectacular attack carried out by the RPA under the command of James Kabarebe, which was attributed by the authorities in Kigali to a previously unknown Congolese rebel group, the RassemblementCongolais pour la Démocratie (RCD). This second aggression was dated by the UN Mapping Report, which studied the most serious violations of human rights and international humanitarian law committed in the territory of the Democratic Republic of Congo, a little differently: August 1998-January 2001.²⁰

The end of these two attacks was marked by the Pretoria Agreement, signed on October 5, 2002, which established the official withdrawal of the Rwandan Patriotic Army from DRC. Meanwhile, in August 1999, March 2000, and May-June 2000, the Rwandan and Ugandan armies fought in Kisangani as the result of a disagreement over the control of mineral resources, coffee, and timber in the northeast of the DRC.²¹

Normally, the end of the rebellions created by Rwanda is marked by the fact that the Rwandan government puts an end to their financial support and ensures the integration of their elements, and therefore Rwandan soldiers, into the highest military and political bodies of power of the DRC. Indeed, we will ultimately find an overrepresentation of Congolese Tutsi in the command structures of the army and the police, in the intelligence services, and in central administration of the DRC.²²

The second episode, between 2002 and 2012, was marked by military operations under the command of two Tutsi-Congolese generals, former Rwandan Patriotic Army (RPA) soldiers, Laurent Nkundabatware and Bosco Ntaganda, and by the Rwandan military operations under the cover of March 23 Movement (M23).²³ Rwanda funded and supported the UPC and its militia in Ituri at this time.

During this period, the Rwandan army continually poured resources into eastern DRC through the military structure led by General Nkundabatware, a Munyamulenge officer in the Congolese army, after having officially moved into the RPA. Despite the official withdrawal in October 2002, Rwanda returned troops a few months later to South Kivu and the province of Ituri.²⁴ It also redeployed them to North Kivu in