Rwanda is experiencing its best growth performance since independence, accompanied by heralded progress in reducing poverty. However, the stylized facts show that recent growth was led by nontradable services and that the public sector dominates investment, which is primarily financed by foreign grants. Foreign aid has caused the real exchange rate to appreciate, compounding difficulties faced by manufacturing and other tradable economic activities. This study assesses the future growth prospects of Rwanda.
The report first focuses on broad economic growth using a rather aggregated 18-sector dynamic general equilibrium model to display the trade-off between rapid growth and structural change. The analysis shows that with the current investment pattern, rapid growth is possible but structural transformation is slow. With an overvalued exchange rate, growth in the tradable sector slows down and its share in the economy stays small. The importance of agriculture thus should be considered in the broad development strategy, for its role not only in poverty reduction but also in economic growth.
For this reason, this study further develops a 54-sector dynamic computable general equilibrium model with more detail for the agricultural sector. The analysis shows that the agricultural and service sectors are less sensitive than other sectors to foreign inflows and their induced overvaluation of the real exchange rate, due to these two sectors’ stronger linkages with the rest of the economy. This outcome indicates that the domestic market plays a crucial role in stimulating growth in Rwanda, a low-income country in its early stage of development.