The decision of the UK government to partially disburse frozen aid to Rwanda could mark the start of a more demanding relationship between Rwanda and international donors, Fitch Ratings says.
The conditionality of the UK’s aid disbursements could mark the start of international donors taking tougher stance towards Rwanda. The UK said it was paying out half of the aid it had frozen last July in recognition of Rwanda’s engagement with internationally backed peace efforts in eastern Democratic Republic of Congo. However, it also said that the decision to reschedule the remaining GBP8m reflected “caution” about Rwanda’s alleged involvement with M23, an armed group active in destabilising that area.
We now expect other bilateral donors to take decisions on aid disbursements in the coming months, with some waiting for the final UN report on the issue due in November 2012. Nevertheless, we believe that Rwanda will continue to attract significant aid flows from international donors, reflecting its strong track record in poverty reduction and control of corruption.
The UK decision to disburse half of its frozen general budget support to Rwanda will come as a relief for the latter’s budget. Total grants (including general budget support, sectoral and capital grants) from international donors account for almost half of government revenue (44% of revenue in FY12), and the UK is the biggest bilateral donor for general budget support. The GBP8m that the UK will now pay out represents 0.2% of GDP or 0.7% of government revenue.
Fitch affirmed Rwanda’s rating at ‘B’ in August 2012. The rating is supported by solid economic policies and a track record of structural reforms, macroeconomic stability and low government debt (22.8% of GDP). The rating is constrained by structural weaknesses including low GDP per capita and limited economic diversification. Potential further delays to aid disbursements increase downside risks. Lower aid inflows could in particular affect growth, mainly through lower public spending.
Should the issues relating to the alleged role played by Rwanda in eastern DRC lead to a permanent deterioration in relationships with the donor community, which is not our central scenario, marked fiscal adjustment would be necessary to maintain public finance sustainability and the rating at the current level.
The UK froze general budget support to Rwanda last July, along with some other bilateral donors, following allegations published in a draft UN Group of Experts’ report about Rwanda’s relationship with M23. Rwanda disputed the findings of the report and submitted an official counter argument to the UN Security Council.
Reuters
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