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Rwanda: What Effect Will Foreign Aid Cuts have on Government Spending?

Large-scale projects are unlikely to lose funding, while opportunities could open up for new investors.
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The Kigali City Masterplan to alter Kigali's landscape by 2050. Photograph by Graham Holliday.

Over the past few weeks, key donors including the UK, US, Germany and the Netherlands, have suspended some of their financial aid to Rwanda following accusations by the UN that the government was supporting the M23 rebel group in eastern DRC in violation of UN sanctions. Nearly $70.4 million in aid has been postponed or cancelled for the fiscal year 2012/3 (equivalent to 3.1% of Rwanda's budget). On August 3, Finance Minister John Rwangombwa warned that some programmes could face delay due to the aid cuts.

However, the government is unlikely to cut funding of large-scale projects, raise taxes significantly or increase the budget deficit. Instead, we expect the government to make non-priority spending cuts in discretionary infrastructure and health projects. The government will also have access to the new sovereign wealth fund, Agaciro Development Fund, which is largely funded by Rwandans in the diaspora who support President Paul Kagame. Spending cuts on the defence budget (27% of total budget) are also unlikely, as the US is unlikely to cancel more than the $200,000 in mostly symbolic aid cuts.

To fund the budget shortfall, we assess the government will probably accelerate the privatisation of some 20 companies in the agriculture, banking, tourism and ICT sectors. This is likely to create opportunities for new investments, particularly from non-traditional sources, such as Asia (particularly Chinese and Indian) and Turkey, which have been less critical of the government's suspected support for M23. However, investors will face elevated risks of government interference as the RPF government favours partial privatisation.

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