Abstract
The 2006 Article IV Consultation on Rwanda highlights medium-term stimulating growth to reduce poverty. The government of Rwanda’s medium-term policies address the country’s challenges to increase growth and make headway toward the Millennium Development Goals. Executive Directors commended Rwanda’s sound macroeconomic management and progress on structural reforms and social reconstruction. Together with debt relief, this has led to macroeconomic stability, strong economic growth, and progress in advancing toward the Millennium Development Goals. Directors emphasized the need for increased training to build expertise and overcome capacity constraints in the public sector.
I - Introduction
At the outset, my Rwandese authorities would like to express their sincere appreciation to staff for the well-written set of papers and the candid exchange of views and constructive policy dialogue held during the discussion on the 2007 Article IV consultation and the first review under the three-year PRGF-supported program. My Rwandese authorities would also like to thank Executive Directors and Management for their continued support and advice received over the past years.
With my authorities’ strong commitment to reforms and adequate Fund-supported programs, Rwanda has since the 1994 genocide made commendable progress in macroeconomic stability and implementing structural reforms, in addition to social rehabilitation. Based on these achievements my authorities reached the completion point under the enhanced HIPC in April 2005 and benefited from the MDRI debt cancellation in January 2006. In order to continue addressing challenges ahead in sustaining economic growth and reduce poverty, Rwanda embarked in June 2006 on a three-year arrangement under the PRGF with low access. As a result, macroeconomic performance is in line with the program and structural reforms are broadly on track. Indeed, all but two performance criteria for the first review were met. The quantitative end-June performance criteria on priority spending and the structural end-August performance criteria on improving the monitoring of projects accounts were missed due to technical difficulties beyond the authorities’ control. As these difficulties have been resolved, the end-September target on priority spending was met and they also expect to meet the end-December target. Regarding the report of a monitoring system of project accounts, the end-August performance criterion was implemented in January 9, 2007 as a prior action.
In view of overall satisfactory program performance, my authorities request the Board’s support for the completion of the first PRGF arrangement review and the waivers of nonobservance of two performance criteria. My Rwandese authorities are cognizant of the daunting challenges ahead and the need to preserve macroeconomic stability, accelerate structural reforms designed to boost growth and enhance competitiveness. The authorities are committed to maintaining sound macroeconomic policies and advancing on structural reforms. To this end they continue to count on the strong support of the international community in their efforts going forward. They are also appreciative of assistance received from their development partners, in order to help meet the challenges ahead.
II - Recent Economic Developments and PRGF Implementation
Growth performance in Rwanda is beginning to assume a broader front in addition to the construction sector which has been the dominant force behind the economic growth experienced in recent years. Now buoyant activity is picking up in manufacturing, services and financial sectors. Economic growth is expected to reach 4 percent in 2006, despite the poor harvest in the agricultural sector due to bad rainfalls and the energy oil price shock.
In the fiscal area good performance has also been recorded. In particular revenue enhancement measures which included a widening of the tax net and a broadening of the tax base to fringe benefits resulted in revenue collection overperforming program targets and overall expenditure remained on track. As a result the end-June target on the domestic deficit was met by a wide margin. Moreover, the authorities further strengthened economic legislation, with a view to improve tax efficiency and are continuing to address weaknesses identified in implementing the Organic Budget Law. The authorities have indicated that draft accounting instructions, forms and procedures for budget users will be issued within next month while the review of the wage structure of the public sector is expected to be implemented by March 2007.
In the monetary area, targets on reserve money and net foreign assets set for end-2006 were met although inflation increased to 11 percent mainly due to the rise in food and energy prices.
The external current account for 2006 is expected to be better than programmed. On one hand, imports were lower than envisaged. On the other hand, the Banque Nationale du Rwanda (BNR) increased sterilization of government spending through domestic instruments. Exports receipts also increased, due to high volumes of coffee and tea exports. On the exchange rate front, the nominal exchange rate depreciated, although there was an appreciation in the real effective exchange rate terms.
With regard to structural reforms, implementation was broadly conducted as planned. In their efforts to bring the banking supervision in line with international best practices, the authorities submitted in September to Parliament, necessary amendments to the banking law. In addition, they closed 9 mismanaged Microfinance Institutions. To stabilize the situation and avoid adverse contagion, half of net deposits were reimbursed to depositors and measures were also put in place to administer the recovery of outstanding loans. To enhance public financial management, the authorities issued guidelines for undertaking bank reconciliation and accounting for government agencies. They also approved the publication of the Organic Budget Law and its supporting financial regulations as well as the creation of a Decentralization Unit in the Ministry of Finance. To strengthen debt management, the reconciliation of the debt databases maintained by the Ministry of Finance and the NBR was implemented. To improve the investment climate, the authorities approved the draft laws on establishing registration agency and on intellectual property and submitted the laws to Parliament.
III - Economic Policies and Structural Reforms Going Forward
My Rwandese authorities are fully aware of the need to pursue the implementation of prudent policies and accelerate structural reforms, geared to sustain growth, reduce poverty and achieve the remaining MDGs. Accordingly in 2007, macroeconomic policies will focus on improving the well-being of the population and growth-enhancing investments and reforms. My authorities expect growth to reach 6.5 percent, inflation brought down to 5 percent and international reserves maintained at least 4.3 months of imports. To this end they are determined to step up their efforts to remove obstacles to private sector and assign high priority to the new identified sources of growth including development of agricultural and tourism sectors as well as improvement in infrastructure and energy supply.
Fiscal policy
My authorities remain committed to prudent fiscal policy, with a view to well manage the domestic demand impact of fiscal policies. On the revenue front, the objective is to maintain the ratio of revenue-to-GDP at the level of 15 percent of GDP. Measures identified to further increase fiscal revenue include, among others, implementing tax on mobile and fixed telephone, raising the excise tax on cigarettes and as well as increasing the reference price for petroleum products. Moreover, on the basis of a survey on the informal sector, ways and means will be devised to widen the tax base over the medium-term. With regard to public expenditure, my authorities intend to increase the share of priority spending in the budget, while improving the quality of public services. Priority spending will increase for social sector and enhancing the productivity of the economy. Part of the increase in this priority spending will be financed through the MDRI debt relief. The authorities also intend to undertake an audit of the 2006 peace keeping expenditures and publish the audits results by end-March 2007, reduce to 2.37 percent of GDP the military spending, reallocate funds from tertiary to lower education and, improve the quality of education by hiring more teachers and providing districts and schools with more control of incentive schemes. A new structured electricity tariffs adopted earlier on is scheduled to be implemented early 2007 and the authorities stand ready to raise electricity tariffs if the need arises. Regarding the domestic deficit in 2007, it is projected to increase by about 1 percent of GDP, excluding spending on demobilization and peace keeping.
Capacity constraints explain the difficulties facing the authorities in the management of the fiscal area notably in the execution of the budget. To alleviate these constraints, there is a need for the Fund to play a crucial role by providing a well targeted technical assistance in collaboration with Rwanda’s development partners.
Monetary and Exchange Rate Policy
Monetary policy’s objective pursued by my Rwandese authorities is to keep inflation under control. To this end, they will continue to use reserve money as the operational target. Monetary developments will be closely monitored and excess of liquidity will be sterilized through the sales of foreign exchange. For 2007, Rwandese authorities aim at reducing the inflation level to 5 percent, which will limit year-end reserve money growth to 13 percent and enable more room for credit to the private sector.
The exchange rate system adopted in 1995 has served the economy well. Rwanda accepted in 1998 the obligations under Article VIII, Sections2, 3, and 4 and maintains a system free of restrictions on payments and transfers for current international transactions. My authorities acknowledge that an increase in spending from higher aid flows is likely to result in further pressures for a real exchange rate appreciation. To address the issue, they will forcefully implement the NBR’s intervention strategy with a view not to rekindle inflation or crowd out private investment. In their efforts to further promote the market-oriented system, my authorities have started to pave the way for an interbank-based market. In this respect, an instruction was issued last June to improve auction procedures and abolish the provision allowing the NBR to check whether the foreign exchange purchased at auction was used in accordance with regulations. Amendments to the foreign exchange regulations were also issued in order to address regulatory constraints and reduce reporting requirements. Moreover, on the issue of further selling foreign exchange in order to mop up excess of liquidity and preserve Rwanda’s competitiveness, my authorities are of the view that this approach should be gradual and close coordination of fiscal, monetary and exchange rate policies should be made with a view to help address the volatility of external aid which continues to be crucial. My authorities cognizant of the need to further deepen the foreign exchange market and to this end call on the Fund to provide technical assistance designed to help assess the framework and operational guidelines of the existing market. This assessment will enable my authorities to enhance the dialogue with staff on the issue regarding the flexibility of the exchange rate.
Financial sector issues
The financial sector has improved over the recent years and authorities are determined to enhance banking supervision, including supervision of microfinance institutions through the implementation of recommendations made by the 2005 FSAP. In addition to further strengthening financial institutions, the authorities aim at increasing the savings rate and open up access to credit. In order to prevent the recurrence of crisis in the microfinance sector, a law on microfinance institutions will be submitted to Parliament by June 2007. The minimum capital requirements for these institutions will be increased, as well as exposure limits for group loans and adequate management will be required in granting licenses. Regarding the modernization of the payment system, a unit was created in March 2006 to coordinate the various components of the process. My authorities also intend to reorganize and financially restructure SYMTEL with the World Bank’s technical assistance. As for the promotion of the insurances’ industry, an action plan designing the framework for the regulation and supervision has been launched. Furthermore and in order to adopt the international financial reporting standard (IFRS), the authorities have initiated a training program for accountants and intend to amend relevant tax laws, with a view to allow companies to base tax returns on IFRS standards.
External sector and debt issues
The authorities through their export promotion strategy will continue to focus on enhancing the productivity in the traditional sectors and diversify the country’s export base. On the external debt front, it is worth noting that the implementation of debt relief under the enhanced HIPC and MDRI is at an advanced stage. The indicators of Rwanda’s debt sustainability are more favorable than at the last program review. Most of the creditors have provided debt relief to Rwanda or are willing to cancel outstanding loans. Taking fully into account these achievements, my Rwandese authorities remain committed to pursuing a prudent debt management policy. In this regard, a new debt recording system linking the Treasury and the NBR will be in place early 2007. An indicative target on the Net Present Value of external debt for 2007 will be introduced, in order to ensure the debt sustainability and allow a review of the medium-term indebtedness profile.
Regional trade and integration
My Rwandese authorities are cognizant of the importance of regional trade and integration in the country’s development strategy. Benefits expected from the country’ participation in the promotion of regional trade and economic integration include diversification of the economy through broadening export base and enhancing capacity to finance the development efforts. In this context and since November 2006 Rwanda became a member of the East African Community. The terms of the treaty and customs union will be negotiated in 2007 and implemented by end-2008. Moreover, negotiations are also ongoing on a customs union in the Common Market for Easter and Southern Africa in addition to discussions on an Economic Partnership Agreement with the European Union. It is worth noting that Rwanda’s participation in all these arrangements will enable the country to promote its external trade, address common issues including infrastructure needs and free movement of goods, people and services.
Structural reforms and competitiveness
My authorities are determined to pursue their structural reform agenda, with a view to tackle obstacles identified on the path towards a strong and sustainable economic growth. Among these obstacles, they note low agricultural yields, severe infrastructure gap, a shallow financial system and high cost of doing business. Therefore, improvements in the country’s competitiveness will hinge on pursuing structural reforms geared to boost the productivity of agricultural and export sectors as well as improving the conditions of the private sector promotion. In this respect the authorities will enhance the dialogue with all stakeholders and further strengthen the link between policies and growth and poverty alleviation. In their efforts to create conducive environment for investment and private sector promotion, my Rwandese authorities have submitted to Parliament five out of 14 business laws including a bankruptcy law. They plan to introduce in the course of the years to come laws pertained to contract enforcement, e-commerce and labor. They also plan to establish by March 2007 a program on “Commercial Justice, Business and Land Registration” in partnership with the private sector, make operational by October 2007 the Office of the Register and Land Titles and reduce by August 2007 the number of documents required for exports and imports.
In addition my authorities are mindful that factors other than exchange rate policy are important in determining the level of competitiveness of the economy. In particular my authorities are committed to improving the business environment, implementing civil service reforms, investing in infrastructure, enhancing agricultural productivity, promoting new information technologies and communication networks in order to increase the supply responsiveness of the economy.
IV - Conclusion
In order to continue making significant progress in reducing poverty and reaching the MDGs, my Rwandese authorities are fully committed to policies and reforms set out in the current PRGF-supported program. With the continued support of the Fund and the international community, commendable achievements have been made in addressing the country’s difficult challenges. Nevertheless, a lot remains to be done in order to sustain growth, improve competitiveness and alleviate poverty in a context of limited resources. My authorities are hopeful that strong and continued technical and financial assistance from the international community will be forthcoming. On their behalf, I will appreciate the Board’s support for the completion of the first review under the PRGF for Rwanda and waivers for nonobservance of two performance criteria.