Abstract
This paper discusses key findings of the Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) for Rwanda. All but one of the end-2007 quantitative performance criteria were met. IMF staff supports the authorities’ request for a waiver of the nonobservance of the performance criterion on net credit to government. IMF staff also recommends completion of the Fourth Review under the PRGF arrangement based on Rwanda’s performance and understandings reached on the macroeconomic and structural program for 2008.
1. This statement summarizes developments in Rwanda since the issuance of the staff report. The additional information does not change the thrust of the staff appraisal, although risks of higher inflation have increased.
2. Preliminary information on the quantitative targets suggests that the PRGF program remains broadly on track. The indicative targets for end-March for net credit to the government, domestic financing, domestic debt, and net international reserves were all met by comfortable margins. However, the indicative target on average reserve money was missed by a small margin due to a technical misunderstanding of an adjuster by the National Bank of Rwanda; the broad money indicative target was also missed by a small margin; and the indicative target on the net accumulation of domestic arrears was missed due to time lags in processing payments. As the deviations were either small or temporary, they do not call into question the prospects of achieving the end-June targets.
3. CPI inflation in April rose to 11.0 percent year-on-year from 7.6 percent in March, mainly reflecting the ongoing increase in international food and oil prices. About half of the overall inflation can be attributed to higher prices for energy products and imported food. In the 12 months to April, transportation prices rose by 17 percent and prices for energy products by nearly 30 percent. Core inflation, excluding fresh food and fuel, also accelerated to 14.4 percent from 10.8 percent in March, largely reflecting rising prices of imported food and housing rents. The overall food price index—which accounts for almost 40 percent of the consumer basket—increased by about 6 percent year-on year, as stable prices of local products largely offset strong increases in the imported food prices.
4. The recent sharp increase of international oil prices will likely have a significant, though manageable, impact on Rwanda’s balance of payments. Using the most recent WEO oil price projections (where the average oil price is higher by 22 percent in 2008 and 32 percent in 2009 than in previous projections) and assuming that import volumes would remain largely the same as in the macroeconomic framework for the staff report, staff projected that Rwanda’s current account may deteriorate by an additional 1.0 percent of GDP in 2008 and 1.4 percent of GDP in 2009. With international reserves at about 16 percent of GDP and steady inflows of donor financing, Rwanda should be able to withstand this shock in the near term. However, should elevated oil prices persist, the downside risks to external sustainability would increase. The staff will discuss the possible policy implications, in light of updated projections, at the next review.
5. The authorities have recently declared their intention to develop a national investment strategy, in order to improve medium-term investment planning. The strategy will be based on priorities identified in the new Economic Development and Poverty Reduction Strategy, projected financing that is consistent with debt sustainability, and the debt management strategy that is currently being developed by the authorities. It will make planned investment projects more transparent and would provide the context for dialogue with development partners.