Rwanda: Adopting austerity measures after cuts in aid

23 Jan

Tuesday, 22 January 2013

Kigali (Rwanda) – Rwanda has frozen the recruitment of civil servants, citing ongoing reforms within the public service sector. The freeze on employment is being seen by many economists as part of the government’s wider austerity measures to tackle its budget deficit, occasioned by aid cuts by major donors.

All public institutions have been asked to suspend hiring of government workers, including support staff. Cases where the recruitment had started, but candidates are yet to be placed in their positions, must also be suspended, according to a memo signed by the Minister for Labour and Public Service, Anastase Murekezi.

The memo does not specify the kind of reforms being undertaken.

The Treasury is struggling to manage its budget after some donors suspended or withdrew aid to Rwanda over allegations that the country is backing the M23 rebels operating in eastern Congo.

In spite of Rwanda’s denial, Germany, UK, the Netherlands and the US announced they were suspending aid.

The accusations also affected an expected dispatch of crucial funds from the African Development Bank (AfDB). The shortfall in donor aid disbursements has prompted the Treasury to postpone spending on some unspecified projects in the agriculture, health, infrastructure and justice sectors.

In the past fiscal year, the government spent Rwf148.1 billion ($234.6 million) on salaries and wages. The wage bill was expected to rise to Rwf181.6 billion ($287.7 million) this fiscal year to cater for the proposed increases in salaries.

However, budget experts predict Treasury could slash expenditure on salaries and wages of civil servants when it presents its supplementary budget to parliament some time this month.
Some civil servants worry the reforms could result in massive retrenchment to reduce the wage bill, and there is uncertainty among business executives over the continued withholding of donor aid, which is hurting business confidence.

Businesses are concerned that if aid is not disbursed within the next few months, the economy could slow down given that the government remains the biggest spender, financing most of the development projects that also benefit the private sector.

In the financial year 2012/2013, the government had planned to increase spending by 16 per cent to Rwf1.3 trillion ($2.3 billion) from Rwf1,1 trillion ($1.9 billion).

“From a business point of view, the trickledown effect on deposits in the banking environment is bound to have an impact. We are already seeing deposit rates going up, which means banks in town are beginning to feel the pressure for deposits,” said Maurice Toroitich, managing director of KCB Rwanda.

“Either the pressure is there or banks are beginning to take a position,” he said, adding that aid suspensions are likely to affect the performance of banks.

Bankers say deposit rates are climbing steadily, signalling a potential liquidity crunch in the near future that could make access to credit very costly, if economic conditions do not improve.

Specifically, deposit rates have sharply risen to 15 -20 per cent from 9.3 per cent in November 2012.

This could lead to higher lending rates to businesses — which, banks fear, if combined with sluggish economic activity could increase default rates, affecting the asset quality of the banks.

While most business executives remain cautiously optimistic — given that Rwanda’s good track record on aid effectiveness could eventually make donors reverse their decision — the impact of the delayed disbursements will definitely be felt in the economy in the coming months.
However, the central bank sought to allay fears of a liquidity crunch, saying the country has enough reserves to counter any shortages.
“We have 4.3 months’ of imports, which gives us room to address any issues,” said Claver Gatete, the Governor of the National Bank of Rwanda, adding that the government is also currently negotiating with donors that could yield positive results.

He said the central bank had tasked banks to diversify their sources of deposits to mitigate risks associated with deposit concentration, which he says could have stressed bank deposits.
“This has been compounded by a small component of aid suspensions,” he said.

The recent decision by the central bank to auction Treasury bills worth Rwf12 billion ($18.7 million) was also seen by economists as a temporary effort to help the government bridge its funding shortfall.

However, the central bank said it aimed to tame inflation and shore up the Rwandan franc, which depreciated by 4.5 per cent against the dollar between January and November last year.
Analysts also say delayed aid disbursements will also force the government to delay some key projects that it had planned to implement in 2012 specifically strategic investments such as the multimillion-dollar Convention Centre and construction of a new airport at Bugesera.

Recently, the International Monetary Fund warned that prolonged aid cuts to Rwanda would hurt government efforts to fight poverty.
The decision is also expected to hurt Rwanda’s economic growth. Growth is projected to reduce by at least 1.5 to 2 percentage points to 6 per cent this fiscal year. Earlier forecasts had put the growth rate at 7.6 per cent.



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