Does Rwanda have fiscal space to maintain subsidies?

The government of Rwanda has been providing substantial subsidies amounting to at least Rwf44 billion on fuel, transport, and fertilizer in efforts to shield its citizens from the impact of rising global prices. The International Monetary Fund, however, has raised concerns over the sustainability of these subsidies. Straton Habyalimana, the Lead Consultant at Straton's Advisory Services, shed light on the rationale behind these subsidies in a recent interview with CNBC Africa. The landlocked nature of Rwanda necessitates heavy reliance on imports, making the country particularly vulnerable to inflation and price hikes on the global market. As a result, subsidies have played a crucial role in mitigating these effects, ensuring that the people of Rwanda do not bear the full brunt of the price increases. One of the key areas where subsidies have been instrumental is the fuel sector. The government's investment in subsidizing fuel has had a ripple effect on the economy, influencing production, transportation, and overall costs. By absorbing a significant portion of the fuel costs, the government has effectively prevented a domino effect of price increases on other goods and services within the country. Moreover, with nearly 39% of the population still living below the poverty line, these subsidies have served as a lifeline for many vulnerable Rwandans, especially during the challenging times brought about by the COVID-19 pandemic. Without this crucial support, the already marginalized segments of society would have struggled even more to cope with the economic downturns and price escalations. Despite the success of subsidies in stabilizing prices and supporting the disadvantaged, questions have been raised about the long-term sustainability, particularly in the transport sector. While the sector is slowly recovering from the impacts of the pandemic, maintaining subsidies remains vital for the time being. Many businesses and individuals are yet to return to pre-pandemic levels, and abrupt removal of subsidies could lead to a surge in prices that would further strain the population. Therefore, a gradual approach to phasing out subsidies while ensuring a smooth transition for the affected parties is essential to prevent a sudden shock to the economy. Another area of concern highlighted in the interview was the performance of the agriculture sector despite the subsidies. Habyalimana acknowledged that agricultural subsidies are a common practice globally, aiming to help farmers adapt to new technologies and improve productivity. Small farmers, in particular, often lack the resources to invest in the necessary advancements that could boost their yields. By continuing these subsidies, the government can provide the needed support for farmers to enhance their output and eventually achieve sustainable agricultural practices. While there are challenges in sustaining these subsidies due to limited fiscal capacity, the benefits they bring in terms of food security and economic growth outweigh the costs. Habyalimana emphasized that Rwanda's tax base and revenues pose constraints on the country's ability to sustain subsidies in the long run. The risk of subsidies becoming an entitlement rather than a temporary relief is also a concern, as it may hinder the necessary adjustments and efficiency improvements within the economy. However, he suggested setting clear limits and timelines for subsidies in critical sectors like fuel and fertilizers, gradually phasing them out over a specified period. This approach would incentivize individuals and businesses to strategize and prepare for a future without government support, fostering self-sufficiency and economic resilience. While the concerns over Rwanda's fiscal space to maintain subsidies persist, the current need for these support mechanisms in a recovering economy cannot be overlooked. Striking a balance between short-term relief and long-term sustainability will be vital for Rwanda's economic trajectory in the years to come.