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© 2009 International Monetary Fund
August 2009
IMF Country Report No. 09/264
Rwanda: Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance Criteria—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Rwanda
In the context of the sixth review under the three-year arrangement under the Poverty Reduction and Growth Facility and request for waivers of nonobservance of performance criteria with Rwanda, the following documents have been released and are included in this package:
The staff report for the Sixth Review Under the Three-year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance criteria, prepared by a staff team of the IMF, following discussions that ended on July 7, 2009, with the officials of Rwanda on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 23, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A Press Release summarizing the views of the Executive Board as expressed during its July 31, 2009 discussion of the staff report that completed the review and request.
A statement by the Executive Director for Rwanda.
The documents listed below has [have] been or will be separately released.]
Letter of Intent sent to the IMF by the authorities of Rwanda*
Memorandum of Economic and Financial Policies by the authorities of Rwanda*
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
RWANDA
Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance Criteria
Prepared by the African Department
(In collaboration with other departments)
Approved by Martine Guerguil and Dominique Desruelle
July 23, 2009
Program Review
All end-2008 quantitative performance criteria were met and performance through March 2009 was broadly satisfactory.
Staff recommends completion of the sixth review under the PRGF arrangement based on Rwanda’s performance and understandings reached on the macroeconomic program for 2009/10.
Staff supports the authorities’ request for waivers of nonobservance of performance criteria on nonconcessional borrowing and nonintroduction of multiple currency practices.
Participants
The mission team headed by Ms. Murgasova visited Kigali during May 18–29, 2009. The team comprised Mr. Mitchell, Mr. Gorbanyov, Mr. Roudet (all AFR) and Mr. Vandepeute (MCM) and was assisted by Mr. Gershenson, the resident representative. Mr. Bah, Senior Advisor to the Executive Director for Rwanda, and World Bank staff participated in the discussions. Ms. Murgasova and Mr. Mitchell visited Kigali again during June 22–July 7 to continue policy discussions.
The mission met with Minister of Finance and Economic Planning Musoni, Governor Kanimba of the National Bank of Rwanda, other government officials and representatives of the private sector, civil society, and the international community.
Contents
Executive Summary
I. Recent Developments and Program Performance
II. Liquidity Issues in the Banking Sector
III. Macroeconomic Policies for 2009/10 and the Medium Term
A. Fiscal Policy
B. External Debt Sustainability
C. Monetary and Exchange Rate Policy
D. Addressing Credit Stagnation and Strengthening the Banking Sector
IV. Performance Monitoring and Structural Reforms after the PRGF
V. Staff Appraisal
Tables
1. Selected Economic and Financial Indicators, 2006–10
2a. Operations of the Central Government, Calendar Year Basis, 2006–09
2b. Operations of the Central Government, Fiscal Year Basis, 2006/07–2011/12
3. Monetary Survey, 2006–10
4. Balance of Payments, 2006–14
5. Financial Soundness Indicators for the Banking Sector, 2006–March 2009
6. Millenium Development Goals
7. Proposed Schedule of Disbursements Under the PRGF Arrangement, 2009
Figures
1. Rwanda: GDP Growth, Inflation and Exchange Rate, 2003–09
2. Rwanda: Program Performance in 2008 and 2009
3. Rwanda: Liquidity Developments, 2006–09
Boxes
1. Rwanda: Performance Under the PRGF-Supported Program
2. Rwanda: Update of Selected DSA Indicators
Appendix
I. Letter of Intent
Attachment I: Memorandum of Economic and Financial Polices (MEFP) of the Government of Rwanda
Attachment I. Table 1: Quantitative Performance Criteria and Benchmarks for 2008
Attachment I. Table 2: Quantitative Indicative Targets and Benchmarks for 2009–10
Executive Summary
Program performance was broadly satisfactory. Economic growth reached 11.2 percent in 2008, exceeding initial expectations. Inflation accelerated to above 20 percent in the second half of last year, but declined sharply in early 2009 because of falling world commodity prices, a favorable local harvest, and subsiding domestic demand pressures. All quantitative end-December 2008 performance criteria (PCs) were met. However, commitments to save all additional revenues and to increase interest rates were not observed. Liquidity pressures among banks emerged in late 2008 because of high credit growth and a decline in deposits.
In early 2009, external shocks affecting Rwanda created new challenges for macroeconomic policies. The impact of the global economic crisis led to a sharp fall in Rwandan export revenues and a slowdown of economic activity. Liquidity shortages exposed weaknesses in risk management and governance of commercial banks, prompting them to tighten credit standards and leading to a decline in credit growth. The involvement of the Rwandan military in resolving the conflict in the Eastern DRC necessitated an increase in fiscal spending. The situation was exacerbated by delays in donor disbursements, and the government drew on its deposits to finance expenditures. Several indicative targets for end-March 2009 were therefore missed, including domestic fiscal balance, net credit to government, and net foreign assets.
The macroeconomic program for the 2009/10 fiscal year is designed to cushion the impact of the global economic crisis while preserving medium-term fiscal and external sustainability. The 2009/10 fiscal program accommodates a moderately higher budget deficit to stimulate the economy, financed by drawing down government deposits at the central bank. Fiscal consolidation is envisaged over the medium term, but priority spending will be safeguarded. The monetary program in 2009/10 will focus on keeping inflation in single digits while making room for liquidity support to the banking system if needed.
Staff supports the authorities’ request for waivers for nonobservance of program performance criteria on (i) contracting new nonconcessional external debt and (ii) nonintroduction of multiple currency practices (MCPs). In late June 2009, the authorities contracted an external loan from the ExImBank of China on less concessional terms than allowed under the program. The World Bank has confirmed the project’s viability. Staff analysis indicates that contracting the loan does not significantly affect debt sustainability. Rwanda’s development partners have indicated that the loan would not hinder access to concessional financing. In June 2009, the central bank eliminated the foreign exchange hedge facility, the introduction of which in March 2009 gave rise to nonobservance of the continuous performance criterion on the nonintroduction of MCPs.
Macroeconomic risks have increased. Spillovers from the world crisis, liquidity shortages or solvency problems in the banking system may require additional policy adjustments.
Staff recommends conclusion of the sixth review under the PRGF arrangement.
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INTERNATIONAL MONETARY FUND
RWANDA
Staff Report for the Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance Criteria—Informational Annex
Prepared by the African Department
(In collaboration with other Departments)
Approved by Martine Guerguil and Dominique Desruelle
July 23, 2009
Contents
I. Relations with the Fund
II. Joint Bank-Fund Work Program, August 2009–August 2010
III. Statistical Issues
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Press Release No. 09/276
FOR IMMEDIATE RELEASE
July 31, 2009
International Monetary Fund
Washington, D.C. 20431 USA
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July 31, 2009
