Economic Policy of The International Monetary Fund in Rwanda

Introduction

Rwanda is one of the poorest countries in the world, with an HPI-1 of 44.5%. The causes of its economic weakness can be attributed to its landlocked position, economic dependence on the export of tea and coffee, and a precarious political situation.

Economic Policy of The International Monetary Fund in Rwanda

With the support of the International Monetary Fund (IMF) and the World Bank (WB), Rwanda has been able to implement important economic and structural reforms and sustain its economic growth over the last decade. Although still recovering from the tragic genocide in 1994, which resulted in the deaths of 800,000 Tutsis and moderate Hutus, the causes of the collapse are not solely rooted in ethnic hatred, contrary to the international community's portrayal. An underlying cause was the economic collapse due to austerity conditions imposed by the IMF and WB, through the implementation of Structural Adjustment Programs (SAPs) on Rwanda’s pre-genocide economy. These programs had a destructive impact, laying the foundation for conflict. Ironically, these same institutions later helped rebuild the country.

Impact of Structural Adjustment Policies

Particularly between the collapse of the coffee market and the early stages of the genocide (1990-1994), data will be provided to support the disruptive impact of the SAPs. Structural Adjustment Policies are economic policies that countries must follow to qualify for new WB and IMF loans and help them repay older debts owed to commercial banks, governments, and the World Bank (Stiglitz, 2002).

Coffee Market Collapse

Rwanda's post-colonial economy was dominated by coffee exports. By 1986, coffee accounted for 82% of Rwanda's export earnings. However, international prices were on a downward spiral and finally collapsed in 1989, when the International Coffee Agreement failed to reach an agreement on new export quotas (World Bank, 1994). This led to a dramatic loss in export revenues as external debts rose rapidly. Coffee prices decreased dramatically, impacting the Rwandan economy significantly: Rwanda's export earnings plummeted by 50% between 1987 and 1991, and income from coffee exports fell from $144 million in 1985 to a mere $30 million in 1993 (Prunier, 1995). Rwanda's external debts doubled between 1985 and 1989 and increased by another 34% between 1989 and 1992. The government was in a difficult position, having paid a fixed sum for coffee to peasants throughout the 1980s. Due to overproduction, Rwanda lost nearly two-thirds of its revenue from coffee exports.

Economic Structural Adjustment Programme

In November 1990, the WB, IMF, and the Rwandan government reached an agreement on an economic structural adjustment programme (SAP) to stabilize the economy. In 1991, Rwanda received $90 million in loans from the World Bank. Along with several bilateral donors, the Bretton Woods institutions contributed $216 million to the programme in 1990 and another $375 million in 1991 (Uvin, 1998). Common guiding principles and features were implemented: export-led growth, privatization and liberalization, efficiency and free market, currency devaluation, lifting imports, restricting exports, eventual elimination of the Equalization Fund (used to buy coffee from planters), and withdrawal of agricultural subsidies.

Currency Devaluation and Its Consequences

Coffee exports were supposed to increase through a devaluation of the Rwandan Franc. Under IMF recommendation, the Rwandan government devalued the Rwandan Franc by up to 67%, causing massive inflation, a collapse of real earnings, and dramatic price increases for consumer goods (Chossudovsky, 1997). Consequently, export earnings decreased due to the drop in coffee prices, resulting in a fall in production. When the currency was devalued, the government was able to drastically reduce the "real" price of coffee to farmers, disguising this reduction by limiting the decrease in the nominal price of coffee. The government reduced the nominal price from 125 RWF to 100 RWF per kilo in 1990, and then raised it unilaterally to 115 RWF. Moreover, farmers were guaranteed a fixed amount for their coffee production, which was decreased by 20% to reduce government spending. As a result, many farmers replaced cash crops with food crops as coffee sales no longer covered investments.

Social and Economic Implications

Inflation grew from 1% in 1989 to 19.2% in 1992, and real income slumped. The price of fuel and other necessities shot up, leading to a deterioration of the balance of payments and negative economic growth. Foreign debt increased by 34.3% between 1989 and 1992, with Rwanda's external debts amounting to US$804.3 million in 1992 (Pottier, 2002).

Impact on Public Services and Social Climate

SAPs demanded increased support for the private sector and cuts to the public sector. The civil service was considered ineffective and had to be reformed. Fees for education, water supply, and medical care were raised, and sales tax increased. Economic reform resulted in the collapse of public services, famine, (affecting many areas since 1992), rising unemployment, and an unstable social climate. Middle and upper-level positions in the public service and the military were available only to Hutus, while Tutsis focused mainly on work in the private sector due to government-sponsored discrimination (Hintjens, 1999). SAPs demanded increased support for the private sector and cuts to the public sector, creating a perception that Tutsis were favored by the SAPs. Many Hutu elites in the public sector feared losing their employment and influence. The International Red Cross (ICRC) and the United Nations Food and Agriculture Organization (FAO) highlighted the famine affecting the Southern provinces. Health and education programs collapsed; hospital structures and medical supplies were mainly used for the militia, and infant malnutrition increased dramatically.

Conclusion

The austerity measures demanded by donors under the SAPs exclusively affected non-military expenditures, while military expenditures took up a growing proportion of state income and foreign loans. Financial resources focused on the war effort, and the displacement of large numbers of the population further decreased agricultural production. In exchange for the devaluation of the RWF, the IMF provided credit in the form of quick-disbursing loans to maintain the flow of imports. While import prices soared, under IMF insistence, the price at which coffee was bought from local producers was frozen, ruining hundreds of thousands of small coffee farmers. Consequently, these destitute farmers became a permanent reservoir of recruits for the army. GDP per capita fell by nearly 30 percent, and poverty increased from 40% in 1985 to 53% in 1992 (Uvin, 1998).

In conclusion, the IMF and WB are responsible for creating the preconditions that led to genocide, which I consider a product of economic miscalculations. The SAPs did not enhance development; they augmented Rwanda’s indebtedness and slowed its development.

References

• Chossudovsky, M. (1997). The Globalization of Poverty: Impacts of IMF and World Bank Reforms. Zed Books.
• Hintjens, H. M. (1999). Explaining the 1994 Genocide in Rwanda. The Journal of Modern African Studies, 37(2), 241-286.
• Pottier, J. (2002). Re-imagining Rwanda: Conflict, Survival and Disinformation in the Late Twentieth Century. Cambridge University Press.
• Prunier, G. (1995). The Rwanda Crisis: History of a Genocide. Columbia University Press.
• Stiglitz, J. E. (2002). Globalization and Its Discontents. W.W. Norton & Company.
• Uvin, P. (1998). Aiding Violence: The Development Enterprise in Rwanda. Kumarian Press.
• World Bank. (1994). Rwanda: Poverty Reduction Strategy Paper.