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.
This statement provides information on economic developments that became available since the issuance of the staff report on the 2002 Article IV consultation with Rwanda and requests for a new PRGF arrangement and for additional interim assistance under the Enhanced HIPC Initiative (EBS/02/122; 7/5/02). These developments do not alter the thrust of the staff appraisal.
1. The PRGF-supported program for 2002–03 included the ratification by parliament of a budget in line with understandings reached during the program discussions; action to bring reserve money to or below the indicative ceiling for end-June 2002; and the issuance of guidelines determining qualification and priority for payment of outstanding government obligations as prior actions upon which the issuance of the Board documents for the program would be conditioned. As noted in the staff report (EBS/02/122, Box 1), the actions on the budget and on reserve money were intended to ensure that program implementation was feasible. The issuance of guidelines on payments on domestic obligations was key to strengthening transparency in financial administration. All three of the conditions were met, as required.
2. Regarding the revised budget for 2002, parliament, on July 2, 2002, ratified a budget in line with program understandings. The budget includes agreed tax measures on import tariff bands and announces a reduction in the corporate income tax rate from 40 to 35 percent, In addition, the revised budget provides for an increase in the VAT rate from 15 percent to 18 percent—one percentage point higher than had been anticipated—which is expected to generate an additional RF 1 billion (0.1 percent of GDP) in government revenue (above program projections) during the remainder of 2002. At the same time, authorizations were approved to cover wage increases associated with promotions in the armed forces (RF 0.6 billion) and additional spending on goods and services. Overall, the budget as revised maintains a domestic fiscal deficit equivalent to 3.3 percent of GDP and an overall deficit on government financial operations (excluding grants) equivalent to 9.9 percent of GDP, as envisaged in the program.
3. The guidelines setting out the basis for determining qualification and priority for the payment of outstanding government domestic obligations were issued on June 28, 2002. The guidelines, issued in the form of a ministerial instruction, instituted a committee charged with the prioritization of obligations for payment based on a defined set of criteria. Under the guidelines, the committee would submit payment recommendations to the Minister of Finance and Economic Planning on a quarterly basis.
4. Recently, the National Bank of Rwanda (NBR) has acted to tighten liquidity in the banking system significantly. In this regard, the NBR conducted a number of special treasury bill auctions and, by June 30, 2002, reserve money (program definition) had been brought to RF 40 billion—RF 0.3 billion below the indicative target for that date.
Recent developments in government finances
5. Preliminary information suggests that the domestic fiscal deficit at end-June 2002 was approximately RF 2.5 billion (0.3 percent of GDP) above the indicative target, as delayed collections on nontax revenue and spending on goods and services more than offset higher-than-projected tax revenue. As nontax revenue targets for the remainder of 2002 are expected to be met and as increased spending through end-June reflected a shift in outlays from the third quarter, fiscal performance remains largely in line with program objectives.
6. At the Paris Club tour d’horizon of July 10, 2002, the Club could not agree on a new Paris Club rescheduling for Rwanda due to the reservations expressed by one creditor who, before being able to join the consensus, required the completion of a review by its agencies of Rwanda’s human rights record and military outlays. As a result, US$ 4.1 million in debt rescheduling that had been included in program financing has not yet been approved.
7. However, the loss resulting from the exclusion of financing from debt rescheduling has been more than offset by the effect of the depreciation of the U.S. dollar versus the euro and the pound sterling in the period since the program was constructed using the revised WEO rates issued on July 17, 2002, given that a substantial part of donor assistance to Rwanda is euro and pound sterling denominated and expected to be disbursed toward the end of 2002. As a result, the program remains fully financed.
8. Fund approval of the request for a new PRGF for Rwanda would facilitate consideration of a new IDA credit by the World Bank’s Executive Board and support disbursement of external assistance from other donors that is tied to Rwanda having a program in place with the Fund. Disbursement of such assistance is critical to financing government operations during the remainder of 2002, including the demobilization program, gacaca courts, constitutional reform, and other key social initiatives.