Failure of Rwanda trade policy

By The Rwandan Economist

Introduction

Rwanda has decided that having an open liberalised economy is a pre-condition for its economic growth. The trade policy therefore, does not look at reviewing alternatives to Rwanda’s commitment to liberalisation, but rather at establishing the right strategies to ensure that Rwanda benefits fully from liberalisation, and to ensure that the potential negative effects are mitigated. Rwanda’s major economic challenges and constraints in trade of both goods and services are largely manifested in the supply-side constraints and less in the demand side, and on market constraints, in particular in regards to goods trade. These constraints mainly comprise “the productive resources, entrepreneurial capacities and production linkages which together determine the capacity of a country to produce goods and services. These productive capacities develop through capital accumulation, technological progress, and structural change. Trade liberalization alone, as past experience has shown especially for LDCs, is not enough to help trade and economic growth. Accumulation of resources, including labour, human capital, physical capital, land and natural resources; improvements in the technologies for converting those resources into goods and services; investments in efficient public infrastructure; and the innovation of new goods and services are extremely important complementary economic development factors that need to be coherently developed in order to make trade an effective engine for economic development and poverty reduction. The fundamentals for long-term growth are human resources, physical infrastructure, macroeconomic measures and the rule of law. The role of trade policy in economic growth is largely auxiliary and of an enabling nature: extremes of export taxation and import restrictions can surely suffocate nascent economic activity, but an open trade regime will not on its own set an economy on a sustained growth path. Too much focus on “outward orientation” and “openness” can even be counterproductive if it diverts policymakers‟ attention away from the fundamentals listed above and treats trade rather than per capita income as a yardstick of success. As a result of this analysis, the Rwanda trade policy emphasises the need to address the critical supply side constraints hindering Rwanda‟s trade growth. It reinforces the need to have a trade policy. focusing on the fundamental issues critical to Rwanda’s trade performance without ignoring the traditional issues of market access. Rather than outlining competing alternatives, the trade policy identifies complementary initiatives to address the constraints identified in the analysis above. It is important, however, to note that Rwanda’s trade policy commits to maintaining Rwanda’s openness with its key trading partners including its regional partners in the EAC and COMESA, with its commitment to the African economic integration agenda; its bilateral partners such as the EC as well as the multilateral stage with its WTO commitments. Rwanda also commits to developing further market access opportunities with emerging economies such as China, India and Brazil. 

I.Internal trade issues 

For the Trade Policy to be complete, it needs to also address internal trade issues. One of the important functions of Government is to create an enabling environment in which enterprises operate. Clear policies and legislation have to be put in place to foster a competitive, liberalised environment for business enterprises, thereby increasing efficiency in the economy to the ultimate benefit of both consumers and producers. Rwandan internal trade policy environment is addressed primarily by three separate but complementary policies. These are the Competition and Consumer Protection Policy (2010), the Rwanda Industrial Policy and Master Plan (2010) and the Rwanda SME Policy and Strategy (2010), each addressing a crucial but separate element of the areas that make up the internal trade environment. The trade policy does not attempt to duplicate the policy directions articulated in these documents but rather seeks to complement them particularly with regards to the initiative affecting internal trade issues in Rwanda. As economies move progressively towards increased liberalisation, certain undesirable business practices can emerge which act as a hindrance to development and economic growth. The absence of a competition and consumer protection policy in Rwanda has created opportunities for some sectors of the business community to engage in unfair business practices, such as price fixing, speculative hoarding and collusive tendering. The Rwanda Competition and Consumer Protection policy aims to promote fair competition; its purpose is not to condemn or penalise those industries in Rwanda that have large shares of the market. Large and strong companies can enjoy economies of scale that enable them to minimise costs and withstand both domestic and foreign competition. On the other hand, such firms can occasionally practice anti-competitive behaviour. It is important to ensure that consumers are adequately protected from firms, whether large or small, which engage in collusion that is designed to prevent competition. Competition policy is complementary to trade liberalisation. The consumer welfare and developmental benefits resulting from trade and investment liberalisation, in the absence of the appropriate competition rules and supporting institutional infrastructure, have been questioned in the light of the experiences of many developing countries. The potential benefits of a shift towards a more market-oriented economy will not be realised unless business firms are prevented from imposing restrictions on competition. In the light of Rwandan commitment to a liberalised economy, there is a need for a fair and equitable environment where producer and consumer can maximise their profit and satisfaction respectively. The Rwanda Competition and Consumer Protection policy therefore aims to give Rwandan market-oriented policies the best possible chance of success. Rwandan Industrial Policy and Master Plan can be defined as the set of all policies that promote the diversification of the economy into higher value-added sectors and generate new areas of comparative advantage. The Rwandan Small and Medium Enterprise (SME) Policy and Strategy is designed to complement a set of existing policies/strategies that aim to increase non-farm employment, develop business and technical skills in the Rwandan workforce, support value-added sectors in the Rwandan economy, strengthen the financial sector, and facilitate investment finance to generate industrial growth. All these are supporting policies to the SME policy, the unifying factor being their impact on Rwandan competitiveness. These three policies address the internal trade policy issues in Rwanda. They deal with the policy measures necessary to ensure the efficient functioning of the Rwandan market as well as the protection of consumer. They also address the policy issues necessary to create an enabling environment for Rwandan businesses, particularly the SMEs to prosper and thrive.

II.Trade constraints in Rwanda 

A Diagnostic Trade Integration Study was conducted for Rwanda under the Integrated Framework program in November 2005. The study identified key barriers and constraints to RwandaN trade growth. The Rwanda DTIS was updated in December 2009. The DTIS identified the following constraints to the growth of trade in Rwanda.

 1) Infrastructure 

The DTIS identified weaknesses in infrastructure as a key constraint to the growth of trade in Rwanda. Two aspects of infrastructure are particularly important for Rwanda, namely energy and transport. Sufficient supply and efficient use of energy are important factors for economic development. However, the energy situation in Rwanda is not sufficient for its development: per capita energy consumption is very low and people rely heavily on fuelwood which accounts for over 80 per cent of the energy supply. Moreover, energy resources are limited and dependency on imported energy such as petroleum products is rising. Thus, it is crucial for Rwanda to aggressively pursue a secure stable supply of energy. Rwanda’s electricity cost at $0.24/Kwh is the highest in the region and more than double that of Kenya. Ultimately, this negatively affects the competitiveness of Rwandan exports and impedes Rwandan manufacturing businesses‟ ability to compete with imported manufactured products from the likes of Kenya. With its mountainous terrain and associated rainfall erosion, severe constraints have been placed on the country’s road network – for which the maintenance cost is twice higher than that of most Sub-Saharan countries. The country’s road network of 14,000 km, spread over barely 27,000 square km of national territory, is among the densest in Sub-Sahara Africa, and far exceeds its human and financial capabilities. Recent sector surveys have found that 45 per cent of Rwanda’s paved national road network in 2008 was in good condition, while around 10 per cent of earth national roads and 10 per cent of district roads were in good condition. Roads are therefore a heavy constraint on trade and commerce within Rwanda.

2) Trading across borders

 Being a landlocked country 1,740 km from the Port of Mombasa and 1,480 km from Dar es Salaam, Rwanda transport costs represent as high as 40 per cent of export and import values. Furthermore, there are additional costs to trade across Rwanda Northern and Central Corridors, which are avoidable. These non-tariff barriers (NTBs) include the weighbridges and corruption found on the transport corridors. Bureaucracy at border-posts and at the ports used by Rwandan traders are also a constraint bringing additional costs and delaying the speed and turnover of trade. 

3) The business environment Paying taxes: 

Businesses believe that the system is difficult to understand. This forces businesses to hire additional staff which increases costs. As a consequence, numerous businesses and banks complain that tax liabilities are uncertain because it is difficult to predict what will be allowed or disallowed. This raises business risks, which in turn raises the risk premium charged by banks. Moreover, inappropriate tax assessments raise the costs of paying taxes, through both higher tax liabilities and the added cost of protesting the assessment. There is also a perception that tax administration does not offer incentives for businesses, especially SMEs, to pay taxes and recent studies cite tax as a significant hindrance to operating in Rwanda. 

4) Human resources

 The DTIS found that the recruitment and training of sufficiently skilled staff is seen as a major difficulty by Rwandan businesses. An adequate technical and vocational education and training (TVET) sector is crucial to overcome this difficulty and ensure that a wide range of skilled technicians and professionals are available.

 5) Limited value addition of existing exports

 Rwanda is heavily reliant on its traditional export sectors of tea and coffee, as well as the more recent growth industry of minerals. Together these consistently constitute around 90 per cent of exports7 . These sectors face volatile international prices particularly coffee and minerals exports, which can lead to sharp variations in the export receipts of the country, leading to an unstable balance of payments position. Other existing exports with much smaller shares include hides and skins, horticulture including pyrethrum, as well as handcrafts. A much larger sector in services attracting huge revenues of foreign currency is the Rwandan tourism sector. International markets for most of Rwanda‟s existing exports are very large and have complex chains of added value. In these international value chains, with the exception of tourism, Rwandan production is firmly towards the bottom end. Higher value added in these sectors – for instance the roasting of coffee, or the production of leather and leather goods as opposed to exporting raw hides and skins – offers the strongest potential for Rwanda to increase its role in global trade. However, at present, Rwanda’s existing export industries face a number of constraints to value addition. These include those faced by other firms (skills, finance etc.), but also challenges specific to them. For example, in the tea sector, policy has been driven by the privatisation of tea estates and factories, in order to promote efficiency. In horticulture, cold storage was a key component of the first DTIS (2005), and is now in operation, although producers still face challenges in transporting their goods from Rwandan farms to Kigali.

6) Limited diversification of exports

 As stated above, Rwanda is still over-reliant on a limited export basket dominated by low value added commodities. Diversification of the export base is therefore required. Furthermore, with over $1 billion of imports, there are a number of industries in which it would be beneficial if Rwandan firms could compete . Entering into new export markets is a process fraught with market failures – for example a firm entering a new market takes on risks and if successful, would see the benefits accrue to other firms, hence the firm may refrain from entering the new market, hurting the Rwandan economy as a whole. There is therefore a role for Government and policy action to encourage experimentation in new markets for goods and services. RDB has undertaken work to identify clusters that have the best chance of becoming new and lucrative export markets for Rwanda. Each of these markets faces a specific set of challenges and constraints to overcome if they are to succeed. Sectors to target include business process outsourcing (BPO), specialised tourism, mining services, processed fruit and vegetables, silk textiles and dairy. Furthermore, other work by the President’s Office has suggested the promotion of the pharmaceuticals, metals and bio-plastic sectors. All selected sectors will require support and capacity building in the short to medium-term to maximise the chances of success. 

7) Lack of investment in productive sectors

 Like many developing countries, Rwandan banks and other financial institutions do not lend at levels that meet the demands of the commercial sector. Lending is constrained by costs and risks arising from five factors: high reserve requirements, defective legal and regulatory environments, crowding out by government bonds, asymmetrical information, and inadequate skills for assessing and managing risk. Many steps are underway to address these issues, including the improvement of lending-related laws, strengthening of court enforcement systems, and creation of credit information resources. At the same time, issues such as

Conclusion

From the analysis of the Rwanda Trade Map Report 2008 and the Rwanda Trade Atlas 2010, it is established that the main constraints relating to internal trade can be grouped into four main categories: ï Challenges relating to trade infrastructure – namely, trade centres, markets, and storage facilities. Trade facilities outside of the large urban areas in Rwanda are largely underdeveloped. As such, there are high barriers as well as higher costs associated with trade in certain areas of the country. 

– Wide spread Anti-Competitive Behaviour by businesses – Because of the absence of an effective Competition and Consumer protection policy and law in the past, traders and business have used this opportunity to practice anti competitive activities. This has further exacerbated the market inefficiencies in Rwanda particularly for certain key products and services. 

-Market Information Gaps –There is the absence of an effective market information system in Rwanda. This has contributed to part of the challenges and troubles encountered within the general internal trade system in Rwanda. 

– Lack of structured forms of organising large scale trade: Despite the enactment of the Companies Act and the Cooperative Law, there is still sizeable amount of informality, cooperative societies and several sole-proprietorship companies are still showing signs of weaknesses in corporate governance, and there is virtually limited capacity for traders to organise for bulk purchase.