Rwanda - Economic memorandum : recent economic and sectoral developments and current policy issues

Report No. 4059-RW ,1 Rwanda Economic Memorandum FILE COPY Recent Economic and Sectoral Developments and Current Policy Issues May 20, 1983 Division C Country Programs II Eastern Africa Region FOR OFFICIAL USE ONLY U~~~. I Document of the Warld Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS AND UNITS Currency Unit: Rwandan Franc (RwF) Exchange Rates: Through December 1971 US$1.00 = RwF 100.00 January 1972-December 1972 US$1.00 = RwF 92.11 January 1973-December 1973 US$1.00 = RwF 82.90 Since January 1974 US$1.00 = RwF 92.84 Fiscal Year: January 1 to December 31 Standards: Metric I'  TABLE OF CONTENTS Page No. CHAPTER I: INTRODUCTION AN) SUMMARY ............................ 1 A. Scope, Structure, and Main Themes of the Report .............. 1 B. Main Findings, Conclusions and Recommendations ............... 5 Macroeconomic Developments .. .. ....... ................... . ... . 5 Medium-Term Prospects .......... .. ... . .. ... . . .........*.... * 8 Macroeconomic Management:, Issues and Recommendations ......... 9 Sectoral Developments, Issues and Recommendations ........ ...... 12 PART I: RECENT DEVELOPMENTS, MEDIUM-TERM PROSPECTS AND ISSUES IN MACROECONOMIC MANAGEMENT ............ 24 CHAPTER 2: RECENT ECONOMIC DEVELOPMENTS IN PERSPECTIVE .......... 25 Structural Characteristics . ..... . . .. ..................... . 25 The Structure of Production .... .... ...... . . .. ........ 28 Rwanda's Growth in an African Perspective ....................... 29 The Growth Record from 1969 to 1981: An Overview ................ 30 Some Positive Aspects of Rwqanda's Economic Management ........... 33 Shortcomings in Economic Policy and Management ...e....*......... 35 The Evolution of GDP by Sectors ................................. 37 Agricultural Performance . .. ........... . . . .. .. . . ... .. . 38 Trends in Other Sectors ............ *................. 42 Investment and Savings . ......................... 43 The Public Finances ........ ... ............... 45 Money and Credit ...........0#00.00t......... 50 Prices, Wages and Employment .................................. 53 The Exchange Rate and Trade System ............................ 55 The Balance of Payments ....... .... ..*..O... ................. 56 CHAPTER 3: MACROECONOMIC MANAGEMENT: SOME ISSUES ............... 61 Planning, Programming and Budgeting Issues ..................g... 61 The Planning Process . ...... ..................... ,. ... 61 The Budget Process ....... ..... 63 Technical Assistance and Aid Coordination ........ *..O ........ 65 Management of the Parastatal Sector ......................... 66 Conclus ion . . . . . . 000. 4 0*a00000000*0 0 0 ,, 069  Page No. CHAPTER 4: MEDIUM-TERM PROSPECTS .............................. 70 Introduction and Main Findings .. ................ 70 Balance of Payments Prospects .................. . .. ...... 72 The Budgetary Outlook ................... . .................. 76 The Outlook for Overall Output and Employment Growth .......... 78 Conclusion ................................... ............... *....... 80 Annex to Chapter 4 - Assumptions Underlying the Projections ... 82 CHAPTER 5: MACROECONOMIC MANAGEMENT: A POLICY AGENDA ......... 87 Balance of Payments Management and Related Policies ........ ... 88 Fiscal and Monetary Policies ............................................. . 91 The Need for a Realistic Public Investment Program .. .......... 94 Financial Management of Parastatals and Mixed Enterprises ..... 95 Export Producer Prices ....... . ..... .............. . .. 96 Interest Rates .... . ......... .. .... ... 98 The Coordination of Macroeconomic Management .............. 98 PART II: SECTORAL DEVELOPMENTS, ISSUES AND RECOMMENDATIONS 99 CHAPTER 6: POPULATION ......................................... -.0l Overview ..................... ..*...... .00.................... 100lo Population Growth: Determinants and Effects ................... 101 Recent Trends in Mortality and Fertility ...................... 103 Demand for Family Planning . ..... . ............................ 106 Government and Donor Efforts .................................. 107 Population Projections .. .... .. .. . . . . ........... ..108 Conclusion ............. 109 CHAPTER 7: AGRICULTURE .... . ..................... ...... . ill Introduction ......................................... 111 Recent Trends in Output and Yields ............................ 112 Government Assistance to the Sector ............... 116 Results of Past Efforts ................. ................... 116 Financing of Past Investments . ............................. 117 The Third Development Plan (1982-86) ........... ............ 118 Key Issues for Government Attention .............. ............. 122 Alleviating Technical Constraints to Production .. .......... 122 Improving Producer Incentives .............................. 125 Improving the Institutional Framework . ...... *.. 128 Summary ............. .. .......................... 131  Page No. CHAPTER 8: ENERGY .. ........... *.* * * ........ *** 133 Background ........... .................... 133 Energy Consumption and the Economy ............................ 134 Energy Issues and Recommendations ............................. 135 CHAPTER 9: DOMESTIC AND INTERNATIONAL TRANSPORTATION .... ..... 140 Domestic Transport .. ............................... ..... . ...... 140 Priorities for Domestic Transport .......................... 142 External Transport . .......... . . ...... ...... ..*... ......... . 144 Priorities for External Transport .......................... 146 Transport Planning and Coordination ............................* 147 STATISTICAL APPENDIX   FOR OFFICIAL USE ONLY PREFACE (i) This economic memorandum comprises a review of Rwanda's economic performance in the 1970s and 1980s to date and an assessment of some current policy issues of particular importance. It is based on the findings of an economic mission that visited Rwanda in November/December 1981. The members of the mission were: Messrs. Alberto Eguren (mission chief), Jean-Louis Sarbib (planning economist), Yves Gazzo (agricultural economist), Mrs. Denise Williamson (economist), Mrs. Ann Elwan (demographer), and Ms. Miriam Schneidman (research assistant). Other World Bank staff members who contributed to this memorandum were Mr. Joris Van Der Ven (transport economist), Ms. Susanna Badgley (agricultural economist) and Mr. Robert Armstrong (senior economist). (ii) An earlier draft of this nemorandum was discussed extensively with the Rwandan authorities iin Kigali in November 1982 and again in Washington in March 1983. Subsequent to these discussions, parts of the memorandum were revised and updated to incorporate newly available data concerning the economy's performance in 1982. It should be noted, however, that because Rwanda's Third FiLve-Year Plan (1982-86) was made available only in November 1982, this nv!morandum does not incorporate a World Bank review of the final version of the Plan. This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may riot otherwise be disclosed without World Bank authorization.   COUNTRY DATA - RWANDA AREA (Thousand Sq. Km.) POPULATION DENSITY (1982) 26.3 5.5 million (mid-1982) 210 per square km. Rate of Growth: 3.6% 393 per square km. of (from 1978 to 1982) arable land POPULATION CHARACTERISTICS (1978) HEALTH (1977) Crude Birth Rate (per 1,000) 54.0 Population per physician 38,792 Crude Death Rate (per 1,000) 21.0 Population per hospital bed 650 INCOME DISTRIBUTION ENERGY CONSUMPTION PER CAPITA Z of national income, highest quintile ,. (Kilograms of coal equivalent) 28.3 lowest quintile ACCESS TO SAFE WATER (1976) ACCESS TO ELECTRICITY Z of population - total 35.0 % of population - total - rural NUTRITION (1977) EDUCATION (1980) Calorie intake as % of requirements 94.2 Adult literacy rate % 40.0a/ Per capita protein intake Primary school enrollment Z 60.0 (grams/day) 57.0 GN? PER CAPITA IN 1981 b/: US$236 GROSS DOMESTIC PRODUCT IN 1981 ANNUAL RATE OF GROWTH (%, constant 1976 prices) c/ US$ Mln. % 1969-74 1974-81 GDP at Market Prices 1,253.5 100.0 3.2 5.4 Gross Domestic Investment 282.4 22.5 3.6 12.9 Gross National Saving 109.3 8.8 Current Account Balance -172.5 -13.7 Exports (g+nfs) 150.9 12.0 0.7 7.1 Imports. (g+nfs) 332.) 26.5 -1.3 10.9 GOVERNMENT FINANCE (Central Government) (RwF Mln.) Z of GDP 1981 1981 1977 Current Revenue 13,400 12.7 11.5 Current Expenditure 10,408 12.1 8.6 Current Surplus 2,992 0.6 2.9 Development Expenditure 1,978 2.2 1.4 a/ According to estimates by the Ministry of Primary and Secondary Education. b/ The per capita GNP estimate calculated by the same conversion technique as the World Bank Atlas. kll other conversions to dollars in this tasble are at the average exchange rate prevailing during the periol covered. c/ Trend rates based on least squares estimates. Not available. Not applicable.  COUNTRY DATA - RWANDA MONEY, CREDIT and PRICES 1977 1978 1979 1980 1981 1982 a/ (Million RwF outstanding end period) Money Supply b, 10,175 11,204 14,112 14,270 16,060 17,460 Bank Credit to Government (net) 363 23 -1,473 -3,829 -2,778 150 Bank Credit to Private Sector 4,389 5,134 4,564 6,480 8,147 9,765 (Percentage of Index Numbers) Money as % of GDP 14.0 13.8 14.6 13.4 13.8 12.8 Consumer Price Index (Jan-Mar 1976=100) 116.7 131.3 152.1 163.2 173.8 191.2 Annual percentage changes in: Consumer Price Index 14.5 12.5 15.8 7.3 6.5 10.0 Bank Credit to Government (net) -77.4 -93.7 -6504.3 -159.9 27.4 105.4 Bank Credit to Private Sector (net) 60.1 17.0 -11.1 42.0 25.7 19.9 BALANCE OF PAYMENTS 1978 1979 1980 1981 1982a/ MERCHANDISE EXPORTS (AVERAGE 1978-82) 1978 1979 1980 1981 1982a- US$ Mln % (US$ Millions) Coffee 78.0 56.1 Exports (g+nfs) 126 227 166 151 156 Tea 10.7 8.2 Imports(g+nfs) -261 -309 -323 -332 -348 Caesiterite 16.6 12.6 Resource gap (deficit-) -136 -82 -157 -181 -192 Pyrethrum 5.1 3.8 Cinchona 1.7 1.3 Factor services (net) -5 -2 5 12 10 other 22.5 17.3 Net transfers -- 5 -3 -3 TOt 135.7 100.0 Balance on Current Acet. -141 -79 -155 -172 -182 Official grants 95 128 106 106 97 Direct private for. invest. 10 13 17 19 19 EXTERNAL DEBT, DECEMBER 31, 1981 Net M&LT Loans 19 40 33 25 30 US$ Mln. Nethe MELT Lane 19 -2 3 25 30 Public Debt, incl.guaranteed 172.1 other M&LT (net) 1 -22 -2 2 - Non-Guaranteed Private Debt Net short-term capital 21 -10 22 20 - Total outstanding & disbursed Capital flows, NEI -6 1 -2 -9 -3 Errors & omissions 5 -1 -6 10 - NSET DEBT SERVICE RATIO for 1982 a,d, Increase in reserves (-) -4 -70 -13 -1 42 Gross reserves (end-year) 100.0 177.6 208.8 199.2 161.6 Public Debt ic. guaranteed 2.8 * * * Public Debtincl.-guaranteed Prvae.8b Petroleum importsc/ 17.0 23.0 30.0 42.0 TNon-guaranteed Private Debtu. Petroleum exportst/ . . . . ~~~Total outstanding & disbursed . Petroleum exports~/. RATE OF EXCHANGE Annual End IDA LENDING (February 28, 1983) e/(D $ Ml.) Averages Period Outstanding & Disbursed 79.4 1974-82 December 1982 Undisbursed 102.0 US$ 1.00 - RwF 92.84 92.84 Outstanding incl. RwF 1.00 - US$ 0.011 0.O1 Undisbursed 181.4 a/ Preliminary estimates. b/ Includes money and quasi-money. c/ Crude and derivatives. d/ Debt service net of interest earned on foreign exchange reserves as a percentage of Exports of Goods and Non-Factor Services. e/ US dollar amounts equivalent for IDA VI credits (expressed in SDRs) are calculated at the rate as of February 28, 1983. Not available. Not applicable. - Less than US$0.5 million.  CHAPTER I: INTRODUCTION AND SUMMARY A. Scope, Structure, and Main Themes of the Report 1.01 Rwanda celebrated the twentieth anniversary of its independence on July 1, 1982. Upon this occasion, the President (of the Republic) presented a speech in which he remarked not only upon the substantial progress in economic developmenat that Rwanda has achieved over the past twenty years, but also identified areas in which progress to date has been disappointing and other areas in which the future will present a combination of challenges and opportunities. 1.02 The focus of this report is broadly similar to that of the President's speech in that the report provides, firstly, a review of the evolution of the economy in recent years (particularly since the mid-1970s); and secondly, a diagnosis of the main constraints, both internal and external, to the country's development. In addition it includes: thirdly, an assessment of Rwanda's near-term economic prospects, with particular reference to the balance of payments and public finances; fourthly, a selective review of issues concerning population, agriculture, energy and transportation; andt finally, some recommendations concerning what actions need to be taken -- mainly by the Government but to some extent also by the donor commntmity -- to address the principal issues and to cope with the principal constraints. A central conclusion of the report is that Rwanda will have to cope with some different and indeed more difficult constraints (particularly financial constraints) in the years ahead as compared to those it faced in past years. 1.03 Although it may appear from the above that the present report is both ambitious and comprehensive, its scope of coverage and depth of anialysis are in fact limited and selective. For example, the report's time perspective is limited in the main to the latter half of the 1970s and the early- to mid-1980s. The sectoral coverage is concentrated upon the few sectors listed above. And many important issues (including, for example, those relating to education, nutrition, health, infrastructural development, the tariff structure, the adequacy of tax administration, income distribution, communal and prefectural administration, migration, employment and wages, etc.) are assessed only cursorily if at all. Some of these sectors and issues are of course addressed in other documents and some will be addressed by the Bank, in the course of coming months and years, in the context of an expanded economic and sectoral work program for Rwanda. A substantial proportion of this work program will be devoted to the further analysis of key issues in agricultural development. 1.04 Another caveat relaLtes to the quantity and the quality of the data contained in this report and its Statistical Annex. Rwanda's statistical base is unfortunately quite weak on both accounts, and this inevitably handicaps the rigor and reliability of analyses based on these data. Whereas the data concerning money, credit, and foreign exchange reserves may be deemed to be reasonably reliable, data concerning the national accounts, agricultural production, and even trade movements, the  -2 - consumer price index, and budgetary accounts are incomplete and/or unreliable to varying degrees. Readers should therefore make due allowance for this situation, especially when citing this report as a source. In arriving at its main findings and conclusions, the mission has exercised some care to make appropriate allowances for the margins of error considered to apply to each set of data. Nevertheless, more complete and reliable statistics are indispensable for performance monitoring and policy making. Thus, an "action program" is needed to produce more timely and accurate national accounts, commodity production data, government accounts, public enterprise financial accounts, aid flows by end-use and periodic reports on selected key indicators at the macroeconomic, sectoral and project levels. Clearly, more technical assistance is needed in this area, while at the same time there is a need to ensure that such assistance as is already being provided is used more effectively. 1.05 A central theme of this report is that the policy framework and instruments of policy which appear to have served Rwandan development in the late 1970s will not be adequate or appropriate to meet the challenges of changed circumstances in the remainder of the 1980s. In comparison with many -- indeed most -- African countries, Rwanda's economy fared reasonably well over the years 1975-82, notwithstanding disruptions caused by the 1978-79 conflict in Uganda and the decline in Rwanda's export price index which occurred in 1980-82. For not only did Rwanda's GDP grow at a relatively rapid rate over this period, but so was Rwanda's experience -- at least until 1981 -- the exception to what was happening in much of the rest of Africa insofar as Rwanda also succeeded in: raising its governmental and total domestic savings rates; containing the growth of credit (thereby limiting the extent to which inflation was fueled by excess demand); increasing its foreign exchange reserves; raising its share of exports in GDP; increasing food production at a faster rate than population growth (thereby averting a growing dependence on food imports); and containing the growth of the country's debt burden to a manageable level. As a consequence of the relatively favorable directions in which these key indicators of economic performance were moving, Rwanda was able to achieve some real growth while at the same time it averted the kind of balance of payments and fiscal crises that were emerging in much of the rest of Africa by the late 1970s. 1.06 Some of the catalysts to Rwanda's relatively favorable growth performance over this period were external: good weather, improved terms of trade, and large aid inflows which facilitated the maintenance of a much-enlarged resource gap. Since 1979, however, world coffee prices have fallen substantially while at the same time worldwide economic difficulties have led to a marked deterioration in the "international aid climate". In the months and years ahead, Rwanda must be prepared to cope with a less favorable combination of external factors than has characterized the recent past. In the past two years, the Government has already had to face a deterioration in its budgetary and balance of payments positions, and the near- to medium-term prospects are such that priorities will have to be changed, policies adapted, and overall economic management improved  considerably if Rwanda is to avert both the prospective financial crisis and decline in per capita income that would be the consequences of delayed or insufficient action on these fronts. 1.07 Part I of the reporl: provides a diagnosis of how and why these (and other) performance indicators moved as they did in the 1970s and 1980s to date; an assessment of some issues of macroeconomic management; an interpretation of some implications of the changing circumstances which Rwanda's policy makers must confront in the mid-1980s; and a set of recommendations for policy acl:ion. 1.08 Thus, Chapter 2 reviLews in some detail, mainly from a macroeconomic perspective, the evolution of the economy over the past decade or so, with emphasis onI the period 1974-82. 1/ One of the main conclusions of this chapter is that whereas the Government's development policy was, until recently, successful in averting fiscal and balance of payments difficulties, it was much less successful in fostering either increased domestic commodity production or productivity improvements. 1.09 Chapter 3 considers a number of institutional issues in economic management, with particular reference to how and why certain improvements are urgently needed in budgeting practices, investment programming, and management of the parastatal sector. The analytic core of Chapter 4 is a set of projections of Rwanda's medium-term prospects. These projections point to the needs for Rwanda's policy makers to pursue a more active exchange rate policy and to take other new measures to raise government revenues and to contain the growth of both imports and current expenditures. This is largely, because, as was noted above, a number of those external factors (e.g. t:erms of trade) which stimulated GDP growth in the recent past will surely be less favorable in the years ahead than in years past. Consequently, the Government will have to adjust its objectives and priorities to give greater emphasis in particular to financial management issues. The requisite degree of austerity will not be easy to impose, especially sirLce this may imply some reductions in public sector employment and real wage levels, and a resistance to pressures for expansion of social services (e.g. health and education) at a rapid rate. Moreover, to some extent, the favorable external circumstances of recent years have "masked" the underlying severity of the most fundamental pressure building in Rwanda, namely that of rapidly-growing population on the land. This is by no means just a long-term problem. Chapter 5 concludes Part I by setting forth a number of recommendations for government action, mainly with respect to economic management at the macroeconomic level. 1/ One reason why the review is provided in somewhat greater detail than is typical of Bank economic reports is that the last published Bank economic report on Rwanda is now more than six years old.  -4- 1.10 Part II of the report comprises separate chapters on population, agriculture, energy and transportation. A number of the issues considered in these chapters are sector-specific and relatively independent of each other. For example, judgments concerning the appropriateness of, say, family planning and energy pricing policies are derived from quite different criteria. On the other hand, it is obvious that transportation and agricultural investments and policies must be closely linked, and that the country's rapid population growth -- in the face of an already very high man-to-land ratio and limited prospects (at least in the near-term) for creating productive employment opportunities outside the agricultural sector -- has a bearing on all sectors, not to mention the budget and the balance of payments. Like other reports on Rwanda, this report concludes that the single most important issue in Rwanda today -- and for the foreseeable future -- is the demographic issue. The above-noted inter-relationship between Rwanda's rate of population growth and its agricultural prospects in particular was stressed by the President (in his July 1, 1982 speech) when he observed: "Very rapid population growth has resulted in a reduction of land availability for foodcrop production; continuing deterioration of the soil, and fragmentation of productive land holdings without improvement of cultivation practices (...), which are among the causes which have inhibited food production." Moreover, Rwanda's educational and health policies and programs in particular will have a great bearing on whether family planning and other measures affecting the rate of population growth can be effected quickly and effectively enough to avert the grave social and economic crisis that seems inevitable in the absence of such measures. 1.11 There are two other themes which cut across the sectors. One is that the afore-mentioned need for financial austerity in the years ahead will call for a stricter rationing of resources and the vigorous implementation of policies to mbilize resources, contain subsidies, recover costs and otherwise bring prices of services provided by public enterprises more into line with their full costs. Hence, the Ministry of Primary and Secondary Education must be just as concerned with cost-effectiveness as, say, the Ministry of Public Works. The problems of overstaffing and under-management of parastatal agencies, as well as of many government departments, are manifest in mst sectors. 1.12 Another theme, not unrelated to the last, is that the impending 'pgriode de p6nurie" will call for across-the-board "intensification" efforts whereby increased priority needs to be given to production vis-a-vis other objectives, and whereby increased efficiency of resource use in the public sector needs to be facilitated by: (i) the preparation of a national Public Investment Program (PIP) which is in turn based upon realistic and feasible "hard-core" sectoral investment programs; and (ii) the formulation of time-specific sectoral action programs which spell out (as the Five-Year Development Plans have not done) policy changes as well as expenditure priorities requisite to achievement of the principal sectoral development objectives. Such action programs are most urgently needed for family planning and the commodity producing sectors, namely agriculture and manufacturing.  - 5 - 1.13 It is of course recognized that much additional work, including in some cases much more refined analysis, will be required to shape new policy instruments and to translate the generally broad recommendations contained in this report into time-specific action programs. This is of course fundamentally a task for the Government. But it is one in which donors may be of great assistance. It is hoped that this report, and its discussion amongst donors as well as amongst government officials, may serve to foster a somewhat greater degree of consensus both as to the nature and implication of the economic difficulties that Rwanda seems likely to face in the months and years ahead, and as to what most needs to be done, separately and jointly, by all parties concerned with Rwanda's development. B. Main Findings., Conclusions and Recommendations 1.14 A number of the main findings and conclusions of the report have been touched upon in the above paragraphs. The following paragraphs will concentrate on the mission's numin findings insofar as they relate to Rwanda's medium-term prospects, some issues relating to macroeconomic management, and key sectoral developments and issues. The main recommendations concerning macroeconomic management are summarized in paras. 1.25-1.31 and are elaborated upon in Chapter 5. The main recommendations concerning sect:oral priorities and policies are included in paras. 1.32-1.60 and are elaborated upon in Chapters 6-9. Macroeconomic Developments 1.15 Rwanda's GDP growth between 1969 and 1981 is estimated to have averaged about 4 percent in real terms. The period 1969-1974 was one of slow growth (about 3 percent per annum on average) whereas the period 1974-81 was one of relatively rapid growth (over 5 percent per annum). In the 1969-74 period, adverse weather conditions and the absence of significant changes in production techniques combined to keep the rate of growth of agricultural production below the rate of population growth, estimated at 3.2 percent during that period. The growth of other sectors was constrained by low rates of savings and investment and by a low level of imports. But with governmental current expenditures consistently above revenues (which were largely dependent on foreign trade, which was stagnant), there was resort to bank financing of the overall budgetary deficit. At the same time, even though the current account deficit of the balance of payments was contairLed to only 3 percent of GDP, capital inflows werie not sufficient to cover this deficit, and there was a decline in international reserves to a level equivalent to less than one month's imports by the end of 1974. 1.16 As noted above, some of the catalysts to Rwanda's accelerated growth during the period 1974-81 were external: weather, terms of trade and capital inflows. On the wrhole, Rwanda enjoyed good weather during  this period, and this was undoubtedly an important factor accounting for more rapid agricultural growth. The income gains which resulted from the improved terms of trade during 1976-79 were substantial, equivalent to 3 percent of GDP, and more than made up for the estimated 1-2 percent of GDP lost as a direct consequence of the closure of the Uganda border in 1978 and early 1979. Increased external assistance was particularly important, as aid flows were equivalent to 13 percent of GDP in 1974-81, as compared to only 2 percent in 1969-74. The extent to which Rwanda has been a most-favored beneficiary of foreign aid in recent years is indicated by the fact that, in 1979, per capita disbursements of net official development assistance (ODA) totalled US$34, nearly twice the average for Africa as a whole. The adverse effect on the economy of the 1979-80 oil price increases was relatively small insofar as petroleum imports, which had been equivalent to less than 2 percent of GDP before the price increases, were still equivalent to only 3 percent of GDP after the increases. 1.17 The combination of improved weather and terms of trade plus increased capital inflows in the second half of the 1970s had mutually reinforcing and beneficial effects on the budget, balance of payments, savings and investment rates and, of course, on economic growth. The weather facilitated increased food production (thereby mitigating the need for food imports) and export crop production (thereby adding to export duty receipts as well as to foreign exchange earnings). The improved terms of trade also served to raise export and import duties (insofar as Rwanda's exports now financed a relatively larger volume of imports, upon which the revenue structure is highly dependent). And the increased capital inflows facilitated the rapid growth in imports, thereby adding to government revenues. Mainly as a consequence of these developments, Rwanda's tax ratio (taxes as a proportion of GDP) increased from an average of 6 percent in the early 1970s to about 10 percent in the 1974-81 period, thereby enabling the Government to increase both its current expenditures (some of which, like teachers' and extension workers' salaries, were development-oriented) as well as its development (public investment) expenditures. Notwithstanding the fairly rapid growth of government expenditures, the government budget registered overall surpluses in most of the years since 1975. The demand management policies pursued by the Government (as reflected in a very low rate of expansion in total domestic credit) enabled it to contain the inflationary forces resulting from periodic scarcities related to border closures, high world inflation, and significant increases in international petroleum prices. In the wake of rapid import growth, the current account deficit increased to 10 percent of GDP during the period 1974-81. Throughout most of this period, however, the increase in aid flows led to a significant build-up of gross international reserves. Owing to the very high concessionary element in these aid flows, the annual debt servicing burden remained low; thus, in 1981 (as in 1970) the debt service burden was equivalent to less than one-half of one percent of GNP and to less than 2 percent of exports of goods and non-factor services. 1.18 Whereas Rwanda's accelerated growth in the second half of the seventies was aided by favorable external factors, the Rwandan authorities surely deserve credit for a number of aspects of their overall economic  -7- management, including the prudence of their fiscal, balance of payments, and debt management. Indeed, t:he Government is to be commended for its devotion to development. Fundamental factors in this context have been the country's political stability, the relatively low share of resources devoted to defense expenditures, and the Goverment's concern with fostering equity in economic opportunity. Among the specific development-oriented actions of recent years for which the Government is to be commended are the following: (i) the emphasis given to developing physical infrastructure (especially transportation, in due recognition of the substantial externalities of this sector's development);. (ii) the increased emphasis given to the identification and implementation of agricultural projects and programs oriented to raising smallholder productivity; (iii) the raising of coffee producer prices (in 1977) to the highest level (in real terms) in Africa; (iv) the adoption (in 1979) of a comprehensive reform of the education and training system, with the (well-placed) objective to better adapt this system to the country's economic and social development needs; (v) the taking of some first steps towards addressing the problem of Rwanda's high rate of population growth; and (vi) the attempt to foster the capabilities of communes to serve as multi-purpose instruments of local development, including through their roles as collectors of local taxes, and as initiators and implementors of local development projects. Among the several accomplishments of the communes have been the construction of school buildings and health centers, the upkeep of local roads, and reforestation efforts. 1.19 A combination of external and internal developments in 1981-82 began to have adverse financial effects, revealing at the same time Rwanda's extreme vulnerability to external events and the extent to which the favorable external environment of the preceding years had "masked" certain weaknesses of domestic development efforts. Thus, although the economy continued to expand in 1981 and 1982 (though in the latter year at a lower rate), expansionary fiscal policies, together with unfavorable terms of trade, resulted in EL deterioration in both the budgetary position and in the balance of payments. This deterioration was exacerbated by a substantial (17-21 percent) appreciation of Rwanda's trade-weighted exchange rate since 1980 -- an appreciation which stemmed from the pegging (since 1974) of the Rwandan franc to the U.S. dollar. 1.20 Among the mDst worrisome indicators of shortcomings in the Government's development programs and policies are: (i) in the face of rapidly changing external conditions and domestic inflation, the lack of a sufficiently rapid response capability and flexibility in adjusting the exchange rate, interest rates, tariff and tax rates, and the prices of services supplied by public enterprises; (ii) the launching of various projects and programs (e.g. the 1979 education reform) in the absence of a realistic medium-term macroeconomic framework, with the consequence that there was not sufficient regard given to financial feasibility; (iii) insufficient coodination and control in invostment planning, with the consequence that the actual allocation of public investment was largely a function of the preference cf various aid donors who identified, prepared  - 8 - and financed projects of their own choosing in an un-coordinated manner; (iv) the failure of many agricultural projects and programs to have their intended effect on output and productivity; (v) inadequate progress in export and industrial diversification in the absence of well-articulated investment and policy action programs geared to achieving those objectives; (vi) at the level of the Central Government, an excessive growth of employment, partly attributable to the policy of practically guaranteeing employment to secondary school graduates; (vii) deficiencies in budgetary processes, notably the lack of integration between budgetary and investment programming processes and, in particular, a lack of sufficient analysis in the formulation of recurrent budgets; (viii) rising costs, diminished profitability, and in some cases growing subsidies to parastatal enterprises whose multiple objectives were often not clearly enough specified, whose financial accounts were poorly maintained, whose staffs and payrolls became over-inflated, and whose efficiency of operation has not been adequately monitored; and (ix) inefficiencies in the taxation and service-provision functions of the communes, and their financial over-extension. Finally, it must also be deemed a serious shortcoming of Rwanda's management in the 1960's and 1970's that a policy and program of national family planning were not pursued more aggressively, given the overriding importance of this issue in a longer-term perspective. During the past two years the Government has begun to focus on this problem, but there remains an urgent need to develop and implement a well-conceived action program for accelerating the adoption of family planning and otherwise coping with the country's serious population problem. Medium-term Prospects 1.21 Rwanda must be prepared to cope with a marked slowdown in economic growth in consequence of increasingly severe balance of payments and budgetary difficulties. Indeed, the Government already made some hard choices in its preparation of the 1983 development budget. Although most ongoing projects have been funded, some have been left out of the budget altogether, while only a few new projects have been included. In years past, Rwanda's limited absorptive capacity (i.e. the country's capacity to identify, prepare and effectively implement projects and programs with satisfactorily high economic and financial rates of return) could be said to constitute the binding constraint to the country's development. It now appears that import capacity and domestic resource mobilization have become the binding constraints, and are likely to remain such for some time to come. 1.22 The magnitude of the balance of payments and budgetary difficulties with which the Government must cope is illustrated by a set of near-term projections which assume, inter alia, and in some cases rather arbitrarily, that: (i) coffee exports during 1983-86 will average about 29,500 tons per year, which presupposes that Rwanda will be able to sell some coffee to non-ICA countries; (ii) the terms of trade index (which in 1982 was some 20-25 percent below the 1977-80 average) will deteriorate during 1983-86 (by about 10 percent by 1986); (iii) aid donors will maintain the growth of their net aid disbursements at 5 percent and their loan disbursements at 8 percent per year, both in real terms; and (iv) the  - 9 - rate of growth of agricultural output will Blow down to about 3.5-4.0 percent annually, i.e. about the same rate as population growth. The mission's illustrative projections indicate that -- in the absence of changes in the exchange rate, tax and tariff rates or in the statutory liLmit on government borrowing -- there would be virtually no scope for real growth in either imports or total government expenditures over the next several years. 1.23 One of the implicat:ions of this projected scenario is that in order for there to be an rea:L growth in investment (which is highly dependent upon the growth of capital goods imports) while at the same time avoiding a decline in capacity utilization (implying the need for some real growth in intermediate goods :Lmports), there would have to be a very substantial absolute reductioni in consumption goods imports. Yet these are the very imports upon which government revenues are most dependent. For given the structure of governmaent revenues (whereby more than half of such revenues have been generated by the taxation of foreign trade) the deterioration of Rwanda's external account has had -- and will continue to have -- adverse repercussions on export and import duty receipts and hence on the level of government expenditures (both current and capital) which can be sustained without givillg rise to excessive deficit financing. Thus, the mission's revenue projections imply that in order for there to be any real growth in budgeted development expenditures (such growth being a necessary condition for utilizing existing and new commitments of project aid), there must be an absolut:e reduction in current expenditures in real terms. 1.24 This is not to say that all of the burden of fiscal adjustment should fall on current expenditures, particularly since some current expenditures would surely have! a greater developmental impact than certain investments of dubious economic value. Rather, the main conclusion to be drawn from the budgetary projections is that in the absence of substantial measures to raise revenues and. curtail current expenditures, government savings will decline and the Government's development effort could be brought to a virtual halt. Expenditure growth financed by expanding bank credit to the Government is clearly not a viable solution, since the ensuing inflation would exacerbate the fundamental problem of financial disequilibrium. Moreover, sone measures that could improve the budgetary situation in the short-run (e.g. borrowing abroad at high interest rates to sustain the growth of high-duty consumer goods imports or taxing exports at the expense of eroding production incentives) would lead to a deterioration in the country's medium-term balance of payments and over time could be self-defeating, both in terms of effecting stabilization and promoting longer-term economic growth. Macroeconomic Management, Issues and Recommendations 1.25 This illustrative scenario points to the conclusion that Rwanda's prospective budgetary and balance of payments positions are more precarious than has generally been appreciated, at least outside Rwanda. This last distinction is an important one, for one of the more favorable aspects of the situation in Rwanda has been the willingness of the Government to acknowledge the growing gravity of the macroeconomic situation and to  - 10 - consider preventive as well as curative measures. That scenario is however unduly pessimistic insofar as it represents an outlook "without policy reform". What is now called for is the generation of a scenario that remains based upon realistic assumptions (about such factors as weather, terms of trade, capital availabilities and absorptive capacity) but which represents an outlook "with policy reform". What is required may be characterized as a stabilization-cum-structural adjustment program that gives due weight to both demand management and supply-side measures. 1.26 The changed circumstances of the 1980s will call for some new policies, the shaping of some new instruments of economic management, some institutional innovations and/or re-arrangements, and the undertaking of various studies and improvements in the data base to provide a better foundation for informed analyses of policy issues. The changed circumstances will call in particular for: (i) more active and analytic policy-making with respect to the appropriate setting and monitoring of exchange, tax, tariff, interest and public sector wage rates; producer prices; and parastatal output prices; (ii) preparation of a realistic Public Investment Program based upon realistic forward-budgeting exercises; (iii) preparation of sectoral Action Programs -- initially for population and family planning, agriculture, and manufacturing; (iv) related to (ii) and (iii) above, the identification of "core priorities" for current as well as capital expenditures, and the undertaking of a project/program "pruning exercise" to facilitate the concentration of resources (including scarce managerial and administrative capabilities as well as financial resources) on highest-priority uses; (v) a more rigorous application of controls on public sector employment; (vi) improved institutional and procedural arrangements to facilitate intra-governmental communication and policy coordination (both technical and political), better aid coordination, and a more efficient use of external aid (both financial and technical assistance); and (vii) the undertaking (with technical assistance) of new studies on: trends in and determinants of migration; potentialities for additional domestic resource mobilization, including through reforms in the tax structure and improvements in tax administration; the tariff structure (giving due emphasis to efficiency as well as revenue and equity considerations); the economics of parastatal operations; how to improve the productivity of technical assistance; and the establishment of appropriate criteria for the setting of export producer prices.  - 11 - 1.27 The substantial but unplanned appreciation of Rwanda's (trade-weighted) exchange rate which has taken place since 1980, combined with the substantial decline since 1977-78 in export producer prices (especially for coffee but also for other export commodities) point to the need for the Government to take corrective measures to realign the relative priLces of tradeable and non-tradeable goods and services. In particular, the internal terms of trade need to be shifted back in favor of rural and agricultural development vis-a-vis the urban and service sectors. In the mission's opinion, in the absence of some exchange rate adjustment to help effect these objectives, too much of the adjustment burden -- which must in any event take place to cope with the new conditions of budgetary and baLance of payments deterioration -- would have to be put on deflationary demand management (with mre adverse effects on production) and/or on administrative trade controls, which experience in many countries has proven to be cumbersome and inefficient. 1.28 To date, the Government has been understandably proud of the relative strength of its currency and understandably reluctant to (seemingly) join the ranks of those countries for which devaluation symbolizes poor economic management. Unlike in many African countries, however, Rwanda's current financial and balance of payments difficulties are more attributable to external factors than to poor economic management, andi the appreciation of its real effective exchange rate has stemmed more from the fact that the Rwandan franc has been linked to the U.S. dollar than from a domestic rate of inflation in excess of inflation in Rwanda's trading partners. Moreover, a principal reason why devaluations by some countries have not "worked" in terms of effecting the intended adjustments has been those countries' lack of financial discipline in the aftermath of these devaluations. In contrast, Rwanda's history of relatively prudent financial management points to the likelihood that Rwandan exchange rate correction would ir. fact be accompanied by a containment of domestic absorption such that the changes in relative prices and incentives thereby effected would not quickly be offset by an excessive expansion of aggregate demand. The fiscal measures adopted in the 1982-83 budgets provide some concrete evidence that the Rwandan authorities appreciate the necessity for more restrictive demand manageiment. What is needed now is the formulation and implementation of complementary supply-side measures aimed primarily at enhancing incentives and raising productivity in the agricultuiral and export sectors. 1.29 In order to minimize the future impact of exchange rate variability among the major currencies on the external current account, it would appear desirable for Rwanda to delink the franc from the dollar and peg it instead to a broader-based basket of currencies. With respect to its demand management policies, the Government needs to define public sector credit, subsidy and expenditure ceilings consistent with a recognition that a reduction in the public sector wage bill (in real terms) cannot be avoided, and that there is only a very limited margin for shiLfting the burden of adjustment through additional foreign borrowing. Hence, any adjustments in tariff, tax, or public sector wage rates aimed at diminishing the adverse impact of a devaluation on living standards of particular income groups must be very limited and selective. A major  - 12 - effort must be made to reduce the numbers of redundant employees in the parastatals, mixed enterprises and government administration. At the same time that these and other measures are taken to cut costs, revisions of parastatals' output prices should be made more promptly and in accordance with the principle of full-cost recovery. 1.30 Among the most essential measures that need to be taken on the supply side -- in addition to the setting and maintaining of an exchange rate that restores and/or preserves sufficient incentives to agricultural and export production -- are: (i) the prompt implementation of SOMIRWA's recovery and investment program; (ii) greater concentration of scarce financial and managerial resources on a "hard-core" of priority projects and programs identified through a strengthened investment programming process; (iii) actions to strengthen the communes as instruments of domestic resource mobilization and rural development; and (iv) the implementation of various sectoral policy measures, as outlined below, that would serve to increase commodity production and to establish the critical physical, human, and institutional infrastructure upon which the country's longer-term growth prospects will rest. 1.31 Since the undertaking of these measures will put most of the burden of adjustment on urban dwellers and on public sector employees, an exceptional degree of political courage will be called for on the part of the country's leadership. Yet unless such measures are undertaken -- and soon -- the outcome may well be a worsening of price distortions, increasing financial disequilibrium, accelerating inflation, stagnating exports and foreign investments, and a total disruption of the impressive development efforts which Rwanda has made to date. Thus, it is essential that the Government should act swiftly to correct some shortcomings of its development administration by taking the kinds of initiatives (as summarized in para 1.26 above) that would simultaneously serve to avert a financial crisis and minimize the adverse effects of the adjustment process on the country's development prospects. In sum, the mission's assessment of past performance and its appraisal of the near-term outlook point to the conclusion that the most essential needs are for the Government to clarify its priorities, consolidate its ongoing programs, elaborate its sectoral and macroeconomic policy frameworks, concentrate its financial and managerial resources, and to apply "critical masses of such resources to a limited number of "hard core" priority tasks. Those priority tasks comprise raising agricultural productivity, containing population growth, and developing human resources at the maximum pace that physical and financial constraints may permit. Sectoral Developments, Issues and Recommendations Population 1.32 Rwanda is the most densely inhabited country in continental Africa. Its 1982 population was estimated at about 5.5 million and population density in terms of agricultural land at about 390 per sq km. Although birth rates have traditionally been high, population growth in the past was restrained by high mortality, primarily owing to famine and  - 13 - communicable disease and to a lesser extent by emigration to neighboring countries. Since the last severe famine in 1943, the risk of famine has diLminished, partly because of the introduction of weather-resistant, high calorie-yielding crops. As in most developing countries, improved health conditions have also contributed to reduced mortality in the past two decades. Emigration has also declined since the 1950's. The rate of growth of. the population has therefore steadily accelerated, from about 2 percent in the late 1940s to 3.3-3.5 percent between 1970 and 1978, to an estimated 3.6 percent between 1978 and 1982 -- among the highest in the developing world. In the traditionally settled areas, this rapid population increase has led to a reduction in farm size associated with soil depletion, deforestation and a reduction in the cattle herd. It has also led to miLgration to relatively less-populated (albeit less productive) regions, as well as to the rapid growth of Kigali. Migration within the rural areas has been influenced by the fact that increased agricultural production has to a large extent been achieved through an expansion of the agricultural frontier. There is some evidence that it is the farmers with relatively less land who migrate to other rural areas, whereas migration to the urban areas has included that of young men with relatively high levels of education in search of better employment opportunities. 1.33 Rwanda's fertility, estimated at about 8.3 children per woman in 1978, is the highest estimated for any country. Improving health conditions may have mixed effects on fertility in the short-run, since improving maternal health tends to increase fertility, whereas improving infant and child health tends to reduce it. In any event, it takes considerable time for the effects of declining fertility to be reflected in total population size, and Rwanda's population seems sure to be (barring large-scale emigration) about 10 million by the year 2000. However, if Rwanda were able to bring about a rapid decline in fertility, similar to that achieved in countries with strong family planning programs, this could have a very large impact on the situation faced by the next generation. According to the mission's projections, as of the year 2020 Rwanda's population could lie between 23.5 million (without a change in the fertility rate) and 14.1 million (if national family planning were relatively quickly and effectively implemented). 1.34 The Rwandan Government has gradually come to appreciate that the precarious balance between the nation's limited physical, financial and human resources calls for it to take a more active role in fostering family planning. The main concern relates to the pressure of people on the land and the adverse effects this is having on the environment, on agricultural yiLelds, and the prospects that Rwanda will be able to feed itself in the years ahead. Rapid populatioa growth is also creating unmet new demands for employment and consumption of government resources (financial and otherwise) at the expense of the country's capability to use those scarce resources for programs and projects that could otherwise increase commodity output, raise productivity in all sectors, and create new productive employment opportunities. It is obvious that Rwanda can only hope to "solve" its population pressure problems through bringing about a decline in fertility as quickly as possible, since it is not only the livelihood but the very liLves of the people which are at stake.  - 14 - 1.35 Among the steps taken by the Government towards the formulation of a population policy have been: (i) the creation of a Population Council in 1974 to study problems related to population growth; (ii) establishment. of a National Population Office (ONAPO) in 1980 to plan, coordinate, and monitor all population activities; (iii) the start of a program by ONAPO to sensitize the population about the implications of excessive demographic pressure on the country's limited resources; and (iv) the start of a few pilot family planning programs to test the effectiveness of alternative service delivery methods and to determine the knowledge and use of family planning among the local population. While these efforts constitute positive steps which can serve to increase awareness at the national level, they are still insufficient in view of the importance and urgency of the need to accelerate progress. The scope and nature of a nationwide family planning program remain to be defined and translated into a set of programs/projects to be incorporated in the national development program. Thus, the Government needs to put family planning, along with agriculture and rural development and education, as one of its highest priorities. A means of its doing so would be to give very high priority to the formulation and implementation of a target-explicit, time specific, coherent, detailed, and monitorable action program for family planning. 1.36 A main constraint to the dissemination of family planning information and services is the lack of adequate health facilities and personnel. The planned expansion of health facilities may take too long unless the output of training facilities can be increased. Although the provision of specific in-country training in family planning is part of a USAID-financed project, this will not solve the problem of shortages of qualified personnel. At present, only doctors and high-level staff trained abroad are permitted to provide family planning services; the need for liberalization of these restrictions may be demonstrated as the demand for services increases. Although demand is expected to increase as a result of the sensitization program through mass media started by ONAPO, a large degree of uncertainty exists on the potential receptivity of Rwandan couples to family planning. The pilot programs as well as a nationwide fertility survey planned to start in mid-1983 are expected to provide valuable information on the potential demand for family planning among the local population. The results of these programs and studies should be assessed as quickly as possible and incorporated in the sectoral action program. But efforts both to raise demand and to increase capacity to deliver supplies and services need to be maintained in the meantime. Also needed is an updated study of trends in internal and external migration and the determinants thereof. Agriculture 1.37 Since the mid-seventies, foodcrop production has outpaced the rate of growth of the population. Favorable weather, growth in urban and project-induced demand, and major improvements in the road infrastructure and in commercial transport facilitated this growth in both total production and the share of marketed produce. Over the past decade, however, the growth in foodcrop production came mainly from a 40 percent  - 15 - expansion in the area under cultivation, as the yields of most crops have either been constant or declined. Reduced soil fertility and poor adaptation of foodcrops grown in the traditionally settled central plateau region to the different climatic and soil conditions of the more recently settled eastern savannahs and parts of the western mountainous region account for the declining yields of bananas and the traditional legumes, bieans and peas. A shift to tuber production during the past decade in part reveals farmers' attempts to maximize the volume of food production and rieduce risks when faced with growing land constraints and uncertain weather conditions. Despite the historic importance of cattle as a source of savings and prestige, declining pasture area and the difficulty of producing adequate fodder have reduced the scope for pastoral activity and is crowding cattle out of the farm system. Because other forms of small stock are adaptable to a lower quality feed, and are thus more readily accommodated within the constraints of the small farm, a gradual replacement of cattle by more efficient transformers, such as the small ruminants, pigs and chicken, has taken place over the last decade. 1.38 For a number of reasons, it will be difficult to sustain recent performance in the coming years. Firstly, options for further expansion of t'he area under cultivation are now extremely limited, and future growth will have to come largely from intensification within the farm system and introduction of critical measures to stem further soil deterioration. Secondly, the yields of most foodcrops have either been constant or declined and production incentives for export crops have diminished, heightening the competition between food and export crops. Thirdly, the fragmentation of land holdings, reflecting traditional inheritance rights, is progressively undermining the potential for subsistence agriculture. And fourthly, the unfavorable medium-term world market prospects for the prices of Rwanda's major export crops threaten the Government's ability to suppart planned agricultural development efforts. 1.39 The Government's wide-ranging efforts to develop the country's agricultural potential have been largely financed by external assistance. Although some of the benefits; of these efforts are indirect while other benefits can only be expected to be realized in the medium- to long-term, past investments have not on the whole yielded significant or sustained gains in productivity. By and large, insufficient attention has been paid to understanding the constraints under which farmers operate. Agronomic research has been carried out mainly within the controlled environment of research stations. Limited f'ield testing of new varieties and lack of farm systems research have weakened the validity of the results for extension, while promotional efforts have been designed without an adequate understanding of farmers' incentives. Thus, demonstration and extension efforts have often been ineff'ective because farmers were not motivated to adopt the recommendations. In some cases, poor organization of services failed to meet farmers' demands or to reinforce farmers' initiatives with reliable support services. Moreover, a failure to monitor results and lack of coordination among localized projects and national programs have resulted in an inability to identify problems, duplication of efforts, and a dilution of scarce resources.  - 16 - 1.40 Three areas require priority attention: (i) technical constraints to increasing production; (ii) the adequacy of producer incentives; and (iii) the institutional framework for policy formulation, investment planning, and implementation and monitoring of projects. The Government has recently taken some important steps to address the technical constraints. In particular, it has undertaken a comprehensive evaluation of research efforts to date and in early 1983 it held an international research seminar with the objectives of defining future research priorities and strengthening the national research effort. In the area of technical support services, a further review of past efforts and an analysis of alternatives for restructuring present services are warranted. In this regard, further farm surveys are required to review the economic viability of proposed technical packages and determine the relative importance of costs versus other factors, such as farmers' access to improved inputs and perceived risks of change to new technology, and to assess the scope for greater cost recovery on agricultural and livestock services and commercialization of input supply and distribution. An evaluation of the effectiveness of extension services would also be useful; experience suggests that expanded extension services will not necessarily improve technology transfer. In fact, there may be considerable scope for concentrating existing services on reducing the risks of adopting new technology (through clear demonstration), improving the understanding and efficiency of farm labor (through, for example, the training of women), and reinforcing existing incentives (through market development, e.g. upgrading the management of cooperatives and organization of transport). 1.41 The emergence of domestic and foreign financial constraints increases the urgency for Government to re-examine its export crop promotion policies and to improve the efficiency of its domestic food marketing and pricing policies. The lack of alternative sources of foreign exchange requires, at least in the medium-term, that Government maintain farmers' incentives to produce coffee, by far the most important export crop. The development of an effective and affordable strategy will require that price incentives be accompanied by increased productivity at the farm level as well as by improvements in the efficiency of the processing and marketing of coffee. Producer prices will have to be continually adjusted in order to preserve the competitiveness of cash crops at the farm level. The formulation of appropriate producer price policies requires a better understanding of the factors that make up the competitive and comparative advantages of export crop production, as well as permanent monitoring of changes affecting these factors. In the case of coffee, these factors include the cost and incentive structures of neighboring countries. Although Rwanda has recently managed to sell some of its coffee stocks to non-ICA countries, the prospects for future sales are likely to become increasingly difficult, with discount losses projected to be as high as 60 percent. Under these circumstances, the economic viability of upgrading coffee through the introduction of coffee-washing stations should be considered as a means to maximize foreign exchange earnings as well as productivity gains.  - 17 - 1.42 Providing adequate incentives for foodcrop production through improvements in the efficiency of domestic marketing and pricing policies will be more difficult. In contrast to coffee, the domestic marketing system for foodcrops remains small and underdeveloped, and there are significant seasonal and inter-regional price variations. With the exception of GRENARWA (a parastatal responsible for managing strategic stocks and stabilizing foodcrop prices) which in concert with local silo projects is beginning to exert a price-stabilizing influence, other government efforts -- such as the determination of support prices -- have not been effective. In view of this, the Government should reassess its role in market intervention and consider the implementation of policies directed at stimulating greater private sector participation in the effort to improve marketing while at the same time fostering competition among prLvate traders. Such policies could include: the provision of additional commercial credit for private trade and transport; training of technical and management assistance for local cooperative marketing and storage programs; the construction of improved marketing facilities in rural areas; and the establishment of a regular price information broadcast system. 1.43 Institutional improvements are necessary in the areas of policy formulation, investment planning, and project implementation and monitoring. To strengthen the formulation of agricultural policies, the Ministry of Agriculture must improve the technical and socio-economic information base. Present uncertainties about land use, the crop mix, yields, input use, and about the factors which influence decisions at the farm level are a major obstacle to the formulation of policy, the targeting of assistance, and the design of projects. Two national surveys to upgrade the agricultural data base are now underway. But these will not by themselves solve the problem, and in any event local capacities need to be developed to collect, process and analyze data on an ongoing basis. Another important information gap is that past project experiences have not yet been adequately evaluated. A retrospective review of projects -- their objectives, costs, achievements and problems -- is essential in order to avoid repetition in experimentation, to allocate resources more efficiently, and to better coordinate development efforts. 1.44 Although the Ministry of Agriculture has recently reinforced the units responsible for project preparation, financial control and monitoring, the Ministry does not have sufficient capacity to undertake the economic and financial analyses required to formulate sectoral policy and to plan, program and monitor sectoral investment on a continuous basis. The integration of these functions within the Ministry will require a review and possibly reorganization of existing services, in order to provide the coordinated inputs into policy design and project identification. One of the primary tasks of a policy and planning unit within the Ministry would be to develop (in coordination with the Ministry of Planning) a three-year agricultural investment program and to monitor  - 18 - related expenditures. In this regard, consistent guidelines for project implementation and monitoring need to be established. These guidelines should address, inter alia, the role of the communes in project planning and implementation; mechanisms for budget review and financial control; the design of monitor:ang systems at the farm level; the enforcement of cost recovery in project activities; the role of technical assistance in management and training functions; and the frequency and detail of project reporting. A clearer definition of national agricultural policies and priorities should help to focus external assistance as well as provide a more consistent framework for project interventions. This should be reinforced by regular project management and donor meetings to discuss sector issues, the results of ongoing projects, and priorities for future assistance. Energy 1.45 Rwanda's principal energy problems are related to the fact that it is a small, low income, densely-populated and landlocked country. Most Rwandans are forced by their low incomes to use traditional, non-commercial fuels for cooking and other basic energy needs. The high density of Rwanda's population has made woodfuels increasingly scarce and has put reforestation efforts in competition for land with crop production. Scarcity of woodfuels has led to increased use of agricultural residues as an energy source rather than as organic fertilizer, which has exacerbated the adverse impact on soil fertility of the long-term decline in farm size. 1.46 A work plan for the formulation of a national forestry policy and development plan, prepared in draft outline by the Ministry of Agriculture, is a useful step, although data collection on the extent and type of forestry resources by region, on wood use for various purposes, and on household consumption of fuelwood and agricultural wastes will be needed to effectively allocate forestry resources. Effective implementation of reforestation schemes will require increased and reoriented extension work. Extension workers have so far functioned primarily as guardians of state forestry plantations and woodlots. They now need to be trained to deal more directly with the rural population, with the aim of teaching farmers how to plant and manage woodlots and how to conserve woodfuels and agricultural wastes used for cooking. Furthermore, to encourage forest conservation, efficiency in charcoal production and consumption should be increased. Improved cookstoves should constitute an integral part of conservation efforts, and a program should be developed to encourage the population to convert from their traditional models which use twice as much fuel as the improved models. Simple improved kiln models should be provided, as these could reduce energy loss during the conversion process by up to 30 percent. 1.47 Peat might provide a partial substitute for fuelwood for small industries, rural institutions in a few areas, and perhaps eventually for urban households (but appropriate cookstoves would have to be developed). Rural households, which gather all their fuel at no financial cost, are not  - 19 - likely to shift to any type of marketed fuel. Detailed information on the exltent of Rwanda's peat reserves, and on their potential for exploitation, is still being collected. There is also a need to identify and develop suitable markets for peat. 1.48 Commercial fuels, namely petroleum products and electricity, account for only some 6 percent of total energy consumption. Commercial energy demand is concentrated in the towns and in isolated institutions such as tea factories, missions and mines. Commercial energy consumption grew at an average annual rate of about 9 percent over the period 1975-1980. Nonetheless, commercial energy consumption per capita and per unit of GNP remain far lower than in other countries of similar size and income level. 1.49 Rwanda has no domestic oil production or refining activity, and no apparent prospects for petroleum exploration. Petroleum product imports (at 50,000 tons per annum) are relatively small, accounting for only 13 percent of recorded imports of goods and non-factor services (despite an average c.i.f. cost of nearly US$100 per barrel) and come to Rwanda from Mombasa, a distance of over 1,700 km. Until recently, Rwanda purchased petroleum products from Kenya, at this country's insistence, at prices higher than those prevailing in international markets. Because of balance of payments difficulties Kenya has not been able to import crude oil for processing in its refinery and has, as a consequence, released neighboring countries from that obligation. This action has benefited Rwanda, which may now purchase petroleum products at lower prices. However, it is an action which may be reversed when Kenya's balance of payments position improves. It would thus be advisable for Rwanda to alternatively consider bringing petroleum products accross Tanzania once the Rusumo-Isaka road is opened. Rwanda's vulnerability to interruption in the external transportation route has led the Government to plan the development of a national petroleum reserve. However, before the new stockpiling facilities now planned are filled, there is a need to develop a contingency plan covering the use and reconstitution of the reserves. This plan should, inter alia, aim at allocating the costs of maintaining stockpiles. 1.50 Most of the electric power consumed in Rwanda is currently purchased from Zaire. Rwanda has, however, substantial domestic hydroelectric potential of which only a small proportion is being utilized. It has an electric power grid connected with those of Zaire and Burundi through an existing power plant (Ruzizi I) and a joint hydroelectric power venture (Ruzizi II) is to be undertaken in the near future by the three countries, with IDA assistance. Major issues in the power sector include shortcomings in the existing institutional arrangements, the need to develop an overall sector planning capacity, and inadequate setting of electricity tariffs. There is currently a considerable dispersion of responsibilities for the power sector among various institutions, including the Ministry of Natural Resources (identification of hydrosites), Public Works (construction), Electrogaz (maintenance and operation), and the Ministry of Planning (some planning  - 20 - efforts). Electrogaz should be given more responsibility for the planning and construction phases of electrical system investments, as well as for operation of the system. A study of the power system currently in progress should provide some elements of a needed sector development plan. Adjustments in power tariffs in the future (unlike in the past) should be made promptly and in line with cost increases (although there is scope for cost reduction measures). Domestic and International Transportation 1.51 Domestic transport is almost totally dependent on the road system which now provides access to all major areas of the country; coverage within regions is also adequate, except in a few specific areas where the lack of year-round passable roads may constitute a constraint to agricultural production and, in general, to the economic and administrative integration with the rest of the country. The conditions of the network, however, are very poor, particularly with respect to the unclassified roads (64 percent of the network) and this leads to high transport costs. The road-paving projects underway or about to begin will provide Rwanda with a basic network of national and interregional roads. Therefore, execution of other major road-paving projects included in the Government's transport program does not warrant high priority in view of the financial constraints to be faced during the coming years. 1.52 Such future road investments as can be afforded should be selected so as to make maximum use of the existing network. Improvement of the existing classified network through strengthening road maintenance operations should continue to receive strong emphasis. Moreover, a gradual shift from major upgrading of the main roads to maintenance and minor upgrading of district and feeder roads is also necessary. This will require careful planning, as there is a need to identify those parts of the network which are in particularly poor condition and to design the institutional arrangements for their administration and maintenance. Once the institutional capability has been created, a larger share of available funds will have to be allocated to the development of district and feeder roads. However, considering the large size of the network of these roads in relation to the current and prospective vehicle fleet, they will necessarily remain low-standard and thus lead to relatively high vehicle operating costs. Achieving year round passability, however, will in itself constitute an important improvement. 1.53 The Government's relatively liberal transport policies -- freedom of entry, relatively unrestricted importation and low taxation of small commercial vehicles -- contributed to the rapid development of the road transport industry in recent years. Since the demand for transport is mostly scattered in small quantities over the country and is highly seasonal, for the time being the continued use of traders/truckers who normally have substantial spare transport capacity is probably the most flexible and cost-effective arrangement for handling the country's transport needs.  - 21 - 1.54 Traditionally, two main transport corridors have provided Rwanda with access to the Indian Ocean ports: (i) the northern all road or road/rail route via Kampala in Uganda to Mombasa in Kenya ; and (il) the southern road/lake/rail connection via Bujumbura in Burundi and Kigoma to Dar es Salaam in Tanzania. Both transport corridors are affected by various difficulties. On the northern route, efficiency is impaired by cumbersome international transit procedures, and general political instability in the region over the past decade has led to frequent interruptions in traffic flows thereby severely affecting Rwanda's economy. Administrative and customs procedures are also cumbersome on the southern route which, in addition, suffers from dilapidated infrastructure and management problems at the Kigoma port, the Tanzania railways and the port: at Dar es Salaam. On the whole, the northern surface route is faster and more reliable, and now carries more than 70 percent of total external trade. However, frequent interruptions in traffic flows on this route have contributed to a substantial increase in air transport, which now carries about 20 percent of the total trade. As an alternative to the existing routes, another road/rail route connecting Kigali (via Rusum at the Tanzania border and the railhea,d at Isaka in Tanzania) to the port at Dar tes Salaam is being developed. A transport strategy should now shift the emphasis from developing new roiutes to improving and reducing costs on the existing routes. The investment and actions needed to improve the tranisport position of Rwanda have been the subject of a number of international donor meetings sponsored by the European Economic Commission, and of bilateral discussions beitween Rwanda and the transit countries. Some results are being achieved by these efforts, including progress in the simpilification of transit procedures. These discussions and consultations should remain an important element of Rwanda's strategy for the improvement of its external transport situation, which would also benefit from better preparation analysis and planning work. L.55 In view of both the v:Ltal importance of transport for Rwanda's economy (in particular for agriculture) and prospective financial constraints, a clearer definition of sector policy and of investment priorities has become imperative. In domestic transport, a shift to the development of district and feeder roads requires that a priority ranking of proposed investments be related more clearly to current and! foreseeable transport needs, to the potential for rural development in the areas to be served by improved roads, and to realistic implementation schedules. RLwanda also needs to improve its knowledge of the economic costs of transport on each of the external routes and of the capacity, constraints and risks prevailing on these routes to formulate a strategy which strikes the right balance between least cost and security considerations. The planning unit which the Government has decided to set up at the Ministry of Public Works should give priority to addressing these important questions.  - 22 - Education and Training _/ 1.56 over the past two decades, human resource development has been hindered by financial and physical constraints and by a traditional, elitist system of education inherited from the colonial era. These have limited mass access to education and perpetuated curricula which are not relevant to the socio-economic development of Rwandan society. As of the late 1970s only 40 percent of the adult population was literate, primary school enrollment remained low, and secondary school expansion was both slow and academically-oriented -- resulting in acute shortages of skilled manpower. Thus, the key issues in education were defined in terms of the needs to increase access to basic education and to provide technical and managerial skills to meet the manpower requirements of modernization. Education was given high priority in the Second Plan (1977-81), and budgetary resources allocated to the education sector were increased at an annual rate of about 12 percent in real terms in that period, over double the rate of GDP growth. 1.57 A major reform of education was introduced in 1979. This reform proposed major structural and curricula changes. The system is now in transition. Steps already taken include: (i) prolongation of primary education from six to eight years, with the introduction of new, agriculturally-oriented curricula in grades 7 and 8; (ii) introduction of vocationally-oriented curricula in secondary education; (iii) establishment of a new Ministry of Higher Education to foster and reorient university research toward the country's development needs; and (iv) the establishment (in 1982) of the Centres d'Enseignement Rural et Artisanal Intggrgs (CERAIs). The objectives of the reform are well-placed and appropriate to the country's needs. However, the planned rate of implementation was seen to be over-ambitious insofar as: (i) the financial constraints were under-estimated (and this was evident well before the current financial difficulties emerged); (ii) the time required to generate the requisite number of primary school teachers was under-estimated; and (iii) the country's construction capacities were over-estimated. In light of these realizations, the Government is currently adjusting the implementation targets, to bring them more into line with realistic estimates of available resources. 1.58 The rapid expansion in primary school enrollments achieved over the past decade (7 percent per year) has not improved significantly the inequitable geographic distribution of educational opportunities. It has also placed additional pressures on the primary education system, which was already suffering from substandard school buildings, shortages of teachers, the use of a high proportion of unqualified staff, and high drop-out and repetition rates. Key issues now facing the Government are how to simultaneously rationalize the use of increasingly scarce financial 1/ This section is based upon an internal World Bank working paper rather than upon a chapter in Part II. An updated staff study of the sector will be carried out during the coming year.  - 23 - resources, redress regional inequities in participation rates, and proceed towards the goal of universal primary education. The recent extension of compulsory education to 8 years will postpone achievement of universal primary education and prevent a significant improvement in participation rates. Thus, the alternative of providing 6 years of primary education appears more attractive on equity grounds, and would also permit earlier achievement of universal primary education. The 6-year system is also more cost-efficient, as unit costs are expected to be lower than under an 8-year system which involves additionaL investments for pre-vocational training. 1.59 Secondary education has developed very slowly, with annual enrollments increasing at only 2 percent (1972/80) to about 11,000, or almost 4 percent for the 15-20 age group. Three shortcomings characterize secondary education: (i) inequil:ies in participation among regions and between boys and girls (girls account for only one-third of total enrollments); (ii) high costs (,in comparison to other levels of education) reflecting high boarding/schola]rship fees and low student/teacher ratios; and (iii) curricula with a strong academic orientation. Objectives of the education reform are to increase access, reduce boarding 'acilities, and introduce vocational curricula. The first two have just begun to be iLmplemented, and some progress has been made on the third. Nevertheless, ind in spite of the priority atl:ention given by the Government to development of four critical educational streams -- health, education (teacher training), commerce and administration, and agriculture -- shortages of qualified administrators and technicians are expected to persist in these areas for the ioreseeable future. 1.60 At present, human resource planning is limited. Most planning cells in the technical ministries have not assessed future manpower requirements, mainly owing to shortages of qualified personnel. Although the Ministry of Primary and Secondary Education is currently evaluating the country's prospective needs in specific skills, planning efforts are constrained by insufficient information on the composition of the labor force and on enrollments and costs of informal education and training programs. Labor force data now available from the 1978 Census should soon facilitate better planning.  - 24 - PART 1: RECENT DEVELOPMENTS, MEDIUM-TERM PROSPECTS, AND ISSUES IN MACROECONOMIC MANAGEMENT  - 25 CHAPTER 2: RECENT ECONOMIC DEVELOPMENTS IN PERSPECTIVE Structural Characteristics 2.01 Among the salient ciaracteristics of Rwanda are the country's small size, density of population, hilly terrain and high average altitude, landlocked position, lack of natural resources, underdeveloped physical and institutional infrastructure, and very low level of development as measured by a vrariety of social as well as economic indicators. All of these factors have had an important bearing on the country's development in the recent past, and all continue to influence importantly Rwanda's development strategy and prospects for future growth. 2.02 Rwanda's population as of mid-1982 was estimated at about 5.5 million; the rate of population growth, currently estimated at about 3.6 percent per year, is among the highest in the world. This rapidly-growing population is settled on a land area approximately two-thirds the size of Switzerland, making Rwanda the most densely-inhabited country in continental Africa. Rwanda's population density in terms of agricultural land was estimated in 1982 to be about 390 per sq km, slightly higher than that of India but about four times that of Zaire, and about eight times that of Tanzania. The precarious balance between domestic food supply and population has been an issue cf long-standing concern. Rwanda has historically suffered from periodic famines and malnutrition has been widespread in recent decades. The pressure of people on the land has increasingly led to the cultivation of pasture and otherwise marginal lands, while soil degradation and erosion have resulted from deforestation and in some cases inappropriate cultivation practices. 2.03 Although the urban growth rate has averaged around 6 percent per annum over the past decade, Rwanda remains overwhelmingly a rural society. Ninety-five percent of the population is still classified as rural, and over 90 percent of the labor force is classified as engaged in agriculture. About 40 percent (10,000 km2) of Rwanda's total land area is under cropping, and virtually all of this area is already under intensive cultivation. Grazing lands account for about 13 percent and forest lands for about 7 percent of the land area. The remainder comprises lakes, parks, swamps and urban areas; of these areas taken together, only some 250,000 ha. (i.e. about 10 percent of the total land area) are considered to be suitable for cropping and/or grazing. The reclamation of swamps and marshy valley bottoms would however entail large-scale investments. Foodcrops occupy about 95 percent of the cultivated areas; the remaining five percent is planted under export crops, mainly coffee. It is estimated that only around one-third of domestic food production is marketed. Of the land planted under foodcrops, an estimated 30 percent is devoted to pulses (beans and peas), 25 percent to bananas, 20 percent to tubers (cassava, sweet potatoes and potatoes), and 25 percent to cereals (sorghum and maiLze). Notwithstanding the small proportion of the land area devoted to  - 26 agricultural export crops, these crops (coffee, tea, pyrethrum and cinchona) generate about 70 percent of Rwanda's foreign exchange earnings from merchandise exports; coffee alone accounts for about 60 percent. 2.04 Almost all agricultural activities are carried out by smallholders on plots averaging about one hectare in size. There is however considerable variation in the size of farms, and the median-size family holding is estimated at only about 0.5 ha.1/ But because the more environmentally-favored areas are also those of the greatest population density, income distribution does not vary by as much as the size of land holdings. The relative evenness of income distribution within the rural sector is indicated by estimates that, between the tenth and ninety-fifth percentile groups, incomes probably vary only by a factor of three to five, compared to factors of about ten in many other African countries.2/ The fact is that the vast majority of Rwandans live at or below the poverty level. 2.05 Rwanda's per capita income of about US$240 (1981) is among the lowest in the world, and Rwanda is classified by the United Nations as a least-developed country. Other indicators of the country's low level of social and economic development include: a crude death rate of 21 per thousand population (compared to a crude birth rate of well over 50 per thousand population); a childhood mortality rate of 22 percent; an average life expectancy of only 44 years; ratios of nearly 40,000 persons per physician and 10,000 per nurse; primary and secondary school enrollment ratios of 60 percent and 2 percent respectively; an adult literacy rate of 40 percent;3/ and a level of commercial energy consumption per capita equivalent to less than 10 percent of the average consumption level for all low income countries. 2.06 Among the other difficult conditions with which Rwanda must cope are its great distance from the nearest seaports, its mountainous terrain, and its lack of substantial mineral resources as a basis for mining or industrial development. The surface routes from Kigali to both Mombasa and Dar es Salaam are over 1,700 km in length, a situation which imposes high transport costs on Rwanda's international trade even in the best of circumstances. The natural difficulties of the external transport system have been compounded during the past decade by political events in the region which have raised costs even higher and led to frequent interruptions in traffic flows, at times with severe repercussions on Rwanda's economy. Traffic on the southern route (via Bujumbura and Kigoma to Dar es Salaam) is in addition constrained by dilapidated infrastructure and management problems at the Kigoma port, the Tanzania railways and the 1/ Ministry of Agriculture, Submission to World Conference on Agrarian Reform and Rural Development, 1979. 2/ See Agricultural Sector Review, World Bank Report No. 1377-RW, June 1977, p. 5. 3/ According to estimates by the Ministry of Primary and Secondary Education.  - 27 - port at Dar es Salaam, and by cumbersome administrative and customs procedures. Indicators of the costs which all of these difficulties impose upon Rwanda are the facts that about 20 percent of Rwanda's total trade has for some years been carried by air and that petroleum products delivered to Kigali cost some US$100 per barrel. The development of the domestic transport system, on the other hand, has been constrained by physical difficulties and high costs of constructing and maintaining roads in this country of "milles collines". (There are no railways and only very limited scope for water transport within the country.) Although considerable investments have been made in developing the domestic road network over the past decade, there are still less than 500 km of paved roads, a considerable part of the network is low-standard, and many sections of the unclassified road network are impassable in the rainy seasons. 2.07 Aside from its cultivable land, the only other notable natural resources currently being exploited by Rwanda are a few minerals, and to a very limited extent, hydropower. The minerals are cassiterite (which is by far the most important), wolfram, beryl and columbo-tantalite, plus very small quantities of gold whichb together account for nearly 15 percent of foreign exchange earnings from merchandise exports (1982). Taken together, however, the value added by the production of these minerals now comprises only one percent of GDP, and the volume of output has been declining for some years. Much of the electric power currently consumed in Rwanda is purchased from the Ruzizi hydroelectric power plant located on the border between Rwanda and Zaire and belonging to Zaire. There is a significant potential for the generation of electricity through the construction of many small hydro schemes, but the only possible sites for the generation of large amounts of power are on the borders with Zaire and Tanzania and thus require at least bilateral agreements for development. A relatively large hydroelectric power project on the Ruzizi river is being promoted by Rwanda, Zaire and Burundi under the Economic Community of the Great Lakes Countries, with IrA assistance. 2.08 Rwanda neither produces nor refines petroleum, and there are no apparent prospects for petroleum exploration. It does however share (with Zaire) ownership of a large, potentially exploitable methane deposit which lies dissolved in the bottom strata of Lake Kivu. Valued at a price equivalent (on a calorific basis) to the average costs of Rwanda's petroleum product imports, the potentially exploitable reserves would be worth many times the value of Rwanda's total GDP of around one billion U.S. dollars. But their value in situ is still indeterminate because of the costs and uncertainties involved in extracting the gas and transforming it into forms that can substitute for petroleum. Moreover, further studies may show that only small-scale extraction of the gas is feasible owing to technical complications. In any event, before any major gas extraction effort can begin, a number of technical, economic and institutional issues will have to be resolved, including the conclusion of an agreement between Rwanda and Zaire setting forth the terms of exploitation. 2.09 At present, over 90 percent of the total energy consumed in Rwanda comprises fuelwood and other traditional, non-commercial fuels used primarily for cooking. Only a small fraction of the traditional fuels is  - 28 marketed. These energy resources have been over-exploited. Rwanda's rapid population growth and dependence on woodfuels has led to deforestation, particularly in more-densely settled regions. Given the magnitude of this problem, a multi-pronged strategy should be followed. While making efforts to improve efficiency in charcoal production and use (e.g. through improved cookstoves), the use of new sources of energy, such as peat, should be stimulated (although the use of peat for household consumption would require the development of new cookstoves). In addition, the prospects for relatively low-cost electricity generation for use in the urban and industrial sectors should be exploited, in order to reduce reliance on increasingly scarce charcoal and on expensive petroleum fuels imports. 2.10 Fishing, on the other hand, is an activity which is still quite underdeveloped and which offers a potential for resource utilization without depletion or environmental degradation. At present, fishing is carried out only by artisanal methods. The full potentialities for larger-scale fishing by more modern methods remain to be assessed. A large fishing development project is now being undertaken on Lake Kivu, and other projects are planned for the eastern lakes. Experience with such projects elsewhere in the region has not been particularly encouraging. The Structure of Production 2.11 A comparison of Rwanda's national accounts over the past twenty years suggests that there have been very marked shifts in the composition of value added by sector. According to available estimates, between 1960 and 1981 the share of agriculture in GDP fell by over 40 percent (from 81 percent to 47 percent) while the shares of industry (including construction) and services nearly trebled (from 7 percent to 20 percent for industry and from 12 percent to 33 percent for services). These are quite remarkable changes. But within each sector, only limited structural change has occurred. In agriculture, for example, the past generation has witnessed only marginal changes in cropping patterns and cultivation techniques, and the total volume of agricultural output has grown just about apace with population growth. In recent years a structural dependency has developed on moderate volumes of food imports which in 1981 were equivalent to some 5 percent of agricultural value added and 2 percent of GDP. 2.12 The relatively rapid growth of industry was not accompanied by significant changes in the structure of commodity production. In fact, the recently-completed tin smelter plant and a cement plant still under construction constitute the country's only "heavy" industries, while half of the total value added of the manufacturing sector consists of beer production from bananas and sorghum by artisanal methods. There has also been some growth in the production of beer by modern brewing methods, of other bottled drinks, and of a narrow range of other consumer goods (e.g. sugar, soap, shoes, batteries, matches, pipes and metal products). Over the past decade or so, the share of construction in GDP has risen slightly (to about 4.5 percent in 1981) while the share of mining, as noted above, has declined somewhat (to one percent in 1981).  29 2.13 The greatly-increased share of services in GDP also warrants some explanation, especially since the national accounts attribute nearly 40 percent of the total increase in Rwanda's GDP over the period 1969-81 to the growth of tertiary sector activity. Various factors contributed to this surge. Among them were the increases in marketed agricultural products, manufacturing output, and imports (especially of consumer and intermediate goods) which were reflected in the rapid expansion of commerce anld other service activities. Another important factor was the rapid growth of foreign aid inflows which directly stimulated increased public consumption and investment. And these expenditures in turn also stimulated the growth of commerce and other service activities. The large investments in transportation had their direct impact on the value-added of this sector, while growing numbers of visitors, consultants, resident foreign advisers, and aid administrators gave rise to the growth of hotels, restaurants, shops and other commercial activities. Meanwhile, increased capital inflows and an improvement in the country's terms of trade (during 1976-79) facilitated the growth of government revenues and imports, and this growth also stimulated growth in various service sub-sectors, including government services. 2.14 Given the conventions of national income accounting, the rapid increase in the 1970s in public sector employment and in the Government's wage bill are reflected in a correspondingly rapid growth of value-added in public administration. But especially in view of a government policy of practically guaranteeing employment to all secondary school graduates, it must be questioned to what extent the recorded value added of many government employees represented the production of "real" services which have improved the nation's welfare. There is in fact considerable evidence of overstaffing in both the government administration and the proliferating parastatal enterprises.l/ It should however be pointed out that, unlike in many developing countries, the reported value added of public administration has not so far reflected the maintenance of a large defense establishment. Indeed, between the early and late 1970s, Rwanda's recorded defense expenditure as a proportion of its GDP fell from about 3 percent to 2 percent, i.e. to about one-third the average proportion for all low-income countries. Rwanda's Growth in an African Perspective 2.15 In consideration of the structural characteristics and formidable constraints described above, it may indeed appear surprising that Rwanda's GDP growth rate in the 1970s (or more precisely between 1969 and 1981) was among the highest in Africa. For Sub-Saharan Africa as a whole 1/ There are currently some 16 parastatal enterprises. See Chapter 3 for a discussion of some of the issues relating to their management and functions.  30 (excluding Nigeria), GDP growth in the period 1970-79 averaged less than 2 percent per annum, whereas for the period 1969-81 GDP growth in Rwanda averaged about 4 percent per annum. This experience was in marked contrast to the 1960s, when GDP growth in the rest of Africa averaged about 4 percent per annum, whereas in Rwanda it averaged less than 3 percent -- implying a stagnation in per capita income during that decade. Rwanda's economic development in the 1970s was atypical of Africa as a whole in other respects as well. For example, whereas for other low income countries in Sub-Saharan Africa the 1970s (relative to the 1960s) were characterized by decelerating rates of growth in gross domestic investment, imports and gross domestic savings, the trends in Rwanda were in the opposite direction. Also in this period Rwanda achieved some growth in its volume of exports and experienced a substantial improvement in its terms of trade while export volumes were declining and the terms of trade were remaining relatively unchanged in the rest of low-income Africa. And as noted earlier, Rwanda's avoidance of deficit financing, its accumulation of international reserves, and its maintenance of a low debt service burden also were in constrast to the experience of many other African countries which found themselves confronted by severe fiscal and balance of payments crises by the late 1970s and first two years of the 1980s. 2.16 It hardly needs to be emphasized that one needs to go beyond these indicators to assess a country's economic performance. One of the objectives of the following description and diagnosis of recent economic developments in Rwanda will be to distinguish between the internal and external sources of Rwanda's growth (or lack thereof), and to make some judgments concerning the viability of the development path that Rwanda is treading. Previous sections have already raised some questions concerning, for example, the extent to which agricultural growth is being achieved at the expense of degradation of the environment (e.g. through soil erosion and deforestation) and tertiary growth at the expense of creating an overstaffed and over-extended public sector. Another objective of the following section will be to consider to what extent the inadequacies ascribed to most African countries apply to Rwanda. The Growth Record from 1969 to 1981: An Overview1/ 2.17 As noted above, Rwanda's GDP growth between 1969 and 1981 is estimated to have averaged about 4 percent per annum. But as is clearly 1/ Much of the analysis provided in the remainder of this chapter is based on mission estimates of the national accounts, and must be interpreted (and cited) with caution, owing to the poor quality of the underlying data. Official national accounts estimates at current and constant prices are available only for selected years between 1969 and 1981 and are not comparable.  - 31 - shown in Table 2.1, the period 1969-1974 was one of slow growth (about 3 percent per annum on average) whereas the period 1974-81 was one of relatively rapid growth (over 5 percent per annum for this somewhat longer period). It should be acknowledged that these rates are somewhat "biased" insofar as 1974 -- a year of extremely adverse weather conditions in which agricultural output fell in absolute terms -- constitutes the terminal year of the earlier period and the base year of the latter period.l/ But the table does clearly reveal that, in comparison with the period 1969-74, the period 1974-81 was characterized by much-improved terms of trade, more rapid growth in the volume of exports and imports, much higher levels of foreign aid inflows, and a positive rate of growth in government savings. Also in contrast to the earlier period, this period was characterized by a much higher investment rate and by a substantial accumulation of international reserves. 2.18 Some of the catalysts to Rwanda's accelerated growth were external: weather, terms of trade and capital inflows. On the whole, Rwanda enjoyed much better weather in the latter period, and this was undoubtedly an important factor accounting for mre rapid agricultural growth. The income gains which resulted from the improved terms of trade during 1976-79 were substantial, equivalent to 3 percent of GDP compared to al income loss of close to onte percent of GDP in the earlier period. This much more than made up for the estimated 1-2 percent of GDP lost as a direct consequence of the closure of the Uganda border in 1978 and early 1979. The increase in external assistance was particularly important, as these flows were equivalent to 13 percent of GDP in 1974-81, as compared to only 2 percent in 1969-74. The adverse effect on the economy of the 1979-80 oil price increases was relatively small insofar as petroleum imports, which had been equivalent to less than 2 percent of GDP before the price increases, were still equivalent to only 3 percent of GDP after the increases. 2.19 In the 1969-74 period, adverse weather conditions in the face of negligible changes in production techniques combined to keep the rate of growth of agricultural production below the rate of population growth, estimated at 3.2 percent during that period. The growth of other sectors was constrained severely by the low rates of savings and investment and by the low level of imports. There was however a relatively rapid growth in public administration, albeit from a very small base. With governmental current expenditures consistently exceeding revenues, there was resort to 1/ The extent of the "bias" is however diminished by the fact that the period growth rates have been calculated on the basis of least squares regression rather than on a point-to-point basis.  32 Table 2.1: Selected Financial and EconoiLc Indicators, 1969-82 1969-74 1974-81 1979 1980 1981 1982a/ A. National Accoumts GP Growth b/ (%) Overall 3.2 5.4 7.3 5.9 6.4 4.3 Per Capita -0.1 1.9 3.5 2.2 2.9 0.8 Savings-Investment Gap (GDES<)DI in % of GDP) -4.0 -10.3 -7.9 -13.7 -14.5 -13.1 Cost-of-Living Index Kigali (Amnual Percentage Charge) 6.6 13.2 15.8 7.3 6.5 10.0 B. Bslance of Paynments Indicators Gro6s In