more conservative than that projected in the EDPRS of 8 percent, but can nevertheless be seen as a considerably high growth rate over the long term. The more conservative approach takes into account the potentially dampening effect of the global economic downturn in the next few years and assumes a slower implementation of structural reforms than envisioned by the government. The forecast is in line with the IMF’s recent assessment of the Rwandan economy (IMF, 2009).

For the government, we assume that all receipts except foreign grants do not change as shares of GDP, imposing 2008 GDP shares (the most recent ones that are available) starting from 2008. Foreign grants are fixed in foreign currency on the basis of recent projections. On the spending side, transfers from the government to the household are also fixed as a share of GDP. In each period, government consumption in each area grows within the limits of the fiscal space that remains; government investment is driven by the need to expand the government capital stocks in proportion to the growth in government services. In the private or household sphere of the economy, incomes (from factors and transfers from government and the rest of the world) are allocated in roughly fixed shares to direct taxes, transfers, consumption, and savings. Private investment is driven by available financing (from private savings and FDI net of government domestic borrowing). The market for the private capital factor is cleared by its rent whereas, in the labor markets (one per labor type), the employers can hire as much labor as they wish at a reservation wage that moves upward as the labor market becomes tighter; at full employment, the labor market clears at the relevant wage.

As shown in Table 5, the real annual growth rates of the macroeconomic aggregates are in the range of 4-7 percent per year. In order to maintain balance in the external accounts, the real exchange rate depreciates at an annual rate of 1.8 percent. On the production side, the main contributor to growth is the services sector, followed by the agriculture sector (Table A-5), Panel 2). The shares of industry and services of GDP in 2020 have increased while that of agriculture has contracted. Import and export growth each averages about 6 percent per year. The rate of export growth reflects the success of export promotion strategies and diversification supported by a depreciation of the real exchange rate of about 2 percent per year. The shares of both exports and imports in GDP increase (Table A-1), leading to a more open economy. Imports, however, remain much larger than exports. Even though private remittances make up for some of the trade deficit, Rwanda remains highly dependent on aid (mostly in grant form).

**Table 5:** Real growth rates of selected macro indicators by simulation scenario (% annual growth from 2008 to 2020)

|||Increa|sed aid -|allocated to||||
|---|---|---|---|---|---|---|---|
||BASE|HD|INF|AGR|BAL G|VEFF|CRISIS|
|GDP at market prices|6.0|6.2|6.6|6.5|6.4|6.2|5.4|
|Private consumption|6.2|6.5|6.8|6.8|6.6|6.3|5.1|
|Government consumption|7.3|8.3|8.3|7.4|8.3|8.1|7.1|
|Private investment|3.6|4.0|4.2|4.1|4.1|3.6|1.9|
|Government investment|4.4|5.7|6.9|7.6|6.2|4.9|3.6|
|Exports|5.7|3.6|5.1|4.7|4.2|5.9|5.3|
|Imports|5.7|6.5|6.8|6.7|6.6|5.7|3.3|
|Absorption|6.0|6.4|6.7|6.7|6.5|6.1|5.0|
|Real exchange rate (index)|1.8|0.8|1.2|1.2|1.0|2.0|4.6|

_Source:_ World Bank staff simulations with MAMS.

Under the BASE scenario substantial improvements are recorded for all of the MDGs (Table 6) relative to the situation in 2006 and 2000 (Table 3). However, with the exception of MDG 2 (gross primary school completion rate), none of the targets set in the Vision 2020 are met. The 7