Legal Scholars Advance the Principle of Odious Debts

Why Aren’t We Developing Faster?

(March 4, 2008)

John Gahindiro
According to Paul Wolfowitz, former President of the World Bank: World Bank’s beneficiary countries that do not have access to capital markets mostly “remain poor because their political system is unstable, private property rights are very limited, the judicial system is weak or subservient, or the Government is corrupt” and assistance to such countries “at best provides relief [and] at worst supports corruption or programs that waste scarce local and external resources”.

We know the Rwandan Political System is stable, laws protecting private property rights are already on the books and the Rwandan Government is not corrupt. We need to work a bit more on the other elements pointed out by Paul Wolfowitz in order to make sure programmes do not waste scarce local and external resources. All these elements are the foundation of a Level Playing Field that is corruption-free.

If we are doing so well on many of the right parameters, then why aren’t we developing faster? What are the roadblocks that are preventing us from achieving Vision 2020 before 2020? In this article, we will look at some of the major impediments.

The local Banking and Financial Sectors are still part of the development problem; they are still very weak and need some serious strengthening; measuring the risk in lending and investment is still inadequate, we have yet to create local financial organisations capable of assessing objectively credit worthiness of borrowers and investment seekers.

This weakness is a major opportunity for foreign organisations with the right financial know-how and the right financial muscles. It is important that we attract as many foreign investment companies as possible in order to solve quickly the problem: companies like ADC (African Development Corporation) of Germany, THVF (Thousand Hills Venture Fund) of USA, EcoBank, ACTIS, etc., are starting to show the way.

Interest rates between 16% and 20 %, even in the presence of guarantees by the Government or Development partners, are the only options available to borrowers; borrowers end up working mostly to pay back loans, when they do not end up in bankruptcy. This is also an opportunity for foreign lenders that are willing to follow the guidelines of the Rwandan Central Bank that limits the interest rate of foreign lenders to Libor (London interest borrower rate, 4%) + a premium (4% currently), i.e. around 8%; even if this rate would go to 10%, it would still be better than 18% offered by local banks.

The labour code seems mostly designed to suit civil servants and yet it is legally applicable to the private sector as well: private companies need to hire and fire on a 15-day notice and not be obliged to pay 6 months severance pay when an employee has been around a bit more than 3 months. The majority of hard-working and smart employees are women; they are also the majority of the population. Providing women with three-month paid maternity leave is a bit excessive for a poor country that needs the work of its women. I would suggest a maximum of 15 days paid and two and a half unpaid months and this would be mandatory only for companies with more than 10 employees. After all, domestic workers are hired and fired at will, there is no reason to discriminate against them, what is good for these workers should be good for everybody else; they do not get any maternity leave. Civil servants would be allowed to keep their prerogative as in the long run their contribution to the production sector is supposed to be small; this is what privatisation is all about.

The corporate tax rate is too high: at 30%, it is second only to US corporate tax rate of 35%. This tax rate needs to be decreased to 15%, 16% or 17%. At this rate, we may be able to attract many companies looking for a tax shelter. The argument is that foreign companies investing in Rwanda may request and obtain from RIEPA a 5-year tax holiday. That is good but maybe not good enough. Another argument is that it is harmonised with other tax regimes of East African Community. Today, the smart move is to incorporate in Mauritius a company active in Rwanda, and use the double taxation treaty to pay 15% tax in Mauritius and zero in Rwanda. Mauritius corporate tax is 15% and it has a tax treaty with Rwanda that allows companies incorporated in Mauritius but doing business in Rwanda to pay taxes in Mauritius and get tax exemption in Rwanda and vice-versa.

The investment in infrastructure is very small and comes at a slow rate.

Is it possible to divert most of the foreign aid (loans and grants) to infrastructure: energy, water, communication, internet, roads, railways and hospitals? This could have an adverse effect on the number of civil servants the Government would be able to keep on its payroll. Not necessarily a bad idea, considering that we are starting to spend a great deal of money on e-government services supposed to require fewer highly specialized civil servants.

Creating a company requires too many steps (9) and a lot of wasted time. It does not matter that the average number of steps in Sub Saharan Africa is 11, we still should do better. How about just 2 steps: application on internet, validation and registration.

I recently was complaining to a CEO of local ICT Company and he suggested that he can provide software for a Company Registry in less than 4 weeks. I say let’s put him to the challenge!

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