Rwanda Faces Tough Options After Aid Cut

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On 15 January 2013 saa 05:17
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The decision by Western countries to suspend aid to Rwanda could have huge ramifications for regional economies. It could also slow down growth in the country once referred to as ‘the new darling of the West’.

In the regional geopolitics of the East African Community integration, Rwanda has been a shining example. It has been opening up its doors to Foreign Direct Investment (FDI) faster than other countries by scrapping laws that are unfriendly to investors.

This has seen people and companies moving to set themselves up in Kigali and other towns in the country.

Now, there is concern that suspension of aid, which has been Rwanda’s main source of foreign currency could lead to shortage of foreign currency thus making it difficult for the country to pay the droves of workers and companies migrating from countries like Kenya, Uganda and Tanzania.

“Rwanda has no significant exports and relies heavily on donor aid for budgetary support. Withdrawal of aid could tilt the equation and stall Rwanda’s emerging status as an emerging economic powerhouse,” says James Shikwati director Inter Region Economic Network (Iren). Rwanda has been on a steady growth path.

It had nearly all the indicators of a robust economy pointing north until last year, when a UN report linked it with the M23 rebel movement fighting in Eastern Congo.

Shikwati says a similar situation triggered Zimbabwe’s downfall in the late 1990s. There are warning that Rwanda, which relies heavily on donor aid could find itself heading downhill if it doesn’t move fast to resolve the situation.

DRC war

“Besides the controversial decision by the Zimbabwean government to seize white-owned farms, it should be remembered that its participation from 1998 to 2002 in the war in the Democratic Republic of the Congo set the stage for the current deterioration. It drained the country of hundreds of millions of dollars,” adds Shikwati.

Over the past few months, key donors including the UK, US, Germany and the Netherlands, have suspended some of their financial aid to Rwanda following accusations by the UN that the government was supporting the M23 rebel group in eastern DRC in violation of UN sanctions.

Close to $70.4 million (Sh6 billion) due in aid has either been postponed or cancelled for the current financial year. This, according to media reports is equivalent to 3.1 per cent of Rwanda’s budget.

But Rwanda has not mellowed down either and its ministers have been hitting back hard at Western countries. “This child-to-parent relationship has to end ... there has to be a minimum respect,” Foreign Minister Louise Mushikiwabo was quoted saying by Reuters. “As long as countries wave cheque books over our heads, we can never be equal.” On August 3, the country’s Finance Minister John Rwangombwa warned that some programmes could be delayed due to the aid cuts.

Rwandan Treasury has been mulling over the best way to plug the hole left by suspension of donor aid with reports indicating it was considering increasing domestic resources and upping the current levels of foreign direct investment.

Kenyan firms

But it is yet to sign currency exchange agreements with countries like Kenya, whose companies that include Kenya Commercial Bank, Equity and Nakumatt supermarkets pioneered the leap of faith into the Rwandan economy.

The lack of official exchange rates with these currencies means Rwanda still has to rely on the US dollar, which might become scarcer if the current impasse over aid persists. Rwanda is now looking east, especially to China for redemption.