Home to some of the fastest economic expansion in the world over the last 20 years, Rwanda has achieved an annual average GDP growth rate of 7% over the last two decades. Paul Kagame, who has served as the country’s president since 2000, is broadly considered by analysts and observers both domestically and internationally as the engineer of Rwanda’s notable economic transformation following the end of the genocide in 1994. 

On the demand side, economic growth over the last two decades has been the result of a large public expenditure. Notwithstanding the positive economic transformation this has engendered, it has resulted in several structural challenges for the government. Rwanda’s public-sector-led development model has led to considerable fiscal deficits primarily financed through external borrowing. Debt has risen from 15.6% of GDP in 2012 to 48.9% in 2022. Whilst the national poverty rate declined from 75.2% to 53.5% from 2000 to 2013, this trend has stagnated since, with  56.5% of the population living on less than $1.90 a day.

Capitalising on the opportunities presented by Rwanda’s relatively undeveloped private sector would help to remedy the country’s current economic challenges, and create opportunities for overseas investors and companies. 

Advocacy for private sector-led growth from policy makers

Key policy documents published over the past years and months illustrate the importance the Rwandan government attaches to private sector development to create future economic growth. Engaging the private sector and diversifying sources of finances features as one of the four strategic objectives of the country’s ‘National Investment Policy’ (NIP) published in December 2020 by the Ministry of Finance and Economic Planning. The private sector-led economy envisaged by the NIP is one underpinned by increasing mixed funding through mechanisms such as public-private partnerships (PPPs) and joint ventures (JVs), as well as facilitating export-led growth to improve the country’s balance of payments position and increase foreign exchange earnings. The NIP outlines that whilst PPPs have traditionally been a rare form of financing they are “a suitable step to attract further domestic and foreign investors by efficiently sharing inherent project risks and thereby making investing in the provision of public goods and services more attractive for private partners”.

Equally, Kagame’s flagship national development strategy Rwanda Vision 2050, which was launched by Kagame in 2020, highlights the importance of continuing “the journey towards self-reliance through a private sector-led growth”. As is outlined in the Vision 2050 blueprint, leveraging the country’s demographic dividend, increasing the value of human capital by strengthening the country’s education system, and creating “new growth poles” through urbanisation will serve to increase competitiveness and facilitate the operations of private companies. More recently, Rwanda’s proposed budget for the fiscal year 2024-25, serves as an indicator that the government will opt for a state-driven and proactive approach to encouraging foreign investment during Kagame’s fourth term. As outlined in the proposed budget, the government intends to increase public spending by 11.2% during the fiscal year, with RWF 2,037.4 billion (approximately USD 15.5 billion) to be allocated for both foreign and domestically financed projects.

Structural challenges undermining private sector development 

Despite increasing awareness amongst policymakers of the importance of driving private sector growth, they face several structural barriers to achieving this goal.

Rwanda is confronted with a deficit of skilled workers upon which the government’s vision of private sector growth spurred by innovation and a prospering services sector is contingent upon. The country’s labour market remains characterised by low-skilled, low wage and informal work, with 85% of workers being informally employed as of 2021. Whilst Rwanda’s agriculture sector only makes up 27% of the country’s GDP, it employs 72.2% of the population, primarily in low-skilled and informal positions. Professions such as accountants, lawyers and engineers, on the other hand, are in particular shortfall. Rwanda’s educational framework is in part accountable for the current state of the workforce, with enrolment in tertiary education at 8% for men and 7% for women in 2023. Without access to higher education and specialised training opportunities, workers will be unable to fill the technical and managerial positions that private investment, especially in areas such as services, is dependent on. Investment into the service sector is of particular importance. As Rwanda lacks the natural resources of some of its neighbours, the tertiary sector will underpin future economic growth.

Access to financing solutions and affordable credit constitutes a further obstacle to private sector development. Lending rates are amongst the highest in the region not dipping below 14.16% in the last two decades and banks primarily offer short-term loans with collateral requirements regularly higher than 100% of the loan value. Viable equity financing solutions remain limited for micro, small and medium-sized enterprises (SMMEs). The Rwanda Stock Exchange remains nascent and only constitutes an equity solution for a handful of large companies. Whilst foreign private investors and companies can overcome these issues by leveraging external sources of financing, domestic companies are not presented with the same options, with local SMMEs often lacking the low-cost financing solutions to unlock growth at the early stages of a company’s development. 

Advancing towards a private sector-led economy

There are grounds to believe that Rwanda will be successful in its transition towards a private sector-led economy. Firstly, the transition is already underway. Under Vision 2020, which ran from 2000-2020, a host of reforms were implemented to unlock private investment such as privatisation of state-owned companies and introduction of tax incentives. Between 1996 and 2017, 56 formerly state-owned companies were privatised. Large companies that the Government of Rwanda has sold its stake in through the Rwanda Stock Exchange include: MTN Rwanda - the country’s largest telecommunications company, which was first listed on the RSE in May 2021 - and the Bank of Kigali, which the government sold its 20% stake in through the company’s Initial Public Offering (IPO) in September 2011. Moreover, in February 2021, Rwanda’s Investment Code, which seeks to promote and facilitate investment in Rwanda, was enacted into law. The legislation introduced a wide array of investment incentives, including a preferential corporate tax income rate of 0% offered to any international company that establishes its headquarters and regional offices in Rwanda; invests the equivalent of USD $10 million in the company in tangible and intangible assets; and provides employment and training to Rwandans, amongst other conditions. 

Secondly, Rwanda offers foreign and local companies a favourable regulatory environment and a relatively low and declining levels of corruption and crime. In 2020, Rwanda ranked second highest in Africa on the World Bank’s Ease of Doing Business index, jumping 100 places in two decades. The index ranks countries on how conducive their regulatory environments are for establishing and operating a firm in country. Countries are ranked on several topics including starting a business, registering a property and enforcing contracts. Corruption and crime are also in decline in Rwanda, with the country receiving the lowest score in East Africa on Transparency International’s Corruption Perceptions Index in 2023 and being the second safest country on the continent according to the ENACT Organised Crime Index 2023.

The top-down policy and decision-making structures established by the government have also traditionally shown themselves to facilitate the implementation of economic reforms. International commentators have noted that Western countries provide Rwanda with more aid than other African countries because they deem the country to use it more effectively. These frameworks will likely remain broadly unchanged with Kagame set for at least another five years in office. And we assess that future policies to boost private sector growth will likely be implemented with a similar efficacy. Kagame has committed to improving the economic security of Rwandans and has pledged to transform Rwanda into an upper-middle country before the end of his next term. With 37% of the country’s population under the age 15, Rwanda’s youth will become a powerful voice in the years to come. They represent a valuable driver of growth, however, in the absence of private sector development and integration, they are not likely to be better off than the generations that preceded them.

Despite Rwanda’s traditional reliance on public funds for stimulating economic growth, Kagame has remained persistent in his desire to attract private investment. In recent years, his administration has sought to implement policies, which breaking with the past, are likely to  unlock private sector growth. Coupled with high and sustained levels of growth and other progress made under Vision 2020, such as infrastructure developments, a more central role for the private sector within Rwanda’s growth strategy will likely present untapped opportunities for overseas investors and businesses in the years to come, particularly in Rwanda’s fastest growing tertiary sectors such as financial services, IT and hospitality.