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.


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.

On behalf of my Rwandan authorities, I would like to express my appreciation to the Executive Board and Management for the quality of relations that the Fund maintains with Rwanda, and to staff for the constructive policy dialogue held during the last staff visit to Kigali and the discussions held during the 2008 Spring Meetings. My authorities share the view that the staff report accurately reflects the recent economic developments in Rwanda and the challenges that the economy faces. They remain grateful to the international community for its assistance in their efforts to implement the needed policies and reforms.

Since the third review under the current PRGF-supported program, Rwanda has made progress in implementing its economic agenda, including achieving strong growth while maintaining macroeconomic stability. Despite difficult external conditions, real GDP grew by 6 percent in 2007, above expectations. Headline inflation declined to singe digits although threats of rekindling exist due to the second round effects of the international food and oil price escalation. Nonetheless, fiscal policy remains on track, in line with the program fiscal targets and the NBR stands ready to preserve the reserve money target through a coordinated sale of domestic and foreign sterilization instruments.

On the external front, Rwanda has made important strides in expanding its mineral exports while imports have grown in line with rising capital spending. International reserves have reached a comfortable level—more than 5 months of imports—at end-2007, owing to increases in transfers to the public sector and private inflows, mostly FDI.

As the program performance in the six-month period to end-December 2007 has been broadly satisfactory, with all but one quantitative performance criteria met, my authorities request the completion of the fourth review under the PRGF-supported program. They request a waiver for the one missed criterion on net credit to government on grounds that the nonobservance of this criterion was due to circumstances outside the authorities’ control and was temporary.

My authorities would also like the Executive Board to grant them a modification of one structural benchmark to make it consistent with a FAD recommendation and with the objective of trade facilitation. They also request the revision of three performance criteria at end-June and end-December 2008 to accommodate newly available donors’ funds as well as cope with the exogenous shocks that affect the Rwandan economy, namely the recent political and social crisis in Kenya, the series of earthquakes that struck Rwanda in early February, and the rising world prices for petroleum and food products. Moreover, my authorities intend to address the daunting electricity problems that hamper productivity and growth, by undertaking an important infrastructure project whose financing warrants bringing the grant element threshold to 40 percent from the current 50 percent under the program. My authorities will greatly appreciate the Executive Board’s support to adapting this continuous performance criterion for this sole project, which has been assessed by the World Bank as financially viable and by other partners as critical to Rwanda’s development.

My Rwandan authorities are currently proceeding to elaborate a public investment program which they will table at a donors’ conference to be held in September this year in order to discuss and convene with the donors on Rwanda’s investment priorities. They are also carrying out feasibility studies of some of the projects contained in the draft PIP which they will also present at the donors’ conference. They would like to reassure their donor partners that the projects will not be undertaken before their discussion at the donors’ meeting. They will continue to coordinate with donors in the evaluation of the projects.

I. Recent Macroeconomic Performance and Reforms

Economic performance in the first quarter of 2008 confirmed the strong activity observed throughout 2007, boosted by buoyant construction and service sectors and the good harvest in early 2008. However, high world food and oil prices and escalation in transportation costs arising from the political crisis in Kenya translated into double-digit inflation in March 2008. The fiscal spending backloading in the second half of 2007 may also have caused further pressures on prices. However, on the whole, fiscal performance remained broadly on track. In particular, the target on the domestic fiscal balance at end-December was achieved owing to higher tax revenue which financed the higher-than-budgeted spending in the priority sectors of health, education and infrastructure building. Although the target on net credit to government was missed due to delays in disbursement from the Fast Track Education Initiative (FTEI) and in reimbursements from the African Union for Rwanda’s peacekeeping in Darfur, nonetheless, net credit to government was brought back on track as soon as these payments were received during the first quarter of 2008, thereby neutralizing the expansionary effects. On the monetary front, the National Bank of Rwanda (NBR) has continued selling foreign exchange and domestic assets in order to mop up excess liquidity.

As regards structural reforms, progress has been recorded in several areas. In public expenditure management, one can note the completion and publication in September of a progress report on financial reporting by budgetary agencies; the completion and publication of a study on donor-financed project accounts at the NBR; the publication in September of the progress report on the implementation of the Organic Budget Law; and the publication in October of the consolidated execution report of local governments. In civil service reform, the authorities have finalized a comprehensive review of the wage structure in October. In the area of poverty reduction, a poverty profile for the provinces was produced and it will be extended to districts and communities as soon as external financing is available. Private sector development also has seen progress, with the introduction of a number of measures to reduce the cost of doing business in Rwanda, notably the establishment of the Commercial and Registry Services and the operationalization in October of the Office of the Registrar of Land Titles.

II. The 2008 Macroeconomic Program

The objectives and design of the 2008 program remain unchanged from those laid out by the authorities during the third review under the current PRGF arrangement. The macroeconomic framework is based on a 6 percent growth rate this year as the impact of exogenous shocks from the Kenyan crisis and the earthquakes on the Rwandan economy seems to have been relatively subdued. The framework also assumes an average inflation rate for 2008 that was revised upward at 8.5 percent due to higher transport costs of goods imported from Kenya, significant pass-through of rising world fuel prices and the inflationary impact of rising costs of food imports. My authorities will continue to implement their macroeconomic and structural policies designed to promote growth-enhancing investments and reduce poverty.

Fiscal policy

It is my authorities’ intention to increase fiscal expenditure by an additional 2 percent of GDP from the program outlined during the last review, in order to accommodate the following:

  • (i) additional grants from UK’s DFID for spending on health, and from the World Bank for spending on energy;

  • (ii) additional revenues from higher projected GDP and higher efficiency in collections;

  • (iii) cost of rebuilding and rehabilitating schools and hospitals destroyed by the recent earthquakes, which will be executed through donor-financed projects and by domestic borrowing if necessary;

  • (iv) issuance of secured identity cards to all Rwandans above the age of 16, for multiples purposes (provision of social services, driver licenses, social security, medical insurance);

  • (v) spending to cover costs from a restructuring of domestic debt and a revision of foreign interest payments;

  • (vi) a large infrastructure project (The Nyabarongo Project) to address the country’s electricity supply gaps.

My authorities have committed to release the contingent spending envisaged since the third review under the program only after a careful evaluation of macroeconomic conditions and consultation with the Fund staff.

To accommodate the additional resources and meet the needs highlighted above, my authorities are requesting a modification of the performance criteria on domestic fiscal balance and net credit to government.

Infrastructure building and debt sustainability

Rwanda has continued to suffer recently from acute electricity supply shortage, which prompted the authorities to rent additional diesel generation capacity at a high cost to the public budget and at sharply increased tariffs. To definitely bridge the energy supply gaps, including with the forecasted demand growth, while ensuring reasonable electricity costs, my authorities envisage to build a hydro-electric power plant at Nyabarongo, whose project bears features superior to those of thermal generation and regional hydro power alternatives, notably in terms of early availability, investment cost and consumption tariffs.

To finance the 4-year, US$112.7 million project, which will boost Rwanda’s GDP and export growth prospects, my authorities seek a modification of the program to allow them to borrow on terms that are less concessional than those allowed under the program. Indeed, the loan of US$97.7 million requested to the India Exim Bank (US$80 million of which has been secured) bear a concessionality rate of 40 percent, below the 50 percent required under the program. However, based on the financial viability of the project as assessed by the World Bank, its least-cost expansion plan, its criticality for Rwanda’s development strategy, and the assurances given by development partners that undertaking the project will not hamper Rwanda’s access to their concessional financing, I would appreciate Board support to my authorities’ request of modification of the performance criterion on debt concessionality to allow the financing of this important project.

My authorities will also focus on other priority sectors outlined in their new Economic Development and Poverty Reduction Strategy (EDPRS). They are also developing a comprehensive debt management strategy which, along with the medium-term expenditure framework and the Public Sector Investment Program currently under preparation, and to be discussed with their donors, will guide future borrowing and project priorities as well as ensuring debt sustainability.

Monetary and exchange rate policy

Monetary policy will continue to be tightened in light of the mounting inflationary pressures. This will be achieved through a coordinated sale of domestic and foreign sterilization instruments. In face of the increase in spending from higher aid inflows, my authorities will adopt the recommendations of the recent technical assistance mission from the Fund’s MCM on exchange rate market functioning and introduce, in a gradual approach, greater exchange rate flexibility to achieve the volume of foreign exchange sales consistent with attaining the reserve money target and the ceiling on domestic debt.

Monetary policy will be closely coordinated with fiscal policy by strengthening liquidity monitoring through the enhancement of the Treasury Management Committee (TMC), and by establishing a budget mechanism to reject commitments and payments beyond the cash allocations of ministries and adjust the domestic component of spending depending on the domestic debt and inflation situation.

III. The Structural Agenda

My authorities will continue to focus their structural policies in 2008 and beyond on enhancing productivity of the agricultural and export sectors and advancing the development of the private sector. They will build on the progress achieve thus far in the context of past and the present PRGF-supported programs to make further strides in:

  • (i) enhancing public financial management;

  • (ii) strengthening the financial sector through continued implementation of the Financial Sector Development Strategy, notably by modernizing the national payments system, improving access to credit and financial services, and encouraging the mobilization of long-term savings;

  • (iii) making further efforts to improve the business climate and remove obstacles to private sector development; and

  • (iv) promoting exports by emphasizing productivity growth in the traditional sectors (coffee and tea), diversifying the export base (towards mining and tourism) while operationalizing the Export Processing Zone (EPZ). In the same vein of trade facilitation, my authorities—in accordance with the East African Community common position which Rwanda is preparing to join—have signed an interim agreement with the European Union to pursue negotiations on an Economic Partnership Agreement (EPA). The final agreement on the EPA is expected by mid-2009.

As regards the structural conditionality in 2008, actions are envisaged in the public expenditure management area, with the planned completion and publication of a revised PFM reform action plan for 2008–2010; the production and publication of the MTEF operational manual; and the development and publication of the debt management strategy with clear limits for loans and guarantees that are consistent with the provisions in the Organic Budget laws. Measures are also planned in the tax administration area to address key compliance risks associated with large, medium and small taxpayer segments. As for the financial sector, my authorities will publish a national payment strategy to promote the development of a stable financial system by reducing high transaction costs for businesses and financial risks in payment clearance and settlements.

IV. Conclusion

My Rwandan authorities continue to implement their PRGF-supported program in a satisfactory manner through sound policies and reforms and the attainment of the program objectives and targets. There remains nevertheless a number of challenges to be tackled in order to sustain higher economic growth, make substantial inroads in poverty alleviation and meet the other Millennium Development Goals. The energy and other infrastructure gaps warrant important investments, which my authorities are planning. They are committed to step up their efforts and make corrective actions when necessary, with continued dialogue with the Fund, the Bank, and its other donor partners.

Based on their good track record of policy and reform implementation, I would like, on their behalf, to request the completion of the fourth review under the current PRGF arrangement. My authorities also seek a waiver for the nonobservance of one performance criterion due to circumstances outside their control and which has been met recently. They are also requesting the modification of performance criteria to accommodate additional revenues and grants and allow new expenditures and a less concessional borrowing required to finance a key infrastructure project. I would appreciate Board support in this regard.

Rwanda: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Rwanda
Author: International Monetary Fund