Public DisclosureRwand aAuthorized's Financial Sector AssePublicts, Rw Disclosuref billion Authorized Public Disclosure Authorized Public Disclosure Authorized 2 1 1 , , , 0 5 0 5 0 0 0 0 0 0 0 0 0 2 0 0 6 The Role of a Deeper and More Diversified Financial Sector Financing Development 2 0 June 2015|EditionNo.8 1 3 $41 1960 G D P p e 97842-RW r 2000 C $207 a p i t a 2013 $639 Rwanda Economic Update Financing Development The Role of a Deeper and More Diversified Financial Sector TABLE OF CONTENTS Abbreviations and Acronyms ....................................................................................................................................... i Foreword ........................................................................................................................................................................ ii Overview ........................................................................................................................................................................ iv Part 1: Recent Economic Developments and Prospects ............................................................................................ 1 1.1. Introduction ........................................................................................................................................................ 2 1.2. Real Sector ......................................................................................................................................................... 4 1.3. External Sector ................................................................................................................................................... 8 1.4. Monetary Sector ................................................................................................................................................ 15 1.5. Fiscal Sector ...................................................................................................................................................... 20 1.6. Macroeconomic Policy Direction ...................................................................................................................... 22 1.7. Economic Prospects ........................................................................................................................................... 23 Part 2: Financing Development ................................................................................................................................... 27 2.1. Introduction ....................................................................................................................................................... 28 2.2. Overview of Rwanda’s Saving and Investment ................................................................................................ 28 2.3. Domestic Saving in Rwanda ............................................................................................................................. 30 2.4. Foreign Saving in Rwanda ................................................................................................................................ 34 2.5. Identifying Alternative Financing Sources for Development ............................................................................ 36 2.6. Role of the Financial Sector .............................................................................................................................. 39 Part 3: Financing Development: The Role of a Deeper and more Diversified Financial Sector ........................... 41 3.1. The Role of the Financial Sector in Economic Growth and Financing Development ...................................... 42 3.2. The Financial Sector at the Center of Rwanda’s Development Vision ............................................................. 44 3.3. The Current State of Rwanda’s Financial Sector .............................................................................................. 45 3.4. Opportunities and Challenges for the Financial Sector to Enable a Successful Transition from ODA .......................................................................................................................................................... 55 ANNEX NOTES Annex Note 1: Rwanda’s foreign direct investment - current status and international comparison ............................. 62 Annex Note 2: 2014 tourism sector performance in Rwanda ........................................................................................ 65 Annex Note 3: How fuel pump price is determined in Rwanda .................................................................................... 67 Annex Note 4: Does producer price index lead consumer price index in Rwanda? ..................................................... 69 Annexes Tables ............................................................................................................................................................... 71 FIGURES Figure 0.1: High growth and low income .................................................................................................................... iv Figure 0.2: High public and low private investment .................................................................................................... iv Figure 0.3: Low exports (goods and services, 2009-13 average) ................................................................................ v Figure 0.4: High net ODA inflows (2010-12 average) ................................................................................................. v Figure 0.5: Annual GDP growth recovered in 2014 ..................................................................................................... v Figure 0.6: But, quarterly GDP growth decelerating .................................................................................................... v Figure 0.7: Growth drivers in Q3 2014 decelerated in Q4 (production and expenditure account) .............................. vi Figure 0.8: Real credit growth rate reached the pre-aid decline level (growth rates) ................................................. vi Figure 0.9: Balance of payments deteriorated in 2014 ................................................................................................. vi Figure 0.10: Less expansionary fiscal stance (domestic revenue – expenditures) ......................................................... vii Figure 0.11: Stable CPI inflation rates due to low transportation ................................................................................... vii Figure 0.12: Energy imports fluctuate in price and volume ........................................................................................... vii Figure 0.13: Snapshot of Rwanda’s macroeconomic development ............................................................................... ix Figure 0.14: High public investment relies on foreign saving (in 2010-14) .................................................................. ix Figure 0.15: Large institutional investor base in East Africa ......................................................................................... xiii Figure 1.1: High growth and low income .................................................................................................................... 3 Figure 1.2: Low exports of goods and services ........................................................................................................... 3 Figure 1.3: Real GDP growth rate recovered in 2014 .................................................................................................. 4 Figure 1.4: Q4 growth became below 5 year average ................................................................................................. 5 Figure 1.5: Quarterly growth rate decelerated ............................................................................................................. 5 Figure 1.6: Annual GDP growth rate by sector ............................................................................................................ 5 Figure 1.7: Quarterly GDP growth rate by sector ........................................................................................................ 6 Figure 1.8: Annual GDP growth rate by expenditure .................................................................................................. 6 Figure 1.9: Quarterly GDP growth rate by expenditure .............................................................................................. 6 Figure 1.10: Real GDI was slightly higher than GDP ................................................................................................... 8 Figure 1.11: Deteriorated balance of payments ............................................................................................................. 9 Figure 1.12: 2014 current account ................................................................................................................................. 9 Figure 1.13: Workers’ remittance inflows started to increase in 2010s ......................................................................... 10 Figure 1.14: Budgetary grant aid fell in 2014 ................................................................................................................ 10 Figure 1.15: Commodity prices ..................................................................................................................................... 11 Figure 1.16: Imports