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Statement by Damian Ondo Mañe, Executive Director for Rwanda and Laurean W. Rutayisire, Alternate Executive Director

Author(s):
International Monetary Fund
Published Date:
May 2005
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Introduction

We would like to express our Rwandese authorities’ appreciation to Management and Staff for their continued support to Rwanda in implementing its reform program to address the important economic and financial challenges facing the country. Our authorities have continued to implement sound macroeconomic policies and undertaken profound structural reforms under uniquely difficult circumstances characterized by the aftermath of 1994 genocide. These factors have been compounded by adverse exogenous shocks deriving among others from unfavorable export commodities prices, spikes in oil prices and drought. The drought in particular has affected agriculture production and also caused drying up of water sources for hydroelectric power generation leading to the severe electricity shortage.

However, the authorities’ persistent determination to succeed their PRGF supported-program has, despite the difficult conditions, enabled them to meet all performance criteria for the fourth review with the exception of two quantitative criteria and one structural criterion. The two quantitative criteria were: priority spending which was less than targeted and was due to delays in donors’ disbursements; non accumulation of external arrears which arose in connection with BADEA loans. The Rwandese authorities understanding of the loan repayment outstanding was similar to that of the BADEA that the amount due constituted outstanding” current dues” and not outstanding” arrears payments” under the arrangement for settlement of arrears concluded between the government of Rwanda and BADEA. Given the amount involved in the misreporting, the deviations from the continuous performance criteria were minor and have not endangered the objectives’ achievement under the PRGF supported-program. Also the amount outstanding was settled after a short period in July 2004 and our authorities appreciate Managing Director’s favorable recommendations. With regard to the structural criterion missed, there was a delay in submission of the revised 2004 Budget to Parliament in July instead of June due to capacity constraints. Moreover, the implementation of the program till December 2004 remains broadly on track. Considering the fact that these deviations were minor and beyond the control of the authorities and also the fact that they were corrected sooner after, our authorities request waivers for the performance criteria missed in order to allow the completion of the fourth review under the PRGF arrangement and its extension to February 11, 2006 as well as the related disbursements.

In addition to having established a good track record in their PRGF performance, our Rwandese authorities have implemented their full PRSP for a second year successively and have met all triggers for HIPC completion point as set out in the decision point document. The one remaining trigger which our authorities partially fulfilled and for which they request waiver is with respect to the tea sector. The partial fulfillment attributed to failure to receive acceptable bids for the sale of one tea factory. Our authorities are currently in the process of inviting new bids and are committed to the privatization of the remaining tea factories.

Given the evidenced strong performance in most policy areas under the PRGF and PRSP, our Rwandese authorities request Board approval of their attainment of the HIPC completion point. Owing to exogenous factors which have fundamentally affected their economy, resulting into worsening of debt sustainability, our authorities also request additional HIPC Initiative relief to reduce Rwanda’s debt sustainability ratio to the HIPC Initiative threshold ratio.

Recent Developments and Performance under Program

In the real sector, Rwanda has over the past decade largely succeeded in macroeconomic stabilization. In spite of capacity constraint, policies implemented have significantly improved macroeconomic performance. In 2004, real GDP grew by 4 percent compared to 0.9 percent in 2003, thanks to strong activity in the construction, transport and, communication sectors despite the difficulties encountered in the provision of electricity. Due to higher energy and food prices annual inflation stood at 10.2 percent at end-December 2004 but underlying inflation remained stable at 6 percent. Growth in the formal and manufacturing sectors was negatively impacted by severe electricity shortage experienced in 2004. This shortage is the result of a combination of lack of investment in the sector, the drop in water levels in hydroelectric dams and the surge in oil prices. The rehabilitation of infrastructure has been undertaken and electricity tariffs were doubled in January 2005 with a view to cover the additional costs resulting from the rehabilitation investment.

In the fiscal sector, the prudent policies implemented has enabled maintenance of the domestic fiscal balance at its 2003 level. For 2004, higher revenue due largely to increases in indirect taxes and strengthening of tax administration, coupled with expenditure restraint resulted in a domestic fiscal deficit of 5.5 percent which is lower- than- the 7.8 percent programmed. The revenue-to-GDP ratio rose to 14 percent of GDP compared with 13.5 percent in 2003. In order to ensure achievement of the program’s objectives after the delays in donors’ disbursements at end-June 2004, the authorities decided to restrain temporarily the public expenditure including the priority sectors instead of using the central bank financing. Once the external disbursements resumed, the short fall in priority spending was made up.

In the monetary area, policies kept inflationary pressures under check and the end-quarter objectives on reserve money under the program were also met. In order to attain these objectives in the context of an increase of currency in circulation due to payment of coffee farmers in mid-year, the authorities issued a large amount of Treasury Bills, mainly to non bank sector. The gross official foreign reserves increased to 5.8 months of imports compared with an objective of 4.6 months, due mainly to the better performance of exports. As a result, the real exchange rate of the Rwanda franc appreciated slightly.

A joint Bank-Fund mission conducted last February the Financial Sector Assessment Program for Rwanda with a view to identify financial system strengths and weaknesses and design plan of actions to increase the system contribution to economic growth and poverty reduction. In the FSAP mission findings Rwanda’s financial sector remains shallow and relatively underdeveloped. The size and structure of the economy pose significant challenges for building a deep, efficient and diversified financial sector. To correct the situation, the authorities have undertaken significant measures which include privatization of banks, strengthening the banking sector regulation and supervision, creation of a regulatory framework for micro finance and a new independent regulator for insurance industry. Furthermore, the authorities agree with staff that the reform measures identified by the FSAP cannot all be implemented in the short-term. They require long-term commitment and planning. To this end, the authorities will establish a road map, identifying needs for capacity building and seek the necessary technical assistance.

With regard to the external sector, the current account deficit narrowed compared to the program target, due to strong export growth and slowdown in imports. To address weaknesses in the export sector, the authorities endorsed an export promotion strategy in September 2004 and created a inter-ministerial monitoring structure. The export promotion strategy identified short-term measures to be implemented with a view to improve access of coffee and tea farmers to inputs factors and strengthen Rwanda’s presence in the international market. Regarding the external debt, the authorities continued to make use of highly concessional loans to finance the country’s development efforts. In this regard, the authorities appreciate the assistance received from the international community and will continue their efforts to reach agreements on debts cancellations or rescheduling with the remaining Paris Club and non-Paris Club creditors.

In the structural area, our Rwandese authorities have continued their reform efforts. In this regard, an organic budget law and financial regulations meant to strengthen the budget process and expenditure control were submitted to Parliament in August2004. Moreover, the authorities continued the streamlining of the tax system and submitted to the Parliament in September a new investment code, a new tax procedures, income tax and customs laws after the creation of a large tax payers unit. A Treasury Management Committee was established as well as a cash management unit and a fiscal unit to consolidate budgets for districts and autonomous agencies. In the banking sector, the majority shares of two commercial banks were sold to investors. An action plan was established to strengthen the soundness of the banking system and the audit of the National Bank of Rwanda’s 2003 financial statements was completed. The delay to complete this action was due to the fact that the tendering of audit had to pass through the nation procurement and the procedure took time.

On the PRSP’s implementation, the second annual progress report was completed and provided a candid review, while highlighting progress achieved. In addition, significant progress was made in political and administration governances. To enhance transparency and accountability, planning and budgeting processes have been improved and an action plan to modernize the public financial management system was also adopted.

Macroeconomic outlook and Policies for 2005

Our Rwandese authorities would like to continue their close relationship with the Fund in order to further enhance macroeconomic and structural policies aimed at fostering sustained growth, achieving sound fiscal and external sustainability over the medium-term. In this regard, they are fully determined to put into place strong macroeconomic and structural policies meant to reduce poverty through raising productivity in agriculture, infrastructure and exports sectors and achieve the MDGs as well as the middle income status by 2020. The 2005 objectives indicated a growth rate of 4 percent and a reduction in inflation to 6 percent by end-year, while the domestic fiscal deficit, excluding demobilization will be 4.5 percent of GDP. These objectives are consistent with preservation of macroeconomic stability and advance the medium-term agenda towards the attainment of the MDGs.

In order to achieve higher growth rate, our authorities take strong note of the Fund advice on the need to substantially increase capital and labor productivity in addition to the need to increase spending in critical PRSP sectors and deepening the structural reforms meant to foster the private sector development. To this end, the authorities will continue to implement productivity enhancing strategies in key sectors including agriculture, energy, water, health and education. They will also continue to strengthen public finance management in order to ensure efficient allocation of resources and will intensify their steps towards privatizing remaining public enterprises.

In addition, our Rwandese authorities are fully aware of the importance of stability in the Great Lakes region for the economic development of the region. They welcome the signs of progress in the implementation of the peace accords and they will along with other parties involved continue to contribute to peace building efforts in the region.

Debt Sustainabiity

Our Rwandese authorities are committed to the sustainability of the country’ external debt. To this end, they intend to strictly limit the external borrowing and rely mostly on grants. It is worth noting that in observing this prudence our authorities new borrowing during the interim period were kept at the level less that the cap set. By reaching the completion point and receiving additional HIPC debt relief, Rwanda’s external debt will be substantially reduced. Our authorities take good note of the Staff’s three scenarios analyzing Rwanda’s debt sustainability and agree that a higher and sustained level of grant financing, strong export growth and a focus on further revenue mobilization will be key to improving Rwanda’s debt situation.

Fiscal Policy

Fiscal policy will aim at supporting macroeconomic stability, reprioritizing and improving the quality of spending and mobilizing domestic revenue to fund the ambitious development efforts, while reducing reliance on external assistance over the medium term. In 2005, the authorities intend to consolidate the recent improvements introduced in tax laws and administration. New revenue measures will be developed for the 2006 budget, given the need to strengthen revenue mobilization for the medium-term fiscal sustainability. Efforts to realize efficiency gains in tax administration will continue and an action plan to reduce tax incentives, including tax holidays and exemptions will be submitted by end-September 2005.

The quality of spending will be improved and the authorities intend to increase through their contingency priority spending budgetary allocations in favor of agriculture, export promotion, rural roads and water. The non priority expenditure is expected to fall and the authorities agree with staff that efforts are to be made in order to restructure the public expenditure. The organic budget law submitted to Parliament will help improve the efficiency and transparency of public expenditure management and strengthen the legal and regulatory framework governing the budget process and execution for all levels of government. In this regard, a single account for Treasury will be adopted as well as applying budgeting and accounting standards to local governments and integrating the recurrent and development budgets. Moreover, civil service reform will continue at the central government level and then expanded to provinces and parastatals. A new pay structure, simplifying the old one and integrating benefits will be introduced in 2005.

Monetary and Financial Policies

The monetary objectives set out for 2005 are to contain inflation at least at 6 percent and continue building up the international reserves. To this end, broad- money will be used as the nominal anchor to control inflation with reserve money as the operational target. The exchange rate of Rwandan franc will remain market determined and credit to the private sector is expected to expand while the central bank stands ready to tighten the monetary policy in the event of inflationary pressures emerge. To improve the operation of the foreign exchange auctions, the variation in the margin by which the exchange rate can vary has been increased and a study towards a further flexibility will be finalized by end-March 2005. Using the findings of the recent FSAP mission, the authorities will further strengthen the supervision of the banking sector in particular, the non bank institutions which provide rural areas with financial services. Strong oversight procedures will be put in place as well as an action plan to address weaknesses in the financial institutions, including the Housing Bank.

Structural reforms

In this area, the main objective set out by the authorities is to improve the business environment with a view to further spur the private sector activity. Therefore, efforts to strengthen the legal framework for private business and make significant progress in the privatization will be intensified. To promote private/public sector partnership, a permanent secretariat has been created and the authorities organized a national investment dialogue and an investment conference held respectively in February and March with a view to address obstacles to investment and encourage joint venture with foreign investors. Mindful of the need to broaden access to credit and stimulate growth in rural areas, the authorities have submitted a new land law to Parliament and the law is expected to be approved in 2005. Furthermore, the authorities are determined to further reduce the public sector in the economy through the privatization of several public enterprises. In this regard, steps will be intensified to finalize the privatization of the telecommunications company and prepare for the sale of Primeholdings’hotel projects.

PRSP Progress Report

Rwanda is making good progress in implementing its poverty reduction strategy. It is worth noting that the second annual progress report is an important milestone in the country’s long vision to reduce the poverty line from 60 percent to 25 percent and raise per capita income from $250 to above $1000. The report presents a candid analysis of achievements to date and also constitutes a policy document as all stakeholders have fully participated in its preparation and identified weaknesses to be addressed.

The progress made are related to the reform of public finance management, human resource development including education and health. Our authorities are of the view that economic infrastructure development is an important requirement for a poverty reduction strategy based on sustained development of productive capacities, transport, energy, water and ICT. The private sector is regarded as the engine for economic growth and the authorities are committed to creating a conducive environment for its development. In their efforts to facilitate access to credit and establish a sound financial system a regulatory framework for micro-finance activities has been established but also and a policy to strengthen the banking supervision was developed. In order to address the weaknesses in institutional capacity facing the PRSP’s implementation, a clear policy has been designed covering the needs, budget, management and assessment of capacity building programs.

The authorities have taken good note of the findings of the report, the views expressed by stakeholders as well as the assessment of the staff of the World Bank and the Fund. Based on these recommendations, they will further improve the implementation of the PRSP.

Conclusion

In view of the fact that Rwanda has satisfied broadly the conditions for reaching the completion point under the HIPC Initiative as well as the achievements made under the PRFG supported-program and the strong commitment of the authorities to pursue the reforms process, we would appreciate Directors’ support for the proposed decisions. Rwandese’ authorities fully recognize that important challenges remain and progress made has to be consolidated. They will pursue and strengthen their reform efforts and are hopeful that the international community will continue their strong support for these efforts.

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