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Term limit change could affect economy

IN SUMMARY

·        Fitch Ratings is cautioning that a change in the Constitution could be a liability in the long-term.

·        Donor countries could stop their aid funds over the constitutional amendment. Over 33 per cent of Rwanda’s budget is financed by donors, funding that if stopped could cause economic instability.

Fitch Ratings is predicting risks in Rwanda’s economic outlook despite maintaining its long-term foreign and local currency issuer default ratings at B+ for the second year running.

The debt risk rating organisation said political uncertainty in 2017 is the main risk to economic stability. Rwanda’s parliament is carrying out nation-wide consultations with citizens on a proposed amendment to article 101 of the Constitution to remove presidential term limits.

READ: Rwanda MPs step up efforts to grant Kagame third term

Fitch Ratings is cautioning that a change in the Constitution could be a liability in the long-term. “The amendment would increase political risk in terms of long-term governance and could potentially have an adverse reaction from donors,” said a statement from Fitch Ratings.

Donor countries could stop their aid funds over the constitutional amendment.

Over 33 per cent of Rwanda’s budget is financed by donors, funding that if stopped could cause economic instability.

The economy suffered from an aid cut in 2012 as a result of accusations that Rwanda supported the M23 rebel group, which was fighting the DR Congo government.

As a result of the aid cut, Rwanda’s economic growth declined to 4.6 per cent in 2013 — the lowest in more than five years — from an average of 8 per cent.

The political uncertainty could also weigh on potential foreign direct investment coming into the country as some investors adopt a wait-and-see approach before committing funds to the country.

However, Leonard Rugwabiza, the chief economist at the Ministry of Finance and Economic Planning said there will not be any political instability even after 2017.

“The risks to Rwanda’s economy only have to do with how to improve the quantity and quality of our exports, which will have a big impact to the economic growth of the country,” said Mr Rugwabiza.

The country’s GDP growth reached 7 per cent in 2014 and accelerated to 7.6 per cent in the first quarter of this year, backed by rising agricultural output and a strong performance across most tertiary sectors.

Continued efforts to improve the business environment, along with greater regional integration, should help lock in private investment and sustain the growth momentum.

Fitch expects the economy to expand by 7.3 per cent this year (above the authority’s 6.5 per cent forecast) and GDP growth to remain above 7 per cent in 2016-17. A sharp fall in external demand or commodity prices constitutes a key risk to the outlook. 

Fitch Ratings also recognised that the government continues to put prudent fiscal policies in place to deal with a shift in the structure of foreign aid from grants to loans.

Grants accounted for an estimated 7.2 per cent of GDP in the 2014/15 fiscal year, the lowest level in 11 years.

 

 

EM

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