1. On behalf of my Rwandan authorities, I would like to thank the Board, Management and Staff for their continued support. Staff’s last visit to Kigali to conduct the Article IV consultation and the 5th review of the PSI helped to confirm the significant progress made over the last decades in transforming the economy, and to identify and develop the strategy to meet the challenges that still constrain this endeavor. My authorities very much appreciate the candid and open discussion that took place and broadly share the thrust of the staff report as a fair reflection of results achieved and issues at stake.
2. The PSI continues to serve Rwanda well as an appropriate anchor for the authorities’ policies geared towards maintaining macroeconomic stability, supporting growth and the overall economic development, and reducing poverty. My authorities have maintained the momentum of strong and sustained reforms that have led to robust output growth in the last decade – above 8 percent a year- and made significant advances in reducing poverty, from 57 percent in 2005/06 to 45 percent in 2010/11, equivalent to lifting about a million people out of poverty. The authorities are committed to keep pace with the macroeconomic policies and structural reforms that underpinned these achievements, as evidenced by their performance for the period under review.
3. Amid a domestic environment of mounting social needs and capacity constraints, paired with the international environment of global slowdown and delayed donor aid, my authorities have maintained the momentum of reforms and economic development leading to strong results. In view of this performance, my authorities request the Board’s support for the conclusion of the 5th review under the PSI and the 2012 Article IV consultation, including a waiver on the nonobservance of the quantitative assessment criterion on net domestic financing, which was missed by a small margin.
Recent Developments and Program Performance
4. My authorities’ performance under the PSI continues to be strong. All but one end-June quantitative assessment criteria and all indicative targets were met. Structural reforms are also proceeding well, albeit some with delays due to capacity constraints and the heavy workload caused by the volume of pressing reforms on the government agenda. Key steps have been taken; the homegrown DSA is now completed and the medium-term debt management strategy will be submitted to Cabinet in late November 2012. My authorities reaffirm their commitment to step-up efforts to implement other important measures in early 2013, including in the public financial management and investment climate areas.
5. The benign macroeconomic management paired with structural reforms in major sectors, has supported output growth. After standing strongly at 8.6 percent in 2011, real GDP growth is projected to ease to 7.7 percent in 2012, partly due to a poor weather-caused weak agricultural output and delayed capital spending. The supply gap in domestic fresh food should push inflation upward, to 7.5 percent at end-2012, against a low 5.6 percent in September, and still well below its 2011 peak of 8.3 percent. My authorities are taking actions, including from the monetary side to help inflation edge down to their medium-term target of 5 percent, in line with the East African Community convergence criterion.
6. Aid disbursements from a number of bilateral and multilateral donors, estimated at about 3 percent of GDP, have been delayed, hence taking a toll on the government fiscal stance, widening the current account deficit and cutting back growth. My authorities view these adverse developments as temporary. They are continuing discussions with partners aimed at settling misunderstandings and resuming financing flows as planned.
Challenges and Policies Going Forward
7. Structural transformation for Growth and poverty reduction. Though the global slowdown and the setback in donor assistance have constrained growth this year, my authorities continue to endeavor along the lines set forth under their Vision 2020 and reflected in their successive Economic Development and Poverty Reduction Strategies (EDPRS). It is to create a thriving broad-based economy away from agriculture towards industry and services, which would grow at sustained double-digit rates over the medium term and generate employment opportunities to lift more people out of poverty. In this regard, the authorities intend to keep pace with their development plans that helped reduce poverty by 12 percentage points in the last five years, as the recent household living conditions survey showed. The authorities’ EDPRS 2 is being developed accordingly, addressing four key areas: (i) economic transformation, (ii) rural development, (iii) productivity and youth employment, and (iv) accountable governance. The government’s macroeconomic policies and structural reforms for 2012/13 and the medium term will be consistent with this framework.
8. Fiscal policy. Maintaining an environment of macroeconomic stability continues to guide my authorities’ fiscal and monetary policies. The fiscal stance in FY 2011/12 was characterized by higher-than-projected revenue and lower-than-planned spending. The drivers on the revenue side were income tax and taxes on goods and services and international trade, while under-execution of domestically-financed capital expenditures contributed to reduce spending. Going forward, my authorities remain committed to their strategy of fiscal consolidation through increased revenue mobilization and expenditure prioritization. In this vein, the government has already implemented two out of four tax policy measures planned for FY 2012/13; since July 2012, the tax rate for imported construction materials has been increased from 5 to 10 percent and the gaming tax has been effective since September 2012. Other important revenue administration measures are in their final steps of preparation. These include: introducing Electronic Sales Register for recording taxpayers‘transactions and limiting VAT evasion; introducing e-filing and e-payment systems to save time and improve service delivery; and establishing a One-Stop-Border Post at Kagitumba and Rusumo border posts with 24-hour operations to facilitate cross-border trade.
9. My authorities are cognizant of the need to overhaul tax policy, with the view to raising further the tax revenue-to-GDP ratio. Moreover, in the face of uncertain donor assistance, the government’s overarching goal of reducing aid dependency over the mediumterm is acute more than ever. For FY 2012/13, the authorities will continue to keep a prudent stance, including by reducing spending to make up for shortfalls in external assistance and by stepping-up revenue mobilization effort where necessary. For their broader tax policy reform agenda, the government will take advantage of the recommendations made by the recent FAD mission.
10. Monetary policy and the financial sector. Monetary policy over the past years has been supportive of growth by facilitating credit to the private sector. With the slow recovery worldwide and the ensued adverse impact on exports, my authorities appropriately used the policy mix to enhance the domestic demand. Going forward, my authorities are working on revamping the monetary framework and the key instruments for conducting policy, with the view to enhancing transmission mechanisms. As regard the banking sector, it remains healthy, well-capitalized and competitive. My authorities will continue to strengthen the whole financial sector, to make it a sound provider of financing for productive activities. In that regard, the NBR will closely monitor compliance with the existing laws while taking steps to improve them, in line with the FSAP recommendations. Financial inclusion remains a key concern to my authorities; in this vein, they are committed to helping the development of the saving and credit cooperatives (SACCOs) on a sound footing. The NBR will pay a particular attention to the supervision of this specific sector.
11. Investment financing and debt. My authorities intend to issue in December 2012, a 10-year Eurobond worth US$ 350 million. The proceeds will be used to retire an existing publicly-guaranteed debt and fund the completion of a strategic investment project, the Kigali Convention Center. As assessed by staff, this one-off operation will not change the conclusions of the last DSA update, nor will it materially affect Rwanda’s debt sustainability.
12. Over the past years, Rwanda has strived to implement an ambitious economic growth and poverty reduction agenda with remarkable success. It has at the same time endeavored to mitigate the impact of the global slowdown on its main indicators. Through sound policies, my authorities have continued to help the economy recover its strong growth rates exhibited throughout the last decade, and also made important inroads in curbing down poverty. These achievements have been made possible along with a long period of macroeconomic stability. The PSI instrument has proved an appropriate anchor as Rwanda leveraged the gains of this favorable environment.
13. Yet, the challenges stiff facing the economy are daunting, and my authorities are committed to pursue their efforts of structural transformation towards a more sustainable growth model. From a still shallow tax base and the associated aid dependency, to the narrow export sector, my authorities are fully aware of the needed structural reforms to remove the bottlenecks and achieve the ambitious goals of their Vision 2020. In this endeavor, my Rwandan authorities will continue to rely on the assistance of their development partners and the Board’s support.