Realism of the program

Macroeconomic developments thus far in 2004 have been encouraging: good rains appear to provide a basis for a recovery in agricultural production; inflation has begun to moderate; and the international market price for coffee has strengthened in line with the program projections. As noted in the staff statement, the performance of government revenue and spending during January-April 2004 provide support for the authorities’ commitment to the 2004 program.

Growth prospects

For 2004, projected GDP growth largely reflects the expected recovery of agricultural production, following a drought-induced decline in 2003. Regarding the medium- to longterm, Rwanda’s growth strategy has benefited from extensive technical assistance, including from the World Bank, EU, AfDB, and several bilateral partners. The strategy, which is subject to periodic review, relies on improvements in agricultural productivity. As growth prospects depend on the effective implementation of the strategy, the authorities will need to make a strong effort to see that it is realized.

Corrective Measures

To correct for slippages under the 2003 program, the 2004 program includes a substantial reduction in net credit to government from the banking system and a fiscal program that incorporates a specific contingency mechanism to assure that macroeconomic objectives will be achieved. Domestic arrears accumulated during 2003 were cleared by end-May 2004. Through end-May, reserve money growth, reflecting the limited extension of net banking system credit to government, was lower and the net foreign assets of the central bank higher than had been targeted. The financing terms for the energy rehabilitation project have been modified, bringing them into compliance with the floor on concessionality set under the program. On the structural side, legislation on the new budget law, financial instructions, and new tax legislation have been readied for submission to parliament.

Fiscal issues

Fiscal consolidation: The government’s fiscal program for 2004 targets progress towards the achievement of the millennium development goals, in line with policy frameworks that have been developed with the assistance of the World Bank, the AfDB, EU and bilateral donors. While total expenditure is programmed to rise substantially, owing to higher grants, changes to the structure of recurrent expenditure are limited. Value added and customs tax rates were revised during 2002-03. Revenue enhancement will result from the implementation of the revised tax and customs laws and improvement in tax administration, with technical assistance from the Fund and other partners.

Wage bill and civil service reform: The wage bill, at 4.8 percent of GDP, is among the lowest in Africa. Looking forward, the authorities have signaled their intent to reform the civil service, in cooperation with partners, with the objective of implementing best practices in this area.

Composition of expenditure: Fiscal operations are recorded in detail in the government’s computerized budget and expenditure system. Monthly data on spending authorizations, commitments, and payments are communicated to the Fund in detail, with a four week lag, including military outlays for wages and goods and services. The Auditor General’s report on the audit of the Ministry of Defense for fiscal 2001 and 2002 noted that defense spending was funded through budget allocations disbursed through the system used for reporting to the Fund. In 2003, defense spending on wages and goods and services decreased to 2.7 percent of GDP, from 2.9 percent in 2002. Fund staff would welcome any other reliable information regarding defense spending that Directors could provide.

Contingency measures to deal with a possible shortfall in aid inflows: Reflecting uncertainties regarding external program assistance, the government has identified a list of contingent outlays for reduction, which consist mainly of delaying funding increases for districts and the introduction of new programs in nonessential areas.

Exports

Performance versus projections: Exports were projected by the staff using WEO prices. However, year-to-year supply shocks have resulted in a pronounced variability in international market prices for coffee and tea. Recent volume decreases reflected, in part, a drop in international prices below production costs.

Medium-term outlook: For 2004, the projected volume increase for coffee (2 percent) is conservative. In addition, data on tea exports for January-March 2004 are in line with projected volumes for these exports. The realism of the medium- to long-term projections depends critically on the implementation of Rwanda’s export promotion action plan, which is being developed with the assistance of the World Bank. Reflecting the importance attached by the staff to this issue, a structural benchmark for cabinet approval of the action plan was established for end-September 2004.

Mineral exports: Regarding coltan, Rwanda’s exported 732 tons of this mineral during 2003, with a value of US$6.4 million. Production is projected to decline by another 30 percent in volume terms during 2004. The staff is not aware of any claims regarding the origin of Rwanda’s coltan exports in 2003. If any additional information is made available, the staff will pursue the matter during discussions for the forthcoming program review.

Structural conditionality and capacity constraints

The structural conditionality set for Rwanda’s key economic legislation targeted the creation of a comprehensive and coherent framework. These reforms were considered to be fundamental to improving economic efficiency, strengthening the government finances, and enhancing accountability.

As the authorities’ human resources were limited, the realization of the performance criteria depended on the coordinated scheduling of supporting technical assistance which, at times, was delayed. Nonetheless, critical progress has been achieved in all of the targeted areas: a new procurement code has been approved, and the budget law, financial instructions, and tax and customs laws have been finalized and readied for submission to parliament. Given the advanced stage reached in implementing these reforms, new performance criteria were not seen by the staff as being necessary. Taking into account the need to streamline conditionality, the staff was of the view that it was important to focus on other measures that were necessary to push the reform agenda forward. The staff will continue to monitor the implementation of the structural performance criteria that were not observed and their status will be reported in subsequent reviews.

Banking statistics

The commercial banking statistics reported to the Fund correspond to data collected by the central bank as part of its regular supervision activities. In the past, these data have allowed the staff to identify emerging issues in some institutions. While the data reports are detailed, their communication does not create additional work for the authorities.