Rwanda, 19 Years Later

A look at recent economic progress in Rwanda, which issued its first-ever dollar-denominated bond last week.

Former US President Bill Clinton visits with Rwandan cassava farmers in 2008. Photo by Justin Sullivan/Getty Images.

Investors had plenty to cheer Monday, with yields falling at Italy’s first debt auction under its new government and US consumer spending and incomes growing again in March. But our focus was in far-away Rwanda, which issued its first-ever dollar-denominated bond last week.

The issuance itself was miniscule—a $400 million 10-year note—but the significance is remarkable. In 1994, Rwanda endured a horrific genocide that saw between 800,000 and 1 million people brutally murdered and countless more souls displaced. The humanitarian consequences were immeasurable, and the economic consequences were vast as well. Exports and private investment had already fallen substantially since the late 1980s, but in 1994 real GDP fell nearly 50% to around $823 million (in 2005 USD)—around 1969’s level.

As the country rebuilt, it relied on IMF and World Bank loans. Government spending drove growth as private investment and exports floundered, and real GDP didn’t regain its previous (1992) high until 2000. And that’s about when things began to change. In late 2000, Rwanda agreed to debt relief terms with the IMF and World Bank under their Initiative for Heavily Indebted Poor Countries (HIPC). Among the many conditions, Rwanda agreed to make several structural socioeconomic reforms, including liberalizing the tea trade, modernizing health care, rebuilding and reforming political institutions and providing businesses a stable, predictable regulatory environment. Four and a half years later, the IMF and World Bank decided Rwanda had fulfilled its end of the bargain, saying it had “largely achieved macroeconomic stability and established a good track record of policy implementation.” Debt relief came in 2006 to the tune of $1.2 billion, reducing Rwanda’s debt burden to $486 million, or 15.6% of GDP, and slashing debt service costs by nearly 90%.

Improved public sector finances may be the most obvious benefit of Rwanda’s HIPC participation, but the country gained much more. Enabled by the structural reforms of the early 2000s, trade and private investment skyrocketed, driving gangbusters GDP growth from 2004 on as the government played less of a role. In 2007, private investment surpassed government spending for the first time ever, and the margin has widened since. The government’s made several additional reforms in recent years, making Rwanda the eighth easiest place to start a business globally according to the World Bank. As trade and agriculture flourished, Rwanda became self-sufficient—since 2007, it hasn’t taken any food aid (refugee camps aside). And while grants still provide around 40% of the government’s budget, overall foreign aid has fallen as a percentage of GDP in recent years, as growth begat higher tax revenues and foreign investors piled in. Last week’s bond issue, which was oversubscribed at 8.5 times coverage, might be seen as a culmination of this long recovery process.

However, that doesn’t mean Rwanda’s in perfect shape. It’s come a long way, but it has much further to go. Poverty is widespread. Roughly 80% of the population relies on subsistence farming, and rural areas still face power shortages. Private and intellectual property rights and the rule of law remain weak, as does the political structure. Rwanda is a democracy, but allegations of fraud and voter intimidation marred the 2010 election, when Paul Kagame won a third term. Kagame’s government has been criticized for authoritarian tendencies, including media controls, suppression of free speech and interference in the judicial system. Corruption is a real problem. These are all headwinds against continued growth and emergence from poverty.

Businesses also face headwinds. Credit is easy to access in principle, but private financing is expensive. Additionally, because Rwanda is landlocked and doesn’t have well-developed infrastructure, import and export costs are far higher than the global and regional averages. Modernizing road and rail—even basic improvements, like paving more roads—would likely help the nation capitalize far more on its high coffee and tea production/exports. And perhaps this is where its newfound capital markets presence can help. The proceeds from last week’s bond are already earmarked for a major construction project in Kigali (the capital), a new hydroelectric power plant and expanding Rwandair, the state-owned airline. But strong demand suggests Rwanda could raise more funds for infrastructure buildouts from international investors if it needs to—provided it exercises prudent debt management. To that end, the government plans to reduce its holdings in several state-owned companies over the next two years—the less bloated a government is, the more attractive investors tend to find it.

Time will tell whether Rwanda can seize this momentum and emerge as an African tiger. But the remarkable progress since its darkest days 19 years ago deserves recognition globally—and can perhaps serve as inspiration for nations like Myanmar, only beginning to work their way back from war or repression.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.