Introduction

Our Rwandese authorities would like to express their appreciation to staff for a well-balanced report on Rwanda’s recent economic developments and performances under the PRGF. Our authorities are also appreciative to staff for their policy advice as well as to Management and Directors for their continued support in strengthening the relations between Rwanda and the Fund.

Over the past years, the economic and financial performance of Rwanda has continued to register significant improvement. In addition to their commitment to uphold the performance achieved in macroeconomic stability, our authorities are also fully committed to intensify their efforts in removing the obstacles to private sector development, promoting exports and improving energy supply as well as strengthening expenditure management. In order to improve the investment and private sector development, the authorities have undertaken a review of business laws. In the energy sector, efforts to harness electricity from the Lake Kivu methane gas project are at advanced stages and the authorities expect the project to be operational in mid-2007. Regarding export promotion, clear responsibilities of all agencies involved have been established and progress is being made in producing high value added in coffee and tea. While our authorities are making these strides however Rwanda being thousands of miles away with no railway link and limited all weather roads connection to sea ports, remain a severe constraints on broadening growth opportunity and on dramatically increasing competitiveness. Our authorities are continuing to approach donors with a view to address these constraints. They will appreciate Fund’s advice on this important issue.

Under the PRGF-supported program, all but two performance criteria for the sixth review and all quantitative end-2005 benchmarks were observed. Furthermore all prior actions related to the sixth review were successfully implemented. The missed criteria, included priority spending and publication of the audit on Prime Holdings in addition to benchmarks on the accumulation of domestic arrears and non concessional external debt. As rightly indicated capacity constraints explain these slippages in the third quarter of 2005 but they were all corrected soon after. Accordingly, our Rwandese authorities are requesting waivers for the non observance of these performance criteria.

Our authorities also request the completion of the sixth and last review under the current PRGF arrangement as well as a new three-year PRGF arrangement in order to complete their unfinished structural reforms agenda which would help them establish a path for accelerated growth and sustained poverty reduction. After a successful implementation of the new PRGF program, Rwanda intends to graduate from the use of Fund resources.

Program Implementation and Economic Developments in 2005

The macroeconomic policy implementation further improved in 2005, as real GDP grew significantly and inflation was subdued, as projected. Foreign assets stood at 6.2 months of imports cover compared to the program objective of 4.9 months. Moreover the current account deficit as well as the fiscal deficit was lower than programmed.

In the real sector, a real GDP growth rate of 6 percent compared to 4 percent in 2004 was recorded. This higher real GDP growth rate is attributed to increases in agricultural production, after the adverse effects of drought experienced for two consecutive years, strong growth of value added in the manufacturing sector and increased value added in the financial and communication sectors. Moreover, inflation declined to below to 5.6 percent at the end of 2005 against a target of 6 percent.

As regards the fiscal sector, tighter policies continued to be implemented, in spite of temporary increases in expenditure during the third quarter. As a result, the end-2005 fiscal targets were subsequently met, including domestic arrears clearance and priority spending. Although domestic spending was high mainly due to outlays on peace-keeping efforts, local elections and Gacaca trials, a combination of lower wages and interest rate bills with an over performance in tax revenue collection stemming from increased tax efforts enabled our authorities to maintain the program target on domestic fiscal deficit.

In the monetary area, actions undertaken by the authorities involving the issuance of short term domestic debt to mop up excess liquidity helped the attainment of all end-quarter reserve money targets. However there was a broad agreement that sterilization through domestic debt was not an option as it would drive up interest rates, negatively impact investment and increase the losses of the central bank. Hence staff urged the authorities to use the sale of foreign exchange instead. Our authorities are of the view that such approach should be gradual and that proper coordination with policies should also be made.

On the external front, the current account deficit narrowed compared to the program target. This was due to strong exports, notably from higher coffee receipts, and lower overall imports' growth. Following the debt relief under the enhanced HIPC Initiative and MDRI, for which our authorities are grateful to the international community, the NPV of debt-to export ratio was projected to about 59 percent at end-2005. In order to keep the debt level below the LIC debt sustainability thresholds our authorities are committed to further enhance public debt management.

With regard to structural reforms, some delays were recorded in the adoption of the Organic Budget Law (OBL) as it became necessary in the first instance to complete civil service reform and the restructuring of local administrative districts. As a result of these reforms substantial progress was made in public expenditure management and efficient public spending. The Organic Budget Law has already been passed. Further progress in structural reforms has involved the privatization of three tea estates and banking supervision by the central bank has been strengthened with amendments to the banking law. Moreover the NBR reached an agreement on a restructuring plan for a problem bank. On export promotion, stakeholders in the ongoing strategy have signed a memorandum of understanding clarifying their roles in addition to the publication by the NBR of a review of existing exporter financing schemes. To boost transparency, the authorities have published the financial audit and business plan of Prime Holdings in December 2005 and are in negotiations with new investors to take on the management of the hotels. In addition, the audit of Rwanda’s peace-keeping activities in Darfur was published which indicated that all funds have been used according to their intended purpose.

As regards PRSP’s implementation, the participatory approach was strengthened and the third report was completed. Not only did it provide a wide review but it also highlighted progress made towards poverty alleviation.

Macroeconomic Outlook and Medium-term Economic Program

Our Rwandese authorities would like to continue their constructive cooperation with the Fund with a view to strengthening macroeconomic stability, while implementing policies designed to promote growth, reduce poverty and achieve the MDGs as well as reaching middle-income status by 2020. To this end, the Rwandese authorities request a new PRGF arrangement to advance key reforms and they reiterate their full commitment to growth enhancing and poverty reducing policies. The key macroeconomic objectives set out for the medium-term are: (i) increasing real GDP growth to 7 percent by 2009; (ii) maintaining inflation at around 5 percent; (iii) maintaining official reserves at levels to cover at least 4 months of imports and (iv) increasing the revenue-to-GDP ratio to over 14.5 percent of GDP by 2009 along with an increase in capital spending and a further reorientation of expenditure toward priority outlays.

On the other hand, our authorities are cognizant of the importance of stability in the region for the economic development of all member countries. In this context, they will continue to work closely with the international community and neighbouring countries to further contribute to the efforts aimed at building lasting peace in the region.

Sources of Growth

Over the medium-term, the authorities will step up their efforts to remove obstacles to private sector and improve the delivery of public services including assigning high priority to agricultural development and improvement in infrastructure and energy supply. In the same vein, the authorities will continue their efforts to build human capital through better health and education services. In order to lower energy costs and reduce the country’s dependence on expensive fuel-generated electricity, the hydro-power projects will be pursued together with the methane gas plant in the Lake Kivu.

Fiscal policy

The authorities will continue to implement sound policies designed to achieve fiscal sustainability. In 2006, a review of the subsidy in the petroleum sector will be undertaken to determine its sustainability and the impact on the poor. Already the reference prices were increased in December 2005 and February 2006 to reduce the implicit subsidy. Furthermore our authorities will review the new income tax laws to ensure that the additional incentives provided in the laws are not abused. On the expenditure front, the quality of spending will be further improved through allocating more funds to PRSP priorities and improving the public services delivery. Given the poor weather conditions in 2006, the authorities are prepared to react swiftly in the case of a food emergency including by using the MDRI relief. In fact an amount of US$ 8 million has been set aside under the Fund’s MDRI flow relief to cover food shortages remaining after donors' support.

The reform of the core civil service is advancing and a medium-term reform program will be designed for the entire civil service with the assistance of the World Bank. Further reforms will aim at restructuring public institutions according to the ongoing territorial reorganization and a review of the legal framework. The passage of the organic budget law and legislative changes related to the restructuring of local governments will further strengthen public expenditure management. Reporting practices and auditing accounts will be strengthened with the three-year training of accountants and the finalization by end-2006 of the accounting instructions, forms and procedures for budget users. To enhance fiscal transparency the authorities will start publishing budget execution reports on a monthly basis and data on priority spending on a quarterly basis. As for the accounts reconciliation exercise, guidelines will be issued and already training program for accountants is underway.

Monetary and financial policies

Monetary policy will aim at further reducing inflation by limiting reserve money growth, while allowing increases in private sector credit. Moreover the authorities will start encouraging a shift into longer-dated sterilization instruments to reverse the shortening of maturities during 2005 and achieve the program’s inflation target. In the event of emergence of inflationary pressures, the authorities stand ready to tighten monetary policy including through the increase of interest rates. In order to further develop and deepen the inter bank foreign exchange market, the authorities have requested technical assistance from the Fund. The central bank will also continue its efforts to strengthen the supervision of banks in the context of rapid credit growth.

External sector

Due to temporary import increases stemming mainly from the Lake Kivu project, the current account deficit, excluding official transfers, is expected to widen compared to 2005. Exports will grow by at least 6 percent, reflecting a significant increase in coffee, tea and minerals receipts. Regarding the external debt, the implementation of debt relief under the enhanced HIPC Initiative is advancing, as evidenced by various agreements reached with most multilateral and bilateral creditors. Under the assistance of Debt Relief International, the public debt management is being upgraded.

Structural reforms

In order to achieve sustained growth, poverty reduction and attain the MDGs, the authorities will intensify their efforts aimed at improving the business climate boosting the agricultural sector, increasing energy supply and promoting export and developing the financial sector. In the context of the Economic Development and Poverty Reduction Strategy, a system to monitor the implementation of the main recommendations of the DTIS will be established in addition to implementing the financial sector reform over the medium-term. As for the energy sector, not only the Lake Kivu methane gas project is underway but the authorities are also developing other sources of energy such as biogas, solar energy as well as hydropower projects in cooperation with donors. The export promotion strategy will be more focused on new export products including mining, tourism and the development of export processing zones.

The authorities are mindful that increasing agricultural productivity and raising rural incomes are essential to reducing poverty and enhancing growth. In this regard, they will implement the recently adopted agricultural sector strategy based on water management, control soil erosion; increase productivity and livestock development. Needless to mention, our authorities have already promulgated the new Land Law which will enable farmers to use land as collateral for bank credit. Laws on establishing a commercial registration and on intellectual property are scheduled to be approved by end- 2006.

PRSP implementation

Significant progress has been made in implementing Rwanda’s PRSP since its launching in 2002. Three progress reports were published and remain important milestones in the country’s strategy to fight poverty. With a view to pursue their efforts designed to meet the MDGs and upgrade the country as a middle income one, the authorities have started the preparation process of the second PRSP which will be more results-oriented and carried out with strong partnership from all stakeholders.

Conclusion

Given the overall significant macroeconomic achievements made under the current PRGF Fund-supported program, our Rwandese authorities request waivers for the non observance of the missed performance criteria. They also request the completion of the sixth review under the PRGF arrangement, as well as a new three year arrangement supported by the PRGF. Our Rwandese authorities fully recognize that important challenges remain and progress made thus far has to be consolidated. They are thankful to the Fund and the international community for their policy advice, technical and financial support in their reforms and macroeconomic stabilization program. They remain fully committed to implement sound policies conducive towards growth promotion and poverty alleviation.