Rwanda most ‘business friendly’ in East Africa

Rwanda has once again led the continent in achieving a high rank in the World Bank’s Doing Business 2012 report. This has been the result of  several years of targeted reforms  in virtually all spheres of economic activity. But more still needs to be done.

Based on the evidence of the last few years, it is clear that the government of Rwanda has realised that if the country is to generate much-needed economic growth and attract investment, it must carry out important reforms and tackle inefficiencies across the board.

President Paul Kagame has been relentless in his efforts to these ends, instituting one bold reform after another. These reforms have tackled virtually all aspects of economic policy – from land reform to easing the entry and cost of doing business, to the free movement of workers in the East African community.

The World Bank has once more recognised these considerable efforts, ranking Rwanda as the most business-friendly nation in East Africa in its widely respected Doing Business 2012 report. Rwanda is now the third-easiest place to do business in the sub-Saharan Africa, after Mauritius and South Africa.

Globally, Rwanda jumped an impressive 13 places to take 45th place and is the world’s second-top reformer (i.e. it gained the second-largest number of places) in creating a business-friendly environment. This success represents a continuation of recent good performance, with the country moving up an impressive 76 places, from 143rd in 2009 to 67th in 2010, making it the unchallenged emerging market champion in this respect.

Its position in the 2012 report, which is in effect a seal of approval from the world’s top financial institution, is expected to have discernible impact on the already increasing volume of foreign investment pouring in to the country. It will also hope $35m fully finally lay to rest the image of a Rwanda as war-torn country, especially after the dreadful events of 1994, an association that is, understandably if unfortunately, indelibly linked to the country.

By comparing and contrasting different nations and juxtaposing the regulatory environments of 183 different global economies, the World Bank report provides an effective indicator of relative economic progress.

Ten different criteria are examined to produce the aggregate index on which rankings are calculated. These are: starting a business, dealing with construction permits, access to electricity, registering property, obtaining credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency

Global factors

Even though Rwanda, like the rest of Africa, is faced with an unstable and turbulent global economy, it has managed to produce a sound economic performance. For example, it has restricted inflation to a lower level than its regional neighbours – with the central bank expecting a rate of between 8% and 8.7% at the end of the year. This is due in part to improved coordination between fiscal and monetary policy, which in turn has helped to minimise the risk of inflationary fiscal deficit financing. Inflation rates in neighbouring states are in a different ballpark – in September 2011, Uganda’s inflation rate was 28.3% and Kenya’s was 17.3%.

The country has also revised growth projections upwards for the year to 8.8%, driven by better performance in the agriculture, industry and services sectors, and accompanied by better than expected credit growth. Credit grew, unexpectedly, by 20.9% as of August against an annual target of 19.2%; agriculture by 8.2%, the industrial sector by 15.1% and the services sector by 8.5%.

Yet the economic progress of any country in the globalised world is also inevitably pegged to that of the global economy. There have been several growth-curtailing factors: the World Bank’s food prices index shows a rise of 33% as of August; international fuel prices have remained stubbornly high at around the $100 per barrel mark.

East African Community

Given the fact that Rwanda is landlocked, the country has pursued a strong policy of integration with the East African Community Customs Union, which also includes Kenya, Uganda, Tanzania and Burundi.

Newly independent South Sudan applied for membership of the community in October and there is no doubt that after the formalities have been completed, it will be warmly welcomed by the regional group. Interestingly, Sudan (north) also applied for membership, even before South Sudan did but, as things stand, it is unlikely that it will be granted.

South Sudan sits on nearly 7bn barrels of proven oil reserves. The ambitious $22bn Lamu Port South Sudan Ethiopia Transport corridor (Lapsset) will connect Lamu on the Kenya coast with South Sudan and Ethiopia via highways, railways and two oil pipelines. With oil finds in Uganda, the East African Community (EAC) is expected to become perhaps the most dynamic sub-region in Africa for at least the next few years.

But South Sudan is desperately short of managerial capacity in most aspects of governance and business and this is where Rwanda could come to the rescue. It has already been asked to pass on its knowledge on how to make South Sudan more business and investment friendly. Currently, South Sudan finds itself on the lower reaches of the World Bank’s ease of doing business ranking, occupying the 126th position.

However, Rwanda is still in no real position to benefit from its membership of the Community. While tariffs on the movements of goods among the community members have more or less been scrapped, non-tariff barriers such as poor roads and the high cost of transport are taking a severe toll on Rwanda’s economic management. Around 40% of the cost of imported retail goods is related to transport costs.

Rwanda, Uganda and Burundi still incur the greatest costs, due to the distance from the main ports of Mombasa and Dar es Salaam.

Rwanda has been critical of the lack of progress within the EAC for not doing more to reduce such barriers along the Northern and Central corridors, making the country’s transport costs very high. It costs as much as $6,500 to ship a full 20 foot container load to Kigali from Mombasa, as opposed to a cost of around $1,300 to Nairobi.

Rwanda has pushed for the implementation of laws on the movement of labour, especially with Kenya. The two nations have already signed a bilateral agreement to allow citizens to move freely and seek employment in the two countries. Rwanda has also amended immigration laws to allow EAC citizens to work and reside in the country.

Best place to start a business

Rwanda has also been widely and justifiably hailed for the progress it has made in making it easier to start a business in the country. Vital for foreign investment, the ease of starting a business and being able to formally register a company quickly has tangible benefits for owners and employees – companies often outlive their founders.

It is also important to investors to have easy access to services, from courts to banks. Employees are, of course, legally protected. The rights of owners are guaranteed, as is the protection of investment. Registration costs have been reduced, further spurring entrepreneurship.

In the ‘ease of starting a business’ category Rwanda is placed an impressive 8th globally – this compares to a regional average of 68th. Mauritius comes out at 15th. The process of starting a business in Rwanda takes three days, involves two procedures and requires 0% of paid-up minimum capital.

Rwanda jumped 29 places in terms of its improvements in the ‘access to credit’ by small businesses category taking it to 8th position globally.

In June 2010, ahead of the 2011 World Bank report, the National Bank of Rwanda (BNR) implemented key credit information reforms that eased access to credit and boosted ranking in the report. Reforms led to improved banking practices and helped keep track of loan defaulters, enabling an easier weeding out of non-performing loans.

The central bank announced that it will increase lending to the private sector by a substantial 19.2% this year, adding that this will be done at lower interest charges and at a level that will not increase inflation.

On the judiciary front, Rwanda stands in the 39th position globally, for the ease of enforcing contracts. The regional average is 65th.

Challenges remain

However, and not surprisingly, challenges remain. John Gara, the CEO of the Rwanda Development Board (RDB), says: “There are some areas where we are not doing very well, particularly in areas like closing a business. This is where Rwanda was always ranked last in the world but we moved from 183rd to 165th. There is a problem of businesses closing without going through the court process. But now that the law is in place, the number of businesses closing legally through the courts is going to improve.”

The country has also not fared well in the ‘property registration’ category, dropping from 41st to 61st. This poor performance was caused by a Rwanda Revenue Authority requirement of a Capital Gains Tax for registering property which has been mentioned in the report as hampering the process.

There is also considerable need for more progress in the Rwandan process for resolving insolvency. A distinction is needed in the bankruptcy system to distinguish companies that are financially troubled with those that are economically viable. The World Bank is concerned that even viable businesses can be liquidated. In this category, Rwanda ranks 165th globally against a regional average of 127th.

In terms of investments, inflows amounted to $4.35bn between 2000 and 2010. Although this figure shows an improvement over previous periods, regional counterparts such as Kenya and Uganda still fared better.

A co-author of the report, Robert Murillo, said that the performance achieved by sub-Saharan Africa is a clear indication that the region is on the right path and has done so by improving its business environment. “We are pleased to count among the top chain reformers in the world, four sub-Saharan African countries, including two who emerged from a situation of conflict, meaning that even countries from conflict can perform well.”

Data shows that 78% of sub-Saharan African governments undertook at least one positive reform in 2012. In fact, Eastern Europe was the only region in the world that made more progress in improving its business environment than sub-Saharan Africa. Burkina Faso, Guinea-Bissau, Mali, Sierra Leone and Senegal – as well as Rwanda – are all listed in the global top 15 ‘most improved nations’.

However, despite these encouraging improvements, there are still very significant further efforts required.

Collectively, the sub-Saharan region remains the lowest ranked in terms of the ease of doing business in the world. Even in Rwanda today it takes 29 days to export a container and 31 days to import one, at an average cost of $3,275 and $4,990, 50% more than the regional average and more than three times the OECD average.

There is still considerable internal opportunity for improvement, in terms of insolvency practice, the management of construction permits and other bureaucratic procedures.

Some of the most important issues, such as cross-border trade, both in terms of infrastructure improvements as well as tariff and border challenges, will only be resolved with greater regional cooperation.

The good news is that steps in that direction are already being taken. If the nations that are willing to move forward together do not allow themselves to be held back by those who lack the political will, rapid progress will be possible.