Statement by Damian Ondo Mane, Executive Director for Rwanda and Laurean Rutayisire, Alternate Executive Director

This paper assesses Rwanda’s First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. Performance under the PRGF-supported program has been encouraging. However, poverty is pervasive, and the economy, which remains heavily dependent on rain-fed agriculture and external assistance, is vulnerable to changes in climate and in international developments. The 2003 program supports critical operations envisaged under the Poverty Reduction Strategy Paper, including the transition to democracy and military demobilization.

Abstract

This paper assesses Rwanda’s First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. Performance under the PRGF-supported program has been encouraging. However, poverty is pervasive, and the economy, which remains heavily dependent on rain-fed agriculture and external assistance, is vulnerable to changes in climate and in international developments. The 2003 program supports critical operations envisaged under the Poverty Reduction Strategy Paper, including the transition to democracy and military demobilization.

I. Introduction

Our Rwandese authorities would like to express their appreciation to Fund management and staff for their continuous assistance in their adjustment efforts and are thankful for the support received from the international community in their fight against poverty. The continued success of our authorities in implementing sound policies under the PRGF-supported program has enabled Rwanda to achieve a strong economic performance in 2002. Economic growth remained strong, inflation was contained and the external reserve situation improved. Our authorities also made substantial progress in the first-year implementation of the PRSP and implemented key conditions established for reaching the completion point under the enhanced HIPC Initiative. Program implementation was in line with the program targets, as most quantitative performance criteria for end-December 2002 were observed, except three, namely the domestic fiscal deficit criterion, due to the cost of withdrawing troops from the DRC; the net accumulation of domestic arrears criterion, following delays in donor disbursement for budgetary support and; the criterion on the accumulation of external arrears with one creditor, due to administrative capacity constraints. Most structural performance criteria were also met and substantial progress was made on the structural reform agenda. On the basis of their strong track record, their commitment to meeting the program objectives, and corrective actions taken, our Rwandese authorities request waivers for the nonobservance of the above-mentioned performance criteria.

On the political front, our authorities are moving forward with a program of nation-building and reconciliation, which is a prerequisite for social and economic transformation and includes notably the recent adoption of a new constitution to be followed later this year by presidential and legislative elections. Other important measures have been taken, including the recent release of persons suspected to have been involved in the genocide, the continued implementation of the demobilization and reintegration program with the assistance of the World Bank, the acceleration of the decentralization of government activities and the establishment of key institutions of economic governance, such as the Office of the Auditor General. The achievement of this process by 2005 will free additional resources for investment in productive activities and poverty reduction.

Our authorities are committed to regional stability and any solution that can bring a lasting peace. To this end, our authorities have continued to support the Lusaka Peace Treaty and the 2002 peace agreement between the Presidents of Rwanda and the DRC, and they completely pulled back Rwandese troops from the DRC at the end of 2002.

Despite these achievements, Rwanda’s economic and social situation remains fragile, as poverty remains widespread, the economy is heavily concentrated in a limited number of agricultural exports and Rwanda is still dependent on external grants and borrowing to finance a substantial part of government current and investment expenditure.

Our Rwandese authorities are aware that achieving the objective of strong and sustainable growth to reduce poverty will require, in the long-term, diversifying the economy. With about 90 percent of the population living in rural areas, where poverty is widespread, the PRSP rightly focuses on agricultural and rural development, human resources and infrastructure. In support of this strategy, our authorities will focus their efforts on maintaining macroeconomic stability and addressing domestic and external imbalances and economic diversification, so as to create an environment conducive to stronger productivity and higher economic growth and employment.

II. Recent Economic Developments

Performance in 2002 was broadly satisfactory. On the macroeconomic front, real GDP growth was strong, reflecting a construction boom and favorable agriculture harvest. The year-average inflation was contained at 2 percent.

In the fiscal area, substantial progress was achieved. In the absence of unanticipated outlays for the withdrawal of Rwanda’s troops from the DRC, the performance criterion on the domestic fiscal deficit would have been met. Domestic revenue exceeded the program targets, following improved tax and customs administration, the introduction of new taxes and an increase in the existing taxes, notably VAT rates. Expenditures (excluding outlays for troops’ withdrawals) were marginally below the programmed level, and the performance criterion for recurrent spending in priority areas was met. In line with the agreement reached with the DRC in July 2002, our authorities have completely pulled back their troops within Rwandan borders by withdrawing about 23,000 soldiers from the DRC, with unanticipated costs of about RF10.9 billion. However, the performance criterion on the net reduction of domestic arrears was missed, due to delays in the disbursement of external assistance. They also continued their work with CEPEX, in order to strengthen the predictability and coordination of external assistance, as well as its alignment with the budgetary cycle.

In the monetary area, faced with the larger-than programmed expansion of credit to government during parts of the year, due to troop withdrawals from the DRC and a weak banking sector, our authorities took steps to tighten liquidity conditions through open market operations. Accordingly, they met at the end of December 2002, the performance criteria for reserve money, net foreign assets of the National Bank of Rwanda (NBR), and net credit to government of the banking system at end-December 2002. Nonetheless, due to increased donor disbursement through commercial banks, as well as increasing credit to the economy, broad money growth was above the program targets. As a result the Rwanda franc depreciated against the US dollar despite the central bank’s intervention.

In the financial sector, our authorities took steps to improve the health of the banking sector, including the implementation of the restructuring plan for the Banque Commerciale du Rwanda (BCR) and the preparation of its privatization. The Banker’s Association also decided to share information on defaulting borrowers on a consolidated basis. These efforts were complemented with the strengthening of banking supervision, in particular the completion of audits of commercial banks by the “Banque Centrale du Rwanda “(BNR), the extension of BNR supervision to microfinance operations and the reinstatement of accelerated loan recovery procedures “voie parée”. As a result, the stock of nonperforming loans was reduced and the rate of provisioning increased.

In the structural area, progress was made in strengthening the administration of public finances. In this regard, our authorities enacted legislation to prohibit extra-budgetary and off-budget operations. They also took steps to improve the reporting system of the districts and improve capacity at the local level and enhance transparency through the timely publication of data on government financial operations. In order to strengthen financial controls, transparency and accountability in the management of public resources, our authorities took steps to fully enforce guidelines for the opening, closing and monitoring of government bank accounts and accelerate the audits of public entities by the Office of the Auditor General (OAG), while enhancing legislation to grant public access to these audit reports. In line with these efforts, the National Tender Board was formally established and the Arbitration Center strengthened. As regards civil service reform, our authorities are continuing to implement the new organigrams. On external arrears, our authorities have developed an action plan to strengthen the management of external debt service, including a comprehensive review of debt payment procedures from the authorization and execution of payment. In the privatization area, progress has been made, with the five-year management contract awarded for the electricity and parastatal company (Electrogaz), the hiring of financial advisors to prepare the sale of the telecommunications company (Rwandatel) and the preparation of the sale of two state-owned tea estates, three rice processors, as well as mining, printing, hotels and livestock enterprises.

III. Medium-Term Program and Policies for 2003

For 2003, the main objective of our authorities is to maintain macroeconomic stability and limit external imbalances, while continuing to support the implementation of the poverty reduction strategy of the PRSP. To this end, they intend to improve public finances, strengthen the financial sector and carry out their poverty reduction strategy through operations in agricultural and rural development, human resources and infrastructure development. Based on this strategy, our authorities’ macroeconomic objectives for 2003 are to achieve a real GDP growth of at least 3.2 percent, contain inflation at 4.7 percent and increase the external reserve position to 7.4 months of imports.

Fiscal Policy

Consistent with the medium-term fiscal sustainability objectives, the fiscal program for 2003 seeks to reduce the structural fiscal deficit, while allowing for additional resources for transitional activities, capital outlays and poverty reduction. These developments are made possible by higher revenue collection and a substantial increase in external grant and loan inflows. In this context, revenue mobilization is a key element in support of the attainment of fiscal sustainability. Thus, our authorities will pursue their efforts to strengthen the revenue base, through further strengthening tax and customs administration, notably by improving the computerization of these administrations, upgrading the border posts and increasing the audit activity of the Rwanda Revenue Authority.

Although our authorities will maintain the core expenditure program within the program targets, overall expenditure will increase slightly. This reflects exceptional expenditure for the constitutional referendum and elections, outlays to strengthen petroleum reserves, spending delayed from 2002 and additional outlays in 2003 for demobilization and reintegration and the establishment of peace in the region. In line with the PRSP, our authorities will also increase spending for the priority sectors identified in the PRSP, and outlays for assistance to the victims of the genocide, as well as foreign-financed capital expenditure. Should the country experience any revenue shortfall, our authorities stand ready to reduce non-priority expenditure accordingly. In order to offset, the higher-than programmed settlement of domestic arrears experienced in 2002, our authorities intend to focus on bringing payments float to a normal level and will set up mechanisms to ensure a transparent payment of obligations.

Monetary Policy and Financial Sector Development

Monetary policy will aim at limiting inflation and appropriately building net foreign assets. To this end, our authorities will contain broad money growth at a level close to that of nominal GDP and further strengthen their monitoring of monetary developments. This will involve the strengthening of BNR capacity for policy analysis and implementation, so as to improve the effectiveness of monetary policy. Consistent with their fiscal objectives and reasonable targets for credit growth to the private sector and based on the expected high inflows of external financing, our authorities will continue to build up external reserves. A comfortable reserve position will also help cushion against the risk of disorderly adjustment of exchange rate caused by potential disruptions in foreign aid or further trade shocks. Regarding foreign exchange policy, our authorities are well served with the managed exchange rate system.

In the financial sector, building on progress achieved thus far, our authorities intend to strengthen BNR supervision for both the banking and the microfinance sectors and to take further steps to address the weaknesses in the banking sector. To this end, they will continue to closely monitor the operations of troubled banks and intensify the completion of full audits of commercial banks, while taking further steps to finalize the restructuring of BCR and complete its privatization. They will also put in place within the Central Bank adequate safeguards in the areas of control and governance.

As regards the prevention of money laundering and the financing of terrorism, our authorities have joined a regional association to share experience on the development of legislation and institutional framework to address this issue. In addition to these efforts, our authorities have requested a FSAP, in order to explore ways to strengthen the financial sector, formulate a strategy on the management of non performing loans and provide options regarding the restructuring of the specialized housing bank (Caisse Hypothécaire du Rwanda), as a vehicle for long term savings and investment.

Structural Reforms

In the structural area, the main objectives of our authorities are to improve economic efficiency and governance, strengthen the administration of public finances and support the decentralization of government, in order to reflect priorities identified in the PRSP.

As regards decentralization of government, our authorities will pursue the implementation of their strategy at the provincial and district levels in the context of the overall strategy to reduce poverty. As part of this effort, they have appointed the executive for the Community Development Fund (CDF), with responsibility of overseeing and coordinating the administration of the development projects implemented at the district level. At the same time, they are taking steps to strengthen budget execution, improve reporting systems and provide the training needed to strengthen the public accounting at the central government ministries, provincial administration and district levels.

In the area of public finances, with the assistance of the Fund, our authorities will bolster their efforts to further improve the effectiveness, transparency and accountability of government operations. To this end, they have set up a task force to provide recommendations for the closure of accounts operating outside of controlling regulations, and develop a revised common account nomenclature, while helping improve the reconciliation and monitoring of these accounts. In support of these efforts, our authorities also intend to increase the monitoring and control mechanisms of public resources through conducting a thorough inventory of the physical assets at all levels of government and developing a common framework for charts of accounts. These efforts will also entail the strengthening of the reporting system at the province and district level and strict control of district borrowing by the Ministry of Finance. In order to enhance public debt management, our authorities are preparing an action plan aimed at improving coordination between the Ministry of Finance and BNR, and enhancing the role of CEPEX in the monitoring of the foreign-financed development budget.

Our authorities also intend to strengthen the legal framework governing the administration of public finances. Following the adoption of the new constitution, which establishes the legal basis for budget management, our authorities will accelerate the adoption of the Organic Budget Law and the related regulations. Following the creation of a formal appeals process for taxpayers, the establishment of a bill of taxpayers’ rights in 2002 and the creation of tax and commercial chambers within the court system, our authorities are working toward the establishment of tax and commercial chambers within the court system and the adoption of new commercial and tax codes, in order to improve the legal environment for private sector development.

Poverty Reduction and the Use of HIPC resources

Our authorities have successfully completed a participatory full PRSP, which focuses on the a number of areas which are fully financed in the 2003 budget. The rise in social spending in the priority areas since the HIPC interim relief started in 2001 exceeded the increase in relief flows, reflecting the poverty focus of our authorities. Our authorities also made substantial progress towards the completion point triggers under the HIPC Initiative. Nearly all the triggers have already been met, despite some temporary delays, which seem now to have been overcome, in the privatization of two tea factories. Our authorities have also stepped up their efforts in the social sectors. All triggers in the education sector have been met and substantial progress is being made in the health sector. Among others, net primary school enrollment increased beyond targets, a gender action plan was finalized and measures to eliminate all forms of discriminations against women were implemented. Our authorities are currently carrying out, with the help of the World Bank, a Poverty and Social Impact Assessment that will help them refine their poverty reduction strategy.

IV. Conclusion

The continued implementation of sound economic policies under Fund-supported programs has enabled Rwanda to achieve good economic and financial performance and lay out the foundations for sustained economic growth. Despite these achievements, a number of bottlenecks are to be addressed, in order to foster economic diversification and reduce poverty. Our Rwandese authorities are determined to build on past progress and persevere in their adjustment efforts, in order to implement this ambitious, but realistic program, so as to reach the completion point under the Enhanced HIPC Initiative and create an environment conducive to economic growth and poverty reduction. In this context, they are hopeful that they can continue to rely on additional, predictable and timely international financial and technical assistance. In view of the strong track record of our Rwandese authorities and their renewed efforts to forcefully address the remaining weaknesses, we would like to request Board’s approval for waivers for the nonobservance of the performance criteria, which our authorities were not able to meet, due to constraints beyond their control, as well as Board’s support for the completion of the first review under the PRGF.