Abstract
The main risk to the program is that inflationary pressures would reemerge owing to improper management of the scaling up of aid and fiscal spending, or a protracted crisis in Kenya. The structural agenda focuses on maintaining the momentum in the previously initiated areas, particularly in the financial sector, tax administration, and public financial management. The authorities are launching a few large projects in energy, agriculture, and the information and telecommunication sectors aimed at easing binding infrastructure bottlenecks. Structural reforms advanced, albeit with some delays.
I - Introduction
On behalf of my Rwandese authorities, I would like to express our appreciation to Executive Board, Fund management and Staff for their support and continuous policy advice. My Rwandese authorities are also grateful to the international community for its assistance in their efforts to implement needed reforms aiming to achieve strong and sustained growth and alleviate poverty. Under the current Fund-supported program, my authorities have made remarkable progress in maintaining macroeconomic stability and debt sustainability and achieving appreciable economic growth. However, Rwanda as a landlocked country, still dealing with the complex socio-economic aftermath of the 1994 genocide, faces enormous difficulties, owing to the rise in oil prices and very recently compounded by political conflict in Kenya which affects Rwanda’s outlet for its exports and imports and an earthquake which struck the great lakes region with a big toll in human lives and infrastructure.
My authorities’ implementation of the program supported by the current PRGF has been broadly on track. All quantitative and structural performance criteria for the completion of the third review were met, with the exception of the performance criterion (PC) on the issuance of the first consolidated report of local governments, showing transfers and budget execution per major line items per district and per province for the period from January to April, 2007. The delay was due to capacity constraints, which led to misinterpretation of the PC. As the nonobservance was temporary and given the commitment to meeting the program’ s objectives as well as the record of accomplishment, my authorities request a waiver for the nonobservance of the structural PC on the issuance of the consolidated report of local governments.
Mindful of the need to step up their efforts to fight poverty and attain the MDGs, my authorities have successfully launched in November of 2007 their new Economic Development and Poverty Reduction Strategy (EDPRS) indicating the medium-term policy agenda. This agenda aims at reducing poverty, by preserving macroeconomic stability and removing obstacles to sustained economic growth.
II - Recent Economic Developments.
Economic activity, boosted by investments in construction and services sectors, has continued to be strong in 2007. Real GDP growth is estimated at 6 percent against 5.5 percent in 2006. Inflation has declined to 8.7 percent by November from 12 percent in the beginning of the year and is expected to remain in single digits. The reserve money targets were met, but broad money was higher than anticipated. The backloading of fiscal spending to the second half of the year, which injected extra liquidity into the economy during a short period, explained this situation. The exchange rate moderately appreciated against the US dollar. The National Bank of Rwanda has continued selling foreign exchanges in line with the program and has relied on sales of domestic assets in its liquidity withdrawal efforts. In June 2007, the NBR started selling foreign exchange directly to banks at a daily fixed rate, after the abolition of the foreign exchange auctions due to the lack of effective competition.
In the fiscal area, fiscal performance remained broadly on track. Buoyant revenues and expenditure restraint in non-priority areas enabled the authorities to meet all fiscal objectives for the first half of 2007. However, the indicative targets on net credit to the government, domestic fiscal balance, and net accumulation of domestic arrears for end-September were missed on account of delays in external disbursements from AfDB and the Fast Track Education initiative, which were received only in the last quarter. Domestic petroleum prices were adjusted periodically to reflect the world oil market developments and the authorities are committed to generating positive revenues from petroleum taxes. In addition, privatization proceeds exceeded expectations with the sale of Rwanda Telecommunications for a total of US$ 100 million whose part will be used for future infrastructure investment.
As regards structural reforms, substantial progress has been made in several areas. In particular, a progress report on financial reporting by budgetary agencies was published in September and a comprehensive review of the wage structure of the public sector was finalized in October. The poverty profile for the provinces was also produced and it will be extended to districts and communities as soon as the external financing is available. The publication of the consolidated execution report of local governments was done in October instead of July. The legal and regulatory framework for microfinance institutions was submitted to the parliament in June. An insurance bill was also submitted to the Cabinet, while a unit to supervise non-bank financial institutions was established in the NBR. Amendments to the Banking Law were approved by the Parliament in October and the related regulations are under preparation. The AML/CFT bill was approved by the lower chamber of Parliament and has been submitted to the upper chamber for review. A number of measures to reduce the cost of doing business in Rwanda have been introduced. These measures have included the introduction of the Commercial and Registry Services and the Business and Land Registration program.
III–2008 Program and Medium-Term Agenda
My Rwandese authorities are fully aware of the critical importance of preserving macroeconomic stability and removing obstacles to growth, in order to fight poverty and attain the MDGs. They are strongly committed to these objectives, which are clearly set out in the new Economic Development and Poverty Reduction Strategy (EDPRS). The main elements of this strategy include enhancing agricultural development and trade; removing obstacles to private sector development; addressing severe infrastructure bottlenecks; improving the delivery of public sector; relying on sustainable financing sources with an emphasis on raising the revenue to GDP ratio in the long-term and developing on a pilot basis the grassroots “Umurenge” scheme. In this context, my Rwandese authorities intend to implement in 2008 policies aiming at a real GDP growth of 5.5 - 6.5 percent and possibly 7 percent. Inflation will be maintained within single digits, with a level of international reserves of about 4.5 months of imports. On the structural front, efforts will focus on further improving financial management, developing the financial sector in addition to growth-enhancing investments and reforms.
Fiscal Policy
The fiscal program in 2008 is to further boost productivity and help improve the living standards of Rwandese population. To this end, my authorities intend to pursue prudent management of aid flows consistent with the single-digit inflation objective. This management will also focus on preventing a crowding out of the private sector and building up costly domestic debt. On the revenue front, measures envisaged will aim to increase the revenue-to-GDP-ratio to 13.7 percent, by widening the tax base and improving the efficiency of tax administration on the basis of the recommendations made by the technical assistance benefited from the IMF’s Fiscal Affairs Department. In addition, no further tax exemptions will be granted and the existing ones will be carefully managed. On the expenditure side, more resources will be dedicated to public infrastructure and to agriculture, education, health; electricity and water, with a view to meet the important needs in these areas and strengthen the private sector development. The authorities are also strongly committed to continue monitoring the costs associated with the African Union peace keeping in Darfur. The audit report of the spending in 2007 will be published by end-May 2008. A budgetary allocation of about 0.3 percent of GDP is scheduled for the parliamentary elections in 2008 and the military spending will remain at about 2 percent of GDP.
Monetary Policy and Financial Sector Development
The monetary objective is to contain inflation within a single digit. To this effect, the authorities stand ready to tighten the monetary policy stance and to closely monitor public expenditure and credit to private sector. Furthermore, reserve money growth for the year will be limited to 14 percent. The NBR will continue to sell foreign exchange with a view to mopping up the excess of liquidity. The authorities intend to revitalize the foreign exchange market. In this respect, the forthcoming MCM technical assistance will be helpful in enhancing institutional and human capacity. In order to further strengthen liquidity management, the authorities intend in 2008 to introduce four week instruments and establish repurchase agreement operations ranging from 1 to 90 days. The authorities are also committed to formalizing the existing Treasury Management Committee (TMC) as an analytical platform to coordinate and refine the implementation and forecast of fiscal and monetary policies. In addition, the conversion of the Union des Banques Populaires du Rwanda (UBPR) from a microfinance network to a commercial bank will be completed in the first quarter of 2008.
Structural Reforms and Competitiveness
The structural reform agenda will focus on pursuing efforts to improve the conditions for the private sector, enhance the productivity of the agricultural sector and expand the export base. In this context, momentum of reforms in the financial sector, tax administration and public financial management will be maintained. As for public finance management, the authorities intend to develop a new medium-term PFM action plan to update the framework needed to implement specific reform measures, guide the mobilization of resources and improve coordination and sustainability of the reforms. On the export side, Rwanda’s Free Zone Company Ltd was established to fast track the implementation of the Export Processing Zone (EPZ). The authorities intend also to develop with the assistance of the World Bank a master plan for the development of the tourism sector which attracts substantial inflows of FDI.
Other structural reforms designed to create an environment conducive to private sector development include the modernization of the national payments system and the creation of capital market to develop long-tern finance. With regard to the payment system, the National Payment Council will be established by-June 2008. The authorities plan to inaugurate by the first quarter of 2008 a government bond market which will be followed by the establishment of a corporate bond market. They also plan to enact a Private pension and Mutual Fund law to further strengthen the legal and regulatory framework in order to support the development of a market for the contractual savings industry and long-term saving and investment instruments. To reduce the cost of doing business, the Rwanda Commercial and Registry Services will be made operational in providing a comprehensive registration system aimed at improving business registration, securization of assets and registration of intellectual property rights.
Debt Sustainability
The debt sustainability analysis concludes that Rwanda remains at a high risk of debt distress, owing to its small export base with or without borrowing for the large infrastructure project. My authorities are of the view that given the country’s export potential if the infrastructure projects are implemented notably in the energy, agricultural and ICT sectors, there will be a substantial improvement in the debt indicators. However, to prevent the reaccumulation of unsustainable debt, my authorities will develop a debt management strategy to guide future borrowing.
Poverty reduction
My Rwandese authorities are strongly determined to pursue the fight against poverty. In this regard, they have completed and published the second PRSP, which has been elaborated through a participatory process and endorsed by all stakeholders. This new PRSP will be a guiding tool for the elaboration of fiscal policy and provision of international support to Rwanda.
IV–Conclusion
My Rwandese authorities have implemented under the current PRGF-supported program sound policies and reforms, while achieving remarkable performance. However, there remain a number of challenges to overcome, in order to sustain higher economic growth and make substantial inroads in poverty alleviation. My authorities are committed to step up their efforts with the continued support of the international community. Given the authorites’achievements under the program and their commitment to achieve the program objectives, I would like on their behalf to request the Board approval for the waiver of the performance criteria as the nonobservance was temporary and the completion of the third review of the PRGF arrangement.