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The International Response to Conflict and Genocide:Lessons from the Rwanda ExperienceChapter 3 Support for Economic and Public Sector Management The war destroyed the macro-economic and institutional infrastructure necessary for the successful and balanced growth of a modern, market-based economy. Banks were shut down, a significant amount of the money supply was taken out of circulation to refugee camps and the administrative capacity of the government was obliterated. In July, the fleeing interim government took 24 billion Rwanda francs and allegedly substantial amounts of hard currency that had been in coffers of the Central Bank.1 The amount of local currency looted represented twice that in circulation at the time. The Gross Domestic Product is estimated to have declined by more than half from 1993's already low level; the rate of inflation reached 40 percent. The new government that formed in July 1994 found itself with very limited capacity: less than one-third of the civil service and only three percent of the professional staff had returned by the end of the year.2 Re-establishing conditions favoring growth and the development of Rwanda's economy will require large investments in training, rebuilding the institutions of governance and repairing infrastructure. Re-creating the public sector, however, provides a unique opportunity for Rwanda's new leaders and development partners seriously to address the inconsistencies and inefficiencies, such as high public wage bills and extensive public involvement in the private sector, that had begun to hinder Rwanda's development under the previous regime.
Macro-economic and public policy reforms With the 1990 commencement of the structural adjustment process, former Rwandese authorities had acknowledged that their previous policies were no longer appropriate to new realities. By the mid-1980s, rates of economic growth had turned negative from the highly positive levels that had prevailed throughout the 1960s and 1970s. By the mid-1980s, the volume and value of exports, which grew tremendously during the earlier period, stagnated and fell. The collapse of the world coffee market, combined with the government's initial inability to deal with the ensuing economic crisis, delivered a devastating blow.3 Largely because of the crisis in the coffee sector, the public finance deficit more than tripled between 1988 and 1990, when the first devaluation of the Rwanda franc occurred. The Structural Adjustment Program (SAP) encompassed two devaluations, elimination of official prices for most products, increased access to foreign exchange, the elimination of non-tariff barriers to imports, reduced regulation of commercial activity and allowable profit margins. Because of the large increases in military expenditure that occurred at the same time, however, Rwanda's economy continued to decline as the 1990 civil war began to intensify, in spite of some moves towards economic liberalization. The new government came to power with a basic set of principles regarding macro-economic policy and public administration as articulated in its first comprehensive policy document: greater market liberalization, disengagement of the State from commercial and productive activities, greater regional trade, and reduced public expenditures4. This economic philosophy was shaped by pragmatic analyses of the economic crisis, the views and priorities of donors, and the failure of highly interventionist approaches to development. However, proposed economic and public administration reforms did not represent a radical departure from pre-war policies. Instead, the reforms represented an amalgam of elements of the 1990 Structural Adjustment Program, new thinking, and measures aimed at wresting control of the money supply from the exiled former government. The economic reforms central to Ugandan reconstruction, in the wake of its long civil war, are likely to have served as an important model. The new government proposes to expand the objectives of the stalled SAP. Basically, the government envisions the development of an outward-looking, export-oriented economy based on diversified exports controlled largely by the private sector. To finance these activities and provide the private sector access to foreign exchange for imports necessary to revive the economy, the government requested US$206.9 million for 1995 in the Rwanda Recovery Program (US$189.6 million for financial support and US$17.3 million for economic management and public administration). A natural concern is the extent to which the government takes "ownership" of the aforementioned policies, especially in a country for which donor intervention has traditionally played such a critical role in policy formulation. However, the new government has a very strong private sector constituency that would naturally seek to remove many of the regulations to its activities inherent in government intervention.5 It is, however, too early to predict how strongly the government will support these reforms as conditions change. The market-oriented policies largely reflect the Uganda model of post-war reconstruction - that is, that an economy struggling in the aftermath of civil war simply cannot afford to maintain a large public bureaucracy. These policies have been reinforced by the international financial institutions most involved in assistance for the re-establishment of economic and public management capabilities. But they do not appear to have been forced upon the new government. During its first mission to Rwanda after the war (September 1994), the World Bank stressed the need to keep civil service recurrent expenditures down, preferably to half the pre-war levels. The World Bank team also suggested that the government temporarily fix a "realistic" exchange rate and quickly establish an interest rate policy. It noted the government's intention to change the currency and to reform trade policy without giving its own views as to the advisability or the feasibility of these actions. The IMF sent a mission to Kigali in November 1994 to review the government's planned de-monetization and its proposed reforms of the exchange rate regime. In January 1995, the IMF outlined its policy recommendations for recovery of macro-economic and financial management.6 It proposed extensive short-term reliance on technical assistance in policy formulation and implementation, the preparation of a public budget, adoption of a tax code "to incorporate structural changes," implementation of a new tariff system and increased reliance on indirect instruments of monetary policy, especially for the management of exchange rates. The IMF, like the World Bank, was particularly interested in keeping public recurrent costs down, and in ensuring that the government maintain an employment policy driven by new realities and new needs rather than one based on past staffing levels or on political convenience. Policy action by the government The conditions of demand and supply of Rwanda francs became highly volatile and unpredictable during and immediately following the war. The large sums of money in the hands of the former government outside the country, an estimated 24 billion Rwanda francs, constituted a double threat to the new government. First, they represented vast resources for the defunct government with which to procure weapons and ammunition and to feed its army and militia. Second, they provided a monetary lever by which the old government could destabilize the macro-economic balance within Rwanda. To eliminate these twin threats, the new government, with the approval of the IMF, undertook to de-monetize a portion of the currency in circulation. It issued new bills that were exchangeable only by people residing in the country in early January 1995. Presumably to spare poorer refugees and to reduce the impact on people who could not reach a bank, coins and small denomination bills were not de-monetized. Of course, money held in bank accounts was untouched by this action. While there is some debate on the actual figures, the de-monetization supposedly constituted an anti-inflationary contraction in the money supply as well: 11 billion Rwanda francs were printed, but only 10.2 billion were replaced.7 IMF officials have expressed confidence in the new bills.
In early March 1995, the government accepted the principle and practice of market determination of the rate of exchange for cash transactions.8 Throughout much of the period from July 1994 through early 1995, there was virtually no banking system. Currency exchange was done nearly exclusively through private currency traders who bought US dollars, for example, at between 300 and 250 Rwanda francs to the dollar. Virtually no trades were made at the official exchange rate of 138 francs. The acceptance of a flexible exchange rate regime, while congenial to reform-minded policy makers, was made easy because of a number of factors that might be expected to change in the future, thereby reducing commitment to market-determined rates. First, the government did not, nor does it yet, have the ability effectively to manage a fixed regime. Besides, throughout much of the period from July 1994 through early 1995, there was virtually no banking system. One year after the war, only two commercial banks were open in Kigali, with only a few of their branch offices outside of the city functioning. The Central Bank didn't have the liquidity to engage in currency transactions either. Second, when relief workers and embassy officials began to arrive, there was an accompanying large infusion of foreign currency, mostly US dollars. A larger volume of foreign currency "chasing" Rwanda francs led to the latter's appreciation on the open market. It is unlikely, though, that the relative under-supply of Rwanda francs will continue indefinitely into the future. Third, and perhaps most important, opposition to devaluation of the franc was limited because the new leaders were more likely to have their wealth stored in foreign currency than in Rwanda francs. As time passes, the constituency for a free market and lower exchange rates is likely to weaken. With increased demand for imports and salaries paid in Rwanda francs, there will be increased pressure on monetary authorities to maintain the value of the franc. In fact, a visit to Rwanda in December 1995 confirmed that pressure is building to curtail currency trading outside of the small number of accredited bureaux de change. This pressure is occurring at the same time that the value of the Rwanda franc is dropping and the gap between official and parallel market exchange rates is growing.
On the fiscal side, it appears that the public sector is growing rapidly and that the government is unable to practice real fiscal conservatism. Control over the public sector wage bill has proven particularly difficult due to the nature of the coalition government. Each of the political parties represented in the government controls one or more ministry or agency, which are treated to some extent as independent power bases, making coordination more difficult. Furthermore, the Arusha Accords stipulated that a certain number of ministerial positions be awarded to each of the key political parties contesting power before the war. This provision, along with the perceived need to create a new Ministry for Rehabilitation, has produced an already-unwieldy structure that exacerbates the staffing problems faced by the government. As the government prepares for reconstruction, the challenge will be to find mechanisms by which the larger budgets and personnel requirements of reconstruction can yield, in the post-reconstruction period, to smaller recurrent budgets for development and public administration. International interventions The principal donors to have disbursed funds for financial support to the government and for economic and public management have been the World Bank, the African Development Bank, the European Union, the Netherlands, Canada, and the United States.9 Aid from the US, the Netherlands and Canada was largely responsible for unblocking World Bank funds by covering the government's arrears through June 1995. The provision of counterpart funds has been ensured primarily by the EU, Belgium and Canada. Additionally, roughly US$12 million have been committed for re-equipping key ministries, and to the Trust Fund for projects identified by the government and UNDP. As of mid-May 1995, US$4 million had been disbursed by the US in this category, to re-equip eight ministries. Germany, Belgium, the Netherlands and the UK (the last two through funding of the Trust Fund), had begun assistance programs to train magistrates for the Ministry of Justice, provide technical assistance to the Ministry of Planning, and ensure salarysupplements to the civil service. The programs and amounts identified above do not provide the full picture of international support for the rehabilitation of Rwanda's economic and public management capacities, though. Various UN agencies and NGOs, such as WFP, UNICEF, FAO, UNDP and World Vision, have provided ad hoc assistance to support the administrative capacities of the ministries or local government bodies with which they have been working. Furthermore, UNDP, the World Bank and the IMF have sent consultative missions, conducted studies, and otherwise supported the process of identifying priority needs for economic and administrative management. UNDP, for example, was integrally involved with the preparation of the Rwanda Recovery Program and has co-managed the UN Trust Fund with the government. Further, the World Bank Assessment Mission of September 1994, one of the earliest major donor missions to Rwanda, set the tone for donor assistance. The implicit recommendation was that donors should move rapidly and unreservedly to support and strengthen the capacities of the new government, and that aid should rapidly shift away from the refugee camps to Rwanda itself.10 In November 1994 the World Bank sent a team to Rwanda to begin preliminary work on the Emergency Recovery Credit. The World Bank resident mission was re-opened in January 1995. Lastly, the IMF clearly has an important role to play in financial and economic management decisions being made by the new government. The IMF made its first mission to Kigali in late 1994; a subsequent mission in January 1995 reviewed Rwanda's fiscal needs. Through these and other contacts with the government, the IMF provided consultation on a host of financial and economic management issues, the most pressing at the time being de-monetization. The IMF has pledged US$13 million in assistance to Rwanda. About US$8.0 million involves the freeing up of the Reserve Tranche and the Compensatory Contingency Financing Facility; part of the remaining US$5 million will fund a program of technical assistance to rebuild macro-economic and financial management capacities. Problems and prospects The initial steps to gain some degree of control over the economy appear to have been successful. It is, of course, very difficult in the Rwandese context to isolate the impact of macro-economic policy, and other factors such as the large influx of foreign currency, on the relative stability of the Rwanda franc. Nonetheless, de-monetization appears to have progressed smoothly and to have caused relatively few losses.11 There was no appreciable increase in inflation subsequent to de-monetization, and confidence in the new bills remains high. Further, devaluation, or more accurately, acceptance of a market-determined exchange rate, has not caused instability.
In spite of initial successes, there remain some areas of concern and issues requiring resolution. While the World Bank responded rapidly and effectively to the humanitarian crisis by granting US$20 million to UN agencies to lay the foundations of a broad-based reconstruction and development program, its relative slowness in releasing the US$50 million Emergency Recovery Credit has diminished its effectiveness. A large part of the credit is intended to restore the economic foundation of the country and rehabilitate the private sector by reactivating the financial system and increasing the availability of credit. Delays in disbursement of the public sector component of the ERC have retarded overall reconstruction and may have contributed to deepening the economic and political crisis. The December 1995 resignation of Rwanda's Central Bank governor, while not attributable to the World Bank/government of Rwanda impasse, is worrisome evidence of turmoil within the government's macro-economic management apparatus.
The newly-created Ministry of Rehabilitation has been rapidly built up, being given priority over other ministries that have traditionally had the technical expertise necessary to carry out programs of rehabilitation. Overall, the UN, donors and NGOs have been largely responsible for the reinforcement of what has become a parallel structure or a "super ministry" -a "government within a government". In fact, the Ministry of Rehabilitation wrote the country's resettlement plan without consultation with line ministries.12 There is some concern within the international community that this ministry has usurped the role of more-technically-competent line ministries in other sectors, negatively affecting the quality of analysis, efficiency of resource use, and inter-ministerial relations. It is likely to have long-term public expenditure as well as political ramifications, as the Ministry fights to maintain its privileged position. A relatively small amount of the funds for rehabilitation of economic and administrative capacity have been provided directly to the government. Although there are many reasons for this, the government's limited absorptive capacity is a major factor. Further, the multitude of agencies working in Rwanda, with higher salaries and more congenial work environments, has reduced the number of qualified staff available to the government, thereby weakening rather than strengthening absorptive capacity. Of the over US$200 million pledged during the 1995 Round Table Conference for "financial support" and "public management," half-way through the year only 12 percent (US$30 million) had been disbursed, one-third of which was for the payment of development bank arrears. By year's end, most was committed, half had been disbursed, and one quarter had been mobilized in the country.13 Financial and technical assistance, including consultative missions, have provided good support for macro-economic management. However, support for rehabilitating public management was early on often ad hoc. Nonetheless, some of the important steps towards economic stability - control of the money supply, reform of exchange and interest rate regimes - and towards improved management of the public sector have been taken. This is evidence that the government, with its development partners, plans to exploit the unique opportunity to address seriously the inconsistencies and inefficiencies that had begun to retard Rwanda's development under the previous regime. To the extent that donors are flexible in their response and the necessary funds are forthcoming, they can help steer Rwanda away from the highly interventionist policies of the past to a development in which the initiative of the private sector is effectively fostered and harnessed. Endnotes 1) Interview with Mr. Niyitegeka Gerard, Central Bank Governor, Kigali, Rwanda, May 1995. At contemporary exchange rates of 140 Rwanda francs to 1 US dollar, 24 billion Rwanda francs represented roughly US$170 million. This of course does not take into account the certain decline in the value of the Rwanda franc were the entire 24 billion francs to be put into circulation. 2) See Government of Rwanda, Document-Cadre pour la Réhabilitation et le Renforcement d'Urgence des Capacités de Gestion Economique. 3) World coffee prices plummetted in 1990, but the government, fearful of losing its foreign exchange earnings, kept producer prices well above market levels. This imbalance quickly dried up the coffee stabilization fund, which had been designed for cyclical rather than long-term price movements, and put tremendous pressure on the state treasury. The November 1990 40 percent devaluation against the SDR was one of the first concrete measures of structural adjustment. (The SDR or Special Drawing Rights is an IMF-sponsored international currency for transactions between countries.) 4) See Government of Rwanda, "Towards a New Rwanda Declaration of the Rwandese government on the Principles of a Recovery Policy". 5) This private sector orientation could be seen as early as 1992 in the highly market-oriented platform of one of the RPF's early political allies, the Liberal Party. 6) See International Monetary Fund, "Rwanda: Outline of a Comprehensive Program of Technical Assistance for Rebuilding and Strengthening Macro-economic and Financial Management". 7) The estimated in-country money supply at the time of de-monetization was in the order of 12 billion Rwanda francs. 8) Article 14 of Banque Nationale du Rwanda, Règlementation des Changes, which also cites the underlying legislation as Decret-loi No. SP1 du 03 mars 1995 portant Organisation et Gestion du Marché des Changes. 9) Ranked in order of Round Table funds disbursed by December 1995 for sub-program 1, "financial support", and sub-program 3, "Administration". 10) Interview with assistant team leader of World Bank Assessment Mission, Mr. Doyen, Washington, DC, April 1995. 11) Interviews with Mr. El Quorchi, IMF, Washington, DC, April 1995. 12) Interview with member of World Bank Resettlement Mission team, Washington, DC, April 1995. 13) Refers to funds in sub-program 1: "Financial Support", and sub-program 3: "Rehabilitation", category "Administration of State..." in Rwanda Round Table Conference: Programme of National Reconciliation and Socio-Economic Rehabilitation and Recovery, Government of Rwanda, Geneva, January 1995. | ||||||
