Abstract
Botswana, Rwanda, and Seychelles have established a relatively sound foundation for governance through strong political will, commitment, and societal consensus. Botswana developed a good policy framework to help prudently manage its wealth from mining resources. Rwanda rebuilt itself from a devastating conflict by adopting more advanced institutional models. Seychelles, a small island state, responded decisively to its 2008 debt crisis by embarking on a comprehensive program of economic and institutional reforms. Today these countries are among the sub-Saharan African countries that lead in sound governance, which may now help them address the impact of COVID-19 more effectively. This chapter examines their approach to good governance and finds common characteristics in these three countries’ governance frameworks: the reported transparency of their economic policies, sound protection of economic rights, and criminalization of corruption. While key pillars of governance seem to have been successfully established in these countries, further reforms— including strengthening macrofinancial policy frameworks and improving information about their performance in delivering government services—would be needed to ensure accountability and sustained implementation.
Motivation and Context
Reducing corruption has fostered good economic performance in Africa. Empirical studies on Africa tend to support evidence of the beneficial impact of good governance on economic performance (see Chapter 2): improving governance and reducing corruption in sub-Saharan Africa could increase the region’s GDP per capita growth by about 1–2 percentage points (Hammadi and others 2019), since control of corruption and political stability, among other elements, are associated with higher economic growth in Africa (Ondoa 2019). African firms in industries that are more prone to corruption are also more likely to stop exporting (Faruq 2017). However, the relationship between corruption and growth could be nonmonotonic with the impact of corruption on growth depending on the quality of institutions (Aidt, Dutta, and Sena 2008). In a more conservative sense, corruption—the abuse of public office for private gain—distorts the activities of the state and undercuts efforts to achieve sustainable and inclusive economic growth (IMF 2019a).
Indeed, a handful of countries have emerged among top governance performers in sub-Saharan Africa, while also achieving relatively strong economic growth. Botswana, Rwanda, and Seychelles are among such performers. In particular, all three countries are not only relatively strong performers in sub-Saharan Africa, but in some cases, they even perform better than some advanced countries.1 Moreover, these three countries share common characteristics, with all three countries experiencing a relatively strong economic performance, comparable to or with higher growth than the median emerging sub-Saharan African countries from 2009 to 2019.2 Yet these three countries also differ from each other, and their structural differences, in fact, indicate that good governance can be achieved in a variety of circumstances: Botswana is landlocked and resource rich, Seychelles is a small island at a higher level of development, while the case of Rwanda shows that it is possible to improve governance over time in countries emerging from conflict and fragility with limited resources. Those structural features highlight the importance of institutional factors in explaining strong governance performance.
This chapter aims at identifying the common institutional characteristics of three of the stronger sub-Saharan African governance performers and providing insights on the key institutional foundations for governance upgrades. It assesses shared and individual characteristics of Botswana, Rwanda, and Seychelles by reviewing these countries’ progress against the key elements of the IMF governance framework.3 The framework provides an assessment of the nature and severity of governance vulnerabilities in the institutional functions that are most relevant to economic activity; namely: (1) fiscal governance, (2) financial sector oversight, (3) central bank governance and operations, (4) quality of market regulations, (5) rule of law, and (6) anti–money laundering and combating the financing of terrorism (AML/CFT).
Fiscal Governance4
The three countries score relatively well in the fiscal governance dimension, which comprises the institutional frameworks and practices of the public sector. This includes practices in revenue administration to strengthen the state’s ability to collect taxes, and public financial management, which is crucial to ensure greater efficiency and transparency in public spending.
Revenue Administration
Transparent rules, proper risk management, sound audits, and digitalization are key elements of good governance practices in revenue administration. Transparent rules and sound revenue administration practices foster more revenue collection, helping countries better achieve their development goals. When the rules of paying taxes are clearly defined, disseminated, and understood, tax obligations are viewed as relatively fair, which improves compliance and facilitates revenue collection (IMF 2019a, p. 43). Meanwhile, proper risk management practices help raise resources at a lower cost for the revenue administration by focusing its capacities on higher areas of risk for revenue collection instead of allocating the same resources to all categories of taxpayers. It therefore induces taxpayer compliance, with a more efficient allocation of resources. Moreover, the public’s confidence in the revenue administration and government increases as digitalization of the revenue administration reduces opportunities for corruption (Chapters 14 and 15) and actions to reduce tax arrears, including through a sound audit program, intensify.
Transparent rules for taxpayers and strong practices in revenue risk management characterize Botswana, Rwanda, and Seychelles. Based on the PEFA methodology, Rwanda and Seychelles outperformed the median emerging market country in terms of having transparent rules for tax obligations and liabilities, while Botswana was slightly below that benchmark (Figure 3.1).5 Botswana’s information covered all major taxes. Rwanda had compiled a set of clear and comprehensive tax laws and regulations and had a functional administrative tax appeals system. Seychelles used multiple channels to facilitate taxpayers’ access to up-to-date information on revenue obligations and rights. Regarding revenue risk management, all these countries scored above the median emerging market country (PEFA 2017a; 2017b; 2020).6 Botswana had set up a relatively new unit focusing on tax risk management. Rwanda used a computerized risk-based taxpayer-profiling module to identify and select taxpayers for audit and fraud investigations. Seychelles used a structured and systematic approach to risk management with specific attention to large and medium taxpayers.
PEFA Scores in Revenue Administration (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).PEFA Scores in Revenue Administration (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).PEFA Scores in Revenue Administration (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).Revenue audit and investigation remains a somewhat challenging area for some of these relatively strong sub-Saharan African governance performers. Based on the PEFA, both Botswana (in 2020) and Rwanda (in 2017) scored below the median emerging market country in that area, while Seychelles (2017) performed better. However, Rwanda has recently leveraged third-party information and enhanced IT systems to improve audit procedures and undertake closer scrutiny of large taxpayers (IMF 2019b). Even though Seychelles outperformed the median emerging market country in that area in 2017, it is further building its tax audit capacity (IMF 2019c). Auditing practices need to evolve in parallel with increasingly complex taxpayer accounts, making this area a candidate for continuous improvement. Strong audit and investigation practices foster better compliance from taxpayers and more effective revenue mobilization.
The three countries fared relatively well in at least one other area critical for good governance in revenue administration (IMF 2018). Progress is ongoing in digitalization of the revenue administration, notably in Rwanda and Seychelles. Processing of tax arrears outperformed the median emerging market country for Botswana and Seychelles, while Rwanda is implementing a work program featuring more efficient practices, such as detecting noncompliance using macroeco-nomic data and implementing a risk differentiation framework to focus on priority areas, for reducing the outstanding stock of tax arrears (Rwanda Revenue Authority 2016).
Public Financial Management
Institutional arrangements and practices to enhance public spending efficiency and foster transparency are critical for good governance in public financial management (IMF 2018). Strong procurement standards minimize opportunities for corruption and ensure a more efficient allocation of budgetary resources. More information for policymakers on a broader set of fiscal activities, including operations of state-owned enterprises (SOEs), is essential to help formulate better fiscal policies. An effective internal control environment is a major component of good PFM governance since it creates appropriate incentives and limits discretion by public servants (IMF 2019a). Strengthening information for the public on government service delivery performance boosts civil servants’ accountability. Without information, the public is unable to assess government performance against set standards, which reduces public pressure for corrective actions in the event of poor performance. Finally, public pressure also depends on access to externally audited government accounts by the legislature.
Good access to audit reports by the legislature seems to be a common characteristic of these three countries. Based on PEFA scores, Botswana, Rwanda, and Seychelles either outperform or are aligned with the median emerging market country for legislative scrutiny of audit reports. The capacity by elected officials to access audit reports on government activities offers a level of transparency on these activities that is a necessary condition for good fiscal governance. Moreover, transparency on budgetary execution is reportedly relatively strong in Rwanda and Seychelles, as they perform well on indicators for the legislative scrutiny of the budget, financial data integrity, and public access to fiscal information. In Botswana, this follows a long tradition of limiting powers of traditional leaders and holding local consultative assemblies.7 Rwanda requires in its constitution that the office of the auditor-general issue a report on the annual state budget (Transparency International UK 2011). Seychelles enacted its audit legislation in 2010 to provide independent operation of its office of the auditor-general according to international best standards, including making the auditor-general’s office fully accountable to the National Assembly (OAG, n.d.).
The three countries continue progress in reforming public procurement and oversight of SOEs. Regarding public procurement, Rwanda outperforms while Botswana is aligned with the median emerging market country (Figure 3.2). Seychelles underperformed relative to that benchmark. Nonetheless, as of 2021 Seychelles is planning to receive technical assistance in public investment management, including to strengthen its capacities in procurement. Moreover, efforts in improving fiscal transparency continue, including reforms to upgrade the oversight of SOEs. Botswana, Rwanda, and Seychelles are making strides in many dimensions to catch up to the median emerging market country in the area of public asset management.8 Botswana is considering adopting and implementing a regulatory framework for parastatals, including to empower the country’s public enterprises evaluation and privatization agency (IMF 2020a). As of January 2021 Rwanda is preparing a draft SOE ownership policy that mandates planning, budgeting, and reporting and also establishing sanctions and enforcement criteria for noncompliance. Seychelles has amended the Code of Governance for SOEs according to OECD guidelines. It has also adopted amendments to the Public Enterprise Monitoring Committee Act to strengthen that entity’s enforcement powers for noncompliance by SOEs, including regarding due diligence in the appointment of directors.
PEFA Scores in Public Financial Management (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).PEFA Scores in Public Financial Management (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).PEFA Scores in Public Financial Management (2016 framework; score: 0 = low to 7 = high)
Source: Public Expenditure Framework Assessment (PEFA).The three countries perform differently on internal control environment indicators, with particular vulnerabilities on implementing audit processes and relatively low effectiveness of expenditure commitments for Botswana and Seychelles. Rwanda is relatively well positioned compared to the emerging market median for financial data integrity (which encompasses financial data integrity processes), internal audit, payroll control, and internal control on nonsalary outlays. However, Botswana needs to catch up to the emerging market median along all these dimensions. Its score on financial data integrity is particularly dragged down by relatively low scores on accounts reconciliation, while its financial data integrity processes are relatively better rated. Implementation of its internal audit processes seems to be a particular vulnerability, while its coverage of internal audit earns a top score. Internal controls over payroll and nonwage outlays are also reported to be relatively weak (PEFA 2020). The performance of Seychelles is more mixed, with relatively strong scores in integrity of financial data and at par with the emerging market median for payroll control. Nonetheless, Seychelles is reported to be relatively weak on implementation of audit processes, which drags down its relatively good score on internal audit (PEFA 2017b). Botswana’s effectiveness of commitments on nonsalary outlays is reported to be relatively weak (PEFA 2020).
There is also scope for these three countries to improve information on the government’s service delivery performance. The PEFA indicator assesses the quality of annual performance information at different stages of the budget cycle: in the budget’s documentation, the year-end report, and audit reports. Based on PEFA scores, Botswana, Rwanda, and Seychelles underperform relative to the median emerging market country with respect to information on whether resources reach service delivery units as planned to help achieve annual and medium-term performance targets. Coverage of that information helps promote greater operational efficiency of the government. Nonetheless, Rwanda has established a distinctive system for individual accountability. Since 2006 every public servant has been required to sign an annual performance contract based on annual individually tailored and team objectives, which collectively aim at controlling the pace and quality of program execution, and the contracts are published. Nonfulfillment of contracts is consequential, including the possibility of dismissal. Improving information on the delivery of public services may allow Rwanda to showcase the impact of its reforms on public servants’ accountability for the quality of delivery of public services.
However, Botswana and Rwanda performed somewhat less well overall on the Open Budget Survey (OBS) (International Budget Partnership 2020) than several other sub-Saharan African countries (Figure 3.3). Based on these countries’ comparative scores on the OBS’s very detailed questionnaire, there was scope for Botswana and Rwanda to further improve the information presented in the budget document. This would include more details on revenue and expenditure, the impact of new policy proposals, historical outturns, extending the fiscal perimeter to extrabudgetary funds, transfers to SOEs and other levels of government, and tax expenditures and earmarked tax revenues. Similarly, Botswana and Rwanda could present more comprehensive information, in their pre-budget statements, on macroeconomic forecasts underpinning budget projections, government policies guiding estimates of expenditure and revenue, estimates on government borrowing and debt, and estimates of government expenditure for a multiyear period two years after the implementation of the budget. These countries could also present further information on net new borrowing, total debt outstanding at the end of the year, and projected interest spending in the enacted budget document. Moreover, the executive could strengthen its engagement with the public during the budget process, particularly regarding the dissemination of the citizens’ budget, further communication with the public on the mode of engagement, and better use of public participation during the budget formulation process. Finally, further progress is needed in the development of the supreme audit institution, particularly regarding the examination of its audit report by the legislature, the frequency of the testimony by the supreme audit’s leadership to the legislature, and the independent review of audit processes of the supreme audit institution.
Open Budget Survey (2019) Overall Score
Source: International Budget Partnership (2020).Note: A higher score means a better performance on the OBS questionnaire. Seychelles is not included in the survey.Open Budget Survey (2019) Overall Score
Source: International Budget Partnership (2020).Note: A higher score means a better performance on the OBS questionnaire. Seychelles is not included in the survey.Open Budget Survey (2019) Overall Score
Source: International Budget Partnership (2020).Note: A higher score means a better performance on the OBS questionnaire. Seychelles is not included in the survey.Since the OBS assessment, Rwanda has adopted measures that strengthened fiscal transparency, including setting up a fiscal risk committee, publishing a comprehensive fiscal risk statement, and compiling a fiscal risk registry. It has also produced quarterly execution reports on the budget execution of the central government using GFSM 2014 during fiscal year 2019/20 (IMF 2021a).
Financial Sector Oversight and Regulation of Competition
The financial systems in Botswana, Rwanda, and Seychelles are reported to be generally well advanced in implementing international standards.9 All three countries previously undertook reforms in this area and are continuing efforts to further buttress their financial stability frameworks, finalizing the implementation of Basel II, starting Basel III, and implementing properly BCBS Core Principles for Effective Banking Supervision (Basel Committee on Banking Supervision 2012). Good governance in financial sector oversight is key to macroeconomic stability, and Botswana, Rwanda, and Seychelles have a solid foundation in that area. Country experience shows that weak regulation and supervision of the financial sector can lead to financial instability, with significant macroeconomic implications (IMF 2018). Financial systems in Botswana and Rwanda reportedly enjoy well-regulated competition and a relatively high compliance with prudential rules (Figure 3.4).10 While Botswana scores high on efficiency of banking and financial supervision, Rwanda scores relatively low on efficiency of banking and financial supervision but does well in banking sector competition. The generally good performance seems to reflect previous efforts undertaken by the authorities to improve financial sector oversight. Between 2013 and 2016 Botswana and Rwanda took significant steps in strengthening (1) the prudential rules in the banking system, (2) the supervision of the financial system, and (3) the system providing information about the position of banks.
Financial Sector Oversight (Score: 0 = low, 4 = high)
Source: World Bank, Institutional Profiles Database 2016; 2012 (when 2016 not available).Note: Seychelles data not available.Financial Sector Oversight (Score: 0 = low, 4 = high)
Source: World Bank, Institutional Profiles Database 2016; 2012 (when 2016 not available).Note: Seychelles data not available.Financial Sector Oversight (Score: 0 = low, 4 = high)
Source: World Bank, Institutional Profiles Database 2016; 2012 (when 2016 not available).Note: Seychelles data not available.Botswana, Rwanda, and Seychelles show continuous efforts to enhance the design of the financial stability framework and remain proactive in the wake of the pandemic. Botswana made progress in assigning a clear macroprudential mandate to the Bank of Botswana (BoB) and in filling data gaps. The Financial Stability Committee has been established and is meeting on a regular basis. The BoB started collecting and monitoring data on households’ indebtedness and the real estate market. In the first half of 2020 Rwanda implemented regulations governing mortgage refinancing companies, which involved changes in the shareholding, amalgamation, and transfer of portfolio of insurers and reinsurers. Rwanda also took steps to closely monitor credit risk from COVID-19-related loan restructuring by issuing guidance to banks and microfinance institutions (MFIs) on their proper classification and provisioning. Technical assistance aiming at improving the country’s stress-testing framework is ongoing. Seychelles approved the policy framework for crisis management, bank resolution, and safety nets in 2018, which provided for the resolution authority to have adequate powers and tools to ensure capacity to address financial stability issues. Seychelles also continues to make progress toward adopting the Basel II framework and developing the oversight framework of the national payment system. Recently, the authorities took measures to address the risk of the potential loss of correspondent banking relationships (CBRs) and to buttress financial stability.11
Further reforms on the design of regulatory and supervisory framework are underway to buttress financial stability. Botswana is considering monitoring the liquidity situation in the financial system, strengthening the liquidity framework and the risk-based supervision framework of nonbank financial institutions, and finalizing the banking act to enhance the crisis resolution framework. To enhance efforts to safeguard financial sector stability, Rwanda intends to release the capital conservation and domestic systematically important banks (DSIBs) buffer and require capital restoration plans from banks on a case-by-case basis. Further reforms would, however, be needed to strengthen risk-based supervision, stress testing, financial safety net and crisis preparedness and management, as well as financial infrastructure. Seychelles continues its efforts to strengthen the financial stability framework. The authorities have formulated a policy framework paper on the Financial Sector Stability Act, which will assign macroprudential powers to the relevant institutions, allowing them to take corrective actions to tackle risks from a potential buildup of consumer credit.12
Central Bank Governance and Operations
Good performance in central bank governance and operations is macrocritical since it fosters appropriate use of public resources (see Chapter 13) in order to avoid potential adverse macroeconomic consequences. The assessment below covers the adequacy of (1) the mandate, decision-making structure, and autonomy of the central bank; (2) the accountability and transparency framework; and (3) the internal control environment.13
The three countries considered are reported to have relatively independent and transparent central banks. There is ongoing progress in strengthening their central banks’ mandates, frameworks for accountability and transparency, and the effectiveness of their internal controls. However, more reforms are needed to ensure the adequacy of mandates and modern monetary policy frameworks.
Central bank independence and transparency appear to be strong in the three countries considered. Based on the 2016 and 2012 World Bank’s IPD central bank independence indices (Figure 3.5), both the degree of independence of the central banks and degree of transparency of economic policy are relatively high in Rwanda and Botswana, above the EM median. While there is no IPD data available for Seychelles, anecdotal evidence, supported by the authorities’ request for a voluntary safeguard assessment completed in 2018, suggest a strong level of independence and transparency of the Central Bank of Seychelles (CBS). In particular, the CBS has ensured that its legal framework remains on par with international standards, including through a review of the Financial Institutions Act initiated in 2019, which allows the implementation of risk-based AML/CFT supervision consistent with FATF standards.
Central Bank Independence and Transparency of Economic Policy Index Financial Sector Oversight1 (Score: 0 = low to 4 = high)
Source: Institutional Profiles Database.Note: 1The Transparency of Economic Policy Index reflects a broad assessment of transparency as it encompasses all public administration, including the central bank.2 Seychelles data is not available.Central Bank Independence and Transparency of Economic Policy Index Financial Sector Oversight1 (Score: 0 = low to 4 = high)
Source: Institutional Profiles Database.Note: 1The Transparency of Economic Policy Index reflects a broad assessment of transparency as it encompasses all public administration, including the central bank.2 Seychelles data is not available.Central Bank Independence and Transparency of Economic Policy Index Financial Sector Oversight1 (Score: 0 = low to 4 = high)
Source: Institutional Profiles Database.Note: 1The Transparency of Economic Policy Index reflects a broad assessment of transparency as it encompasses all public administration, including the central bank.2 Seychelles data is not available.In Botswana, Rwanda, and Seychelles, measures to improve central bank governance and operations focused on the adequacy of the central bank mandate and the accountability and transparency framework, and on the effectiveness of the internal control environment:
In Botswana, both the Bank of Botswana Act and the Banking Act were revised to strengthen central bank governance and support modernization, including for the development of a crisis resolution framework.
Similarly, the 2016 safeguard assessment for Rwanda resulted in the central bank taking proactive steps to (1) strengthen the National Bank of Rwanda’s (BNR) safeguard framework, with amendment in 2017 of the BNR Act, which includes enhanced provisions on personal autonomy of board members and strengthening external audit arrangements; (2) improve the transparency of the IFRS financial statements; and (3) reinforce the composition of the Audit and Risk Committee and enhancement of the internal audit and risk management functions. The National Bank of Rwanda also published macroprojections for the monetary policy committees (MPC) decision-making in quarterly inflation reports, following best practices established by other central banks.
The 2018 safeguard assessment in Seychelles resulted in the central bank taking proactive steps to (1) strengthen its reserves management operations and risk management functions and further progress in developing a comprehensive AML/CFT framework for its own banking operations, and (2) further improve the effectiveness of the internal audit activity. In September 2020 the draft amendments to the CBS Act, including provisions to enhance the governance arrangements, were presented to the National Assembly.
Further measures on the adequacy of the central bank mandate and modernization of the monetary policy framework should complement existing efforts. Further measures to strengthen both the CBS staff’s capacity for inflation forecasting and liquidity management and its communication policy would help Seychelles to make the transition toward an interest-rate-policy-based framework. The Bank of Rwanda is also transitioning to a new interest-rate-based operational framework, which will require making further reforms to the monetary policy committee’s decision-making process and strengthening communication tools to better anchor inflation expectations. To accommodate changes linked to the increased use of digitalization and financial technologies by banks and nonbank institutions, the Bank of Botswana is planning work on new laws, regulations, strategies, and operations.
Quality of Market Regulations
Market regulation is a key function of the state, with macroeconomic implications. Good-quality market regulation promotes private investment opportunities and minimizes the scope for fraud, abuse, and rent extraction. A strong and resilient regulatory and institutional framework enables a virtuous balance between encouraging private sector involvement and promoting the public good through targeted interventions that address market failures and misaligned incentives and that foster competition.
The assessment below examines the extent to which the regulatory environment could hinder private businesses. It is based on the World Economic Forum Global Competitiveness Indicators, which combine data from the World Bank Doing Business Indicators and scoring from the Executive Opinion Survey, which polls a country’s business executives on various aspects of its regulatory environment and other aspects of a country’s business environment.
Botswana, Rwanda, and Seychelles are reported to enforce their regulations according to relatively high governance standards. They seem to have relatively clear and accessible regulations, minimizing opportunities for discretionary treatment and corruption. Following corruption scandals during the 1990s, Botswana has proactively sought to reinforce its legal and institutional frameworks (Transparency International 2014). Rwanda also renewed its commitment to fighting corruption during its postconflict recovery, culminating in the enactment of a new law to fight corruption in September 2018 (Bizimana 2019). Seychelles adopted its Anti-Corruption Act in 2016 (anti-corruption Commission Seychelles).
Botswana, Rwanda, and Seychelles: Regulations and Global Competitiveness Index
Source: World Economic Forum (WEF), The Global Competitiveness Report 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdfNote: International rank out of 141 countries in 2019 (lower is better) based on scores of different aspects of regulations pertaining to the business environment.Botswana, Rwanda, and Seychelles: Regulations and Global Competitiveness Index
Source: World Economic Forum (WEF), The Global Competitiveness Report 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdfNote: International rank out of 141 countries in 2019 (lower is better) based on scores of different aspects of regulations pertaining to the business environment.Botswana, Rwanda, and Seychelles: Regulations and Global Competitiveness Index
Source: World Economic Forum (WEF), The Global Competitiveness Report 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdfNote: International rank out of 141 countries in 2019 (lower is better) based on scores of different aspects of regulations pertaining to the business environment.This is the case even though the regulations themselves, as they apply to the business environment, are reported by the World Economic Forum to be somewhat different across these countries (Figure 3.6).
The three countries rank similarly in regulations for property rights and competition in services but more disparately in other business regulations. Botswana, Rwanda, and Seychelles ranked similarly for the protection of property rights in 2019. Botswana, Rwanda, and Seychelles occupy a relatively similar world rank for regulations governing competition in services. In other regulatory areas, however, there are wider dispersions among the countries’ positions. Notably, Rwanda’s regulations for land administration are reported to be among the best in the world, serving as a model for an area critical for the investment climate due to a fully digital land registration system requiring minimal procedures that can be completed quickly (IFC 2019). Rwanda also is reported to performs well in terms of labor market flexibility, particularly regarding the strength of its workers’ rights policies and the flexibility of its wage determination. Moreover, regulations in Rwanda and Seychelles appear to be relatively more conducive to market competition with relatively lighter business regulation requirements.
Enforcement of business regulations in Botswana and Rwanda are reported to follow relatively good governance practices, based on the World Justice Project Rule of Law Index. The index is constructed from survey data, both from polls of the general population in a given country and qualified respondent questionnaires sent to experts around the world. The answers are codified as numeric values, which produces raw country scores that are then normalized (Figure 3.7).
Botswana and Rwanda: Rule of Law for the Regulatory Environment
Source: World Justice Project, Rule of Law Index 2020 Scores, https://worldjusticeproject.org/our-work/research-and-data/wjp-rule-law-index-2020Note: Higher scores reflect practices closer to best international practices.Botswana and Rwanda: Rule of Law for the Regulatory Environment
Source: World Justice Project, Rule of Law Index 2020 Scores, https://worldjusticeproject.org/our-work/research-and-data/wjp-rule-law-index-2020Note: Higher scores reflect practices closer to best international practices.Botswana and Rwanda: Rule of Law for the Regulatory Environment
Source: World Justice Project, Rule of Law Index 2020 Scores, https://worldjusticeproject.org/our-work/research-and-data/wjp-rule-law-index-2020Note: Higher scores reflect practices closer to best international practices.Botswana and Rwanda are reported to apply and enforce government regulations without improper influence at least as well as the median emerging market country (World Justice Project 2020).14 Government regulations seem to be effectively enforced (in the sense of full compliance enforcement), government expropriation appears lawful with adequate compensation, and administrative proceedings seem to respect due process. The area that would benefit most from development for Botswana is reducing the time to conduct administrative proceedings. Similarly, it seems that Rwanda could further develop its ability to apply and enforce government regulations without improper influence.
Overall regulations in Seychelles could be fine-tuned, including in key sectors such as market concentration, the property market, and tourism (World Bank 2017). While according to the index Seychelles has relatively good regulations to prevent market dominance, certain sectors, such as tourism, banking sector, and information and communication technology, have only a few incumbents that face fewer incentives to innovate. Moreover, while Seychelles ranks relatively well for its administration of land, its property market could be made more transparent by publishing price data. Further financial sector–related laws are needed, as the low level of competition among actors in the banking sector continues to be reflected by the large spreads between interest on deposits and loans. Finally, tourism suffers from a lack of regulation and common standards, with potentially large negative externalities for the overall sector.
Rule of Law
To promote investment, strengthen credit availability, and facilitate debt restructuring, property and contractual rights need to be well protected and enforced. The most important determinant of a strong protection of economic rights is the quality of the judiciary, regarding both its technical capacity and its independence from private influence and public interference. The predictability and timeliness of enforcement of these rights is also critical (IMF 2018).
Economic rights are reported to be relatively well protected by Botswana, Rwanda, and Seychelles, supported by a relatively sound judiciary system, but insolvency regulatory frameworks seem widely different across these countries.15 Overall, based on the Worldwide Governance Indicators, Botswana seems to have a relatively stronger rule of law than do Rwanda and Seychelles (Figure 3.8.2). Based on the World Justice Project’s Rule of Law Index,16 judiciary systems in Botswana and Rwanda seem to compare mostly favorably to that of the median emerging market country, particularly regarding the relative independence of the justice system from the government (Figure 3.8.1). Botswana also is reported to outperform the benchmark for its relatively corruption-free judiciary system. All civil justice systems are reported to be effectively enforced, which enhances the predictability of the protection of property and contractual rights. Moreover, Rwanda and Botswana seem to have a relatively timely judicial system that prevents unreasonable delays. Although a government’s ability to restructure debt is an important aspect of the protection of economic rights, this is an area of wide disparity among these three countries. According to the World Economic Forum (2019), Rwanda has the best regulatory framework in the world, vastly outranking Seychelles, with Botswana far behind.
AML/CFT
The adequacy of the framework for AML/CFT is another key element of state function with macroeconomic implications. Money laundering and related predicated crimes can undermine the stability of a country’s financial system or its broader economy. Weakness in this area can also facilitate corruption, including at the transnational level, by allowing perpetrators to conceal the proceeds of corrupt acts. The assessment below looks at the adequacy of the legal framework, the overall institutional capacity, and effective implementation. Gaps in implementing the framework may foster money laundering and undermine the stability of the financial system. They can also facilitate corruption by providing opportunities for perpetrators to conceal the proceeds of corrupt acts.
The three countries considered progressed in establishing national AML/CFT frameworks, but face implementation challenges in supervision and mitigation. The countries advanced in establishing the framework, cooperating internationally to fight criminals and seize their assets, applying preventive measures, and using financial intelligence. However, they face implementation challenges in most of the objectives a framework for AML/CFT is expected to achieve. Botswana and Seychelles have generally not been effective at reaching most of the 11 key goals that an AML/CFT system should achieve (Figure 3.9). The two countries were moderately effective in three key areas related to (1) international cooperation aiming at facilitating actions against criminals and their assets, (2) application of AML/CFT preventive measures, and (3) the use of financial intelligence and relevant information by competent authorities for money laundering and terrorist financing investigations. Based on the latest Eastern and Southern Africa Anti-Money Laundering Group (ESAAMGL) mutual report for Rwanda (ESAAMLG 2014), the country made considerable progress in establishing a national AML/CFT framework in recent years, but also faces implementation challenges regarding lack of awareness of the prevention and detection of money laundering and terrorism financing, implementation of the legal framework, supervision of reporting entities within the financial sector, and mitigation of the potential domestic and cross-border risks. More recently, however, Rwanda adopted the Law on the Prevention and Punishment of Money Laundering and Terrorism Financing.
Botswana, Rwanda, and Seychelles are compliant with most of the technical requirements of the FATF recommendations in some areas, but still face shortcomings in others. Botswana and Seychelles are rated partially compliant with most of the technical criteria regarding (1) transparency and beneficial ownership of legal persons and arrangements and (2) the powers and responsibility of competent authorities and other institutional measures. On the latter, the two countries are partially compliant with requirements on regulation and supervision of financial institutions, as well as requirements on statistics. Similarly, based on the latest ESAAMLG mutual evaluation report for Rwanda, the country’s AML/ CFT law regarding the beneficial owner would need more details to be effective, while competent authorities lack powers and adequate supervisory authority, as well as detailed statistics on the effectiveness of the AML/CFT regime. Both Botswana and Rwanda are partially compliant with most recommendations regarding preventive measures. While Seychelles is compliant with most of the preventive measures, the country still has major shortcomings in AML/CFT policy coordination, money laundering and confiscation, and terrorism financing.
AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.AML/CFT Measures: Effectiveness and Compliance with FATF Technical Requirements
Source: ESAAMLG mutual evaluation reports; and IMF LEG; 2017, 2018, 2019.Note: Data for Rwanda are not available.Recommended actions pertain to implementation and compliance requirements, including enhancing capacity, applying a risk-based approach, and improving transparency and beneficial ownership. Seychelles is encouraged to enhance the capacity of the relevant AML/CFT institutions, implementing a risk-based approach to AML/CFT supervision, and pursuing efforts to improve transparency of both domestic and international business companies while establishing a beneficial ownership register for the offshore sector. Recommendations for Rwanda include improving the collection and verification of beneficial ownership, notably through a provision on beneficial ownership information from bidders as part of the tender for the public procurement process and through information available on the government’s e-procurement website. Botswana will need to implement a sound and effective risk-based approach to supervision for offsite surveillance, and on-site activities for the BoB and Non-bank Financial Institutions Regulatory Authority (NBFIRA) should continue.
Governmental Measures to Prevent Corrupt Acts
Deterring transactions involving a public official abusing his or her office is best achieved through strong legal and institutional frameworks. The first element of a good framework is to have laws criminalizing corruption. These laws also need to be applied rigorously, with particular attention paid to the governance of the anticorruption entities. The laws also need to restrain concealment of the proceeds of corruption of officials.
Sound legislation criminalizing corruption contributed to relatively high scores for the anticorruption policies of Botswana, Rwanda, and Seychelles (Figure 3.10). Based on the Bertelsmann Transformation Index, Botswana and Rwanda’s anticorruption policies score above the median emerging market country (BTI 2020).17 This index reflects the scoring by country experts of a country’s different dimensions of governance according to a standardized codebook. The scores and assessments are published online and reviewed by a second country expert. Consistency is ensured by subjecting each of a country’s scores to regional and interregional calibration processes. Botswana, Rwanda, and Seychelles have enshrined the criminalization of corruption in their laws (Africa Integrity Indicators 2020). Botswana is particularly well noted for its Directorate on Corruption and Economic Crime (DCEC), established in 1994 to combat economic crime through investigation, corruption prevention, and public education. The directorate is part of the office of the president and reports directly to the president.
Botswana also adopted the Whistle Blowing Act in 2016. Furthermore, the government established a special court to expedite corruption cases.
However, the application of these laws is relatively challenging, according to the Ibrahim Index of African Governance (2020). This index is a composite indicator based on experts’ surveys of different aspects forming subcategories of the index. Botswana, which outranks Rwanda in terms of its anticorruption policy, earns lower scores on the policy’s application and anticorruption investigations. Botswana’s DCEC’s perceived lack of independence from the government may hamper its effectiveness, including in addressing high-level corruption. Moreover, Botswana has yet to enact laws on the declaration of assets and liabilities18 and on political party financing. In Rwanda and Seychelles,19 the bodies investigating cases of public sector corruption are independent by law, which has earned them higher recognition on that aspect of corruption control (Africa Integrity Indicators 2020). The Africa Integrity Indicators are constructed with scores by in-country researchers using an evidenced-based methodology. Each indicator has a score, an explanatory comment, and sources. Data is gathered through a variety of sources, including legal and scholarly reviews, interviews with experts, and reviews of media stories. Rwanda is rated as being relatively more effective at investigating corruption, due to its well-functioning mechanisms, including online, by which the Office of the Ombudsman can receive citizens’ complaints. In contrast, the online mechanism in Botswana is reported to be outdated and not anonymous. Seychelles’ effectiveness at investigating corruption improved after amending its Anti-Corruption Act in July 2019, but its Public Officers’ Ethics Commission does not have investigative powers (Figure 3.11).
There is still significant scope for improving the process of appointing staff to these countries’ anticorruption bodies. According to the Africa Integrity Indicators’ methodology, countries would earn a perfect score on “Appointments to investigative body” if appointments were merit based, free of conflict of interests, and changes in the appointment could only be effected through due process by an oversight body. Currently, in Botswana and Rwanda, all appointments are decided by the president, but must be approved by the Senate in Rwanda, while Seychelles approved the head of the ombudsman’s office through a merit-based selection process for the first time in 2017 (Africa Integrity Indicators 2020).
Control of Corruption
Source: Africa Integrity Indicators, 2020.Note: Higher scores reflect practices closer to best international practices. Based on the latest year where scores are available, from 2018 to 2020.Control of Corruption
Source: Africa Integrity Indicators, 2020.Note: Higher scores reflect practices closer to best international practices. Based on the latest year where scores are available, from 2018 to 2020.Control of Corruption
Source: Africa Integrity Indicators, 2020.Note: Higher scores reflect practices closer to best international practices. Based on the latest year where scores are available, from 2018 to 2020.A sound legislative and regulatory framework governing the extractive sector is an important pillar of a strong anticorruption strategy. Throughout the world, the sector contributes the most to the bribery of government officials, with the highest value of the bribes paid in any sector (OCED 2014). More specifically, the sector is prone to abusive cross-border and domestic profit shifting that not only erodes the tax base but is instrumental in causing corruption by facilitating the remuneration of illicit stakeholders and intermediaries. Moreover, the taxation of extractive industries should be brought under the tax administration instead of sectoral ministries or agencies. A recommended practice is to develop units in the revenue administration that specialize in extractive industries. Finally, public disclosure of information on tax payments, including any specific tax or customs incentives and privileges, licenses, contracts, and production data, can help reduce opportunities for corruption in the extractive sector. While Seychelles’ oil and gas sector remains at the exploration stage, it has been participating in the Extractive Industries Transparency Initiative (EITI) since August 2014. It adopted the Beneficial Ownership Act in March 2020, which requires it to publicly disclose beneficial ownership in the extractive sector. In September 2020 the EITI board agreed that Seychelles had made meaningful progress in implementing the EITI standard (EITI 2020).
While not participating in the EITI, Botswana, an important exporter of minerals, established in 1994 the Pula Fund, a long-term term investment portfolio, to preserve part of the income from diamond exports for future generations. Foreign exchange reserves exceeding what is expected to be needed in the medium term are transferred to the Pula Fund and invested according to established investment guidelines. The Pula Fund is a sovereign wealth fund (SWF) governed under the generally accepted principles and practices for SWF’s, also known as the Santiago Principles (Bank of Botswana, n.d.).
Conclusion
Botswana, Rwanda, and Seychelles are three relatively strong governance performers that share transparency as a common feature of governance. All three countries have been proactive in adopting policy frameworks that support good governance. Botswana did so to prudently manage its wealth from mining resources, while Rwanda and Seychelles needed to rebuild their institutions after a devastating conflict and a debilitating debt crisis, respectively. These countries have relatively transparent economic policy and management—with more work needed, however, on expanding budgetary information and engaging the public in budgetary discussions, financial supervision, and protection of economic rights. Botswana, Rwanda, and Seychelles have relatively transparent rules for tax obligations and liabilities, their legislatures have somewhat good access to audit reports, and they practice good risk management of their revenue administration. Moreover, these countries have well-supervised financial systems and relatively high compliance with prudential rules, their central banks enjoy a high level of independence and have transparent monetary policy, and they have strong regulations for property rights and competition in services. All three countries have enshrined the criminalization of corruption in their respective laws.
Accountability and buttressing policy frameworks remain common areas for improvement in these countries. Botswana, Rwanda, and Seychelles would benefit from providing public services more efficiently, including by strengthening accountability through improving the information on the performance of the delivery of services by the government. Strengthening tax revenue audits and investigations would further improve fiscal governance. Other beneficial second-generation reforms, already underway, are to design financial regulatory and supervisory frameworks to support orderly crisis resolutions. Moreover, monetary policy frameworks will benefit from their ongoing modernization.
A common feature of these countries is that their business regulations are applied according to good governance practices and protected by a relatively independent judiciary system and a sound rule of law. Rwanda’s regulations for land administration and insolvency respectively earn top rankings, and its other regulations are relatively business friendly, while Botswana and Seychelles have different strengths. Botswana, Rwanda, and Seychelles have proper laws criminalizing corruption, but their application and enforcement remains challenging, as is implementation of the AML/CFT framework. While these countries have sound legislation criminalizing corruption, the application of this legislation is complicated by the relative lack of political independence of some of the institutions mandated to fight corruption, including through ad hoc hiring procedures for staffing these institutions. Similarly, the countries’ AML/CFT frameworks are compliant with most technical requirements, but application would be strengthened by accelerating implementation of all requirements, enhancing capacity, applying a risk-based approach, and improving transparency and declaration of beneficial ownership.
Moreover, to bridge the gap with emerging markets, Botswana, Rwanda, and Seychelles need to accelerate reforms centered on accountability and implementation. While these countries have successfully established the pillars of good governance, they need to follow up with second-generation reforms that ensure that implementation is of as high quality as the intended objectives of the laws and regulations. Proper accountability is the first step.
Finally, a good governance framework requires that governance evaluations are recurrent, well disseminated to the general public, and supported by authorities who are committed to explaining their findings, including in areas where progress has been limited or reversed.
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For example, in Transparency International (2020)’s Corruption Perception Index, Seychelles scores better than Spain, Botswana scores better than Poland, and Rwanda scores better than Italy. Based on the Corruption Perception Index alone, Botswana, Rwanda, and Seychelles could then be identified as three of the four best performers in sub-Saharan Africa. (Te other one is Cabo Verde.)
Regarding Seychelles, the average was calculated for 2010–19 (after the country’s 2008 debt crisis) and compared to the median growth for sub-Saharan African countries, excluding Nigeria and South Africa during that period.
See IMF (2018) for a comprehensive presentation.
The relative quality of fiscal governance in Botswana, Rwanda, and Seychelles is based on the Public Expenditure and Financial Accountability Framework (PEFA) methodology. PEFA indices reflect ordinal scores (reffecting a comparison with good international practices) of three or four dimensions of subcomponents (31 in total) of seven different pillars: budget reliability, transparency of public finances, management of assets and liabilities, policy-based fiscal strategy and budgeting, predictability and control in budget execution, accounting and reporting, external scrutiny, and audit. This methodology does not assess government service delivery performance as such, but rather helps to identify the bottlenecks in service delivery due to defciencies in the public financial management (PFM) framework and implementation.
The PEFA assessment based its evaluation on taxpayers having easy access to comprehensive, user-friendly, and up-to-date information on tax liabilities and administrative procedures for all major taxes, along with redress processes and procedures. The assessment also gauged whether the revenue administration supplemented this with an active taxpayer education campaign.
PEFA assessments based on the 2016 framework for Botswana (assessed in 2020), Rwanda, and Seychelles (both assessed in 2017), were scored on revenue risk management.
Democracy Web: Comparative Studies in Freedom, “Accountability and Transparency: Country Studies—Botswana, https://democracyweb.org/accountability-botswana.
PEFA defines public asset management as compliance by government entities with maintenance of records in financial and nonfinancial assets and transparency of government asset disposal.
The assessment of the quality of financial sector oversight in Botswana, Rwanda, and Seychelles is based on the Institutional Profiles Database (IPD), which is a measure of countries’ institutional characteristics through composite indicators built from perception data. The data is produced by surveying in each country the economic mission offices of the French Ministry for the Economy, Industry and Employment and the offices of the French Agency for Development. For instance, each indicator is graded from 0 (low) to 4 (high) depending on the perceived degree of quality. For example, the indicator on competition regulation in the financial sector is graded from 0 to 4 depending on the perception of the degree of effectiveness of financial regulation.
While the IMF governance framework pertaining to the oversight of the financial sector does not include areas such as competition in the banking sector or competition regulation in the financial sector, the framework does include an assessment of market regulation. Issues of market regulation pertaining to the banking and financial sectors are included in this section.
As of April 2021 the resulting amendment remains to be submitted to the Cabinet.
It is based on the World Bank’s IPD survey data related to the perception of central bank independence and to the perception of accountability and transparency framework. The indices rank from 0 (no independence/transparency) to 4 (strong independence/transparency).
The World Justice Project’s Rule of Law Index does not include information for Seychelles.
World Bank (n.d.) Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/.
The World Justice Project Rule of Law Index does not cover Seychelles.
The index does not include Seychelles.
Announced in 2018.
Seychelles’ anticorruption legislation was passed in March 2016.
