increase in aid to USD 85 per capita in 2012 and up to USD 90 per capita until 2020, compared to USD 70 per capita in the baseline.

A main question faced by Rwanda’s policy makers is to decide to allocate additional foreign aid to best address the challenges Rwanda is facing; the objective of the simulations in this section is to suggest likely consequences of alternative decisions. As mentioned above, there are several constraints holding back the development of Rwanda’s economy. The 2007 Country Economic Memorandum (CEM) identifies three major areas of constraints to growth in Rwanda. They are (i) the poor condition of infrastructure, particularly electricity, transport and water; (ii) the low base of skilled labor; and (iii) low productivity in agriculture. It is clear that these constraints cannot be tackled individually, but their strong interdependencies and complementarities have to be taken into account, e.g. the necessity to improve the infrastructure and skills base in order to develop the industry and services sector. Due to the limited resources, however, the use of additional funds will have to be prioritized to maximize their benefit.

In the following scenarios, additional budget resources will be allocated to different sectors to compare the effect on the macroeconomic development and improvements of MDG indicators. Hence, depending on the simulation, the additional aid will be allocated to human development, encompassing the education, health and water and sanitation sector; infrastructure; agriculture; or be split between these three areas. In all other respects, the assumptions in these scenarios are the same as for BASE. Most importantly, for the sectors of non-targeted government spending, the real growth rates of the BASE scenario are left unchanged.

A general observation for all four scenarios with an increase in foreign aid until 2012 is that a surplus in the balance of payments leads to less depreciation of the exchange rate during that period, causing lower export growth and promoting imports, leading to a worsening of the trade balance (Table 5). This is in line with findings from Foster and Heller (2007), linking the increase in aid receipts in Rwanda since 2003 to a moderate exchange rate appreciation. The additional available funds enable government consumption and investment to expand, in turn permitting higher private consumption, investment and savings. Overall, GDP growth is accelerated by 0.2 to 0.6 percentage points compared to the BASE scenario. Foreign and domestic government debt to GDP ratios are smaller than in the baseline due to the higher GDP growth rate, the higher grant element in the overall level of debt, and the limited depreciation of the currency.

# _4.2.1. Additional aid allocated to human development (AID-HD)_

Rwanda has already made substantial progress in human capital development during the implementation period of the first PRSP (2002-2006). Universal primary education has almost been realized in the sense that, with a net enrollment rate of approximately 94 percent already in 2005, almost everyone receives some primary education. However, so far, a much smaller share has completed the full primary cycle. In 2006, the gross completion rate stood at 52 percent while repetition and drop-out rates remained high and the quality of education low. Transition rates to secondary and tertiary education were low as well, but improving. Regarding health outcomes, under-five mortality has decreased by a large margin and vaccination rates improved. A community-based risk-pooling scheme ( _mutuelles_ ) has been introduced with increasing coverage. Health centers have been utilized more due to improved infrastructure and equipment as well as more staff. Overall, health service delivery has been strengthened, but further funding is essential to continue and sustain these improvements. Rwanda is on track to reach the water and sanitation MDGs. Although not much progress has been made between 2000 and 2006 regarding access to 9