2.3 History of Foreign Aid in Rwandan Economy
Rwanda is generally an extremely poor country with few natural
resources and little industrial production. For 1999, Rwandan GDP is estimated
to have been RwF 641.0 billion, or US$ 1.92 million, and RwF 712.2 billion for
2000, or US$ 1.83 million. The real change in Rwandan GDP is estimated by the
Economist Intelligence Unit to have been 5.3% for 1999. In 1999, annual per
capita income was US$ 189. Debt servicing has since 1994 been a major cause for
a balance-ofpayments deficit, but the most recent figures available seem even
more aggravating. (André et al., 2001). In this respect it
follows that this should be supported by foreign aid in order to realise
socio-economic development.
Similarly, based on IMF, World Bank, and national data, the
Economist Intelligence Unit estimates the latest available debt figures as
follows: the total debt had risen to US$ 1.3 billion in 1999, and debt
servicing to US$ 48.2 million, representing 69% of the value of the US$ 70.8
million merchandise exports. Foreign investments account for more than 90% of
total gross fixed investments, and due to the huge inflow of hard currency from
donors, the Rwandan Franc has been reasonably stable despite the low exports.
(Economist Intelligence Unit, 2000). One may observe that, there is a huge
economic and social divide between the countryside and the urban areas.
Economically, as well as seen from a wider developmental point of view, the
urban areas-in particular the capital Kigali - are far better off in all
respects. According to the Economist Intelligence Unit, Kigali is thus
«home to 94% of Rwanda's banks, 96% of its industry, 65% of the civil
service, 80% of the informal sector and 90% of the hotel space. The city also
has the most reliable supplies of water, electricity and telephone lines.»
About 90% of the Rwandan work force is employed in the
agricultural sector, and the productivity in this sector is generally low.
Agricultural production collapsed with the Genocide in 1994 and only started to
recover two years later, although much of the improvement is because more areas
are being cultivated. Also, the south-western part of the country has
experienced drought and famine. Formal and informal unemployment is widespread
all over the country, which is reflected in the fact that an estimated 70% of
the population lives below the poverty line, and the vast majority of this
group are from the countryside. Tea and coffee are the main export items,
comprising 80% of the value of total exports in 2000.
Rwanda earned US$ 68.4 million from exports in 2000, up by US$
7.2 million from 1999, in spite of a drop of nearly US$ 4 million in the value
of its main export, coffee. Tea accounted for this improvement, since tea
exports were US$ 8.5 million higher in 2000 than in 1999 because of increased
production. The commodity export from Rwanda is essentially made up of
agricultural goods and natural resources. The total amount earned is around one
million dollar per year Rwanda is not really integrated into the global
economy. Rwanda earned 219 million US$ in 2002 from export of goods and
nonfactor services. This export revenue only constituted 7.65% of GDP in 2002.
Little hope is in sight in this regard, since Rwanda?s export capacity and
ability to attract foreign investment capital is generally regarded as low and
likely to remain so for at least a decade. However, imports reached US$ 245.9
million in 2000 and thus by far outweighed exports, and the balance of payments
situation has not eased in the last few years (Ibid). The present focus on the
Millennium Development Goals (MDGs) has reignited the debate on the need for
more aid to developing countries to help them meet the MDGs by 2015.
However, this has inevitably rekindled the parallel debate as
to whether more aid is really the answer. Will extra money simply shore up
inefficient governments and feed government corruption? One response to this is
to say we must bypass government and make money available directly to NGOs and
other organizations. At the same time, others claim that what is needed is not
more aid, but a fundamental transformation of international power
relationships, especially reform of international trade and finance rules to
allow African and other developing countries to sell their goods and services
at a fair price.
Private and public transfers, which in 1999 covered 64% of the
current deficit, are also diminishing. As a result, the balance of payment
deficit in 1999 went beyond US$ 100 million for the first time after 1994
power-takeover and the trend is forecast by the IMF to continue. However, net
foreign assistance has been declining and is unlikely to exceed US$ 180 million
in 2001 and US$ 170 million in 2002, according to the Economist Intelligence
Unit, partly due to the Rwandan presence in the Congo and partly due to the
termination of the ?emergency period? following the 1994 Genocide.
2.3.1 Aid Effectiveness in Rwanda
During the last decade there has been a heated debate about
the relationship between economic growth and foreign aid. Knack found that
there was an adverse effect of aid in so far as during the period 1982-95 it
increased corruption and lead to a deterioration of bureaucratic quality and
the rule of law. Aid thus seems to be a weak policy to reduce corruption
(Knack, 2000). So while aid has little impact on governance, governance has a
large impact on the effectiveness of aid.
Aid effectiveness has been seen the return to favour of
programme aid instruments, and particularly the rise of budget support. There
has been a shift from discrete projects to much greater coherence of aid
instruments, whether programme or project, around a government-owned policy.
The Rwandan experience raises a wide range of questions about new?
programme aid and in particular budget support which is inherently tied up with
the concept of recipient ownership and has been the stated preferred aid
mechanism of the GoR for many years. Only a limited number of donors provide
general budget support in Rwanda, namely the IFIs, the European Commission, the
UK and Sweden. (Hayman, 2005)
The majority of bilateral donors continue to favour the
project mechanism, which raises quite different effectiveness issues. The
conditionality of projects is more technical; they induce higher administrative
burdens and are not necessarily tied to GoR priorities. Hence, it is too
simplistic to consider projects to be a poor instrument and budget support a
better one; what matters for both instruments is the behaviour of donors and
how they interact with and respect the GoR as recipient (ibid.). Development
Partners have made strong progress in their efforts to reduce transactions
costs in 2007: The Netherlands is phasing out cooperation in health and social
protection; Sweden and the Netherlands are acting as silent partners in
education; and Germany, the Education for All Fast Track Initiative and the
Netherlands are beginning to disburse sector budget support. However,
development assistance remains highly fragmented with some Development Partners
active in 5 (of 15) sectors and each sector hosting an average of 9 Development
Partners. The health sector, for example, hosts 16 Development Partners and
receives 12% of ODA, while infrastructure has 11 Development Partners (across
energy, transport, and water) but also 12% of ODA. Education, on the other
hand, only receives 5% of ODA and hosts 15 Development Partners, not including
silent partners. (Willium, 2001)
The present Rwanda government seems to be committed to the
reform process, and the government would by this criterion be a good candidate
for aid, (SIDA, 2005). As the Government?s development priorities evolve it
will be important to have an even distribution of donor activity across sectors
and to take full advantage of donor comparative advantage. Comparative
advantage refers to those areas in which a particular Development is activated.
Partner is considered to be most effective in relation to other areas where
that Development Partner is engaged. All these, because there is a need to
accompany the 2008 Paris Declaration Monitoring Survey, as a first-step to
determine where Development Partners are, or could be, most effective.
(MINECOFIN, 2007)
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