Rwanda: Staff Report for the 2002 Article IV Consultation and Requests for a New Poverty Reduction and Growth Facility Arrangement and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries

This paper examines Rwanda’s 2002 Article IV Consultation and Requests for a New Poverty Reduction and Growth Facility (PRGF) Arrangement and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Rwanda’s performance under the 2001 program under the PRGF was broadly satisfactory. Quantitative performance criteria for end-December 2001 were substantially met. Despite slippages in the structural reform schedule, achievements in structural performance were substantial. The authorities have finalized a poverty reduction strategy paper. The program for 2002–03 supports the poverty reduction strategy formulated in that document.

Abstract

This paper examines Rwanda’s 2002 Article IV Consultation and Requests for a New Poverty Reduction and Growth Facility (PRGF) Arrangement and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Rwanda’s performance under the 2001 program under the PRGF was broadly satisfactory. Quantitative performance criteria for end-December 2001 were substantially met. Despite slippages in the structural reform schedule, achievements in structural performance were substantial. The authorities have finalized a poverty reduction strategy paper. The program for 2002–03 supports the poverty reduction strategy formulated in that document.

I. Introduction

1. On December 22, 2000, the Executive Board approved Rwanda’s request for a third annual arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 28.56 million (35.7 percent of quota), at which time the Board also decided that Rwanda had reached the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. On October 10, 2001, the Executive Board amended the PRGF arrangement, extending the commitment period through April 30, 2002. The final review was not, however, completed, as a result of delays in reaching agreement on the 2002 budget and the medium-term fiscal framework. The program expired with the last semiannual drawing of SDR 9.52 million undisbursed, and interim relief under the HIPC Initiative lapsed.

2. In their letter to the Managing Director (Appendix I), the authorities describe objectives and policies through 2004 and request Executive Board approval for support of the new three-year program under the PRGF arrangement, as well as for additional HIPC Initiative interim relief through July 31, 2003.1 Access under the PRGF is limited to 5 percent of quota, as more concessional IDA resources will be used to accommodate the larger budget deficits resulting from the implementation of critical transitional programs and to limit the increase in the net present value (NPV) of debt-to-exports ratio. The disbursement of the Fund’s second interim assistance will be SDR 0.838 million, covering 71.8 percent of Rwanda’s principal obligations falling due between August 1, 2002 and July 31, 2003. A memorandum of economic and financial policies (MEFP) for 2002–04 is included in Appendix I. Prior actions for issuance of documents to the Board, as well as proposed structural performance criteria and benchmarks for the first two reviews, are set out in Table 6 of the Attachment I, and the set of quantitative performance criteria and benchmarks for the remainder of 2002 is presented in Table 5 of the Attachment I. A technical memorandum of understanding (TMU) detailing the program targets and reporting requirements is also attached to Appendix I.

3. The most recent Article IV consultation was concluded on December 20, 2000. At that time, Directors commended Rwanda for having achieved a continued level of low inflation and relatively robust economic growth but expressed concerns that macroeconomic policy targets had been missed despite the remedial measures taken by the authorities. Rwanda’s core economic data are largely adequate for program monitoring, although, as noted below, there remains ample room for improvement. Rwanda’s relations with the Fund and the World Bank are summarized in Appendices IT and ITT; statistical issues are described in Appendix IV; selected social and demographic indicators are presented in Appendix V; and on overview of actual and planned disbursements under the old and new PRGF-supported programs is given in Appendix VI. The authorities’ poverty reduction strategy paper (PRSP) along with the joint staff assessment (JSA) and statistical appendix are being issued separately to the Board.

II. Developments Under the Program in 2001

A. Security and Political Developments

4. The process of regularizing Rwanda’s social, political, and security relations has proved to be extraordinarily complex. Eight years after being torn by genocidal spasms, Rwanda is still confronting the formidable challenges of nation building—creating democratic institutions, reestablishing regular judicial processes, ensuring civil rights, and consolidating domestic security. During 2001, local elections were held (up to the provincial level), a commission charged with drafting a new constitution (for submission to popular referendum in 2003) commenced work, and 258,000 judges were elected and began training to conduct traditional (gacaca) courts to resolve the cases of more than 100,000 prisoners accused of involvement in the genocide. A transition is also continuing in the area of civil rights, and, in a test of the boundaries of freedom of expression and political dissent, former President Pasteur Bizimungu and a number of his supporters were charged with threatening state security and detained. Security remained a major issue—in May 2001, troops were mobilized to face antigovernment rebels reportedly based near Rwanda’s borders. At the same time, the government continued to back a rebel movement, the RCD-Goma, operating in the eastern part of the Democratic Republic of the Congo. The RCD-Goma was not party to an agreement between the Congolese government and Uganda-backed rebels, but efforts are continuing to resolve this conflict.

B. Recent Economic and Financial Developments and Program Performance

5. Although the PRGF arrangement expired without the completion of the second review under the third annual arrangement, significant progress was achieved under the PRGF-supported program. Public administration was strengthened, and budgeting was more tightly focused on supporting growth and reducing poverty. Under the program, substantial action was taken to rebuild economic and social infrastructure, and government intervention in the economy was reduced, including the elimination of exchange rate and price controls and the taking of initial steps in privatization and trade liberalization. In 2001, in line with the interim PRSP (I-PRSP) and backed by the international community, postgenocide gains were consolidated. Building on this consolidation, a PRSP that places this effort in a comprehensive medium-term framework has now been produced (PRSP to be issued; and Section IV, below).

6. Performance under the 2001 program under the PRGF was broadly satisfactory. Quantitative performance criteria for end-December 2001 were substantially met (8 out of 10 criteria).2 Achievements in structural performance were also considerable—a system for monitoring poverty-related spending was developed, a value-added tax (VAT) was introduced, the National Bank of Rwanda (NBR) introduced weekly foreign exchange auctions, the Office of the Auditor General was strengthened, tax audits and taxpayer compliance were improved, a revised schedule of fees for government services was introduced, arbitration awards were enforced, and initial steps were taken in offering 51 percent of Rwandatel (the telecommunications company) to a strategic investor. However, a number of challenges remain—the Organic Budget Law and supporting financial instructions will only come into effect next year (see para. 47), the review of tax waivers and exonerations will be followed up by a more comprehensive analysis of exonerations under investment agreements and law (para. 45), all salary allowances in cash and in kind are slated to become subject to taxation with the 2003 budget, the collection performance on tax assessments needs to be improved, and further strengthening of the courts system is needed.

C. Macroeconomic Performance, Policies, and Developments

7. Macroeconomic performance during 2001 was strong. Real GDP grew by 6.7 percent, as a favorable climate stimulated agricultural output and external transfers, equivalent to 11.2 percent of GDP, spurred manufacturing, construction, transportation, and communications activities (Table 1 and Figure 6). Despite weak international prices for coffee and tea and plummeting prices for coltan in midyear, production for export also contributed modestly to growth in Rwanda’s small (9 percent of GDP) export sector. With food in increased supply, the agricultural component of the consumer price index fell, and at end-2001, the consumer price index declined by 0.2 percent on an annual basis. Prices for nonfood items, however, increased by 3.8 percent relative to end-2000.

Table 1.

Rwanda: Selected Economic and Financial Indicators, 1995–2004

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Sources: Rwandese authorities; and staff estimates and projections.

All numbers are based on current exchange rates.

As a percent of the beginning-of-period stock of broad money.

The 2001 rates of growth assume that the excess external budgetary support at end-2000 would be used in its entirety to finance additional social expenditure during 2001.

Revenue excluding grants; minus current expenditure except interest due and except exceptional expenditure.

Revenue excluding grants; minus current expenditure (excluding external interest), domestically financed capital expenditure, and net lending.

For program years: without incorporating undisburesed budgetary grants.

After rescheduling. One disbursed basis, including arrears, rescheduling, and new debt.

Based on assumptions about expected new borrowing. For illustrative purposes, the numbers are shown as if HIPC Initiative assistance had been delivered unconditionally as of 1999. The exports denominator is calculated using a three-year backward looking average.

Financing gap after taking into account identified financing expected during the course of the year.

8. With GDP growth robust, fiscal performance was stronger than envisaged in the program. The revenue-to-GDP ratio rose from 9.7 percent in 2000 to 11.4 percent in 2001, compared with a targeted 10.8 percent (Table 2). In this regard, collections of income taxes and taxes on international trade were strong, and VATs were on-target while nontax revenue fell just short of the projected level. With only minor overruns on primary current spending (equivalent to 0.2 percent of GDP on goods and services and exceptional outlays3), and with domestically financed capital expenditure on target at 0.5 percent of GDP, primary expenditures amounted to 14 percent of GDP, and the primary deficit was limited to 2.7 percent of GDP.4 The performance objective on social spending was met. As donor-financed projects were at 6.2 percent of GDP,5 0.7 percent of GDP below projection owing to implementation delays, and as interest payments were equivalent to 0.8 percent of GDP, the overall fiscal deficit (excluding grants) was equivalent to 9.5 percent of GDP—nearly 1 percentage point lower than targeted.

Table 2.

Rwanda: Operations of the Central Government, 1998–2004

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Sources: Rwandese authorities; and Fund staff estimates and projections.

Program numbers refer to EBS/01/169 (9/26/01).

Expenditure figures for 1999 do not include arrears recently identified.

Excluding exceptional social expenditure, defined as total revenue (excluding privatization proceeds) minus noninterest current expenditure minus domestically financed capital expenditure.

Revenue excluding grants: minus current expenditure, domestically financed capital expenditure and net lending; excluding external interest.

A negative sign indicates an adjustment consistent with higher actual expenditure on a cash basis than on a recorded payment order basis.

A negative sign indicates a reduction. Arrears are shown here in a fiscal accounting sense, which may deviate from the definition of the technical memorandum of understanding (TMU) used for benchmarks and performance criteria.

A negative sign indicates net expenditure out of the noncore government accounts.

A negative sign indicates a net deposit buildup.

Main elements in 2000: the correction of an accounting error involving RF 2.3 billion in European Union aid; changes in vault in cash at the Rwanda Revenue Authority (RRA); and the reimbursement of an unpaid transfer. In 2001: changes in vault cash at the RRA.

A negative number implies a discrepancy that is consistent with underestimation of financing.

In 2000, net credit to government was redefined to exclude the accounts of autonomous public agencies.

Assistance from IMF only.

CSR = Caisse Sociale du Rwanda.

9. Including official grants and taking into account repayments of outstanding domestic obligations (see para. 19), external arrears (see para. 16), and adjustments for movements in government noncore accounts and transitory balances,6 the deficit on government financial operations on a cash basis amounted to a deficit of RF 36.5 billion (4.8 percent of GDP) in 2001. With the receipt of RF 39.5 billion in external financing, including RF 16.3 billion in budgetary loans, along with RF 2.1 billion in borrowing from the nonbank private sector, net government borrowing from the banking system was reduced by RF 5.1 billion (0.7 percent of GDP).

10. Fiscal performance in the first quarter of 2002 was consistent with achieving the program targets set for end-2002. With collections generally on target, revenue amounted to RF 25.1 billion (12.2 percent of GDP on an annualized basis). Savings on wages and salaries during January-March 2002, resulting from unfilled civil service vacancies, and limited transfers, were offset by accelerated spending on goods and services, including for defense purposes. As expected, no external budgetary support (except for HIPC Initiative interim relief grants) was received during the first quarter, and government operations were financed, in part, by credit from the domestic banking system.

11. Although the strong fiscal performance in 2001 led to a reduction in the banking system’s net claims on government, broad money expanded by 10 percent during the year—well beyond the 6.7 percent programmed. Largely fueled by foreign-assistance-related foreign currency inflows, the net foreign assets of the banking system ended the year at about US$18 million above the program target (equivalent to 7 percent of beginning-of-period broad money) (Table 3). As the reduction in banking system credit to government offset only part of the expansionary effect of this inflow, the NBR tightened monetary policy, beginning in August 2001 with a 2¼ point increase of its rediscount rate to 13 percent; this slowed credit expansion during the remainder of the year. Foreign exchange inflows during the last quarter of the year were not, however, fully sterilized.

Table 3.

Rwanda: Monetary Survey, 1999–2002 1/

(In billions of Rwanda francs)

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Source: National Bank of Rwanda (NBR).

December 1999 estimate, are calculated at the then-program exchange rate of $1=RF 330.5. December estimatce for 2000 are calculated at the lhen-program exchange rate of $1-RF411.0. Actual and program figures for 2001 are calculated at the 200l program exchange rate of SI=RF 415.5. The December 2001 estimate and program figures for 2002 are calculated at the 2002 program exchange rate of SI=RF 457.9.

Program numbers are based on EBS/00/264 (12/12/00); reused program numbers are based on EBS/01/169 (9/26/01).

The reserve requirement was reduced in July 1998 from 12 percent to 10 percent, and from 10 percent to 8 percent in July 2000.

The definition of reserve money as performance criterion (PC) or structural benchmark differs from the definition used for the monetary program by excluding the deposits of a defunct savings bank, import deposits, and dormant accounts.