Rwanda: Second and Third Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criteria, and Request for Additional Interim Assistance Under the Enhanced HIPC Initiative

Rwanda’s Second and Third Reviews under the Poverty Reduction and Growth Facility, and request for Waiver of Performance Criteria are discussed. After an extended period characterized by a strong expansion of economic activity, real GDP growth is estimated by IMF staff to have slowed to 0.9 percent in 2003. On the structural side, performance criteria on the revision of the tax law and preparation of the financial instructions for more effective expenditure management have been met.


Rwanda’s Second and Third Reviews under the Poverty Reduction and Growth Facility, and request for Waiver of Performance Criteria are discussed. After an extended period characterized by a strong expansion of economic activity, real GDP growth is estimated by IMF staff to have slowed to 0.9 percent in 2003. On the structural side, performance criteria on the revision of the tax law and preparation of the financial instructions for more effective expenditure management have been met.

I. Introduction

1. In the ten years since the 1994 genocide, Rwanda has reestablished the critical elements of an effective state. This accomplishment reflects the creation and reform of institutions, the implementation of market-based economic policies, a substantial rehabilitation of infrastructure, the reconstitution of required work skills, and the development of poverty-oriented social programs. The adoption of a new constitution in May 2003, followed by a presidential election in August, and legislative polls in September–October set in place the political foundations that will support Rwanda’s economic and financial development.

2. Rwanda addressed a wide range of challenges during 2003. It maintained its commitment to peace in the Great Lakes region, continued with the process of demobilization and reintegration, moved forward with community-based hearings for the genocide-accused, and carried on with the decentralization of government. This extraordinary agenda clearly stretched Rwanda’s management capacity. Macroeconomic policy performance, as noted in the attached memorandum of economic and financial policies (MEFP) and in the paragraphs below, fell short of the standard that had been maintained under preceding programs.

3. Rwanda’s development partners have strengthened their coordination and support efforts in the context of the Strategic Partnership for Africa. Rwanda’s principal donors have committed to increase budget support in 2004 by 3.7 percentage points of GDP relative to earlier projections, mostly in the form of grants. During the second half of 2004, the World Bank’s Executive Board is expected to consider a three-year Poverty Reduction Support Credit (PRSC) that would provide US$70–US$80 million per annum in budgetary support during 2005–07. The prudent management of these inflows will be key to Rwanda’s development strategy.

II. Recent Developments and Program performance

4. Macroeconomic performance under the 2003 program fell short of expectations. After an extended period characterized by a strong expansion of economic activity, real GDP growth is estimated by the staff to have slowed to 0.9 percent in 2003 (Figure 1).1 Following exceptionally strong growth in 2002, food production fell well below the expected level, owing to poor rains. A 15 percent increase in construction moderated the slowdown in economic activity. At the same time, a drop in export earnings driven by exogenous factors, along with a construction-related increase in demand for foreign exchange, led to a 20 percent depreciation of the Rwanda franc in real effective terms (Figure 2). Drought-induced food price increases and the incipient pass-through of exchange rate depreciation resulted in an increase in consumer price inflation to 7.7 percent (5.5 percent excluding food) by year’s end (Figure 3).

Figure 1.
Figure 1.

Rwanda: Real GDP Growth, 1996-2006

(Annual Percentage Change)

Citation: IMF Staff Country Reports 2004, 270; 10.5089/9781451833270.002.A001

Source: Rwandese authorities; and Fund staff estimates. 2004-06 are program targets.
Figure 2.
Figure 2.

Rwanda: Real and Nominal Exchange Rates, January 1999-December 2003

(Annual Percentage Change)

Citation: IMF Staff Country Reports 2004, 270; 10.5089/9781451833270.002.A001

Source: INS.
Figure 3.
Figure 3.

Rwanda: Price Developments, January 2000-February 2004

(Annual Percentage Change)

Citation: IMF Staff Country Reports 2004, 270; 10.5089/9781451833270.002.A001

Source: Rwandese authorities; and Fund staff estimates.

5. In acknowledging program slippages during 2003, the authorities pointed to the critical significance of the political transition, which led to unbudgeted outlays on the elections and goods and services (MEFP, paragraph 6). Six quantitative performance criteria and all structural performance criteria were met at end-June 2003, and three quantitative performance criteria were narrowly missed. Policy performance, however, weakened significantly during the second half of 2003. As a result, six quantitative performance criteria and three structural performance criteria for end-December 2003 and early 2004 were not observed (MEFP, Appendix I, Attachment I, Tables 1 and 2).

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2001-06

article image
Sources: Rwandese authorities; and staff estimates and projections.

2002-03 PRGF: see IMF Country Report No. 02/204; and 2003-04 prog.: see IMF Country Report No. 03/192.

Numbers up to 2003 are based on current exchange rates, while 2004-06 numbers are based on the program exchange rate of RF 580.3/U.S. dollar.

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

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

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

In the “Prog.” and “PRGF” columns for 2002 and 2003, official transfers exclude expected but not yet disbursed budgetary assistance.

After rescheduling, including arrears and new debt (the latter includes assumed project and budgetary disbursements for the period 2004-06). The data under the “PRGF” and the “Prog.”/“Est.” Columns are not comparable since they are based on a different treatment of projected loan disbursements. Data are preliminary and do not reflect changes in exchange rates.

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 (data available at the time of the decision point). The exports denominator is calculated using a three-year backward-looking average. Data are preliminary, pending a full debt sustainability analysis.

Table 2.

Rwanda: Operations of the Central Government, 2001-06

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

Program numbers refer to IMF Country Report No. 03/192.

Planned to be executed only in case of sufficient additional external budgetary grants.

Definition excludes exceptional expenditures; defined as total revenue (excluding privatization proceeds) minus noninterest current expenditure (excluding exceptional expenditure) minus domestically financed capital expenditure. In 2002, the definition includes the cost of the troop withdrawal.

Revenue excluding grants; minus current expenditure, domestically financed capital expenditure and net lending; excluding external interest. In 2002, including the cost of the troop withdrawal.

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

CSR = Caisse Sociale du Rwanda

Includes RF 8.8 billion in termporary credits from Union des Banques Populaires du Rwanda (UBPR) in June 2003.

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

6. The missed quantitative performance criteria for end-December 2003 resulted from unprogrammed government outlays on the elections (paragraph 8), the financing of a hotel project (paragraph 10), and delayed donor disbursements (paragraph 9). To correct for these slippages, the 2004 program includes a substantial reduction in net credit to government from the banking system, slower reserve money growth, and a fiscal program that incorporates contingent cuts to assure that the government’s domestic fiscal balance remains consistent with macroeconomic objectives. Data on government financial operations through end-March 2004 show that revenue and expenditure performance are in line with end-June performance criteria. Payment orders were issued during January-April 2004 to eliminate the stock of domestic arrears that had accumulated at end-2003. As of April 30, 2004, net central bank credit to government was below the projected requirement and, as a result, reserve money growth was lower and the net foreign assets of the NBR higher than had been targeted. The missed performance criteria on new non-concessional external debt, which resulted from an energy rehabilitation loan with a grant element of 47 percent, compared to the 50 percent floor set in the program (MEFP paragraph 13). The financing for this project will be brought to the required concessionality level by end-June 2004. These developments demonstrate that action has been taken to correct missed quantitative performance criteria. Based on the above, the authorities request that the nonobservance of the quantitative performance criteria be waived.

7. On the structural side, performance criteria on the revision of the tax law and preparation of the financial instructions for more effective expenditure management were met. However, the structural performance criteria for submission of a revised investment code, issuance of financial instructions for more effective expenditure management, and incorporation of tax incentives into the structure of the income tax were not observed. Moreover, some structural benchmarks were missed. These slippages were mainly associated with the authorities’ limited pool of adequately trained staff. The authorities set firm dates for the completion of the missed criteria (MEFP paragraphs 37 and 40). Implementation is underway. Signaling a strengthened resolve to advance the structural agenda, the authorities committed to implementing three prior actions for the completion of the second and third reviews under the PRGF arrangement (Box 2). Based on the above, the authorities request that the nonobservance of the structural performance criteria be waived.

8. Fiscal performance, broadly on target through end-June 2003, weakened during the second half of 2003.2 For the year as a whole, domestic revenues, which increased from 12.2 percent of GDP in 2002 to 13.5 percent in 2003, slightly exceeded the programmed level. However, there were expenditure overruns on elections and goods and services, and the government failed to implement expenditure reductions to offset unrealized grants for special health operations. As a result, the domestic fiscal deficit reached 5.5 percent of GDP in 2003, compared with the program’s target of 2.6 percent of GDP (after adjusters). Lower-than-projected outlays on foreign-financed projects, nonetheless, limited the overall deficit before grants to 10.5 percent of GDP, compared with 11.3 percent envisaged in the program.

9. The official foreign reserves target for end-2003 was substantially missed. The gross official reserves of the NBR fell to the equivalent of 5.0 months of import cover at end-2003, compared with 7½ months targeted in the program. Factors contributing to the reserves shortfall included the delayed disbursement of US$62 million in budgetary assistance from the World Bank, the European Union and bilateral partners, and increased National Bank of Rwanda (NBR) foreign exchange sales to reduce liquidity at end-year. As a result of a central bank lending to government, reserve money (evaluated at the program exchange rate) grew by 12 percent during 2003, well above the program’s target (Figure 4).

Figure 4.
Figure 4.

Rwanda: Broad Money and Reserve Money December 2000 - December 2003

(In Billions of Rwanda Francs)

Citation: IMF Staff Country Reports 2004, 270; 10.5089/9781451833270.002.A001

Source: Rwandese authorities; and Fund staff.Note: Scale is logarthmic.

10. Broad money (at current exchange rates) rose by 15 percent during 2003, compared with a program target of 8 percent. Banking system credit to government and commercial bank lending for a hotel project contributed to a rapid expansion in the monetary aggregates. 3 Moreover, the change in the valuation of deposits due to exchange rate depreciation added to broad money growth. Although starting in the fourth quarter the central bank stepped up efforts to tighten liquidity (MEFP paragraph 9), these actions were not fully effective.

11. Difficulties in the banking sector interfered with the central bank’s monetary control. Although recoveries on nonperforming loans improved during the first half of 2003, indicators of banking system soundness began to deteriorate during the second half of the year: some banks failed to regularly observe prudential requirements; regulations on net open foreign exchange positions were repeatedly missed; and reserve requirements were occasionally not met.

12. The external current account deteriorated during 2003. Merchandise exports fell marginally, largely due to a drop in coltan and coffee export volumes and weak international market prices for coffee and tea. With imports growing broadly in line with formal sector GDP, the external current account deficit before grants widened to 19.8 percent of GDP in 2003, compared with 18.7 percent in the program.

13. Rwanda’s external debt steadied in 2003, as new borrowing, excluding a new government loan guarantee, was limited to US$40 million. However, according to preliminary estimates based on a debt sustainability analysis (DSA) update, Rwanda’s net present value (NPV) of debt-to-exports ratio rose to about 300 percent at end-2003, after enhanced HIPC Initiative relief. 4 The deterioration in this indicator, compared with the decision point projection (190 percent), reflects the impact of the lower reference discount rate and the decline in exports (Box 1). An import related government-guaranteed short-term loan on commercial terms, that formed part of the financing package for the hotel project is slated for liquidation by May 31, 2004 (MEFP, paragraph 13).

Rwanda: Debt Sustainability

The staff report for Rwanda’s decision point under the HIPC Initiative projected, under its baseline scenario, that Rwanda’s net present value of debt to export ratio (NPV) would stand at 193 percent in 2003 and then fall steadily to 149 percent in 2008 and 134 percent by 2019. In the event, a preliminary estimate for 2003 shows Rwanda’s NPV to have been 300 percent—well above target. Looking forward, revised projections forecast the NPV to peak at 376 percent in 2005, before beginning a protracted decline that reaches 237 percent in 2019.

Two factors are key to explaining the change in the debt sustainability outlook (see figure below). First, a lower discount rate and exchange rate movements raise the net present value of Rwanda’s debt stock by about US$70 million relative to the decision point document. Second, the initial export projections turned out to be too optimistic: exports of goods and services were expected to reach US$186 million in 2003, and then rise to about US$400 million by the end of the decade. Exports are now estimated to have totaled US$126 million in 2003, and a revised projection for 2009 is, similarly, well below the decision point projection.

Reacting to the weakening of the debt sustainability outlook, the Rwandese authorities have kept new borrowing within the range established in the decision point document: total borrowing amounted to US$84 million in 2002 and US$40 million in 2003. Moreover, borrowing was almost exclusively on highly concessional terms from the World Bank and the African Development Bank.

Looking forward, the authorities face a strong pressure to finance critical social spending and other PRSP-supporting outlays. Nonetheless, unless domestic saving and external grant financing are increased on a sustained basis, government spending may need to be restrained. Against this background, Rwanda needs to move ahead rapidly with the implementation of its export promotion strategy. Simulations show that an additional 12 percent growth of exports over a three-year period starting in 2005 would, other things equal, allow the NPV of debt-to-exports ratio to reach 208 percent by 2010.


NPV of Debt-to-exports Ratio After Enhanced HIPC Initiative Assistance


Citation: IMF Staff Country Reports 2004, 270; 10.5089/9781451833270.002.A001

14. Notwithstanding the missed structural performance criteria, substantial progress was made in implementing Rwanda’s structural agenda for 2003. With assistance from Fund staff, a new tax law was drafted, incorporating tax provisions that were previously under the authority of the investment promotion agency. Fund staff also assisted in the drafting of a new organic budget law and in finalizing supporting financial instructions for its implementation. The office of the Auditor General (AG), which was further strengthened, audited the 2002 accounts of 41 public entities, including the ministries of Finance and Defense, and issued a report to parliament in March 2004. Moreover, the central bank issued public notices for the closure of government dormant accounts, setting in motion a process that will continue through 2004. In addition, a new chart of accounts was developed for government operations, and an internal audit department was established at the Ministry of Finance.

15. In the financial sector, steps were taken to improve banking supervision and alleviate the nonperforming loans problem. However, progress in bank restructuring was slower than targeted (MEFP, paragraphs 16–17). The NBR conducted on-site audits of four commercial banks, established a microfinance sector supervision department, and hired additional supervisors. Nonetheless, the effectiveness of banking supervision continues to be limited by human resource constraints. While steps were taken toward restructuring a mortgage bank and privatizing the Commercial Bank of Rwanda (BCR), neither was fully realized. Following a recapitalization financed by the World Bank, the microfinance institution, Union des Banques Populaire du Rwanda (UBPR), doubled its lending portfolio, with more than a third of the credit growth going to the central government.

III. Policy discussions and revised program for 2004

A. Poverty Reduction Strategy and Growth

16. The 2004 program aims at (i) strengthening macroeconomic stability; (ii) improving economic productivity and external sector performance; and (iii) accelerating progress toward achieving the government’s poverty reduction objectives, including the millennium development goals. Inflation will be substantially reduced, and a return to the target GDP growth trajectory will be supported. In addressing productivity, the authorities intend to update their agricultural strategy, move forward with an export promotion action plan, proceed with the privatization of key sectors, accelerate infrastructure development, and adopt and implement new budget, tax, and investment legislation. Poverty reduction operations include the elimination of fees for primary education, increasing the number of educators, initiating new HIV/AIDS programs, and strengthening public health services. A multi-year labor intensive public works program slated to begin in 2004 will simultaneously address infrastructure and poverty objectives.

17. Under government leadership, and reflecting PRSP priorities, multilateral and bilateral partners have strengthened their cooperation in support of Rwanda’s policy program and have substantially increased budgetary financial support. Coordinated donor support includes efforts by the World Bank, the EU, the African Development Bank, and the governments of the U.S., U.K., the Netherlands, and Sweden in the areas of agricultural policy, export promotion, decentralization, and public financial management. Moreover, a broad range of partners will collaborate on social policies. Strengthened backing of social policies has been reflected in multiyear commitments from the U.K., the EU and, under a poverty reduction credit currently under preparation, from the World Bank. Reflecting support for these policies, 2004 commitments for external budgetary assistance increased by the equivalent of 4 percentage points of GDP relative to the 2003 outturn (of which 2.2 percentage points correspond to external grant disbursements delayed from 2003). The government is seeking an additional 1.4 percentage points of GDP in grant financing for 2004 to cover various activities, including enhanced export promotion activities and community development. Given the large increase in external assistance, the authorities have committed to ensuring that the use of resources is efficient, and that it is effectively monitored.

18. The macroeconomic framework for 2004 supports the resumption of real economic growth of 6 percent, a reduction of inflation to 5 percent by year’s end, and increased spending on poverty reduction. The relaxation of the inflation objective relative to the initial PRGF trajectory (which envisaged a reduction in inflation to 3 percent) takes into account the persistent impact of the exchange rate depreciation in 2003. The import cover of gross official reserves is targeted to fall to 4.6 months, which, while providing broadly adequate cover in the short-term, would not be prudent over the longer term, given Rwanda’s susceptibility to external shocks. Therefore, an increase in cover to 5.5 months is targeted by end-2006.

B. Fiscal Policy

19. Under the 2004 program, the domestic fiscal deficit, excluding delayed demobilization outlays and net lending to meet calls on outstanding loan guarantees, is targeted at 5.6 percent of GDP, similar to that of 2003, while the overall deficit would be in balance. This target reflects both the limited scope for new revenue measures in the short run and critical social spending covered by external program grants. Taking into account demobilization operations delayed from 2003 and net lending to meet calls on outstanding government guarantees the domestic fiscal deficit would amount to 7.8 percent of GDP and the overall fiscal deficit (after grants) to 2.2 percent of GDP.,

20. Domestic revenue is projected to remain stable at 13.5 percent of GDP in 2004. No major tax or nontax revenue policy changes are planned in 2004. A modest fall in customs duties resulting from Rwanda’s entrance into the COMESA free trade area on January 1, 2004 is projected to be offset by improved efficiency in tax collection as a result of ongoing reforms at the Rwanda Revenue Authority. Committed external budgetary grants (excluding relief under the HIPC Initiative) are projected at US$103 million (6.0 percent of GDP) in 2004. As previously noted, the authorities are seeking to raise a further US$25 million (1.4 percent of GDP) in such funding to cover operations planned for the second half of the year (paragraph 21). In the medium-term, it is expected that improved revenue buoyancy will result from a shift in economic activity from the informal to the formal sector.

21. Given the increase in budgetary resources, total expenditure and net lending is programmed to increase to 28.3 percent of GDP in 2004. The authorities explained that the budget includes substantial funding increases for the education, health, and road sectors, and stepped-up financing for growth enhancing activities envisaged under the PRSP. In addition, expenditures include net lending to cover costs incurred during 2003 on the above noted hotel project, and to finance the purchase of electric generators to address a drought-related drop in hydroelectric output. In response to staff concerns regarding the risks associated with their less restrained fiscal program for 2004, the authorities revised the expenditure profile. Specifically, part of nonpriority spending was rephased to the second half of 2004 to facilitate fiscal restraint if additional grant financing is not forthcoming.

22. The deficit will be fully covered by external grants and external program borrowing (US$45 million) under a previously approved World Bank program credit and an African Development Bank credit.

C. Monetary Policy

23. The monetary program seeks to limit inflation to 5 percent at end-2004 On this basis, and taking into account the projected growth of the monetized sector of the economy, the target for broad money growth has been set at 11 percent. Based on the fiscal program described above, the monetary program would provide room for increasing banking system credit to the private sector by 11 percent, in line with GDP growth. The authorities will maintain a managed float of the foreign exchange system.5

24. Efforts to strengthen the financial sector will continue in 2004 (MEFP, paragraphs 47–48). With due diligence inspections completed early in 2004, the privatization of the Commercial Bank of Rwanda is targeted by end-July 2004. Given the departures from prudential regulations during 2003, the central bank will reach agreements with banks by end-June 2004 on action plans to bring all commercial banks back into regular compliance. Banking supervision will be reinforced, as an enhanced supervisory regime will continue for two banks, and on-site audits are planned for five banks. In addition, a joint Fund-World Bank financial sector assessment is scheduled for the fourth quarter of 2004.

D. External Sector Policies

25. The external current account deficit (after grants) is projected to narrow by 1.5 percentage points of GDP, to 6.9 percent in 2004 (MEFP, paragraph 33). Early efforts to strengthen export performance, including targeted activities in the coffee and tea sectors, are projected to yield solid returns during 2004, starting from a limited base. Merchandise imports are projected to increase by 16 percent in U.S. dollar terms, mainly reflecting outlays for the growing development budget and intermediate goods, including fertilizer. In the medium term, and subject to vigorous implementation, the export promotion strategy is expected to substantially strengthen Rwanda’s export performance. While the authorities expect the strategy to substantially strengthen export performance in the near term, Fund staff noted that the realization of accelerated export growth is not certain, as elements of the strategy have yet to be finalized. Given this, staff urged the authorities to take the necessary action, in cooperation with supporting partners, to assure the strategy’s success.

26. Projected donor disbursements and debt reschedulings would fully finance the 2004 program. Balance of payments support is projected at US$174 million, mainly from the World Bank, the UK, the EU, and some smaller bilateral donors. HIPC Interim Assistance and bilateral debt relief are projected at US$41 million. 6

E. Structural Reforms

27. The structural program for 2004 focuses on improving economic productivity, further strengthening the legal framework and public finances, and continuing financial sector reforms. The authorities indicated that this agenda seeks to address the highest priority structural elements of the PRSP’s economic agenda (Box 2). In addressing the weak external sector performance, in particular, the sale of tea factories, the introduction of a strengthened investment code, and the implementation of the export promotion action plan are projected to result in prompt and tangible returns (MEFP, paragraphs 34–35). The authorities have also committed to promptly selling the government’s stake in the recently completed hotel project.

28. The enactment of the organic budget law, income tax law, and customs and public procurement laws targets the creation of a modern, efficient and transparent financial administration (MEFP, paragraph 40). The agenda for public administration reform will continue with the strengthening of budgeting, internal accounting and decentralization, including through the extension the government’s computerized accounting system to the provincial level. Work will begin on the introduction of a treasury single account and key improvements to the budget document (MEFP, paragraphs 43-44).

Structural Conditionality

Coverage of structural conditionality in the 2004 program

Three prior actions have been set for the completion of the second and third reviews, and one structural performance criterion and three structural benchmarks for the fourth review. The prior actions cover public procurement legislation, a strengthening of NBR statistics, and NBR regulations on the net open foreign exchange position of commercial banks. The submission of a revised 2004 budget to parliament, a structural performance criterion for June 2004, will modify the budget in line with the 2004 program. The benchmarks on monthly reconciliation statements of government accounts and inclusion of consolidated government accounts in the 2005 budget seek to improve fiscal transparency. The benchmark on approval of the export promotion plan reflects the authorities’ strengthened commitment to addressing Rwanda’s external sustainability, while the benchmark on external audit of the 2003 NBR accounts follows the recommendations of the 2003 Safeguards mission. Finally, the benchmark for the NBR to set and enforce dates for bringing banks into compliance with prudential regulations will strengthen the soundness of the banking system and improve the effectiveness of monetary policy instruments.

Status of previously established structural conditionality

The 2003 program established structural performance criteria, benchmarks and prior actions scheduled for June-September 2003 (MEFP, Table 2). For the second review, the authorities met the two performance criteria that were set. However, only one of the benchmarks for the second review was observed. Nonetheless, substantial progress was made: the report on the 2002 development budget and list of overdue government obligations to be cleared in 2003 were issued by September 2003; and the process for the sale of BCR was set firmly in motion. The NBR is finalizing the written procedures for assuring consistency between data submitted to the IMF and commercial bank submission. The completion of these procedures by end-May, 2004, has been set as a prior action for this review. The NBR met a September 2003 benchmark by issuing public notifications required for the closure of dormant government accounts and readying an action plan for closure of these accounts. AFRITAC East staff are scheduled, during 2004, to provide technical assistance that will lead to monthly reporting of district financial operations, by end-December 2004. While a new organic budget law drafted with assistance from Fund staff is slated for parliamentary submission by end-June 2004, the end-September 2003 target date was missed.

Three performance criteria and one benchmark were set for the third review. The benchmark for operationalizing internal audit procedures within the NBR was observed, a revised law incorporating tax incentives into the income tax has been readied and is slated for submission to parliament by end-June 2004, and a revised investment code is in preparation. While financial instructions for the implementation of the new organic budget law have been readied, their issuance has been delayed to coincide with approval of the new law.

Structural measures covered by World Bank lending and conditionality

The World Bank’s lending programs are aimed at improvements in the following areas:

  • Public finances: medium term expenditure framework, poverty monitoring, capacity building at Ministry of Finance and Auditor General’s Office;

  • Financial sector: Improved loan recovery, arbitration center, credit unions (UBPR), housing finance (CHR), privatization of the Bank of Kigali;

  • Governance and the business environment: creation of commercial courts, National Tender Board, strengthening the investment promotion authority (RIPA);

  • Regulations and privatization, including the transfer to the private sector of Rwandatel, Electrogaz, and coffee and tea state factories.

Human resources: adoption of sector-wide approaches, immunization, health education, improved access to health services.

F. Governance and Safeguards

29. Rwanda has made significant efforts toward the establishment of an open and transparent public financial administration. Reforms are underway to address issues identified in the Auditor General’s report to parliament, including the required strengthening of public procurement procedures, and plans have been developed to continue with the recruitment and training of accountants and financial controllers in line ministries. The cabinet is also slated to approve a strengthened public tender code by end-May 2004 and, following the adoption of legislation currently under consideration by parliament, the AG’s office will produce annual audit reports of public entities as part of the annual audit starting in 2004.

30. On the basis of a Fund safeguards assessment in early 2003, the National Bank of Rwanda developed an action plan to strengthen its autonomy, external and internal audit mechanism, the legal structure, and financial reporting and internal controls. Since then, some of the key recommendations of the safeguards assessment have been implemented. In particular, a regular, annual external audit process has been established with the audited financial statements to be published within six months of the financial year. Moreover, the NBR agreed to limit the 2004 distributable profit to realized gains. Furthermore, the Internal Audit Department is being operationalized, with the Internal Audit Charter approved and the audit risk assessment of all NBR operations completed.

31. Development and enforcement of anti-money laundering legislation is progressing slowly. An initial draft of the anti-money laundering law was deemed unsatisfactory by the government, and the NBR has requested Fund technical assistance to support its next steps in this area.

G. Statistical Issues

32. Rwanda’s macroeconomic data are adequate for program monitoring purposes. Rwanda has participated in the Funds’ General Data Dissemination System since end-October 2003. Nevertheless, significant weaknesses remain. In particular, reconciliation of fiscal and monetary data is constrained by the large number of government accounts, the current consumer price index is outdated, the quality and timeliness of output data is inadequate, and only limited information is available on monthly and quarterly capital account transactions. The authorities are taking steps to improve the situation. The introduction of a single treasury account at the NBR is envisaged for 2005, a new consumer price index is being tested and will be published in June 2004, and the coverage and quality of balance of payments data is being improved with Fund technical assistance. Furthermore, a new independent Statistics Office is being established with financial assistance from development partners.

H. Program Monitoring

33. The fourth review will assess performance with respect to the quantitative performance criteria for end-June 2004. In addition, it will assess performance with respect to the structural performance criteria for end-June 2004 and three structural benchmarks through end-September 2004.7 The attached technical memorandum of understanding (Appendix I, Attachment II) details the design of the program, adjustment mechanisms and terminology.

IV. Staff Appraisal

34. Increased external assistance inflows in 2004 will provide Rwanda with an opportunity to accelerate progress on its PRSP agenda and towards the achievement of the Millennium Development Goals. Given the recent progress made towards achieving peace in the region and consolidating the political process, the efficient use of these resources would establish a credible basis for continued and, possibly, increased aid commitments.

35. The more expansionary fiscal stance for 2004, which is supported by increased external assistance, entails several challenges that need to be addressed if the poverty and growth objectives are to be achieved and sustained. In particular, the issues of external debt sustainability, increased relative prices for nontradables, and medium and long-run fiscal sustainability must be tackled if the authorities’ strategy is to succeed. The 2004 program reflects discussions on the appropriate balance in each of these areas, along with supporting policy commitments.

36. While program implementation in 2003 was disappointing and economic performance in 2003 fell well short of the program objectives, the implementation of the 2004 program will be facilitated by the improved political situation and the more stable regional environment. With a new executive administration and legislature in place, an expanded resource envelope, and good rainfall in the second agricultural season, the authorities will benefit from a far more favorable environment for the achievement of the 2004 program targets. The success of Rwanda’s poverty reduction strategy hinges on enhancing productivity to promote strong growth in formal sector activity and, with this, increasing nondebt financial inflows and domestic saving.

37. The increase in external budgetary support programmed for 2004 will provide the government with substantial additional resources to finance its operations. Over the medium-term, the complementary strengthening of the domestic resource base will benefit from the prospective revision of tax and investment laws and tax administration regulations. The initial steps taken in this direction are commendable. In moving forward, the authorities will need to ensure that the integrity of the revenue base is maintained and that new initiatives do not detract from that effort.

38. The budgeted increase in government spending for 2004 balances funding for social programs, including free primary schooling and extended health services, against operations such as road development and export promotion that will address supply constraints in the economy. While it would have been preferable for the decisions taken on hotel financing in 2003 to have been made within the PRSP and budget frameworks, the regularization of these expenditures as part of the revised 2004 budget and the planned prompt sale of the hotel are important steps in the right direction. In this context, the decision to rephase part of nonpriority expenditure to the second half of 2004, in order to assure that these resources are used effectively, is appropriate. As the outlook for raising additional external grant financing is uncertain, however, the authorities should be prepared to postpone or reduce spending as needed.

39. The solid policy and administrative frameworks that underpin health and education operations, developed in concert with Rwanda’s supporting partners, will help ensure that the additional resources are well used. The authorities should attach a high priority to efforts supported by the EU, World Bank and other partners to develop strong frameworks for the remaining economic sectors, including agriculture, energy, and exports. In addition, a decisive implementation of actions to strengthen the financial administration of provincial and local government units will be critical in the period ahead, given the progressive decentralization of government.

40. Limiting liquidity growth, given the substantial increase in government spending budgeted for 2004, poses an extraordinary challenge for the monetary authorities. In order to constrain the expansion of the monetary aggregates, the central bank must assure that the foreign exchange auction operates efficiently and that commercial banks are brought quickly into compliance with the regulatory framework, including reserve requirements. Beyond this, the financial sector assessment, to be conducted later in 2004, is likely to provide additional recommendations for strengthening Rwanda’s financial sector and, thus, the effectiveness of monetary policy.

41. The increased external assistance supporting Rwanda’s efforts to reduce poverty will, in the near term, be accompanied by a deterioration in the trade balance. Over the medium-term, under Rwanda’s poverty reduction strategy, this deterioration is expected to gradually reverse, as supply side constraints are addressed and export performance improves. While projected increases in commodity export prices and good weather will contribute to ending the slide in merchandise exports during 2004, the authorities need to begin implementing effectively their export promotion strategy.

42. Serious concerns remain regarding Rwanda’s external debt sustainability. Given Rwanda’s elevated NPV of debt-to-exports ratio at end-2003, new external borrowing should be strictly limited Full implementation of the programs to address Rwanda’s social needs, along with the investment required to sustain high growth rates, will entail elevated fiscal deficits over the medium-term. Given this, the donor community will need to focus on providing external grant assistance to support the achievement of Rwanda’s poverty reduction and growth objectives.

43. Although some progress has been made in implementing recommendations by the Auditor General in 2002, the findings of the audits point to significant weaknesses in public resource management. In particular, continued weaknesses of line ministries in the documentation of their use of allocations, in part related to dearth of qualified accountants, needs to be promptly addressed. The government’s plans to address problems in the operation of the public procurement process are of critical importance and should be implemented expeditiously and decisively.

44. In sum, despite the slippages in macroeconomic performance that took place in 2003, Rwanda, having faced extraordinary challenges in the post-genocide period, has set in place a sound institutional and policy foundation for its economy. The 2004 program builds on this framework. The targeted reduction in inflation and GDP growth are realistic and appropriate. Looking forward, strong policy implementation will be critical, in order to secure continued donor assistance and promote private sector investment. Available data, through end-April 2004, indicate that a good start has been made towards these objectives.

45. Based on the above, the staff recommends that the requested waivers for the nonobservance of the performance criteria on domestic fiscal balance, the net accumulation of domestic arrears, and new nonconcessional external debt at end-June 2003, and the domestic fiscal balance, net accumulation of domestic arrears, net credit to government by the banking system, reserve money, net foreign assets of the National Bank of Rwanda (NBR), and new nonconcessional external debt at end-December 2003, and the nonobservance of the structural performance criteria on the submission of a revised investment code, the issuance of financial instructions, and the incorporation of tax incentives into the structure of the tax law be granted, and that the second and third reviews under the PRGF arrangement be completed.

46. Satisfactory assurances of HIPC assistance were provided by creditors at the time of the decision point. These assurances remain in place. Staff also recommends the extension of provision of additional interim HIPC Initiative assistance for the period June 9, 2004 to June 8, 2005.

Table 3.

Rwanda: Monetary Survey, 2002-04

article image
article image
Source: National Bank of Rwanda (NBR).

Converted at the program exchange rate for 2003 (equal to the end-year rate 2002) of Rwanda franc (RF) 511.9/U.S. dollar.

Converted at the program exchange rate for 2004 (equal to the end-year rate 2003) of RF 580.3/U.S. dollar.

The definition of reserve money as performance criteria or structural benchmark differs from the definition in the monetary program in that it excludes the deposits of a defunct savings bank, import deposits, and dormant accounts. For 2002 and 2003, the PC/benchmark is based on a three-week average, while data in this table refer to the last day of the period.

Broad money plus deposits in UBPR and Rwanda Development Bank (BRD).