3.2 Importance of ODA on Rwanda’s GDP and domestic Fiscal Revenue after 1994
Domestic Resource Mobilization (DRM) is the ability by governments to generate revenue within their territories, which become the resources for allocation to public goods and services. In this study, I am concerned with the government’s ability to
collect domestic resources for fiscal purposes in relation to ODA from bilateral, multilateral and multilateral institutional sources. The government carries out DRM through tax and nontax sources, domestic borrowing such as issuance of bonds and other forms of public revenue generation.
Figure 2: Rwanda - Total Net ODA Disbursements (in US$M) Source: OECD/DAC Database
DRM is important to Rwanda and other developing countries because; it forms the source of sustainable financing for development and is the cornerstone of governance especially through provision of public goods and services. DRM helps in strengthening fiscal institutions for stable collection of revenue that facilitate long term planning which to ensure that resources are allocated to priority sectors and that outcomes are in line with plans and goals. DRM that is accompanied by sustained economic growth may work as an antidote to the effects of aid dependency and allows countries to have an increased sense of ownership and the policy independency to implement programmes that reflect their development priorities. DRM also ensures accountability on part governments in provision of goods and services to those governed.
Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 Table 1: Rwanda’s domestic fiscal revenue, grants as percentages of GDP and domestic
total revenue collected for the period 1995-2003 (Source: BNR Annual Report, 2003).
One of the biggest challenges that faced the government of Rwanda in 1994 in its reconstruction efforts was that there was no economy to tax. The inability to mobilize domestic fiscal revenues was not only because the economy had been destroyed but there were no skilled people to manage the tax department because former employees had been murdered or in exile. The economy which had been severely destroyed however regained and was growing by 80% for the period 1994 and 1998.
Figure 3: Rwanda’s Foreign Aid (including Grants and Loans), foreign loans and net ODA (Source: Ezemeneri et al, 2008)
Rwanda was able to increase its domestic fiscal revenue at a time its ODA was at its highest compared to the GDP because in part it was able to receive support to build its institutions and capacity. The ODA in form of technical and monetary support was used to train employees and build systems that allowed the country to increasingly
surpass its revenue targets. One of the first steps the government undertook was to set up the Rwanda Revenue Authority which was later supported by the British Department For International Development (DFID).
Figure 4: Comparison between Nominal GDP growth and Revenue growth 1998-2004 (RRA Report 2004 pp12)
Ezemenari et al (2008) after their study reported that, “The result was that government revenue, estimated at about 13 percent of GDP in 1992, and which had fallen to below 4 percent in 1994, began to increase gradually to reach an average of around 10 percent per annum between 1996 and 2001. By 2002, revenues stood at 12.2 percent of GDP, reflecting the increase in the VAT rate from 15 to 18 percent, and the substantial strengthening of revenue administration. Revenue as a share of GDP rose further in the following years and is now just under 15 percent.”
Figure 5: Rwanda’s real growth compared to East African Community and Sub-Sharan Africa (SSA) % (Source: World Bank, April 2011)
Owens (Tax Justice Focus) summarized the ODA support to Rwanda Revenue Authority thus, “The Governance Dimension in Rwanda DFID’s support to the Rwandan Revenue Authority (RRA) has resulted in a significant increase in domestic revenue (from 9% of GDP in 1998 to 14.7% in 2005). Costs of collection have also been reduced. This success is the result of strengthening internal organisational structures and processes and of building accountable relationships with external partners, such as central and local government, a growing tax profession and taxpayers themselves. The RRA now plays an important role in strengthening relationships between citizens and the state, helping to build a [social contract] based on trust and co-operation”.
Table 2: Composition of Rwanda’s GDP and tax revenue growth in billions RwF (RRA 2006)
As Gurría (2009 pp15) points out, “On a more positive note, the Rwandan Revenue Authority, with strong international support, carried out changes to strengthen internal organisational structures and training, as well as improve relationships with local government. The result was a sharp increase in domestic revenue from 9% of GDP in 1998 to nearly 15% in 2005.” Indeed the increase was both in both volume and percentage of GDP as shown above.
Table 3: Rwanda’s economic growth compared to some African countries in percentages (BNR 2003)
Rwanda tax policy from a macroeconomic point aimed at raising domestic fiscal revenues, measured by tax/GDP ratios. RRA had as one of its objective to raise the 2009/2010 tax/GDP ratio from 14 % to 15% of GDP, an increase from 9.2 % of GDP in 1996. Indeed since 1995, RRA has surpassed its targeted revenue collection as shown in the table below.
As Addison et al (2006) report, “There is also a balance to be struck in mobilizing more revenue and doing so in ways that do not discourage innovation, and growth through punitive tax rates. Therefore while countries take action to broaden the existing narrow tax base, aid inflows must continue at high levels and, indeed, donors need to step up aid if governments are to meet the ambitious Millennium Development Goals.”
Table 4: Tax gap and tax effort for selected EAC countries and South Africa for selected years,
(Ezemenari et al 2008 pp44)
The support to Rwanda’s tax body, partly from ODA, has enabled it to compare favourably with other countries in the region, their history and resources notwithstanding. At a time when ODA accounted for half of Rwanda’s fiscal revenue, it is inconceivable, that the country would have had the resources and other means to achieve continued success.
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Fiscal revenue
Fiscal year
Comparison of fiscal revenue performance against targets (figures in billion Rwf)
Target Actual
Figure 6: Comparison of RRA performance against targets figures in billions RwF (RRA2008, Pp9). See table below.
Table 5: Rwanda Actual revenue performance compared to targets 1998-2005 in billions (RRA 2008)
From the discussion above, in accordance with the stated Hypothesis, ODA has a positive impact on domestic revenue mobilization. From the evidence, the ODA as a percentage of GDP and the achievements, there is a very strong positive relationship between ODA and the domestic fiscal revenue generation by Rwanda as a recipient.
Figure 7: Comparison of Rwanda and other African countries’ Tax revenues as percentage of GDP 2010 (Pezzini 2011).
It is important to note that out of the total ODA extended to many aid recipient countries the fraction of it going to tax administration is smaller. It is reported that, “of the US$7.1 billion spent in 2005 on bilateral aid for government administration, economic policy and public sector financial management, only 1.7% was directed at tax-related assistance” (Pretoria Communiqué, 2008).
No one should over look the importance of leadership in Rwanda’s utilization of ODA and attempts to improve the economy of the country. President Kagame’s anti-corruption stand is exemplified by the fact that prior to the elections in 2010 two cabinet ministers from his own party, three Directors Generals and other high ranking
government officials were in prison on corruption related charges. The fact that there are low levels of corruption is a result of empowering institutions like the Ombudsman, Auditor General, the Police, Prosecution office and the Judiciary which investigate and prosecute corruption related cases which were empowered to carry out their duties which may not be the case in other countries where politics and public administration are intertwined.
Rwanda government has made improvements in many sectors governance with decentralization and built institution to fight corruption which has increased its nationals’ confidence in the authority for example; in a study by Transparency International in 2011, it was reported that, “the likelihood of encountering bribe demand occurrences is 3.9%, the prevalence of bribery is 2.15% and the impact of bribery on service delivery is 1.98%, while more than 80% of Rwandans have neither encountered nor witnessed corruption”. Indeed Rwanda was ranked at world No. 66 in world rankings ahead of Italy and Brazil according to Transparency International (2010) corruption indices. The globally recognized Transparency International’s Corruption Perception Index (CPI) and East African Bribery Index (EABI) have in the recent past revealed that Rwanda is the best performing country in the East African region and is ranked 9th in the African continent when it comes to corruption control.
Figure 8: Rwanda - Total Net ODA as a Percentage of GNI (OECD/DAC Database) Tax policies in Rwanda did not only increase domestic revenue in terms of volumes and as a percentage of GDP, the efficiency and effectiveness of Rwanda Revenue authority increased thanks in part to ODA through technical and advisory support. Rwanda may have attained the tax mobilization the country did; but no one can doubt that the time would have been longer and the achievements less without ODA particularly in the crucial area of personnel training and capacity building. RRA continually surpassed its revenue target as shown in graph above and table below. The support of ODA in the performance of GDP and revenue mobilization cannot be overemphasized.
Table 6: Rwanda Tax administration costs and cost as percentage of total taxes (Emezenari et al, 2008)
The importance of ODA on the capacity building of RRA as the national tax body in Rwanda is best captured in the study carried out by Land (2004) who reported that,
“ Without DFID support, it would not have been possible to finance a substantial part of the organisational development process that the RRA has undertaken. Whilst the organisation's running costs have been met from the state budget, it did not have adequate means to invest in its own organisational development, whether in terms of covering the costs of training, bursaries, hiring experts or purchasing equipment. By providing all of these inputs in a timely and flexible manner, DFID has considerably accelerated the pace of change within the RRA”.
Table 7: Increase of registered tax payers in Rwanda for selected years (RRA Report)
The support extended to RRA has allowed it not only to collect more revenue but improve its efficiency and relationship with tax payers thereby improving its long term relationship with nationals and build its capacity to serve its core mission (see table below). Since its inception, RRA has surpassed it annual targets every year and its efficiency has improved over the period of its existence.
Figure 9: Collection costs as a percentage of collected tax revenues for some countries (Stijns, 2011)
From the above, there is a strong case that ODA helps recipient countries to strengthen their capacity to collect and increase their domestic revenues as was the case in Rwanda. There is no doubt that RRA might have attained some of the results it did, but the duration, achievements and pace may have been different without ODA which supported the institution and the country in general.
Figure 10: Comparison of some African economies’ actual against potential tax revenue (Stijns)
Tax effort “is an index measure of how well a country is doing in terms of tax collection, relative to what could be reasonably expected given its economic potential.
It is a ratio that, by construction, is always positive. Tax effort is calculated by dividing its actual tax share by an estimate of how much tax the country should be able to collect given the structural characteristics of its economy”3.This calls for a delicate balance between increased tax volumes and optimal rates that do not distort the opportunities to economic agents for example higher tax rates may drive some agents
3 Source: African Outlook available at http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid-2010/the-state-of-public-resource-mobilisation-in-africa/tax-effort/
out of business. Countries that are naturally endowed with natural resources such as oil may apply less than optimal effort compared to those without resources as shown in the graph above.
Figure 11: Rwanda fiscal operations 1995-2003 in RWF billions (source: BNR 2003) The country in an effort to overcome “its small market status” joined together with Uganda, Tanzania, Kenya and Burundi in the East African Community (EAC) creating a common market of 150 million people with a stated object of forming a political federation. The country has also won international recognition in several areas for example its efforts to finding better living conditions for its citizens was awarded with
“what is currently the most prestigious human settlements accolade in the world - the Habitat Scroll of Honour Award” (RDB, March 2011). Rwanda has also protected its
environment and was the first country in the region to put in place stringent environmental policies as Leahy (September, 2011) reported, “Government policies are seldom lauded, yet Rwanda's forest policy has resulted in a 37-percent increase in forest cover on a continent better known for deforestation and desertification…
Rwanda's National Forest Policy has also resulted in reduced erosion, improved local water supplies and livelihoods… Rwanda was the winner of the prestigious Future
Table 8: Release time of goods from Customs (RRA report 2009-2010)
Rwanda embarked on a drive to make tourism as a major economic factor and source of income for the country. For several years after the 1994 genocide tourism in Rwanda remained a distant possibility with little interest from tourists and security concerns over instability caused by former government soldiers and killers who raided the country from neighbouring Zaire later renamed Democratic Republic of Congo (DRC).
Rwanda was declared “the only country to take away the Best African Exhibitor award for the fourth time in a row at the world’s premier tourism trade fair, Internationale Tourismus Börse (ITB-Berlin) 2010” (The Rwanda Focus, 2010). From merely 417 tourists in 1999, Rwanda hosted 666,000 tourists in 2010, a 10% over the previous year, generating 200 million USD compared to 175 Million generated the previous year.
Rwanda was ranked one of the top 5 emerging destinations by the 2011 Wanderlust Travel Awards committee. As a sign of improving tourism, the industry earned Rwf 33
billion (US$56 million) in revenues in the 1st quarter of 2011, compared to the same period the previous year when US$43 million was realized. 201,088 visitors visited the country during the same period representing an increase of 32 % (Daily Monitor online, 2011).
Figure 12: Rwanda Tourism revenue (US$ million), 1992-2008 (Nielsen and Spenceley April 2010)
According to the World Bank’s ‘Doing Business 2010’, “the small East African country reformed in 7 areas propelling its rankings an unprecedented 76 places from 143 in the Doing Business 2009 survey to 67 out of the 183 countries surveyed.”
Rwanda emerged among the top performing countries on the competitiveness index for the year 2011-2012 for the second year in a row according to the World Economic Forum (WEF) in which the country emerged third in Africa behind Mauritius and
South Africa jumping ten positions from number 80 in the 2010-2011 to 70 in the 2011-2012 overall world rankings.
As a result, the country’s dependence on, “Aid as a percentage of government spending dropped from 85% in 2000 to 45% in 2010”according to ACTIONAID citing reforms such as the country’s tax administration that improved and was able to quadruple the country’s own taxes between 1998 and 2006 (ACTIONAID, 2011). RDB reported that in the year 2010, “105 Investment projects were registered and will generate 381M US$ in 2010 of which FDI is estimated at 173M US$, while local investments are estimated at 208M US$. These will create 12,736 jobs”.
In its Doing Business Report 2011, the World Bank commended Rwanda for easing the doing business environment, “The 10 economies that made the largest strides in making their regulatory environment more favorable to business are Georgia, Rwanda, Belarus, Burkina … In 2005 starting a business in Rwanda took 9 procedures and cost 223% of income per capita. Today entrepreneurs can register a new business in 3 days, paying official fees that amount to 8.9% of income per capita. More than 3,000 entrepreneurs took advantage of the efficient process in 2008, up from an average of 700 annually in previous years. Registering property in 2005 took more than a year (371 days), and the transfer fees amounted to 9.8% of the property value. Today the process takes 2 days and costs 0.4% of the value”. In an interview ‘Narrow Minds’, reported that, “Rwanda is now one of Africa’s major success stories and is growing in leaps and bounds. The government has shown it is serious and determined about rebuilding its economy …Who does not want to be associated with success”?
Figure 13: Annual TFP growth rate (%) in Rwanda, 1960-2003 (Kalamogo et al, 2008)
Rwanda’s case may be different because of its history and leadership; in fact the country has defied many predictions and studies. As an example, Knack (World Bank) reported that, “Analyses of cross-country data in this paper provide evidence that higher aid levels erode the quality of governance, as measured by indexes of bureaucratic quality, corruption, and the rule of law” and yet Rwanda with high levels of ODA as a percentage of fiscal budget, Rwanda is the first country where women outnumber men in parliament with 56% members of Parliament (BBC 2008).
Moreover under the provisions of the constitution, a 30% quota in all government appointments and positions are reserved for women; 92% of the population of Rwanda have medical insurance (McNail 2010) while the budgetary allocation to health services particularly in the utilization of ICT and Telemedicine as a proportion of total budget is relatively higher given the country’s resources, for example, it was reported that Rwanda had invested $2 million in telemedicine.
Figure 14: Rwanda’s GDP growth from 1980-2011
(http://www.economywatch.com/economic-statistics/country/Rwanda)/
Cunningham (IPS 2007) reported that the country’s “current ICT sector budget is on par with nations of the Organisation of Economic Cooperation and Development (OECD), a grouping of 30 rich nations, at 1.6 percent, far above the African average…
One billion dollars was committed in 2006… to building nationwide tele-centres with Internet and telephone access points, allowing for increased connectivity and mobility in rural areas.”
Dr Anna Thomas, ActionAid’s Head of Economic & Social Development, put it better,
"Not all aid is the same. Real aid is effective and has few strings attached. It puts developing countries where they should be - in the driving seat of their own development. It makes governments answerable to their own citizens, rather than to the donors. And real aid can help countries do things like raising tax revenues more
effectively, so they can generate more of their own funds for development” (Real aid Report).
The Rwanda freedom indices shown below may be normal or even average by some countries’ standards; however to many social, political and economic observers of Rwanda, they represent a major transformation for a country that was devastated by civil war, genocide and years of dictatorships. As Amartya (1999) argues, “If freedom is what development advances, then there is a major argument for concentrating on that overarching objective, rather than on some particular means, or some chosen list of instruments. Viewing development in terms of expanding substantive freedoms directs attention to the ends that make development important, rather than merely to some of the means that, inter alia, play a prominent part in the process.” The change in Rwanda can be better represented by the improved freedoms enjoyed by its nationals as shown in the graph below.
Figure 15: Comparison of Rwanda, Africa and World Human Development Index trends from 1980 to 2010 http://hdrstats.undp.org/en/countries/profiles/RWA.html
The discussion above shows how Rwanda was able to transition from a country
The discussion above shows how Rwanda was able to transition from a country