An analysis of the effectiveness of Rwanda's tax incentives on foreign direct investment

Abstract

This study examines the effectiveness of Rwanda's tax incentives on Foreign Direct Investment (FDI). According to 2023 Investment Climate Statements on Rwanda by the US Department of State, the voyage of FDI in Rwanda has been inextricably linked with the establishment of tax incentives, which have played a vital role in supporting economic growth and recruiting international investors to the country. Recognizing the importance of FDI in driving economic growth, Rwanda has a history of strong economic growth, high rankings in the World Bank’s Ease of Doing Business Index, and a reputation for low corruption. Rwandan GDP grew 9.5 percent in 2019 before declining 3.4 percent in 2020 due to the global COVID-19 pandemic, the first recession since 1994. In late 2020 and early 2021, the Government of Rwanda (GOR) took significant policy reforms intended to return the economy to growth, improve Rwanda’s competitiveness in selected strategic growth sectors, increase foreign direct investment (FDI), and attract foreign companies to operate in the newly-created Kigali International Financial Centre. The country presents a number of foreign direct investment (FDI) opportunities in sectors including: manufacturing; infrastructure; energy distribution and transmission; off-grid energy; agriculture and agro- processing; affordable housing; tourism; services; and information and communications technology (ICT). According to the National Institute of Statistics for Rwanda (NISR), Rwanda attracted $462 million in FDI inflows in 2018, representing five percent of GDP. Rwanda had a total of $3.2 billion of FDI stock in 2018, the latest year data is available. In 2020, the Rwanda Development Board (RDB) reported registering $1.3 billion in new investment commitments (a 48 percent decline from 2019, and an 89 percent decline from 2018, due to COVID-19), mainly in manufacturing, construction, and real estate. FDI accounted for 51 percent of registered projects. Rwanda's government introduced a variety of tax breaks to attract international investors and boost investment in a variety of areas. These incentives have varied over time to reflect the Rwandan government's shifting goals and economic policies. The goal of this study is to investigate how tax incentives affect FDI inflows and how well they work to encourage investment across various Rwandan economic sectors. This study seeks to gain important insights into the link between tax incentives and FDI in Rwanda by using a mixed-methods approach that incorporates quantitative analysis and qualitative viewpoints from significant stakeholders. The research's methodology included an analysis of FDI statistics from the Rwanda Development Board, as well as interviews with business leaders and government officials responsible for formulating policy and promoting investment. Regression models are used in the quantitative research to determine the relationship between tax incentives and FDI inflows, while qualitative insights give a more in-depth knowledge of the ways in which these incentives have affected investment choices. A study was conducted in Kigali to identify tax incentives available for investors, examine the roles of tax incentives in fostering investments, and find out strategies that can enhance foreign direct investment (FDI) as a way to increase tax collection in Rwanda. The study found that there are various incentives available to investors, such as tax holidays, accelerated depreciation, and duty exemptions, low tax rates compared to neighbouring countries (EAC; Investment Guide). However, the study also found that providing tax incentives is not sufficient to attract FDIs if other conditions, such as good quality infrastructure, low administrative costs, and predictable macroeconomic policies, are not in place. The study concluded that the government should emphasize continuous improvement of physical infrastructure instead of depending on tax incentives to attract FDIs. Physical infrastructure plays an important role in attracting both local and foreign investments.