1. Purpose and obligations under article IV: The extent of compliance

At the outset, we would like to express the appreciation of our Rwandese authorities to the staff for the constructive discussion they had during the 2004 Article IV consultation and for the excellent Selected Issues paper providing useful information on the economy. Our authorities also express their appreciation to Fund management for their continuous support and they are grateful for the continued assistance received from the international community in their efforts to fight poverty and achieve the Millennium Developments Goals (MDGs).

As indicated by staff, our authorities have in their policy implementation endeavors complied with the obligations under Article IV. As correctly documented by staff Rwanda’s trade regime is open with tariff rates reduced and with no non-explicit tariff barriers. Moreover, Rwanda maintains a floating exchange rate regime, which continues to serve the country well. Authorities have furthermore adopted measures to ensure financial stability. Thus, inter alia they have adopted measures to increase tax effort, which has risen to 13.5 percent and are determined to maintain that level in 2004. Going beyond that level requires increasing the tax base, which is currently constrained by the limited size of the formal sector. As they pursue their efforts to bring about formal sector growth, our authorities are committed to avoiding any new tax exemption and to continue with strengthening the revenue authority. On the expenditure side, data for the first half of 2004 indicate that measures to restrain growth in recurrent outlays while accommodating external grant-financed increases in social spending are keeping the overall spending targets on track. External borrowing has also been held below the level projected in the HIPC decision point document. Regarding monetary aggregates there has been a curb in net credit to government and reduction in broad money. On the external front, the first half of 2004 experienced a favorable modest narrowing because of increase in exports volume for coffee and tea, terms of trade and decline of imports.

Structural reforms, which underpin financial stability, have also been implemented. On the financial sector, this includes privatization of BCR and BACAR, conclusion of bank recapitalization plans as well as compliance with other prudential regulation. On the public finance front, a new Auditor General’ Act to enforce control on public finance has been submitted to Parliament for consideration, a new organic budget law has been enacted by Parliament and preparation of finance instructions to accompany the organic budget law is underway. With the assistance of Fund staff, a new tax law was drafted and a new custom registration has been submitted to Parliament.

Over the period 2003-04, the political and institutional framework underpinning a market-oriented economy has been strengthened as the political agenda set out by the authorities has been realized. Indeed, a new Constitution was adopted in May 2003 followed by presidential and legislative elections organized in August and October 2003. Concerning the demobilization and the GACACA process considerable progress has been made as well as on the social front. Moreover, our authorities have not ceased to make their contribution towards peace in the region. However, they are concerned that the Security Council resolution 1493 (2003) of 28 July 2003 requiring all parties to take the necessary measures to prevent the supply, sale or transfer of arms or any related material and of any assistance or training to all armed groups and militias which are not parties to the global and all inclusive agreement, is not being enforced as required a fact which they believe would bring about the lasting peace.

2. Economic Performance and Challenges

The vulnerabilities of the Rwandese economy to shocks were evident in 2003-04. Due to rain shortfalls, the agriculture output declined sharply. Manufacturing activity also shrank, causing real output to grow by less than 1 percent, in 2003. In their resolve to achieve sustainable growth and poverty reduction, our authorities have identified poverty in Rwanda as being a rural phenomenon because 90 percent of the population live in rural sector. For this reason when articulating their strategy to achieve growth and poverty reduction, our authorities have emphasized achieving higher and sustained growth in agricultural production. We share the concern of staff that statistical base which has been used to set target growth rates in agricultural production can be inadequate due to limited resources and technical capacities. Therefore, we call upon Fund staff and the international community to provide the needed assistance.

We appreciate staff analysis in the issues paper which has identified the main constraints to the realization of the agriculture growth strategy namely limitation in the marketing and distribution of fertilizer input, limitation in the input credit system, limited agricultural extension services (farmers education, seed multiplication) and land tenure system. As already mentioned our authorities have prepared a land law which they submitted to Parliament for promulgation. As for other limitations, we also call upon the Fund and the Bank as well as the international community to provide needed assistance in establishing appropriate systems. We also appreciate the analysis done on coffee and the need for further diversification in the exports. The authorities are currently refining their export promotion strategy with the help of the World Bank and other donors. We take note of the staffs concern over the performance of the manufacturing and commerce sectors, which up to now have not achieved their previous peak out put, achieved in 1993. It is true the decline in these sectors out put is attributed to post genocide aftermath. However, it is also a fact that before the genocide, these sectors operated under a high protectionist policy and undoubtedly have failed to with stand stiff competition from imports as the government implemented market liberalization. In deed at the time when Rwanda would have benefited from such market friendly policies put in place, now new shocks which constrain private investment in the formal sector have set in namely shortage of electricity and oil price rises.

As we said earlier above, debt sustainability is an other challenge facing Rwanda’s economy. We agree with staff that the new priority social spending, which our authorities have programmed, will, if not matched by increase in grant financing, likely worsen debt sustainability. However, there is a need to reiterate that our authorities have exercised restraint on other government expenditure and their not making such priority social spending risk being a default on delivery on poverty reduction and the MDGs. We hope, the Fund will give this due consideration including assistance in mobilizing grant financing.

3. Policies for 2004-05 and Medium-Term Prospects and Policies

The Rwandese authorities agree that the main and immediate challenges are achieving high and sustained GDP growth, assuring fiscal and external sustainability as well as reducing poverty. They are cognizant of the need to further strengthen the implementation of structural reforms and adjustment measures in order to improve the institutional environment and develop the basic infrastructure and social investment.

4. Conclusion

We would like to reemphasize that our Rwandese authorities are fully cognizant of the challenges facing the economy and are committed to implement, under the PRGF Fund-supported program, all necessary measures in order to boost economic growth, stimulate economic diversification and fight against unemployment and poverty.

Our Rwandese authorities are hopeful that they can rely on the international community’s assistance in their reform efforts. They hope that, in view of the efforts they have undertaken and the progress made in program implementation, they can reach the completion point under the enhanced HIPC initiative very soon, thus enabling them to devote more resources to poverty reduction.