KIGALI, January 29, 2014: The Rwanda Economic Update synthesizes recent economic developments and put them in a medium-term context. The lagged effect of the aid shock in the second half of 2012 led to deceleration of growth in 2013. However, macroeconomic stability has been maintained and growth is expected to pick up in 2014.
The first part of the report “Seizing the Opportunities for Growth, with a Special Focus on Harnessing the Demographic Dividend” launched today attributes the drop in growth in the first half of 2013 to the aid shortfall in the second half of 2012. With increased domestic borrowing by the government and tightened monetary conditions, the availability of financial resources mainly for households and private business was reduced. Together with the lower level of public capital spending, the credit slowdown led to contraction of domestic demand, which affected mostly the services sector. Growth in the services sector sharply decelerated to 4.2 percent in the first half of 2013, compared to 11.4 percent in the second half of 2012.
However, according to the report, the contraction of domestic demand was partially offset by higher external demand. Despite declining international prices, exports of traditional goods such as coffee and minerals expanded significantly in the first half of 2013. Recent investments in the mining sector contributed to the sharp increase in mineral exports, which accounted for 40 percent of the total goods exports. “The lagged effect of the aid shock to the economy was extended to the third quarter of 2013 and achieving the 6.6% growth projection in 2013 in the report has become more challenging. However, the Rwandan authorities have a good track record of managing difficult periods. Therefore, we are hopeful that the growth will pick up to the level of its growth potential (around 7.5%) in 2014” said Yoichiro Ishihara, World Bank’s Country Economist for Rwanda.
Harnessing the Demographic Dividend
As one of the most important determinants of Rwanda’s long-term development, the fifth Rwanda Economic Update highlights the recent drop in fertility in Rwanda and estimates the potential impact in terms of long-run economic performance. Between 2005 and 2010, fertility rates dropped by 25%, an evolution that the report attributes to improved female education levels, higher women’s participation in the labor force and an overall increase in household living standards. According to the report, the sharp drop in fertility has the potential to boost long-run economic performance through the effect on the age-structure of the Rwandan population. While the labor force now accounts for 53% of the total population, this share is expected to increase to between 64% and 67% by 2050. A larger labor force is associated with higher income levels, and projections in the Rwanda Economic Update hint at substantial increases in income levels over the coming decades. “To cash in on this population shift, it is imperative to have a conducive policy framework and happy to note that many elements of Rwanda’s current policy framework are conducive to realizing a demographic dividend.” said Carolyn Turk, World Bank Country Manager
To make the most out of the oncoming demographic opportunity, the report highlights the need for further improvements in health and education to foster a skilled and productive labor force, while acknowledging that Rwanda’s record of good governance, solid macroeconomic management and business-friendly environment greatly increases the country’s capacity to reap the demographic dividend.