Abstract
The staff report for Rwanda’s combined 2008 Article IV Consultation, Fifth Review Under the Three-Year Arrangement under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criterion is examined. Sound macroeconomic and structural policies backed by substantial donor assistance have led to macroeconomic stability, robust growth and low inflation, a comfortable level of international reserves, and significantly reduced external debt. Short-term risks to economic growth and the balance of payments have emerged because of the global financial crisis and economic slowdown.
My Rwandan authorities would like to thank staff for the constructive discussions held in Kigali relating to the fifth review of the PRGF arrangement and the 2008 Article IV consultation. They would also like to thank the Executive Board and Management for the continued support to Rwanda in its endeavor to pursue the agenda for development and poverty reduction. My authorities broadly share the thrust of the staff report, which well documents the progress made so far in economic management as well as key strategic areas that need further effort to sustain performance.
After more than two years of steady reforms under the current PRGF, Rwanda has consolidated a decade-long performance of macroeconomic stability, and is laying firmer ground for robust growth and debt sustainability. Cognizant of the potential impact of the current global economic slowdown, especially on exports, my authorities have developed strategies to diversify partners and promote exports especially by targeting niche markets. My authorities are also fully aware of the challenges ahead, including promoting job-creating growth especially in agriculture, addressing the infrastructure gap and skilled-labor shortage. The policies laid out in their MEFP for 2009 and for the medium term have been set expressly to address these constraints.
I. Overview of Recent Economic Developments
Rwanda’s macroeconomic performance in 2008 has been satisfactory amid many domestic constraints and a gloomy international environment. End-year growth is projected at 8.5 percent owing to buoyant agricultural production, expanding production of manufactured goods, construction, transport, and a more dynamic financial sector. Inflation recently accelerated, reaching 22.4 percent year-on-year in November. In addition to measures implemented to cope with world oil and food price shocks, my authorities are taking actions both on the fiscal and monetary fronts to bring inflation back to single digits.
My authorities have also recorded appreciable performance in the implementation of the PRGF program. All quantitative end-June performance criteria for the fifth review and all but one structural reform measure through end-June 2008 were met. Revenues outperformed throughout the year, owing to taxation of growing imports and faster-than-anticipated growth, but also as a consequence of higher inflation. My authorities are committed to save part of this revenue with the view of making-up the effect of higher spending stemming from financing emergency programs. In the monetary sector, the authorities intend to further tighten policy to tackle inflation with a view to restoring positive real interest rates. As regards structural reforms, my authorities have made important strides that will undoubtedly improve business in many areas. The PFM reform action plan for 2008-10 prepared with development partners is completed and published. In the financial sector, the National Payments Strategy designed to improve the payments infrastructure and address the development of basic payment services in Rwanda is also completed and posted on the website of the NBR. Many other reforms include a new legal framework to combat money laundering and the financing of terrorism, a better organization and supervision of the insurance industry, as well as the reinforcement of the oversight framework for the NBR. With the assistance of the World Bank and the Fund, my authorities have also developed a debt management strategy that was published on the MINECOFIN website.
II. Program 2009 and Medium Term Agenda
My Rwandan authorities’ medium-term policies are embedded in the new EDPRS (2008-2012), which, in line with the Rwanda Vision 2020 development plan, focus on removing impediments to private sector-led growth, reducing poverty by improving food security, raising income of the poor especially in rural areas and creating social protection schemes, while preserving macroeconomic stability. The EDPRS key elements are: (i) addressing severe infrastructure bottleneck; (ii) enhancing agricultural productivity, linkages and trade; (iii) removing obstacles to the development of private businesses; (iv) improving the delivery of public services; and (v) mobilizing sustainable financing.
Macroeconomic policies for 2009
The authorities projected real GDP growth at 5.5–6.5 percent for 2009 against 8.5 percent in 2008. Recent developments showed an adverse impact of global slowdown on the tourism and FDI sectors in Rwanda, confirming the projected deceleration of growth. Despite a good local harvest and a significant reduction in retail petrol prices, a high food deficit in the surrounding region introduces some downward rigidity to achieving dramatic price decline from a domestic point of view. Nevertheless, my authorities intend to intensify their efforts in that regard. The international reserves target is set at about 4½ months of imports. Structural policies will broadly focus on improving public financial management, developing the financial sector, and making growth enhancing investments and reforms.
In the area of fiscal policy, my authorities’ actions for 2009 will be geared towards increasing the revenue to GDP ratio by at least 0.2 percent to finance public investments. Actions will include a monthly monitoring of government cash flow and a set of structural measures, namely: (i) enhancing taxpayer compliance and refining taxpayer segmentation by allocating more companies to the groups of large and medium-sized companies subject to enhanced surveillance; (ii) increasing efficiency of operations and minimizing transaction costs; and (iii) facilitating trade by further refining the operations and eligibility criteria for using the expedited clearance scheme for compliant exporters, which accounted for about two-thirds of imports in September 2008.
My authorities intend to begin implementing their new medium-term strategy for PFM reform. As part of their broader strategy, the PFM action plan for 2009 includes measures in the areas of economic management and budgeting, financial management and reporting, public procurement and budget execution oversight. A broad range of activities will be carried out, such as building capacity for research and macroeconomic modeling, aligning the budget calendar to practices within the East African Community (EAC), clarifying reporting relationships and reporting formats for sub-national government units, introducing the new integrated financial management information system, SmartGov, or adopting the new organizational structure for the Rwanda Public Procurement Authority.
As regards monetary and exchange rate policies, my Rwandan authorities will maintain a tight monetary policy in 2009. In that regard, the NBR will continue to monitor inflation, government spending and private sector credit and will stand ready to raise the key repo rate, if needed. To reduce inflation to about 14 percent by mid-2009 and to single digits in the second half of 2009, the NBR will limit reserve money growth (12-month) to 15 percent at end-June and 18 percent at end-2009. It is also the authorities’ intention to allow more flexibility in the exchange rate and increase the frequency of adjustments so as to reduce any pressures for appreciation of the franc and to ensure that Rwanda’s exports remain competitive.
Medium term policies
In the implementation of their broad development agenda, my authorities, in consultation with development partners, have elaborated a Public Investment Program (PIP), a Financial Sector Development Plan, and a Rural Development Program to promote private sector led growth and create employment over the medium term. They also recently consolidated and realigned the activities of eight government agencies into the Rwanda Development Board (RDB) to eliminate inefficiencies in operations and streamline the bureaucracy in order to advance private sector development initiatives.
The Public Investment Program aims at supporting the accelerated delivery of strategic national infrastructure without jeopardizing debt sustainability. Its objectives evolve around aligning public investment and private investment with the long-term development agenda, enhancing efficiency in resources allocation, and the overall coordination of interventions. Particularly, the PIP framework highlights the major public projects that are planned over the course of 2009-2011, their likely costs and criteria for selection. The framework was discussed with development partners, some of whom (particularly DFID and the World Bank) are already providing technical assistance. Regarding infrastructure, the focus of the PIP in 2009 is to address the issue of limited and insufficient energy, continue improving ICT infrastructure, design and execute projects to upgrade key road networks in Kigali and the surroundings.
My authorities consider that public investment should be an engine for private investment, by helping to reduce systematically the operational cost of business, and increasing the private sector’s capacity to innovate. The EDPRS targets an average level of public investment of 10% of GDP over 2009-12, whilst private investment will need to rise from 8.6% of GDP to 14.6% of GDP in 2012. The public spending is expected to be financed by a combination of domestic tax and non-tax revenues, external budgetary grants trough budgetary support, external project grants and loans trough project support, and external net borrowing.
In the same vein, my authorities have updated their Strategic Plan for the Transformation of Agriculture (PSTA-Phase II) for implementation over the 2009-2012 period. The government views the agricultural sector and animal husbandry as the main springboard for poverty reduction, through its capacity to improve food security, create employment and raise incomes especially for rural populations. The main focuses of the plan are four fold: (i) agriculture intensification and development of sustainable production systems; (ii) support to the professionalisation of producers; (iii) promotion of commodity chains and development of agribusinesses; and (iv) improvement in the institutional capacity of the supporting systems. Within the framework of this strategic plan, my authorities are planning investments to ease pressure on land, especially through crop intensification, reduce soil erosion and increase irrigation systems. Their approach is to implement over the short-term pilot projects in these areas, to help assess viability, before launching larger investment projects that are under preparation for implementation over a three-year period. As for export crops, the strategy is to promote value-added products targeting niche markets for the traditional sectors of coffee, tea and pyrethrum as well as other non-traditional export crops.
As for the development of the private sector, my Rwandan authorities are determined to advance their goal of making Rwanda a compelling hub for business and investment. Efforts to build a culture of innovation and entrepreneurship, as well as to improve the delivery of public services, will continue. It is in this regard that eight former government agencies were consolidated into the new Rwanda Development Board (RDB). RDB will drive legal and regulatory reforms to eliminate inefficiencies and streamline the bureaucracy. Furthermore, along with the progress already made in building institutions and process for land registration, steps are being taken to make the Rwanda Commercial and Registry Services operational, with the view to improving business registration, securitization of assets, and registration of property rights. Furthemore, the Rwanda Workforce Development Authority created in January 2008—will continue to build its capacity and systems to fully spearhead the development of employable skills and entrepreneurship capacity, principally through vocational and on-the-job training, skills regulation and accreditation, labor market information systems and business incubation.
My authorities have also stepped up efforts to implement reforms outlined in their Financial Sector Development Plan, with the view to building a sound and dynamic financial sector capable of sustaining private sector activities. Banks have been recapitalized and stability indicators have improved. Actions in 2009 will cover the modernization of the national payments system, the development of long-term finance and capital markets, the development of contractual savings and investments, and the transformation of the Rwanda Housing Bank into a secondary mortgage facility. The government will also continue to work on the reform of the Rwandan Development Bank with a view to enhancing medium term lending. A law on non-bank financial institutions (such as private pensions, mutual funds) should come out in 2009, which will set the basis for the emergence of those institutions, twenty of which already operate informally. As for microfinance, a law passed in April 2008 should be gazetted in 2009.
As regards debt management, my authorities are committed to maintain the current favorable situation inherited from debt relief initiatives. Rwanda’s debt distress classification has improved from high to moderate. My authorities intend to further improve this stance thanks to the guiding principles of their debt management strategy whose main objective is to ensure that the financing requirements and repayments are met at least cost with prudent risk considerations while keeping debt sustainable. In that regard, authorities have committed themselves to request, whenever possible, the assessment of the economic and financial viability of major agriculture and infrastructure projects from the World Bank before proceeding. The Rwandan authorities also plan to formulate a strategy to exit from aid dependence over the long term, of which increasing revenue-to-GDP ratio forms a key component.
Conclusion
With the continuous support of the donor community, my Rwandan authorities have made great strides on the path of macroeconomic stability and sustained growth. Nevertheless, Rwanda is still facing many impediments that preclude the country from significantly tackling pervasive poverty. My authorities are committed to steadily pursue their effort that yielded appreciable results other the last decade. Their comprehensive agenda going forward, encompassing all sectors is meant to sustain those efforts, especially in the field of infrastructure, PFM, banking and finance and cost of doing business.
In light of their good track record of policy implementation and sound policy agenda for the period ahead, my Rwandan authorities would like to request the support of the Board for the conclusion of the 2008 Article IV consultation, the completion of the fifth review under the PRGF arrangement and waiver of nonobservance of a performance criterion. My authorities are convinced that the policies set forth for the period ahead will help build a broad-based economy capable of bringing about substantial poverty reduction and achieving the remaining MDGs.