Rwanda is a landlocked country located in east-central Africa in the Great Lakes region. It has a temperate mild and cool climate, influenced by its high altitude. Its geography comprises mountainous relief in the north and west and savannah towards the east. Among Rwanda’s major environmental problems are deforestation, land degradation due to overgrazing, soil erosion, decline in soil fertility, and biodiversity loss mainly through poaching, wetland degradation and pollution. A growing population is exacerbating the pressure on natural resources. Furthermore, the country relies heavily on the agricultural sector which accounts for a third of Rwanda’s GDP and employs about 80% of the total population. Rwanda also imports all of its oil products, which fuels 39% of the country’s electricity generation. The economy is thus vulnerable to negative external shocks from increases in global oil prices.
Overall Fiscal Profile
Over the last decade, Rwanda has made tremendous progress in economic growth and poverty reduction. In the 2012/13 financial year, the GDP growth rate was 6.8%. This is expected to further increase in 2014 and 2015 to more than 7%. Conducive economic policies have also led to the growth of the services and industry sectors, which made up 47% and 15% of total GDP respectively in the 2013/14 financial year. The government is also undertaking structural reforms in order to reduce food prices and maintain inflation at below 5%. As of the end of 2014, Rwanda’s inflation rate remained under 4%. In 2013, total public revenues amounted to 23.9% of GDP whereas public expenditure was 29% of GDP.
Following the decrease in donor funding, the government has increased its efforts to mobilize funding in order to narrow the fiscal gap. The cash deficit in the 2014/15 financial year is expected to be 5.1% of GDP up from 3.1% in 2013/14. To finance the deficit, the government intends to borrow Rwf 106.7 billion (USD 154.5 million) externally and Rwf 69.6 billion (USD 100.8 million) through domestic borrowing. Additionally, Rwanda issued its first sovereign, ten-year bond valued at USD 400 million and with a yield of 6.9%. The money is being used to repay current debt and finance public investments. The Rwandan government also plans to generate additional public revenues through raising the excise tax on mobile phone airtime (or calling cards), introducing a royalty tax on mining, revising VAT exemptions and zero-ratings, introducing tax systems in the agricultural sector and streamlining property taxation. Through these measures, the government aims to increase the volume of taxes to 17.7% of GDP in 2015/16 up from 14.2% in 2013.
Policy and Legal Framework for a Green Economy
In October 2011, Rwanda released the Green Growth and Climate Resilience National Strategy for Climate Change and Low Carbon Development. This is a comprehensive document that envisions Rwanda as a climate-resilient, developed country by 2050, with a low-carbon economy that is operating in a self-sustaining way and enabling Rwanda to be self-sufficient regarding basic necessities. It aims to achieve three strategic objectives: i) energy security and low carbon energy that supports the development of green industries, ii) sustainable land use and water resource management, and iii) reducing vulnerability to climate change through social protection, improved health and disaster risk reduction. The Strategy builds upon existing national development strategies.
In 2000, Vision 2020, the country’s overall national development strategy was launched. Its objective is to transform Rwanda into a middle-income country by 2020. To operationalize Vision 2020, the Economic Development and Poverty Reduction Strategy (EDPRS) was introduced. It sets out a medium-term framework for the achievement of Vision 2020. The Green Growth strategy hence provides the guidelines for mainstreaming climate resilience and low-carbon development into Vision 2020, the EDPRS and into economic policy formulation across sectors.
The Green Growth strategy also aims to mobilise foreign funds and investments for green growth activities, to build the knowledge, skills, human and institutional capacity for transitioning to a low-carbon economy and to ensure the involvement of all stakeholders in the process. Given that the energy sector is one of Rwanda’s largest sources of greenhouse gas emissions, another objective of the strategy is to reduce the country’s dependence on imported fossil fuels and become energy secure. In particular, Rwanda’s potential geothermal energy capacity is estimated at 700MW, which is greater than the country’s projected electricity demand in 2020. Plans are underway to develop 310MW by 2017.
The National Energy Sector Strategic Plan 2008-2020 was also formulated in order to boost the growth of the energy sector. It provides a guideline of investments in the sector with the goal of achieving 100% household power connectivity by 2020, extension of power grid connections and installations, eliminating electricity subsidies, streamlining the implementation of biomass programmes, decreasing the import costs of petroleum and diversifying the sources of energy in the country.
Fiscal Measures for a Green Economy
Lack of access to finance is among the major challenges for the green economy transformation in Rwanda. The Green Growth Strategy acknowledges that there are various options for international financing to fund climate change adaptation strategies, such as the Green Climate Fund, or the utilisation of the Climate Finance Toolkit provided to government ministries. The Green Economy Strategy also identifies UNFCCC’s Clean Development Mechanism and the establishment of voluntary carbon markets as potential sources of revenue. However, these sources alone will not be sufficient to finance the strategy. The National Fund for Climate and Environment (FONERWA) was thus set up in 2012 and officially launched in 2014 and charged with attracting and streamlining finance, and leveraging private investments for green initiatives (see below for more details).
Rwanda’s heavy reliance on imported oil products consumes a large proportion of government revenues, costing the government up to USD 210 million annually. Priority has therefore been given to developing a stable and sustainable domestic energy sector, which the government plans to finance by leveraging private sector investments through implementing various incentive measures. The government also aims to encourage private sector investments in renewable energies through the removal of import and VAT taxes on renewable technology. To minimise the high costs of adoption of green technologies, the government will encourage financial institutions to issue credit to those wanting to invest in renewable energy technologies and enterprises. The government plans to mitigate the risks to these institutions through partial-loan-guarantee or grant-per-unit financed scheme. They will also provide loan guarantees to reduce the interest rates on renewable energy enterprise loans.
Investment in solar and biogas products will be promoted through a grant-per-unit sold scheme. To incentivise investment in renewable electricity, the government will implement feed-in-tariffs and long-term power purchase agreements (PPAs) which will give independent power producers guaranteed long-term energy procurement at a fixed rate, hence providing market security. The government also plans to set-up a Climate Innovation Centre which will help green enterprises access and explore green financing opportunities for their companies.
The National Fund for Climate and Environment – FONERWA
FONERWA is meant to be the financial engine of green growth in Rwanda for the next 50 years and provides both technical and financial support to green economy projects. It aims to sustainably and equitably provide direct access to environment and climate finance according to Thematic Financing Windows. The Thematic Financing Windows categorise priority investment areas in line with the national environment and climate objectives outlined in the national strategies and policies.
FONERWA is financed through both internal and external sources. Mobilization of capital domestically makes the fund more resistant to external aid shocks. Domestic sources include revenues raised from environmental fines and fees, environmental impact assessment (EIA) fees, returns from Forestry and Water Funds, other environmental revenues and seed financing from domestic stakeholders. International sources include international environment and climate funds and contributions from multilateral development partners. Financing will be offered through various monetary instruments. In the short-term (0-1 years), FONERWA will offer performance-based grants and in-kind support (technical assistance) for proposal development. In the medium-term (2-5 years), the instruments will consist of low interest and concessional loans, while in the long-term (>5 years) equity investments will be introduced. The fund is accessible to agencies in both the public and private sectors as long as the proposed projects are compliant with the fund objectives. In addition, FONERWA allocates at least 20% of its total funds to the private sector and 10% to districts.
The FONERWA Managing Committee is the main body in charge of the fund’s management and oversight. It consists of stakeholders from the government at national and local levels, development partners, civil society and the private sector. The FONERWA Technical Committee is responsible for proposal screening and providing technical advice. The FONERWA Secretariat, with the assistance of the Fund Management Team, is in charge of resource mobilization and the day to day management of the fund.
Finances will be disbursed through a multi-stage process. FONERWA publicly announces a Call For Proposals (CFP) during which applicants submit their Project Profile Documents (PPDs) expressing their project ideas. The PPDs are screened by the Fund Management Team as per the eligibility criteria. Approved applicants are requested to submit a full project document and receive support from the Fund Management Team in its development. The Fund Management Team then carries out technical appraisals of the project documents before submitting them to the FONERWA Technical Committee to review the appraisal process. This ensures that the processes were carried out as per established procedures. The FONERWA Management Committee then makes the final approval decisions for funding.
FONERWA’s operations begun in 2012 and the Fund has already raised Rwf 59 billion (USD 85.6 million). So far, four public CFPs have been completed and the sixth CFP was announced in December 2014. 891 project documents have been submitted for funding. 18 FONERWA funded projects have been approved and are currently being implemented in a variety of development areas including investments in renewable energy, natural resource and ecosystem management and electronic waste management.
Fossil Fuel Subsidy Reform
In 2011, Rwanda changed its fuel pricing formula which increased the pass-through of global world prices and essentially eliminated fuel subsidies. Although energy reforms in the country are still in the early stages, the government is committed to transforming the energy sector. Reforms have already begun in the power sector with the goal of providing cheaper and more reliable electricity to 100% of the population by 2020 using renewable energy, gas and peat. The reforms have liberalised the power industry by opening it up to allow participation by private companies. In 2011, the Electricity Law was passed which regulates power production, transmission, distribution and sale, and aims to attract private investment. Further, the Electricity Development Strategy 2011-2017 was also developed in order to operationalize the acceleration of power generation and achieve 50% household connectivity by 2017. In support of these measures, in 2012, the Rwandan government also introduced a Renewable Energy Feed-in Tariff (REFIT) for small and medium-sized power producers. It guarantees purchase of their supply by the Energy, Water and Sanitation Authority (EWSA), Rwanda’s national power supplier, as well as access to the national grid. It is effective for three years, after which suppliers have an opportunity to renew the REFIT. This thus ensures that they will receive returns on their investments.