Abstract
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
Our Rwandese authorities would like to express their appreciation to Fund management and staff for their continuous support. They are grateful for the continued assistance received from the international community in their efforts towards fighting poverty and achieving the MDGs. Since the outset of the current Fund-supported program, Rwanda has made remarkable achievements in maintaining macroeconomic stability, achieving appreciably high growth, increasing social sector spending and remaining current on external debt repayment. Also up to June 2003, all quantitative performance criteria were met.
All these achievements have been made in spite of Rwanda’s unusual experience of genocide in 1994 and its complex socio economic aftermath. As part of dealing with this situation, the government had to carry out in 2003 the political institutional building process, which would lay a solid foundation for a democratic society, good governance and rule of law. This involved carrying out referendum for the adoption of a new constitution, presidential and parliamentary elections and putting in place democratic institutions required by the new constitution including establishment of the Gacaca Court to try perpetrators of genocide. This process was successfully carried out. However, it entailed an additional unforeseen cost financed entirely by domestic resources in the absence of external assistance. Consequently, some performance criteria under the PRGF for the second half of year 2003 were missed.
Since that time, our authorities have been working with Fund staff to put in place corrective measures. During the first quarter ending March 2004, our authorities have implemented those measures, and quantitative targets have been brought in line with the program criteria and they are fully committed to maintaining the momentum. To this effect, the measures agreed on with staff, as prior actions for the second and third review, have been implemented. In view of the corrective measures taken, the commitment to meeting the program’s objectives and the record of accomplishment, our Rwandese authorities request waivers for the nonobservance of the missed performance criteria, approval of the completion of the second and third review under the PRGF and additional assistance under the enhanced HIPC Initiative.
II – Recent Economic Developments
As an economy predominantly based on peasant agriculture, Rwanda’s real GDP continues to be affected by the vagaries of weather. Thus, although a higher GDP growth rate of 9.2 was achieved in 2002; in 2003, the growth rate decelerated sharply to 0.9 following severe drought that affected agricultural production. Also, owing to the fall in agricultural output inflation rose to 7.7 percent at the year-end against the program target of 3 percent and 6.2 percent in 2002.
However, the authorities have adopted a number of measures to increase productivity in agricultural sector. Those measures include land terracing, reforestation, road rehabilitation and extension, improving access to rural credit and the market channels for the distribution of fertilizer as well as improved seeds.
In the fiscal area, fiscal performance through end-June was broadly on target, although during the second half of 2003 the fiscal position weakened. Exceptional expenditure related to Rwanda’s unique post genocide situation, mentioned earlier above, accounted for the widening of the domestic fiscal deficit. Hence, the domestic fiscal deficit in 2003 could not meet the objective of 2.6 percent of GDP set out in the program. This was in spite of the fact that revenue performance continued to be stronger than programmed. The persistent improvement in revenue collection is attributed to the revenue enhancement measures implemented since 2002. These measures include improvement in direct tax collection and strengthening Rwanda Revenue Authority.
On the expenditure side, other than the exceptional increase mentioned above viz, expenditure on new constitution, presidential and parliamentary elections and putting in place democratic institutions required by the new constitution other expenditures remained as budgeted. In their efforts to redress the situation and streamline the public finance management, the authorities have appointed a treasury management team and have initiated movement towards unified treasury account and reinforce control through the Auditor General’s role and the establishment of an internal audit Department within the Ministry of Finance. Moreover, as a measure to reinforce government expenditure control, the prior action which required cabinet approval of a new procurement code has been implemented. As result of these measures, both revenue and expenditure performances as at end-March 2004 have been in line with end-June performance criteria.
On the monetary front, net credit to government was higher than program target owing to exceptional government expenditure increase which was financed by bank borrowing in the absence of the expected external financing. There was also an increase in private sector credit notably as a result of commercial banks lending to Prime holdings hotel project. Owing to the overall increase in domestic credit, reserve and broad money were above the program targets. In order to mop up the excess liquidity, the Central bank sold foreign exchange, which in addition to the drop of export proceeds and delayed donor budget support assistance led to decline in the foreign exchange position, hence missing the program target.
In the financial sector, progress has been achieved, notably in loan recovery, information sharing on credit risk, on-site banking supervision and creation within the Central Bank of a micro Finance Sector Supervision Department. Moreover, the plan for the restructuring of Caisse Hypothécaire du Rwanda is underway and substantial progress towards the sale of Banque Commerciale du Rwanda has been made. Nevertheless, challenges remain as during the second half of the year, some banks failed to comply with the prudential norms with respect to the minimum reserve requirements and foreign exchange open position. In addition, capacity constraints have continued to limit the effectiveness of bank supervision.
As regards the structural area, some performance criteria were missed at the test date. However, as well noted by the staff, there has been substantial progress as some of the structural reforms have already been implemented, while others are in the advanced stage of being implemented.
In the external sector, the current account slightly deteriorated in 2003 compared to the target due to fall in coffee and Coltan export volumes as well as weak international prices for coffee and tea. The decline in exports has led to Rwanda’s net present value of debt ratio to stand at around 300 percent at end 2003 against 190 based on the decision point projection. In order to strengthen the export performance, the authorities have put in place an export promotion strategy with the assistance of the World Bank. With respect to the external debt, the authorities continued to strengthen its management through implementing an action plan designed in this regard. To this effect, the second phase of a capacity-building program for debt management was started in January with the assistance of Debt Relief International. In addition, performance criterion for non-accumulation of external arrears in 2003 was met. Also external borrowings have been kept in line with the level projected in the HIPC decision point document.
III – Medium Term Program and Policies for 2004
For the medium term, the strategy for poverty reduction and economic growth will be guided by the set of policies contained in the Poverty Reduction Strategy Paper issued in June 2002. The progress report issued last July indicated progress made in human resource development and achievements recorded in governance improvement.
Our Rwandese authorities recognize the critical importance of macroeconomic stability towards the attainment of poverty eradication objectives as well as the reduction of macroeconomic imbalances and dependence on external assistance. In order to achieve these objectives, the authorities intend to improve public finances, strengthen the financial sector and implement the poverty reduction strategy through strong actions in rural development, human resources and physical infrastructure development. Based on this strategy and supported by our authorities’ strong commitment, the macroeconomic targets for the medium term are to achieve a real GDP growth of at least 6 percent; contain inflation at 5 percent in 2004 and 3 or 4 percent thereafter and reconstitute gross international reserves to at least six moths of imports.
Fiscal Policy
In accordance with the stated medium term objectives, the fiscal program for 2004 seeks to consolidate gains made in revenue policy and administration over the past 2 years. To this effect, based on the technical assistance from bilateral and multilateral partners further steps to strengthen revenue administration will be taken. Moreover, the reforms already made in direct tax involving revision of marginal rates and taxation of professional remuneration will be fully implemented. Reforms in the Rwanda Revenue Authority to establish a large taxpayer unit will also be put in place.
On the expenditure side, the core outlays will remain within the program targets while increasing slightly. This increase reflects expenditure for newly constitutionally mandated institutions, free basic education, government contributions to HIV/AIDS programs, human resources development, tertiary education, labor-intensive works and export promotion. In the event of revenue shortfall as budgetary external assistance is uncertain the government stands ready to cut non-priority expenditure.
Monetary Policy and Financial Sector Development
The monetary policy objectives are to contain inflation under 5 percent at end 2004 and build up the international reserves and observe the broad money target set out for the year-end. As the authorities are determined to ensure that fiscal and monetary policies operate effectively, the Central Bank and Ministry of Finance will closely coordinate their actions through the newly established Treasury Committee.
Based on their fiscal objectives and targets for domestic credit growth as well as expected inflows of external financing, the authorities will continue to reconstitute the gross foreign reserves. Moreover, the operation on the foreign exchange market will be further strengthened. The NBR has also implemented the prior action, which requires that the regulation on the net open foreign exchange position of commercial banks be restored to the text in force in June 2003. Equally importantly, a review of the current auction system is envisaged in order to ensure that auction exchange rates are determined based on the market rules.
As regards the financial sector, our authorities will reinforce the supervision conducted by the central bank through its efforts to reestablish the mandatory compliance with prudential regulations. In this regard, the NBR will closely work with commercial banks on action plan to bring the banks to fully observe the banking regulations and requirements by the end of 2004. In the same vein, full annual audits of four banks are to be carried out in 2004 and as from 2005; the audit of all commercial banks will be conducted on an annual basis. In addition, the authorities will continue to execute the pending structural reforms in the financial sector including the restructuring of Caisse Hypothécaire du Rwanda and privatization of BCR. In their further endeavors to carry out the structural reforms in the financial sector, our authorities look forward to the forthcoming FSAP mission which will be jointly conducted by the Bretton Woods institutions with the objective to provide a comprehensive program for the reform and development of the financial sector.
Structural reforms
The main objectives set out in the structural area, namely to improve economic productivity, governance, efficiency and external sustainability will be intensified in 2004 in order to reflect priorities outlined in the PRSP. The privatization of the telecommunication enterprise and some tea factories will also be completed. In order to develop a conducive environment for private investment, the legal framework will be further strengthened through additional measures. In this regard, a new investment code as well as a new mining code are slated for consideration by the Parliament before year-end.
As regards the external sector, an export promotion task force was put in place in December 2003 and a detailed export promotion action will be submitted before end-June for consideration by the authorities.
Regarding public finances, the achievements made during the past 2 years in establishing modern, efficient and transparent laws and institutions will be extended in 2004. In this regard, the new organic budget law, a draft tax law, a new procurement code and a draft customs law are in the process to be submitted to the Parliament for consideration. An inventory of the physical assets belonging to the public sector and joint development projects will be completed before end-2004 and annexed to the 2005 budget. These actions and new regulations reflect the authorities’ commitment to further reinforce the legal framework governing the management of public finances.
Poverty Reduction
Our authorities are strongly determined to pursue the fight against poverty through a strategy that includes the private sector and rural led growth. The PRSP fully endorsed by all stakeholders has identified six priority areas on which to focus projects and programs for poverty reduction. The first progress report covering the period August 2002-June 2003 highlighted commendable achievements in health and education sectors as well as governance and infrastructure development.
The authorities are fully aware that the attainment of the poverty reduction objectives will be assured if sectorial strategies and programs in other sectors are similarly articulated and implemented. For this purpose, they will continue to use the cluster framework developed with the help of the World Bank and other donors as coordination mechanisms in articulating strategies for the remaining sectors.
IV - Conclusion
Under the Fund-supported programs, Rwanda has implemented sound macroeconomic policies and achieved remarkable economic and financial performances. In spite of the progress made so far, there remain a number of difficulties and challenges that need to be tackled in order to boost economic growth and stimulate economic diversification, and above all reduce poverty. Our authorities are strongly determined to capitalize up on past progress and persevere in their reforms and adjustment endeavors so that they can reach the completion point under the Enhanced HIPC initiative, which will further strengthen their efforts.
Our Rwandese authorities are hopeful that they can rely on additional international assistance to support their adjustment efforts. In this context, they would also like to renew their appreciation to the entire international community and the Fund in particular for their solidarity during the commemoration of the 10th anniversary of the genocide in Rwanda. Given the authorities’ commitment to pursue and deepen their adjustment efforts through the Fund-supported program, we would like, once again to request the Board approval for waivers of the performance criteria missed and completion of the second and third review under the PRGF, as well as for the provision of additional assistance under the Enhanced HIPC initiative.