26th Jointly organized by : EPRN and GIZ

26th January 2017 @University of Rwanda, College of Business and Economics, Gikondo-Kigali

1. Introduction

Economic Policy Research Network (EPRN ) is an equal opportunity economic policy research platform in Rwanda bringing together key economic management institutions, individuals, and organizations active in economic policy research and analysis to create a pool community for economic policy researchers through organizing trainings on qualitative research methods, research coaching and mentorship, workplace placements, learning tours, and joint research projects to support provide evidence for economic policy formulation and policy research development. EPRN, therefore, responds to economic policy gaps created mainly by lack of quality and informative research and the challenge of human capacity in terms of limited numbers of economic researchers and active involvement. EPRN aims at being the most influential network on issues of economic policy research and capacity development supporting both macro and microeconomic policy in the region and beyond.

On 26th January 2017 at the University of Rwanda, College of Business and Economics, Gikondo Campus, the Economic Policy Research Network (EPRN) with support from GIZ and University of Rwanda, organized a Third Annual Research Conference. The conference was attended by about 500 young researchers, academicians, professionals, and decision-makers working in private institutions, government, civil society organizations, and development partners.

This year’s main theme was “Rwandan Economy towards the Economic Development and Poverty Reduction Strategy 3 (EDPRS 3)” subdivided into seven sub-topics :
• Export promotion (exchange rate, production, local manufacturing sector, “Made in Rwanda”)
• Financial sector development and economic growth (interest rate, access to finance, etc.)
• Inequality-Poverty-Growth-Environment Nexus and Multidimensional Poverty Index, vulnerability, and wellbeing (non-monetary indicators of poverty)
• Inclusive growth and development
• Economic structural transformation (from agriculture and primary sector to a knowledge-based economy, urbanization, etc.)
• Green Growth and climate change
• Vision 2050 (long-term trends, global and regional economy)

2. Opening remarks

Prof Kigabo Thomas, Chairperson EPRN Board

In his opening remarks, the chairperson of the EPRN Board, Prof Kigabo Thomas started by welcoming all participants to the conference. Prof Kigabo mentioned his vision for EPRN is to build up a pool of excellent economic policy researchers that can provide Rwanda with home-grown analysis and solutions. Events like this serve to encourage people, especially young people, to pursue a career in research and to keep improving their academic skills. He added that by bringing together key institutions, individuals, and organizations active in or with an interest in economic policy research and analysis, EPRN creates a network for the stakeholders in the field and a pool of research skills needed for economic policy analysis.

Dr. Hermann van Boemmel, GIZ Rwanda/Macro Program

Dr. Hermann van Boemmel from the GIZ program, Macro-Economic Advice to the Ministry of Finance and Economic Planning (MINECOFIN) stated GIZ is supporting EPRN as we think promoting collaboration between researchers and building their capacity is vital for the development of the country. This conference is one more step towards providing macroeconomic research MADE IN RWANDA that is capable of informing policy decision making.

3. Conference proceedings

Presented papers

In total EPRN received sixteen papers and the top seven of them have been selected to be presented :

Interest Rate Spread in the Financial System in Rwanda : Drivers and Implications by Joseph Ndagijimana

The findings of this research indicate that the GDP, the deposit rate, and inflation have an impact on the interest rate spread in commercial banks. So the following results have been found :
• It takes three years, three months, and eighteen days for the spread of interest rates to adjust to changes in our explanatory variables such as the Deposit Interest rate (DI), inflation (INF), and gross domestic product (GDP).
• 30.28% of shock is eliminated each year by the spread of interest rates and it takes three years, three months, and eighteen days to reach the long-term equilibrium.
• Since the interest rate spread is still a relevant issue in Rwanda, some measures should be taken to reduce it. The problem is due to the high level of lending rate and the lack of competition among commercial banks. Therefore, a competition policy that stimulates growth and rational banking cost, for example, the entry of international banks in Rwanda in a big number, can help reduce the lending rate, to increase the Deposit Interest rate, and thus reduce the spread of interest rates.
• A good competition policy between banks is to increase market transparency and creates a good environment for all investors in the banking market.
• To reduce the volume of non-performing loans and to encourage the level of competition, the introduction of credit agencies is very important.
• The credit agencies could have the role of providing information about the solvency level and the repayment capacity of borrowers. This would help commercial banks to assess the creditworthiness, the repayment capacity, and therefore this will affect the lending rate since the reserve risk rate for non-performing loans is reduced.

Effect of foreign aid on real exchange rate in Rwanda by Charles Ruhara and Joseph Gasana

In his presentation, Dr. Charles highlighted that in broad terms, this study sought to investigate factors influencing the real exchange rate in Rwanda with a special focus on foreign aid inflow. The study also intends to explore the behavior of exports in the presence of large aid inflow and real exchange rate volatility.

Low-income countries face the problem of the low level of domestic savings which are insufficient for them to finance their desired investment. Also, export earnings from low-income countries are not enough to finance imports of capital goods. As a consequence, these countries become constrained in their ability to achieve their target growth rates. To overcome the problem above, developing countries run for foreign aid to finance their investments.

The paper concluded that Aid-recipient countries also would need to spend aid wisely, which would require both economic management institutions and political processes for enforcing transparency and accountability. Aid only appears to be effective in countries with appropriate economic policies, that is, Aid works in a good environment. From this perspective, good policy is a necessary condition for aid effectiveness. Donors also have to adopt aid delivery mechanisms that promote ownership, transparency, and stakeholders’ participation in the development process (Santiso, 2001).

The paper also found that foreign aid inflows are positively related to exports performance. However, the estimated coefficient is not statistically significant in the long run implying that there is no direct meaningful relationship between foreign aid and export performance in Rwanda. In other words, there are more relevant factors than these. Further researches can, therefore, be done for these factors.

Rural Development policies and investment in primary education : farmers in Rwanda by Joseph Nkurunziza

In his presentation, Mr. Joseph indicated that this paper evaluates the contribution of rural development policies on primary education expenditure by farmers, taking into account labor market conditions. The results indicate that land-use consolidation and associated policies for breaking the poverty cycle of farmers add to the willingness of families to invest in their children’s education. The strong linkages of farmer’s investment in child education to the availability of formal employment in the district send a clear message that the sustainability of the current achievements in education will depend on employment expansion as projected in Development Policy Papers.

In his conclusion, Mr. Joseph said that the abolishment of tuition fees and associated measures, and poverty reduction through social protection programs for vulnerable households contributed an increase in enrolment and completion of primary education, and to a decrease of the vulnerability of the poor in Rwanda between 2005 and 2010. The success of these policies is indisputable, but despite all measures taken, primary education is still not affordable for the (extreme) poor in general and for poor farmers in particular. If farmers, who represent more than 80% of the active labor population, are experiencing difficulties in sending their children even to primary school, then achieving the knowledge-based society becomes unlikely. To address poverty reduction among 17 farmers the government set out a land-use consolidation and associated policies to increase agricultural productivity and to create new jobs.

Economic Structural Transformation : from agriculture and primary sector to knowledge based economy and urbanisation by Eric Déo KABERA and Sylvie NIBEZA

The author indicated that economic structural transformation is associated with a fundamental change in the structure of the economy and its drivers of growth and development. It is built upon four key pillars : (i) a declining share of agriculture in the gross domestic product (GDP) and employment, (ii) the rapid process of urbanization as people migrate from rural to urban areas, (iii) the rise of a modern industrial and service economy, and (iv) a demographic transition from high to low rates of births and deaths. Unfortunately, African economies reveal the following characteristics : Most of the economies are driven by natural resource and or primary commodities ; the manufacturing sector remains embryonic, limiting the potential employment gains from the processing of primary commodities ; agricultural productivity remains low and characterized by the limited application of modern technologies ; the rural sector is highly underdeveloped ; birth and death rates are high ; HIV prevalence rates maternal and child deaths are the highest globally, and social protection programs are undeveloped. Rwanda is no exception to such a situation despite its efforts towards sustainable Inclusive Growth.

Using Qualitative and Quantitative Methods, Econometric Model in data analysis using Eviews 8, Data is taken from the World Bank and National Institute of Statistics, the present research aims at describing Rwanda‘s achievements towards Economic Structural Transformation. The research found that Rwanda has implemented significant economic reforms, including privatization, investment facilitation, and trade liberalization, which helped achieve strong economic growth. The services sector now accounts for around half of its gross domestic product (GDP), International trade has been a key factor in expanding the Rwandan economy far beyond national markets. Agriculture decreased its contribution to GDP while increasing production, whereas Industry and Services increased.

Estimating Gravity Model for Agricultural Trade in Rwanda by HARERIMANA Jean de Dieu, NTIRAMPEBA Sylvère and GASANGWA Roy Valence

The author indicated that this paper aims to evaluate the magnitude of agricultural potential trade-in Rwanda vis à vis its partners in East African Community countries using the gravity model approach.

The findings of agricultural potential trade were estimated using the gravity model by using the econometric panel data analysis. The increase of one percent in Rwanda’s GDP on the market prices marks a 2.166 percent increase in Rwanda’s agricultural export flows.

On the other hand, the increase in Rwanda’s depreciation of its partners’ currency causes exports to decrease by 0.93 percent, which is likely to dissimulate the entire agricultural production of which share proved not to be significant but positive. Hence, the share of trade on gross domestic products is attributed to the fact that an increase in agricultural export is at 0.59 percent.

Transportation costs, priced by distance, are found to discourage agricultural export at 0.17 percent. The overall results proved that agricultural trade in East African Countries is by no means going to potentially impact economic growth.

Socio-economic differentials in Desired Family Size : a comparative analysis of Rwanda and Kenya by Dieudonne Muhoza

Dr. Muhoza mentioned that this research seeks to understand how socio-economic and cultural factors operate differently in various contexts to shape the desired family size comparing Rwanda to Kenya. It aims to identify possible target groups for future family planning programs. He said the comparative approach is adopted to gain more insight into the factors that shape family size preferences in various socio-economic and cultural contexts.

Mshoza mentioned that, according to this research, the first difference between Rwanda and Kenya come from cultural considerations which produce opposite effects. In Rwanda, the preference for medium or large families is stated more by the protestant community than other religious communities while in Kenya it is the Muslim community and other religious groups which exhibit a higher propensity for large families. Muslims prefer as much as 8 times large families than Catholics. In this community, more than 70% of the population state to prefer a large family size. In Rwanda, Muslims tend to desire fewer children (negative parameter). Moreover, in Kenya but not in Rwanda, findings show an intergeneration pattern (women born in large families prefer also large families and vice versa) and display an association between the preference for large family size and polygamous unions.

However, the essential difference between Rwanda and Kenya is found for economic factors. In Rwanda, all economic variables, except education, hardly display a difference between different communities indicating a similar preference for medium or large families as for small families. In Kenya, both the woman and husband’s education discriminate enormously women’s attitude vis-à-vis the desired fertility. Uneducated women, for instance, are more than 15 times more likely to prefer large families than those with higher education. In the same line, women residing in poor households like more than other large families.

From the above picture, there is a significant difference in the effects of various factors on the desired family size between Rwanda and Kenya. These differences contribute to the understanding that both socio-economic and cultural factors should be taken into consideration when studying the fertility behavior change and that relations that hold for one community in a country area of no or less importance for another. New attitudes to desired family size diffuse along different paths within the various communities in a specific national context.

Determinants of non-monetary poverty in Rwanda by Thierry Kalisa and Sophie Nottmeyer

The author mentioned that this paper’s motivation is to contribute to the growing literature on the determinants of poverty in African countries using Rwanda as an example. Rwanda has made important progress over the last twenty years after the 1994 genocide against the Tutsi. GDP growth averaged 8 percent since 2000 as published by the National Institute of Statistics of Rwanda, NISR (NISR, 2015a). Rwandans have benefited from this rapid economic growth, as well as reduced income poverty (NISR, 2015b). To continue on this path, the country developed it’s second Economic Development and Poverty Reduction Strategy or EDPRS 2 (Rwanda, 2013) in line with the country’s Vision 2020 (Rwanda, 2000).

The most common measure of poverty used by economists is still based on income, consumption, or expenditure. This can lead to two issues. First, the measurement of these is often accompanied by the inaccuracy of data and/or reluctance from the respondents to give information. Second, having an income slightly above or below a poverty line is not substantially different, the same low income can affect different people in different ways. Income poverty does not show health, education, or social deprivations, and reducing income poverty does not necessarily reduce non-income deprivations. This is why this paper focuses on non-monetary poverty.

Although more and more papers and reports about the MPI are being published by the Oxford Poverty and Human Development Initiative (OPHI), most of them present only statistical results about MPI of different countries including Rwanda (OPHI, 2015). NISR (2012) also presented MPI results for Rwanda with slightly modified indicators to better capture the particularities of the country. They find that 37 percent of the Rwandan population can be considered as poor and this is correlated with characteristics like age, gender, education level of the head of household, and other household characteristics like roofing quality, number of children among others. This paper adopts the same MPI definition but digs deeper using Econometrics and Rwanda’s latest Census data to validate or not the links between these variables and poverty. A probit model is used to model the probability of being poor and OLS estimation is used for the intensity of poverty. We find that all these characteristics help explain that a particular household is deprived or not as well as the intensity of this poverty.

4. Conference Recommendations/Policy Brief : Informing EDPRS 3

The new Economic Strategy of Rwanda…

The economic orientation of Rwanda is at a turning point. The second Economic Development and Poverty Reduction Strategy (EDPRS2) is close to its end and it is now time to advise on what should be the priorities of the next step, EDPRS 3. Scholars, researchers, and stakeholders hence need to do their job. They must provide evidence to the decision-makers. Decision-makers will build on the evidence to guide the economic orientation of the country and design the associated policies. The 3rd EPRN conference aimed at contributing to this process : Researchers and policymakers discussed economic transformation, finance, and poverty. This policy brief draws from research findings and panel discussions of the 3rd EPRN conference.

…must ensure the continuity towards Economic Transformation

The focus on economic transformation for Rwanda and its Region should be strengthened. While past economic growth was driven by an increase in the production of all sectors, economic structural transformation remains limited and productivity needs to be further increased. However, increasing agriculture productivity should be a concomitant goal with economic transformation. Developing new international destination markets for new crops such as e.g. flowers, vegetables, and macadamia and securing and further exploiting the production capacity of traditional crops like tea and coffee are priorities for the agriculture sector agenda.
Still, shifting to an economy oriented towards manufacturing and services will help the increase in productivity. The manufacturing sector is mainly characterized by micro and informal firms which hinder the quality and quantity of production. There is a clear need to change the mind-set, at the demand, and the supply side. On the demand side, the promotion of products and services made in Rwanda must lie at the top of the agenda. This will help the scale-up of firms and contribute to the substitution of imports. On the Supply-side, the need is to strengthen production through incentives in taxes and continuous efforts in infrastructure. While we talk about economic transformation, it is worth noting the links between the sectors along the value chain. We need to promote coordination. One sector does not increase productivity at the expense of one another. Sectors mutually reinforce themselves. Agriculture is part of the transformation. It has to be pushed from subsistence farms to market-oriented farms, to supply industries and create the right link between farmers and industries. The ongoing strategy of joint planning needs to be enforced further.

…for which high-interest rates need to be addressed

Potential investors in Rwanda are concerned about the high-interest rate in the country. Rwanda needs to go deeper than the traditional but needed plea for lower interest rates which has lead other countries from the Region to adopt ceiling interest rates. These policies have proven to be inefficient. One angle of approach to overcome this challenge is to analyze the drivers of the interest rate spread. This type of analysis is of major importance since high-interest rates resulting from high inflation or resulting from a lack of competition in the banking sector will not yield to the same policy recommendation.
Evidence shows that product diversification of banks reduces the interest rate spread. Also higher competition in the banking sector will have a downward pressure on the interest rate. Let promote product diversification and competition in the sector. Besides, higher operating costs in the banking sector increase the interest rate spread which suggests that a more cost-efficient approach, for example through the adoption of new technologies, could reduce the interest rate. As an alternative to the commercial bank as a credit provider, microfinance institution encounters an even higher interest rate which takes them away from the financing of the poor, their public target. The drivers of the interest rate in microfinance are not known yet. Further research should bridge this gap.

…and foreign aid continue to be well channeled

Public finance in Rwanda is still dependent on foreign aid. The management of large financial inflows is of major importance as it can lead to a wider trade deficit, a mechanism known as the Dutch disease. Findings suggest that Rwanda was able to avoid this trap by a good allocation of public resources. We need to keep this good practice and direct aid flows towards export promotion and technology improvements. This will avoid the adverse effect of aid and allow Rwandan firms to access foreign markets, being more competitive, and speed up economic transformation.

…at a time of new demographic challenges

The creation of new off-farm jobs will be needed in a country with high fertility and land scarcity. On the one hand, we have to ensure the sustainability of the soil together with the increase in land productivity, that is, we need to assess how plantation planning affects the long-term land’s quality. On the other hand, evidence suggests that in Rwanda, contrarily to Kenya, the high fertility rate is not a choice made by households but that fertility is partly unwanted and it is concentrated in some specific groups. As a result, we need to target these specific groups and enforce the existing family planning services to further help people achieve their desired family size.

…and to reduce poverty

Poverty reduction will be one of the most important goals of the coming EDPRS 3. Seeing poverty only from a consumption perspective is reductive. It needs to be complemented by other dimensions : education, health, and living standards. And it is not an isolated topic. It is the opposite. As an example to reduce poverty : better education for our children in the rural area needs to go along with opportunities on the labor market, that is more off-farm jobs, which will be partly driven by cheap investment and supported by government spending in export promotion and investment in technologies, which will incentivize parents to invest today in the schoolings of their children, where language skills will be promoted. Better educated people will reduce their fertility, accompanied by family planning services, which will in turn reduce poverty. Better-educated children will grow into better-educated parents, and will themselves better educate their children who will have better opportunities to live a life out of poverty, sustainably. This is the kind of story that has to be promoted through EDPRS 3. This a story that is based on evidence and this is the reason why we need further research on the agenda for Rwanda.

5. Closing remarks

The Guest of Honour, Ms. Francoise Tengera Kayitare, Principal of the College of Business and Economics at the University of Rwanda who is also one of EPRN Board members congratulated EPRN for having organized such a big event with insightful deliberations. He thanked all speakers and participants in general. She emphasized on the role of bringing young researchers like students on-board as they are today and future researchers and policy analysts of Rwanda. We are excited to see such a big number of stakeholders, among them many students at our conference. This is proof that the work we are doing is relevant and it gives us confidence that our mission to sustainably strengthen economic policy research and analysis in Rwanda is on a good way to being achieved.