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Republic of Rwanda

Author(s):
International Monetary Fund
Published Date:
April 2005
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RE: PROGRESS IN PRSP IMPLEMENTATION IN LATE 2004 AND EARLY 2005

Dear Mr. Rato

Rwanda’s PRSP was finalised and endorsed by all internal and external stakeholders; in June 2002. Two Annual Progress Reports, reporting process in PRS implementation until June 2004, have been published so far. The purpose of this letter is to give a brief update on progress in the second half of 2004 and early 2005.

Macroeconomic Policies

Economic growth recovered in 2004, despite frequent power cuts and unchanged agricultural production. Strong activity in construction, transport, and communication raised growth to about 4 percent in 2004, compared with a weak expansion of less than 1 percent in 2003. The recovery fall short of tile growth target of 6 percent, but the: performance was still remarkable considering the ongoing electricity crisis and weak agricultural production. At the same time, rising food and energy prices pushed annual inflation to 10 percent at end-2004.

The external current account deficit declined significantly in 2004. Exports rebounded mainly because of a strong coffee harvest, while imports of intermediate and capital goods slowed down. At the same time, donor assistance was higher than programmed. As a result, the value of the franc; increased vis-à-vis Rwanda’s main trading partner currencies and the real exchange rate appreciated by about 10 percent at end-2004.

Fiscal and monetary policies remained on track, Strong revenue performance, reflecting further substantial improvements in tax administration, resulted in an increase in the revenue to GDP ratio to almost 14 percent At the same time, the government restrained spending and allocated more resources to priority sectors, to particular, priority spending (including electricity) increased by over ½ percent of GDP. [Please see attached table on priority spending in 2004]. Overall, the domestic fiscal balance (excluding demobilization spending) at 5.3 percent of GDP was only about ½ percent of GDP more expansionary than in 2003, Monetary policy remained supportive to maintaining macroeconomic stability and international reserves increased to 5,8 months of imports at end-2004, reflecting in part the World Bank’s PRSC disbursement Moreover, credit to the private sector grew by 10.7 percent at end-2004, implying a small increase in real terms.

Selected Structural Policies

We have made progress in the area of public expenditure management In particular, the government has

  • submitted the organic budget law to parliament in August and subsequently finalized supporting financial regulations, which are expected to significantly strengthen budget processes and expenditure control.

  • created a cash management unit as well as a treasury committee and closed dormant bank accounts to improve cash management

  • presented the 2005 budget with statements of tax expenditure, public enterprise budgets, government equity holdings, and consolidated district budgets,

  • issued in early March 2005 draft instructions by the Public Accounts Department for routine reconciliation, arid published December reconciliation statement for the Treasury and the Rwanda Revenue Authority accounts.

Spending to solve the electricity crisis is a priority and the government took firm actions to reform Rwanda’s energy sector during the course of 2004. In particular, to address the acute shortages, the government procured new fuel-generated thermal capacity to raise the power supply. To solve the underlying structural problems, a medium- and long-term investment plans for urban and rural electricity was prepared, which will be partly financed by a World Bank project loan as well as from a budgetary transfer. To improve governance and management, an energy sector policy (including a proposal for fuel cost pass through) was approved by the Cabinet in December 2004, As production by the additional fuel-based generators is costly, tariff electricity tariff was increased by about 100 percent at the beginning of 2005.

The government has also advanced its export promotion strategy. In September, Cabinet endorsed a strategy, which identified short-term measures for the coffee and tea sectors and created an inter-ministerial monitoring structure. In particular, the measures aim at improving access of growers to input factors and building an international marketing presence for Rwandese tea and coffee. Moreover, for 2005, budget allocations have been, increased, including for coffee, tea, tourism, horticulture, and handicraft.

Financial sector reform remains a priority. Action plans were signed in June with the commercial banks to bring them in compliance with prudential norms and all banks but one have been in compliance in December 2004. Moreover, the privatization of two commercial banks at end-December 2004 is expected to further improve the soundness of the banking system.

Priority expenditure Spending In 2004(In millions rwf)
Recurrent
Internal affairs5 648,30
Agriculture1 408,61
Commerce912,32
Education22 188,23
Youth and Sport381,46
Health8 026,20
Transport and Communication3 991,05
Road Fund2 676,53
Other1 314,52
Gender147,27
Public Service220,65
Land and Natural Resources414,80
Local Government3 051,25
Districts2 527,55
Others553,70
Provinces27 340,15
Community Service Works (TIG - MINIJUST)69,57
Public Works (HIMO - MINALOC)217,50
Export promotion2 190,46
Sub Total76 238,02
Development
Community Development Fund (CDF)2 062,50
Emergency Generators11 756,30
Export promotion1 637,66
Agriculture Guarantee Fund200.00
Sub Total15 706,46
Total91 044,48

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