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
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International Monetary Fund
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Publication Date:
20 Aug 2009
eISBN:
9781451833492
Language:
English
Keywords:
ISCR; CR; government; PRGF arrangement; government deposit; PRGF; Rwanda; balance of payments; monetary policy; exchange rate; economic growth; private sector; Rwandan franc
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This paper discusses key findings of the Sixth Review under the Poverty Reduction and Growth Facility (PRGF) for Rwanda. All end-2008 quantitative performance criteria were met, and performance through March 2009 was broadly satisfactory. IMF 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. IMF staff also supports the authorities’ request for waivers of nonobservance of performance criteria on nonconcessional borrowing and nonintroduction of multiple currency practices.

Abstract

This paper discusses key findings of the Sixth Review under the Poverty Reduction and Growth Facility (PRGF) for Rwanda. All end-2008 quantitative performance criteria were met, and performance through March 2009 was broadly satisfactory. IMF 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. IMF staff also supports the authorities’ request for waivers of nonobservance of performance criteria on nonconcessional borrowing and nonintroduction of multiple currency practices.

I. Recent Developments and Program Performance

1. Rwanda was largely unaffected by the world economic slowdown in 2008 and experienced its impact only from early 2009 (Table 1 and Figure 1). At 11.2 percent, GDP growth in 2008 surpassed earlier projections and reflected the robust expansion in agriculture, aided by the government’s crop-intensification program (which includes the provision of fertilizer and seeds and the expansion of harvest storage facilities) and favorable weather conditions. Manufacturing, services and construction also registered strong growth; the latter due to the rapid private-sector credit increase and scaling up of the public investment program. In early 2009, however, exports declined sharply and economic activity slowed down, particularly in the construction, mining, and tourism sectors.

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2006–10

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Sources: Rwandan authorities; and IMF staff estimates and projections.

Reflects the operations of the Union Banques Populaires du Rwanda (UBPR)—a large microfinance network—that was transformed into a commercial bank in Frebuary 2008.

Data are based on program exchange rate of RF 553.7/US$ for 2006, RF 549.9/US$ for 2007, RF 545/US$ for 2008, and RF 576.8/US$ for 2009.

As a percent of the beginning-of-period stock of broad money.

Increase in 2007 reflects rebasing of the monetary program; reserve money growth was limited to 13 percent after correcting for the rebasing at end-2006.

The outcome on reserve money includes the operations of Bank Populaire du Rwanda, which was incorporated as a bank in 2008 and hence was not included in the reserve money program target.

Revenue excluding grants minus current expenditure except interest due and exceptional expenditure (AU peacekeeping expenditures and spending on demobilizing and intergrating militia groups) minus domestically financed capital expenditure.

Revenue excluding grants minus current expenditure (excluding external interest) minus domestically financed capital expenditure and net lending.

Revision of methodology resulted in sharp increase of tourism revenues, thus increasing exports of services.

After rescheduling, including arrears and new debt.

Figure 1.
Figure 1.

Rwanda: GDP Growth, Inflation and Exchange Rate, 2003–09

Citation: IMF Staff Country Reports 2009, 264; 10.5089/9781451833492.002.A001

Source: Rwandan authorities; and staff estimates.

2. Inflation rose sharply in 2008 but declined in 2009. The lagged impact of rapid domestic demand expansion and rising world food and fuel prices propelled consumer price inflation above 20 percent from mid-2008. In early 2009, however, a rapid decline in world commodity and domestic food prices led to a moderation of inflation to 12.7 percent in May.

3. The fairly stable nominal exchange rate and high inflation led to a rapid real appreciation of the Rwandan franc in late 2008. The NBR modified the mechanism for determining the reference rate at which it sells foreign exchange to commercial banks, which somewhat increased exchange rate flexibility in the second half of 2008.1 However, the nominal depreciation was still much lower than the inflation rate, and in real effective terms the Rwandan franc appreciated by 22 percent during 2008. In 2009, the sharp reduction in seasonally adjusted inflation contributed to a real depreciation of almost 5 percent (Figure 1).

4. A widening current account deficit, resulting in part from a worsening in the terms of trade, was covered comfortably by public and private inflows (Tables 1 and 4). Receipts from both traditional agricultural exports (coffee and tea) and mining exports increased significantly in 2008. However, they were more than offset by the rapidly rising imports boosted by economic growth, government investments, world commodity price increases, and real appreciation. Foreign direct investment (FDI), donor aid, and concessional public borrowing more than covered the current account deficit and led to the accumulation of international reserves to over 5 months of imports.

Table 2a.

Rwanda: Operations of the Central Government, Calendar Year Basis, 2006–09

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Sources: Rwandan authorities, and IMF staff estimates and projections.

For 2008, the increase partially reflects improvements in recording funds for projects.

Net lending in 2007 incorporates RF22.1 billion in receipts from the privatization of Rwandatel.

Definition excludes exceptional expenditures, defined as total revenue (excluding privatization proceeds) minus noninterest current expenditure (excluding exceptional expenditure) minus domestically financed capital expenditure.

Revenue excluding grants minus current expenditure, domestically financed capital expenditure, and net lending, In 2008, excludes RF 33.4 billion received for a telephone license fee.

In 2006, peacekeeping activities of RF 2.9 billion were not covered by grants.

Total expenditure and net lending (excluding privatization receipts) less revenues, foreign financed project spending, and current spending on imports.

A negative sign indicates a reduction.

CSR = Caisse Sociale du Rwanda.

A negative number implies underestimation of financing.

Table 2b.

Rwanda: Operations of the Central Government, Fiscal Year Basis1, 2006/07–2011/12

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Sources: Rwandan authorities, and IMF staff estimates and projections.

Fiscal year runs from July to June.

For 2008/09, the increase partially reflects improvements in recording funds for projects.

Net lending in 2007/08 incorporates RF35.7 billion in receipts from the privatization of Rwandatel.

Definition excludes exceptional expenditures, defined as total revenue (excluding privatization proceeds) minus noninterest current expenditure (excluding exceptional expenditure) minus domestically financed capital expenditure.

Revenue excluding grants minus current expenditure,

For 2006/07, peacekeeping activities were not fully covered by grants.

Total expenditure and net lending (excluding privatization receipts) less revenues, foreign financed project spending, and current spending on imports.

A negative sign indicates a reduction.

CSR = Caisse Sociale du Rwanda.

A negative number implies an underestimate of financing.

Table 3.

Rwanda: Monetary Survey, 2006–10

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Source: National Bank of Rwanda (NBR); and IMF staff estimates and projections.

Reflects the operations of the Union Banques Populaires du Rwanda (UBPR)—a large microfinance network—which was transformed into a commercial bank in Febuary 2008.

The IMF’s MDRI reduced foreign liabilities at the NBR by RF 42.4 million with a counter entry in government deposits (in January 2006).

The definition of reserve money as performance criterion or structural benchmark differs from the definition in the monetary program in that it excludes the deposits of a defunct savings bank, import deposits, and dormant accounts. It includes old notes demonetized at the end of 2004 but in circulation until the end of 2005.

The reserve money target for 2007 is derived by applying the programmed growth rate of 13 percent to the rebased 2006 outcome. The rebased 2006 outcome was calculated by allowing banks to meet the legal reserve requirement on deposits (banks’ reserves at the end of December 2006 fell short of the requirement by RF 7.5 billion, they met the requirement because it is based on an average over two weeks; plus (2) a liquidity reserve of RF 3 billion to ensure sufficient financing in banks’ branches.

From December 2005 on, includes Caisse Hypothecaire du Rwanda (BHR) deposits (RF 1 billion at end-2005).

End-2006 broad money includes RF5 billion temporary build up of local government deposits, which were unwound by February 2007.

Broad money plus deposits in the Union de Banques Populaires de Rwanda(UBPR) through December 2008 and Rwanda Development Bank (BRD).

Table 4.

Rwanda: Balance of Payments, 2006–14

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Rwandan authorities; and IMF staff estimates and projections.

Revision of methodology resulted in sharp increase of tourism revenues from 2008, thus increasing export of services.

Including interest due to the Fund.

Current transfers include disbursed budgetary and HIPC grants and humanitarian and technical assistance.

Includes project and budgetary loans. °

Excluding payments to the Fund.

Other capital includes long-term private capital, commercial credit, change in the net foreign assets of commercial banks, and unrecorded imports.

After rescheduling, including arrears and new debt.

5. Rwanda’s program performance through March 2009 was broadly satisfactory. All quantitative end-December 2008 performance criteria (PCs) for the sixth review were met. However, largely as a result of external and domestic shocks in early 2009 several indicative targets for end-March were missed (MEFP Tables 1 and 2, Figure 2).2

Figure 2.
Figure 2.

Rwanda: Program Performance in 2008 and 2009

Citation: IMF Staff Country Reports 2009, 264; 10.5089/9781451833492.002.A001

Source: Rwandan authorities; and staff estimates.

6. Fiscal performance in 2008 was better than envisaged under the program, but delayed donor disbursements and external shocks created challenges to budget execution in early 2009 (Text Table 1, Table 2a).

  • Revenues significantly exceeded program projections in 2008, largely because of higher nominal GDP (boosted by economic growth and inflation) and unexpected one-off receipts.3 Despite the commitment in the last MEFP to save all extra tax revenues and ease the overheating pressures, part of the additional tax revenue was spent on capital projects that fueled domestic demand. Despite the economic slowdown, revenue collection during the first quarter of 2009 was broadly consistent with projections.

  • The government accumulated large deposits in 2008, which provided a useful cushion against delayed donor disbursements in the first quarter of 2009. By saving unexpected non-tax revenues, the government accumulated deposits in the National Bank of Rwanda (NBR) of 1.8 percent of GDP in 2008. However, in the first quarter of 2009 the delayed disbursement of a large budget support grant from the World Bank (US$79 million) led to a drawdown of government’s deposits up to 1.5 percent of GDP. As a result, end-March indicative targets on the net credit to the government and the domestic fiscal balance were missed. Deposits were replenished once the delayed disbursement arrived in the second quarter.

  • Budget spending exceeded projections. In 2008, current spending matched projections, but capital outlays and net lending significantly exceeded program targets. In early 2009, spending also surpassed projections, largely on account of unanticipated expenditure for military operations in the Eastern DRC (about 0.2 percent of GDP). The program targets on priority spending were met.

  • The government accumulated new domestic payment arrears in early 2009. Having met the performance criterion for domestic arrears repayment in 2008, the indicative target for end-March was missed by RwF 5.6 billion (0.2 percent of GDP). This reflected administrative delays in processing transactions by the Treasury. According to preliminary information, the arrears were cleared by end-June 2009.

Text Table 1.

Rwanda: Operations of the Central Government, 2008–09

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Sources: Rwandan authorities; and IMF staff estimates.

7. The monetary program remained broadly on track, but liquidity shortages in early 2009 prompted the authorities to relax their monetary stance to curb the decline in broad money (Table 3).

  • Reserve money remained high on average during the second half of 2008. Despite meeting the end-month and quarterly targets, the intra-month levels of reserve money during the second half of 2008 increasingly exceeded the target path. This partially reflected the persistence of high levels of currency in circulation. The NBR relied primarily on foreign exchange sales for sterilization, but was not proactive in its use of other monetary instruments, including interest rate policy, to curb money demand despite prior commitments to do so. This sluggish response of monetary policy failed to curb the expansion of domestic demand in 2008 and inflationary pressures remained high.

  • Reserve money and broad money decreased in nominal terms from late 2008. Currency in circulation and deposits fell amid slowing economic activity, and consistent with the increased opportunity costs of holding balances in local currency in light of high inflation and negative real interest rates. In response, the authorities repaid a substantial amount of T-bills and reduced the reserve requirement from 8 percent to 5 percent, injecting large amounts of liquidity into the banking system (up to 1.5 percent of GDP). Broad money growth rebounded somewhat, but remains well below projections.

  • The performance criterion for NFA was met at end-December, but the end-March indicative target was missed due to the slower-than-expected disbursement of grants. The situation improved in the second quarter, when some of the delayed disbursements were made.

8. Higher concessional borrowing led to faster accumulation of external debt. The present value of debt reached US$331.5 million at end-2008, exceeding the program indicative target owing to frontloading of disbursements under existing loan contracts for externally financed projects.

9. The authorities contracted a new nonconcessional loan from the China ExImBank at end-June 2009. The borrowing was foreshadowed in the MEFP for the fifth PRGF review. The loan (of about 0.6 percent of GDP) will finance a road improvement project in Kigali. The loan is on terms that are less concessional (about 34 percent grant element) than those allowed under the program (50 percent grant element).4

10. Structural PCs and benchmarks were not established for the sixth review.

Rwanda: Performance under the PRGF-Supported Program

Sound economic and structural policies under the program contributed to economic growth, while inflation remained volatile. In 2006–08, the GDP growth averaged 8.8 percent, about twice the average growth rate of the three preceding years. However, average inflation exceeded the single-digit target, largely due to the effects of volatile international commodity and domestic food prices, and the lagged effects of rapid expansion of domestic demand.

Resilience to external shocks improved. The low-access PRGF (10.68 percent of quota) helped mobilize highly concessional assistance from donors. In 2006–08, Rwanda received grants amounting to 10–11 percent of GDP and contributing 40–45 percent of budget revenues. The high threshold for nonconcessional borrowing set in the PRGF (50 percent grant element) helped promote debt sustainability. In late 2008, Rwanda’s rating of debt distress risk was revised from high to moderate. Accumulation of imports created a cushion against balance of payments shocks.

The program supported structural reforms undertaken by the government. Reforms in tax administration widened the revenue base and helped raise revenues from 13.3 percent of GDP in 2006 to 15.6 percent of GDP in 2008. Improvements in PFM increased transparency and accountability of budget operations and boosted efficiency of spending. Financial sector reforms aim to modernize the payments system and improve access to credit and financial services, thus promoting credit growth and monetization of the economy. Reforms centered on improving the business climate contributed to private sector-led economic growth.

Yet despite strong economic growth, progress towards the MDGs was uneven. Rwanda is on track to achieving the MDGs in areas related to access to primary education, gender parity, malaria incidence and the prevalence of HIV. However, 56.9 percent of the population lives below the poverty line. Considerable efforts will be needed to meet the MDGs for reducing poverty and hunger, as well as for child and maternal mortality.

Going forward, policies should focus on building on the progress of recent years, further enhancing economic policy coordination and flexibility, and addressing capacity constraints in the public sector. In case of future rapid domestic demand expansion the policy response needs to be faster. Strengthening statistical data compilation, shortening the period of data production, improving data quality, and thus minimizing revisions of published data, would improve macroeconomic analysis. Expanding training would help alleviate the shortage of qualified local staff and improve the efficiency of public institutions.

Rwanda: Selected Economic and Financial Indicators, 2006–08

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Sources: Rwandan authorities; and staff estimates.

II. Liquidity Issues in the Banking Sector

11. The liquidity situation tightened from late 2008, raising concerns about bank stability and affecting credit growth (Figure 3). During 2008, negative real interest rates, increased competition in the banking sector, and more aggressive lending practices raised private sector credit growth to above 30 percent. After a period of rapid increase in 2007 and early 2008, deposits decelerated from mid-2008 and declined in nominal terms from November. As a result, bank liquidity tightened and the maturity mismatch between bank loans and deposits was exacerbated, thus reducing resources available for banks to provide credit to the economy. The credit expansion came to a halt from early 2009.

Figure 3.
Figure 3.

Rwanda: Liquidity Developments, 2006–09

Citation: IMF Staff Country Reports 2009, 264; 10.5089/9781451833492.002.A001

Source: Rwandan authorities; and staff estimates.

12. To facilitate payments and avoid credit stagnation, the authorities injected very large amounts of liquidity into the banking system in late 2008 and early 2009 (¶7). This led to high aggregate excess reserves until the NBR resumed placing T-bills for sterilization purposes in May.

13. Credit growth stagnated despite abundant liquidity in the banking sector. While short-term liquidity conditions generally improved, many banks raised interest rates to attract time deposits and address maturity mismatches between their assets and liabilities, and have generally tightened lending standards, raising the risk of a prolonged credit slump with an adverse impact on the real economy.

14. Two facilities introduced by the authorities in March to increase bank liquidity and promote lending to the private sector were barely used, and in June the NBR eliminated one of them.

  • A three to twelve month financing facility collateralized either by Treasury bonds or foreign currency deposits at an interest rate of 11.5 percent. Only one bank accessed the facility pledging Treasury bonds as collateral. Staff expressed concerns about the fixed pricing and the de jure unlimited nature of the scheme, which could potentially adversely affect the NBR’s control over monetary aggregates. The authorities agreed to address these shortcomings (MEFP ¶40).

  • A foreign exchange risk hedge facility, through which banks could buy exchange rate insurance on their external borrowings for onlending to the economy. The facility was not self-financing because the annual fee of 3 percent to be paid by banks for the hedge was below the estimated price of an option providing similar rights as the scheme (calculated at 8.66 percent). This facility gave rise to an MCP subject to the Fund’s jurisdiction under Article VIII, thus leading to non-observance of a continuous performance criterion under the PRGF. The NBR removed the facility on June 11, before it was used. On this basis, staff supports the authorities’ request for a waiver of non-observance of the performance criterion.

15. Asset quality and profitability indicators of banks have declined since mid-2008 (Table 5). As the asset quality of their portfolios deteriorated, banks have increased provisions against doubtful loans. A recent mission by the Monetary and Capital Markets Department found significant shortcomings in commercial banks’ credit risk management and corporate governance, and weaknesses in bank supervision due to staffing shortages, which will be addressed (MEFP ¶44).

Table 5.

Rwanda: Financial Soundness Indicators for the Banking Sector, 2006–March 2009

(Ratios, in percent)

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Source: National Bank of Rwanda.

16. Responding to economic challenges and changes in regulation, several banks took steps to boost capital. In May, the NBR increased the capital adequacy requirement from 10 percent to 15 percent and modified the definition to include Tier 2 capital. While banks have 24 months to comply with the new regulation, it appears that most already meet it. Banks also reduced off-balance sheet items and insider loans, thus improving most measures of capital adequacy. Additionally, with the reduction in banks’ foreign exchange exposures, market sensitivity to foreign exchange risks has been reduced (Table 5).

III. Macroeconomic Policies for 2009/10 and the Medium Term

17. Three main factors are likely to influence economic performance in the next few years.

  • Growth in the agricultural sector is expected to return to trend, following the exceptional performance in 2008. It could remain higher than average in 2009, reflecting a strong harvest so far this year, and is expected to return to its trend in 2010.

  • The global economic and financial crisis will take its toll on the Rwandan economy. The impact is expected to pass through three main channels: (i) declining external demand for Rwandan goods and services, particularly for tourism and mineral exports; (ii) slumping commodity prices, particularly for minerals; and (iii) scarcer financial inflows, including foreign direct investment (FDI). Despite early concerns, the aid flows are projected to remain high in 2009/10, while they are expected to decline over the medium-term.5

  • The liquidity shortages in the banking sector could exacerbate the economic slowdown by reducing the availability of credit.

18. In light of these factors, the macroeconomic framework envisages the following:

  • Economic growth is projected to slow to about 5⅓ percent in 2009–10, with construction and real estate, mining, hotels and restaurants, and trade being particularly affected by the global economic crisis and the credit slowdown. While growth is projected to reach about 6 percent on average over the medium term, significant downside risks arise from the uncertain path of recovery in the world economy.

  • Inflation is expected to decline to single digits in the second half of 2009 as a result of global disinflation, lower domestic food prices, and easing domestic demand pressures.

  • The balance of payments is likely to deteriorate in 2009—10 before improving in the medium term, supported by the projected world recovery. In line with developments in the first quarter, exports of goods and services are projected to decrease significantly in 2009—a decline that would be only partially offset by the projected reduction in imports.6 FDI and other capital inflows are also expected to fall, resulting in a deterioration of the overall balance of payment by about US$80 million compared to 2008. In 2010, although exports of goods and services and private capital flows will likely start recovering, the projected increase in imports and decline in official transfers should lead to a further worsening of the current account.

  • Some drawdown of international reserves can be accommodated over the next few years to cushion external shocks and avoid abrupt policy adjustments. The reserve coverage is projected to stabilize around 4 months of imports over the medium term—or 4½ months including the upcoming SDR allocation. Staff and the authorities agreed that the SDR allocation will be saved as a safeguard against potential balance of payments pressure in the medium term (MEFP ¶45).

19. In this context, macroeconomic policies will aim at cushioning the impact of the economic crisis on growth and poverty while preserving medium-term fiscal and external sustainability.

A. Fiscal Policy

20. The 2009/10 fiscal program allows a moderate fiscal stimulus to minimize the adverse effects of the current economic slowdown (Table 2b).

  • Revenues are projected to fall by about 2½ percent of GDP compared to 2008/09, largely reflecting the absence of one-off receipts collected in 2008, slowing economic activity, and losses from adopting the EAC common external tariff (CET). To partially offset the revenue losses, the government will introduce additional revenue measures of about 0.4 percent of GDP, which include increasing the fuel levy earmarked for road maintenance, reducing implicit subsidies for fuel products, and raising excise taxes on cell phone airtime (MEFP ¶27 and ¶36).

  • While total spending will decline by about 1 percent of GDP compared to 2008/09, priority expenditures will remain broadly unchanged as a percent of GDP, consistent with the objectives outlined in Rwanda’s Economic Development and Poverty Reduction Strategy (EDPRS) (MEFP ¶29).

  • The expanding budget deficit in 2009/10 will be financed by withdrawing government deposits at the NBR up to 1 percent of GDP. This should provide a stimulus to the economy without rekindling undue inflation pressures or crowding out the private sector (MEFP ¶30).

21. Gradual fiscal consolidation is envisaged over the medium term. Revenues are projected to increase by at least 0.2 percent of GDP per year, reflecting the economic recovery and the increasing efficiency of tax collection. Grant projections for 2010/11 and 2011/12 take into account only the amounts already committed by donors, resulting in a decline of 2–3 percent of GDP from the high level in 2009/10. To maintain current expenditures broadly unchanged as a share of GDP as in 2009/10, projections envisage an increase in concessional borrowing (which would be consistent with external debt sustainability), but no further recourse to domestic financing (MEFP ¶29).

B. External Debt Sustainability

22. Staff supports the authorities’ request for a waiver of non-observance of the performance criterion (zero ceiling) on contracting new nonconcessional external debt from China ExImBank. More concessional financing for the project was not available. All requirements for staff support of the authorities’ request for a waiver have been met: (i) the World Bank has confirmed the project’s viability; (ii) staff’s analysis suggests that the medium-term external debt sustainability has improved since the last DSA (produced in December 2008) because of an upward revision of export revenues, and the borrowing would not significantly worsen the debt outlook (Box 2); and (iii) development partners indicated that they do not view the contracting of the loan as an obstacle for Rwanda’s access to concessional financing. Based on the above, staff believes that the contracting of the loan does not have implications on the authorities’ ability to achieve the program objectives.

Rwanda: Update of Selected DSA Indicators

An upward revision of tourism travel receipts in the balance of payment statistics has led to a significant improvement in the debt sustainability analysis (DSA). The authorities have adopted a revised methodology for estimating travel receipts that has led to a marked upward revision of these estimates. As a result, the ratio of the PV of external public and publicly guaranteed (PPG) debt to exports of goods and services (traditionally the weakest DSA indicator for Rwanda) has improved considerably. While staff broadly agrees with the methodology used in estimating tourism receipts, there remain concerns—both from the authorities and staff—about a potential overestimation of tourism receipts. Staff therefore encourages the authorities to pursue their efforts to refine these estimates. The revised estimates suggest that Rwanda remains at a moderate risk of debt distress.

The contracting of nonconcessional loan from China ExImBank did not significantly worsen Rwanda’s debt sustainability (see charts below).

uA01fig01

Rwanda. External PPG Debt-to-Exports Ratio Under Alternative Scenarios

(All scenarios include the China ExImBank loan, unless otherwise noted)

Citation: IMF Staff Country Reports 2009, 264; 10.5089/9781451833492.002.A001

1 Export value growth at historical average minus one standard deviation in 2010–11.

C. Monetary and Exchange Rate Policy

23. The monetary program will aim to balance the objectives of reaching single-digit inflation while providing sufficient liquidity to banking system. The agreed broad money targets for 2009/10 allow private sector credit growth of about 20 percent, consistent with the projected economic growth and single-digit inflation, and taking into account the envisaged external borrowing by commercial banks (Table 3).

24. Reserve money will remain the anchor of the monetary program. Staff emphasized the need for the reserve money target to be met on average, not only at end-month, through the coordinated use of available monetary policy instruments (sales of domestic securities and foreign currency). A more active use of interest rate policy supported by a proper communications strategy would help anchor interest rate expectations, reduce volatility, and strengthen the monetary policy transmission mechanism. The quantitative targets for reserve money were rebased to reflect the reduction of the reserve requirement and to accommodate a buffer of excess reserves (RwF 4 to 5 billion) that would support the efficient operations of the payments system and the inter-bank market for short-term liquidity.

25. Staff pointed out that greater exchange rate flexibility may be needed to stem the loss of foreign exchange reserves should the balance of payments deteriorate more than currently envisaged. Greater exchange rate flexibility may be required to counter the adverse effects of the global economic crisis and the impact of large real appreciation in 2008 that has affected external competitiveness. Developing a market based exchange rate, either by returning to the auction system or by moving swiftly toward an interbank foreign exchange market,7 would provide an excellent opportunity to foster such flexibility. The authorities broadly agreed with this approach (MEFP ¶38).

26. Liquidity forecasting and coordination of fiscal and monetary policies need to be further improved. Staff encouraged the authorities to make liquidity management and monetary policy more effective by strengthening liquidity forecasting and improving coordination of fiscal and monetary policies. This would include enhanced monitoring of the domestic demand impact of fiscal spending and prompt adjustments in sterilization policies of the NBR to prevent shocks to domestic demand (MEFP ¶41).

D. Addressing Credit Stagnation and Strengthening the Banking Sector

27. Government intervention will be required to complement efforts of the commercial banks to address the problem of maturity mismatches and the risks of prolonged credit stagnation. Staff welcomed efforts by some large commercial banks8 and the Rwanda Development Bank to directly borrow from international multilateral financial institutions for onlending to the private sector. It also recommended that the NBR establish a system to monitor external private sector debt. However, in light of the uncertainty regarding the availability of external financing for the banking sector, staff supports the authorities’ proposal for a limited transfer of governments deposits from the NBR to commercial banks to encourage longer-term investment lending needed to sustain economic growth (MEFP 42). The scheme includes a number of safeguards, namely, commercial banks’ voluntary participation, freedom to set the lending rates, their full assumption of credit risk, and exclusion of undercapitalized banks.

28. Staff recommended a number of measures to strengthen the health of the banking sector. These measures address liquidity and credit risks, corporate governance and risk management of commercial banks; as well as risk-based supervision and staffing of bank supervision (MEFP ¶44).

IV. Performance Monitoring and Structural Reforms after the PRGF

29. Staff discussed with the authorities Rwanda’s relations with the Fund after the extended PRGF arrangement ends in August 2009. The authorities expressed an interest in a PSI from 2010 and to hold discussions on the PSI in early 2010 together with the consideration of the 2010/11 budget (MEFP ¶1).

30. To facilitate the transition to a possible new program, staff and authorities agreed to set indicative targets and structural reform measures for the upcoming fiscal year. The authorities’ MEFP outlines their macroeconomic policies for the 2009/10 (MEFP ¶¶33–53). After the PRGF arrangement expires, staff and the authorities will continue informal monitoring of the agreed targets.

31. Structural policies will continue to build on the broad based achievements of the past years. Focus will be on further reforms in the areas of public financial management, tax administration, financial sector development and improvement in the business environment.

V. Staff Appraisal

32. Rwanda’s economic performance was broadly satisfactory in the second half of 2008. All program performance criteria and indicative targets were met, except for the indicative target on the present value of external debt, which was missed due to frontloading of disbursements for externally financed projects. Economic growth reached double digits, yet inflation increased to over 20 percent in the second half of 2008 due to rising world commodity prices and domestic demand expansion. Inflation pressures abated in early 2009, and the government’s objective to return inflation to single digits in the second half of this year is well within reach.

33. External and domestic shocks in early 2009 were challenging, and the policy response was broadly appropriate. Escalating conflict in the Eastern DRC temporarily worsened the security situation, and Rwanda’s military involvement in its resolution necessitated additional budget spending. The world economic crisis began to affect Rwanda, and falling international prices and external demand caused a sharp contraction in the country’s exports in the first quarter of the year. Even though imports are expected to adjust in the coming months, proactive policy actions may be needed to ensure balance of payments sustainability. While prompt actions by the NBR have largely resolved short-term liquidity shortages in the banking system, a limited transfer of government deposits from the central bank to commercial banks is appropriate to help prevent the prolonged stagnation of credit to the private sector.

34. Staff recommended that the NBR’s monetary and exchange rate policies need to become more proactive. The NBR should be ready to use exchange rate policy to ensure long-term sustainability of the balance of payments. Adherence to the agreed targets for reserve money consistent with single-digit inflation would provide a nominal anchor for monetary policy. Flexibility in the use of policy interest rates and strengthening the monetary policy framework will be essential for improving the monetary policy transmission mechanism and supporting financial deepening.

35. Staff urged the NBR to strengthen the functioning of the banking system and improve bank supervision. Weaknesses in risk management and corporate governance of commercial banks should be addressed. Additionally, the NBR should improve its staffing capacity and supervisory and monitoring tools.

36. Additional policy adjustments may be required should the world economic crisis and its impact on Rwanda worsen beyond current expectations or should the domestic banking situation deteriorate further. These may include actions to sustain external and budget sustainability, which can be affected by falling exports and diminishing fiscal revenues. In addition, the situation in the banking sector warrants close monitoring and prompt government support if liquidity shortages reoccur or solvency problems arise.

37. Staff welcomes the authorities’ continued commitment to structural reforms. Staff encourages the authorities to persevere with the PFM and budget reforms, strengthening revenue administration and implementing the financial sector reform program. These efforts are also supported by Rwanda’s developmental partners.

38. Staff supports the requested waivers for nonobservance of the program performance criteria on contracting new nonconcessional external debt and nonintroduction of MCPs and recommends completion of the sixth review under the PRGF arrangement.

Table 6.

Rwanda: Millennium Development Goals

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Source: World Development Indicators database. Figures in italics refer to periods other than those specified.
Table 7.

Rwanda: Proposed Schedule of Disbursements Under the PRGF Arrangement, 2009

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Appendix I. Letter of Intent

Kigali, July 23, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

USA

Dear Mr. Strauss-Kahn:

1. The fifth review of our financial and economic program support under the Fund’s Poverty Reduction and Growth Facility (PRGF) was completed on January 12, 2009. In the attached Memorandum of Economic and Financial Policies (MEFP) we review recent economic developments and progress in the implementation of our program through the first half of 2009, and set out policies for the medium term.

2. Program implementation under the PRGF arrangement has been broadly on track. All performance criteria for end-December 2008 were met. The indicative target on the net present value of external debt was not met, reflecting higher absorptive capacity of projects, which accelerated disbursement of existing loans. Due to severe external shocks affecting Rwanda, several indicative targets for end-March 2009 were missed.

3. Rwanda is affected by the global crisis, and its growth rate will slow from 11.2 percent in 2008 to an expected 5.3 percent in 2009. Falling demand in international markets and related decline in world prices will adversely affect our balance of payment. Our macroeconomic framework has been adjusted to reflect this impact.

4. To proceed with the rehabilitation and financing of Kigali’s urban road network, the Government of Rwanda has contracted a nonconcessional external loan and requests a waiver for the continuous performance criterion on contracting of nonconcessional debt. This project is important to address our infrastructure and urban development needs.

5. The Government of Rwanda also requests a waiver for the continuous performance criterion on nonintroduction of multiple currency practice (MCP). In March, the National Bank of Rwanda introduced a foreign exchange risk hedging facility for the commercial banks in order to encourage foreign borrowing and longer-term domestic lending. As the facility has created an MCP, it was removed in June, before it was used.

6. The Government of Rwanda has the intention to seek a new program with the IMF under the Policy Support Instrument (PSI) as a follow-up program to the PRGF arrangement. We would like to hold discussions on the new program in early 2010 at the time of the consideration of the budget for the new fiscal year July 2010/June 2011.

7. In the meantime, we have developed a medium-term macroeconomic framework with indicative quantitative targets and policy plans. A detailed macroeconomic program was also developed for June 2009 to July 2010. This will help bridge the gap between the end of economic program supported by the PRGF arrangement and the beginning of the successor program.

8. In support of our policies described in the MEFP, the Government of Rwanda requests completion of the sixth review under the PRGF arrangement and disbursement of the seventh loan of SDR 1.17 million.

9. The Government of Rwanda believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program but will take any further measures that may become appropriate for this purpose. The Government of Rwanda will consult with the Fund on the adoption of these measures and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations.

10. The Government of Rwanda authorizes the publication and distribution of this letter and MEFP together with the related staff report.

Sincerely yours,

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Attachment: Memorandum of Economic and Financial Policies

Appendix I—Attachment 1: Memorandum of Economic and Financial Polices (MEFP) of the Government of Rwanda

July 23, 2009

1. The Government of Rwanda remains committed to achieving sustained economic growth and poverty reduction through the pursuit of prudent economic and social policies as well as structural reforms. The strategies to achieve these goals are set out in the Economic Development and Poverty Reduction Strategy (EDPRS) as well as in the Vision 2020 development plan. This memorandum of economic and financial policies (MEFP) reviews performance under the program supported by the IMF’s Poverty Reduction and Growth Facility (PRGF) and describes the policies and targets for the medium-term as well as for the fiscal year July 2009/June 2010. The Government of Rwanda has the intention to seek a program with the IMF under the Policy Support Instrument (PSI) as a follow-up program to the PRGF. We would like to hold discussions on the new program in early-2010 at the time of the consideration of the budget for the new fiscal year July 2010/June 2011.

I. Recent Economic Development

2. Growth was strong in 2008 and reached 11.2 percent. This is the first double-digit real GDP growth in the last five years, which was achieved despite the volatile international financial crisis. Agriculture led the way with a real growth of 15 percent. This sector benefited from the favorable weather conditions as well as Government’s crops intensification program supported with fertilizer application, improved seeds and storage facilities.

3. Despite monetary tightening, inflation accelerated in 2008. Rising prices of food, transport and housing and utilities pushed inflation to 22.3 percent by end-December. The average annual inflation was 15.4 percent. These developments partly reflect the pass-through of the high international food and fuel prices that also affected domestic food prices.

4. Fiscal performance was also strong. Total revenue collections at 15.6 percent of GDP were higher than programmed in 2008 because of higher growth, inflation, increased monetization of the economy and “one off” payments. Tax revenue collections were 19.5 percent higher than programmed and reached 13.5 percent of GDP benefiting from the collection of tax arrears of RWANDATEL. Non-tax collections that contributed about 2.1 percent of GDP to revenues were RWF 30 billion higher than programmed on account of “one off” accrual of RWF33.4 billion (US$60 million, 1.4 percent of GDP) in mobile license fees from TIGO company.

5. Government spending on priority programs accelerated during the second half of the year because of the purchases of seeds and fertilizer and spending on storage facilities (largely financed by grants from IDA and AfDB) and maintenance of the road network. The accrual of the additional revenue during the year allowed the Government to increase outlays for various energy, water and sanitation projects in line with the EDPRS.

6. All end-2008 fiscal program targets were met. In the case of the targets for net credit to Government (NCG), domestic fiscal balance (DFB) and priority spending, these were met with comfortable margins largely on account of the “one-off “receipts. The net liquidity impact of fiscal operations, given the high import content of the budget, amounted to 2.7 percent of GDP in 2008, lower than envisaged in the program.

7. The external current account deteriorated sharply compared to 2007. Despite a strong increase in export receipts from coffee, tea, minerals and tourism, the trade deficit widened because of rising import volumes and a surge in food and fuel prices. As a result the terms of trade also deteriorated sharply in 2008. The accrual of donor disbursements together with the inflow of the fees for the mobile license by TIGO led to an increase in gross official reserves from 4.8 months at end-2007 to 5.3 months by end-2008.

8. Regarding the exchange rate policy, over 2008 the Rwandan Franc depreciated by almost 2 percent against the U.S. dollar; however due to the high inflation in 2008, the Rwandan appreciated significantly in real terms against the dollar during the year. It is worth noting that more foreign exchange was sold in 2008 than in 2007, partly reflecting the high demand for imports. However, the stock of foreign exchange has increased over the year as a result of donor disbursements made during 2008 and the large sale of the telecommunication license.

9. The end-December 2008 targets for reserve money and Net Foreign Assets (NFA) were met. However, there was a persistence of high levels of currency in circulation and vault cash, which increased in the face of rapid pace of economic growth, inflationary developments and the opening of new bank branch networks. NBR relied more on the sale of foreign exchange for sterilization purposes rather than on the issuance of domestic instruments. As a result, domestic debt declined sharply in 2008. This policy was also in response to the demand of both the private sector and Government for foreign exchange to finance the high cost of imports in 2008.

10. Broad money growth declined to 5.5 percent at end-2008, which was well below the program projections. The broad money even began to decrease in nominal terms from November 2008 due to falling deposits. The decline in deposits was mainly the result of some large depositors withdrawing their deposits for long term investment both locally and externally. By end-2008 there was a tightening of the liquidity in the banking system. The Central Bank responded to this situation by (i) reducing the reserve requirement ratio by 3 percentage points from 8 percent to 5 percent in early 2009, as well as significantly reducing the stock of outstanding domestic assets (including treasury bills and repos).

II. Structural Reforms

11. Significant progress has been made in developing Rwanda’s financial sector. The number of people accessing formal financial services increased. In line with the objective of the government to increase access to financial services to the population, in 2008 the Central Bank licensed two more commercial banks. These are Banque Populaire du Rwanda which was upgraded from a microfinance institution and the Kenya Commercial Bank Rwanda. In addition, NBR permitted the establishment of 23 new microfinance institutions. Furthermore, six new commercial bank branches were opened in 2008. The total number of beneficiaries of formal financial services has increased by 29.5 percent from 2007 to 2008.1 Structural reforms continued to be developed across the sector, with notable achievements including:

  • Amendments made to the Central Bank Act. These amendments, made in February 2008, gave NBR the authority to regulate the non-banking financial sector, comprising insurance companies, brokers and pension funds. The Central Bank will be able to draw from its experience in regulating the banking sector to ensure the safety and soundness of the non bank financial sector.

  • A number of systems have been implemented by NBR under the new National Payments Strategy. As planned, the switch for card-based payments is operational. A number of key supporting policies are close to being ready for full implementation, including the operation of the Automated Clearing House and the Real Time Gross Settlement system (integrated with the Central Securities Depository). In addition, a National Payments Council has been established to oversee and advise this process, which involves representation from the commercial banks, MFIs, Government, teams involved in the national switch-over, telecoms representatives and the Rwandan Development Board.

  • The Insurance Sector Law came into force in March 2009. The core set of implementing regulations have been released for comments by the industry and will be issued as soon as these comments are discussed and evaluated.

  • In line with the license issued in 2008, a private credit reference bureau will be operational before the end of 2009. The private credit bureau will replace the public credit bureau housed at the Central Bank and will now also cover microfinance institutions. The purpose of the new bureau will be to compile information concerning the repayment behaviour of individuals and businesses and will organize this information for resale to banks, credit providers, insurance companies and other eligible entities. The information provided by credit bureaus is used by credit providers to better assess the risks posed by a particular credit application, based on the credit customer’s ability to manage credit in the past. Credit Bureaus are an essential component in the development of a sound financial sector and a robust credit industry.

12. Progress has been made in reforming Public Financial Management (PFM) in 2008 and early 2009.

  • The PFM Reform Strategy (2008–2012) was approved by Cabinet in December 2008. Since the strategy was approved, a PFM steering committee has been established and the first meetings were held in early 2009. To further embed the principles of PFM, a Manual of Budget Processes and Procedures has recently been approved and training on the content has been scheduled for July 2009. In addition, the piloting of an Integrated Personnel and Payroll Information System has been successfully managed by MIFOTRA, with civil servant salaries paid through this route since February 2009. Further pilots are due across a number of other Ministries over 2009, streamlining payment processes.

  • Embedding the principles of MTEF at every level of government. The government’s MTEF manual formalized practices already in use across the budget process. Indeed, the practices outlined in this document were central to formulating the mini-budget for 2009 as well as the budget for the new financial year 2009/10 that was recently approved by the Parliament. To ensure complete implementation of the manual across all budget agencies, MINECOFIN is currently recruiting a consultant to undertake comprehensive training of all planning and budgeting officers to reinforce the MTEF principles. An appointment will be made by the end of June 2009, with training to commence shortly after.

  • The Government and development partners signed a memorandum for budget support harmonization. Sector-Wide Approaches (SWAPs), designed to harmonize and align donor interventions, were adopted in the energy, transport and agriculture sectors.

III. Program Performance in the First Half of 2009

13. Multiple external and domestic shocks affected economic performance during the first half of 2009. These shocks are expected to reduce demand for exports, especially minerals, reduce income and revenues from tourism and remittances, as well as foreign direct investments. Despite these shocks, performance at end-March 2009 was satisfactory as inflation decelerated on account of good season A harvest.

14. Two indicative fiscal targets for end-March were missed. The targets for Net Credit to Government (NCG) and the Domestic Fiscal Balance (DFB) were missed by some margins. These targets were missed mostly because of the delayed disbursement of budget support grants from the World Bank and the need to finance the DRC military operations, as well as the frontloading of some priority expenditures. The Government financed these expenditures by drawing down deposits in NBR. The target spending for priority expenditures was met with a significant margin.

15. The indicative target for net repayment of domestic arrears was also missed at end-March. This reflected delays in implementing new payment procedures to reduce frauds and increase transparency in payments. Where payments orders did not meet all legal requirements, these were cancelled and re-issued subsequently. Moreover currently, there is lack of synchronization between the payment information system of MINECOFIN and NBR as this is done manually, resulting in a perceived accumulation of arrears though payments by NBR have been effected. Efforts are ongoing to provide an electronic interface between the two softwares (using SmartGov). This will allow automatic synchronized recording of all payments. In the second quarter, there was a sharp reduction of arrears as payments accelerated; as a result end-June target is likely to be met with a margin.

16. Revenue collection during the first quarter matched projections despite the impact of the world economic crisis. Tax and customs revenue collections exceeded projections reflecting a still robust economic growth at the end of 2008 and delayed high imports in early 2009. These imports contained a large portion of capital goods that were partly funded by a drawdown of Government deposits.

17. Government spending exceeded program projections by about RWF 12 billion during the first quarter on account of the internationally approved military operations in the DRC at the beginning of the year, as well as the frontloading of spending on telecommunications, water and energy projects.

18. The impact of the external shocks were felt in the early months of 2009 as exports declined by about 10 percent in U.S. dollar value terms in the first quarter compared to the same period last year. On the other hand, imports in value terms were about 58 percent higher than in the corresponding period of 2008. This reflected delays in arrival of imports contracted last year at high prices as well as a still robust economic growth at end-2008. As a result the trade deficit widened significantly compared to the same period last year.

19. The Net Foreign Assets (NFA) of NBR declined sharply by about 22 percent during the first quarter of 2009. This reflected the delayed disbursements of budget support grants from the World Bank and the need to sell foreign exchange to support import activities. The end-March NFA indicative target was thus missed. Broad money also declined by about 8 percent during the same period, reflecting a decline in currency in circulation and deposits. These developments also reflected the tight liquidity situation in the first quarter of 2009.

20. Regarding fiscal performance in the first half of 2009, the continuing economic growth, high imports and improvements in Rwanda Revenue Authority’s (RRA) efficiency will likely keep revenue collections at the level projected for this period. Strict adherence to expenditure allocation levels as well as enforcement of spending procedures are expected to reduce the incidence of over-spending as well as avoid arrears build up by ministries and agencies. According to our preliminary information, Net Credit to Government and Domestic Fiscal Balance indicative targets for end-June 2009 are likely to be missed on account of (i) delays of disbursement of sector budget support grants, and (ii) expenditures related to the military operations in DRC, which were not foreseen when program targets were set. The Priority Expenditure target was likely met with a comfortable margin.

IV. Macroeconomic Outlook and Medium Term Strategy

21. Multiple external and domestic shocks are expected to continue to impact on economic performance for the rest of the year as well as for the medium term, in particular:

  • Real GDP growth will be led by the agriculture sector, which will continue to benefit from investment in inputs and extension services. This is evident in the strong harvest observed in season A. However, growth in the medium term is expected to be lower than the exceptional performance in 2008/09.

  • The global economic and financial crisis will impact negatively on economic performance by reducing financial inflows through two main channels; (i) declining external demand for Rwandan goods and services with tourism and minerals strongly hit and (ii) reducing other financial inflows including remittances and FDIs.

  • The current liquidity shortage could exacerbate the impact of the global financial crisis by reducing the availability of domestic credit for growth. The stock of credit to the private sector had already declined by 0.5 percent during the first four months of 2009.

22. In light of these factors, real GDP growth is projected to slow down in 2009–10. Real GDP growth is expected to decline from the estimated 11.2 percent in 2008 to about 5.5 percent in 2009/2010 reflecting the slowdown of non agricultural growth. Construction and real estate, mining hotel and restaurants and trade will be particularly affected by the global crisis and the liquidity shortage. From 2010, however, a gradual recovery of the nonagricultural sector in line with developments in the world economy is expected. This together with a normal agricultural growth will be expected to raise real GDP growth to about 6.3 percent in 2010/11 and about 7 percent in subsequent years.

23. Inflation is projected to decline to single digits in the second half of 2009. This decline will result largely from a reduction in import prices, lower domestic food prices on account of the good harvest and an easing of domestic demand pressures. The headline inflation has already fallen from 22 percent at end-December 2008 to about 12.7 percent at end-May, largely reflecting slowing growth of food and housing prices. Continued prudent monetary management will be required to keep inflationary expectations down so as to achieve the target inflation rate of 5 percent in 2010.

24. The balance of payments is likely to deteriorate in 2009–2010. This reflects the sharp deterioration in the external environment as exports of goods and services are expected to decrease by about 23 percent in U.S. dollar terms in 2009 compared to 2008. This decline will be partially offset by a reduction of approximately 7 percent in imports. Despite frontloading of official foreign assistance, the current account deficit (including official transfers) is expected to deteriorate slightly from 5.5 percent of GDP in 2008 to about 6.6 percent of GDP in 2009. Foreign Direct Investment and other capital inflows are also expected to fall, resulting in the deterioration of the overall balance of payments by about US$ 80 million compared to 2008.

25. Although exports of goods and services and other private capital flows are expected to recover from 2010 as the global environment improves, the concomitant increase in imports to support the EDPRS investment needs and the projected decline in official transfers would be expected to lead to a further worsening of the balance of payments. An overall deficit of about US$ 30 million is projected for 2010. To support the projected import values in line with EDPRS investment needs, some draw down of international reserves can be accommodated in the next few years. The balance of payments is expected to improve from 2011 as the world economy recovers and demand for Rwandan goods and services increases. However, the current external shock could have a lasting impact on the reserve coverage of the country, which could stabilize at about 4 months of imports over the medium term, down from about 5.3 months at end-December 2008.

26. The medium-term balance of payments projections assume greater exchange rate flexibility to stem the loss of foreign exchange reserves. This will help gradually offset the competitiveness losses that Rwanda suffered as a result of the large real appreciation in 2008.

27. Fiscal policy will have to balance the competing objectives of cushioning the impact of the economic crisis on growth and poverty reduction as envisaged in the EDPRS whilst preserving the medium-term fiscal and external sustainability. Declining revenues, and from 2010/11 lower committed external budget support, are expected to reduce the available budget resources. For fiscal year 2009/10, fiscal revenues are expected to decline by about 2.4 percent of GDP compared to 2008/09. This largely reflects absence of “one off” payments, slowing economic activity, losses from adopting the East African Community (EAC) common external tariff (CET), and elimination of value added tax on large trucks and surcharge on sugar.

28. In the medium-term, revenues are projected to increase by at least 0.2 percent of GDP per year, reflecting both economic recovery and continued increases in efficiency of tax collection. Grant financing is projected to remain high in 2009/10, but the projection for 2010/12 takes into account only the grants already committed by donors. This shows a decline of about 2–3 percent of GDP compared to the level of 2009/10. To maintain expenditures at a level of the 2009/10 as a share of GDP, projections envisage an increase in concessional borrowing.

29. The expenditure plan shows a gradual adjustment partly offsetting the reduction in resources. The total expenditure in the budget for fiscal year 2009/10 approved by Parliament amounted to 26.9 percent of GDP. A gradual reduction to about 25.2 percent of GDP by 2011/12 is envisaged. The main source of the reduction is externally financed capital expenditure, which reflects expected reduction in donor grants for capital projects. Recurrent expenditure and domestically financed capital expenditure for 2009/10 are projected at about 20.2 percent of GDP, confirming that the expenditure profile will be sufficient to achieve the objectives outlined in Rwanda’s poverty reduction strategy (EDPRS). Priority expenditures will remain at about 13 percent of GDP during this period.

30. The budget deficit (excluding grants) is expected to rise sharply to 13.6 percent of GDP in the 2009/10 budget but thereafter decline to about 11.5 percent of GDP by 2011/12. The increase in 2009/10 and the subsequent decline are broadly consistent with the macroeconomic policy objectives and available financing. The projected net liquidity impact of the budget spending (about 2 percent of GDP per year in 2009/10–2011/12) will provide a stimulus to the economy without compromising the Government’s objective of restraining inflation to single digits. The expanding budget deficit in 2009/10 would imply a draw down of government deposits in the NBR of up to 1 percent of GDP. This would be covered by funds from the mobile telephone license fees of about 1.4 percent of GDP received at the end of 2008. Consistent with the medium-term projections, the budget does not envisage any further domestic bank financing except for monetary policy purposes. An update of the debt sustainability analysis (DSA) indicates that the medium-term fiscal profile is broadly consistent with the maintenance of public debt at a sustainable level.

31. The Government is in the process of studying the macroeconomic implications of its plans for the pension system reform and the introduction of the Provident Fund. This will involve a possible redirection of a part of central Government revenue (and expenditure) to the Provident Fund. Given that more time is needed for the Government to assess the implications of the possible reforms for the central budget, including the revenue losses and offsetting measures for them, the budget for 2009/10 does not include these reforms, and the current medium term projections do not yet include the estimates of the impact. These will be included in the fiscal framework once the technical work has been completed.

32. Monetary policy in the medium term will be more proactive in averting balance of payment pressures as well as moderating inflation. It will also pay more attention to managing the bank liquidity situation. The NBR will continue to use reserve money as the operational target to control inflation. To achieve this objective, NBR will aim to meet the reserve money target on average and not only at end-month, through a coordinated sale of domestic and foreign sterilization instruments. NBR will work with the Fund team to develop a reserve money operational framework that would reduce volatility and improve its effectiveness as an operational target.

V. The Macroeconomic Program for Fiscal Year 2009/10

33. The fiscal year 2009/10 marks the beginning of Rwanda’s aligning itself to the EAC budget calendar as well as implementing the EAC Common External Tariff (CET) from 1st July 2009 under the Customs Management Act. This implies that the customs tariff bands will change from tariff bands of 30 percent for finished products, 15 percent for semi-finished goods, 5 percent and 0 percent for raw materials to a three tariff band of 25 percent for finished goods, 10 percent for semi finished goods and 0 percent for raw materials. Under the CET, taxes on international trade will be levied at point of entry basis instead of CIF Kigali.

34. Managing the impact of the external and internal shocks on economic performance will be at the heart of our macroeconomic policies. On the real GDP growth front, we will intensify our investment and extension service activities in agriculture as the lead sector to achieve our projected growth of 5.3 percent in 2009. The expected good harvest together with our fiscal and monetary policies that are outlined below should enable us to achieve single digit inflation in mid-2009.

35. Regarding fiscal policy, the domestic fiscal deficit (excluding spending on demobilization and peacekeeping operations) is projected to rise from about 5.3 percent in calendar year 2008 to about 6.2 percent in fiscal year 2009/10. This will result from increasing allocation of budgetary resources to investment and other priority projects outlined in the EDPRS, which will provide a solid base for growth in Rwanda.

36. We expect fiscal revenues to decline by about 2.4 percent of GDP compared to 2008/09. This is due to reasons previously highlighted in paragraph 27. These losses will be partially offset by additional revenue measures introduced by the Government, which include increasing fuel levy earmarked for road maintenance, gradually eliminating implicit subsidies on petroleum products and raising excise taxes on mobile airtime.

37. In the case of expenditures, the focus lies in increasing resources to public infrastructure, especially energy and roads. The development of physical infrastructure aims at reducing the cost of doing business in Rwanda to promote private sector led growth. In addition, more resources have been allocated to agriculture, education, health and water. Priority spending will remain high at about 13 percent of GDP, about the same level as in 2008. The priority areas are as follows:

  • Agriculture—we will pursue a multi-pronged approach to growth in this sector. Activities will focus on the provision of fertilizer and improved seeds and other inputs. Funds for reduction of soil erosion, irrigation and water management as well as marshland development have been increased.

  • Energy—to address the issue of limited and insufficient energy, we have allocated sufficient funds to continue various energy projects including the Nyabarongo hydro dam as well as other microdam projects. In addition, funds have been allocated for investment in the Lake Kivu gas project, provision of heavy fuel generating plant for Electrogaz as well as for rehabilitation of distribution infrastructure. It is expected that the implementation of all these projects will make it possible to reduce electricity tariff by half after 2010 as well as cut the subsidy to Electrogaz by 0.5 percent of GDP in 2010–12.

  • Roads—we will undertake various projects aimed at upgrading and rehabilitating key road networks in the country including Kigali and the surroundings. With regards to the Kigali and surroundings road network, we have contracted a loan of US$33 million from the ExImBank of China at end-June 2009. This project is of utmost importance to urban and economic development. The World Bank has confirmed its technical and economic viability. Other more concessional financing for this project was not available. Development partners indicated that this would not jeopardize Rwanda’s access to future concessional financing. This loan has a grant element of 34 percent and our analysis shows that the loan will not significantly worsen the external debt sustainability. We are therefore requesting a waiver for the continuous performance criterion on contracting nonconcessional debt.

  • Information and communication technologies (ICT)—we will continue to invest the proceeds from the sale of Rwandatel in the ICT sector. The objective of this project is to provide a robust nationwide broadband backbone using fiber optics. Over time it is expected that the availability of this ICT backbone will provide a platform to induce new economic activity countrywide.

  • Education and health—In line with our EDPRS policies, we will retain the momentum generated last year in these sectors. Regarding education, after achieving a significant increase in enrolment, the focus is now turned to improving quality of the “9 year basic education” by raising the completion rate and strengthening post-basic education. We will therefore intensify the rehabilitation of existing classrooms as well as construction of new ones. We will also speed up the distribution of textbooks to improve learning, intensify the training of teachers to improve standards as well as distribute 100,000 laptops to various schools to encourage distance learning and promote computer literacy. In the case of health, the budget will support activities aimed at improving human health and slowing down population growth. The focus will therefore be on the purchase of drugs, vaccines and other medical supplies as well as catering for the “mutuelle” insurance schemes and expanding the contractual approach to community health programs.

PRIORITY EXPENDITURE AS PERCENT OF GDP, 2008/09 AND 2009/10

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  • Water and sanitation—we will continue with the rehabilitation of existing water and sanitation infrastructure as well as construction of new ones to improve delivery of services. In the area of water facilities we will finalize the construction of water pipes to various districts and towns including the supply of Kigali with water from the Nyabarongo underground sources. To improve sanitation, we will also complete the construction of various schools and town latrines.

38. On the external front, the impact of the global crisis will result in a slight widening of the current account deficit in the next fiscal year. We will therefore draw down a small amount of our international reserves to enable us sustain our projected level of imports to achieve our growth objective. Should the balance of payments situation unexpectedly deteriorate, to stem the loss of reserves beyond what we have projected we will allow greater flexibility in the exchange rate by replacing the current system of on-demand sales of foreign currency to commercial banks with an auction system based on predetermined foreign exchange sales.

39. Reserve money will remain the anchor of the monetary program for the fiscal year 2009/10 to return and maintain inflation at single digits. We will therefore limit reserve money growth in the July- December 2009 and the January–June 2010 periods to about 6.5 percent and 7.5 percent respectively. To create enough room for an expansion of private sector credit, NBR may have to inject medium to long term liquidity in the banking system.

40. We will implement the facility for collateralized three to twelve month lending by NBR consistent with the reserve money target. The interest rate on the scheme, currently at 11.5 percent, will be changed in line with future changes in policy interest rates.

41. We will further improve our liquidity forecasting and coordination of fiscal and monetary policies. In this regard, we will strengthen the Treasury Management Committee (TMC) to enable it improve the coordination of fiscal and monetary policies. To this end it will pay more attention to the monitoring of the import component and the domestic demand impact of fiscal spending.

42. To prevent the risk of sharp credit slowdown, the Government will temporarily move part of its deposits currently at the NBR to commercial banks. The scheme is currently assessed and limited to 12 billion Rwf for the second half of 2009. Banks that increase the stock of their investment lending with maturity of over 3 years will be eligible for the government deposits. Banks will select the projects, will bear the credit risk, and set the lending rate. At the same time, the participation in the scheme will be voluntary. Only commercial banks that meet the Capital Adequacy Ratio will be eligible to participate in the scheme.

43. The NBR will also aim to restore positive real interest rates to prevent further deterioration of private sector deposits in commercial banks.

44. The NBR will strengthen its efforts to improve the functioning of the banking system and bank supervision. The focus will be on the following areas:

  • We will finalize and implement a new liquidity regulation which will require banks to comprehensively report on maturity of assets and liabilities. On the basis of these reports, we will develop a new and more comprehensive liquidity ratio. When necessary, we will require that banks prepare action plan, including contingency funding plans if needed, to maintain an adequate liquidity position.

  • We will implement the recently approved regulation on classification of nonperforming loans and provisioning. In addition, the capital adequacy requirement was raised in May from 10 to 15 percent to further strengthen the banking sector.

  • We will enforce better risk management practices and corporate governance in the commercial banks, in line with existing regulations. In particular, we will advise each commercial bank to present its risk management program to be discussed with NBR before end-2009.

  • We will strengthen risk-based bank supervision. We will rebuild the Banking Supervision Department capacity to conduct on-site inspections once a year as soon as possible. We will hire, on a temporary basis, external auditors to assist banking supervision department at the NBR in undertaking on-site inspections of two large banks by end-2009.

  • We will augment the supervisory capacity at the NBR. Therefore, we will address the staffing shortage at the bank supervision department. Recruiting and training of new staff is now underway. In addition, by end-2009, we will improve the salary structure of the NBR to enhance motivation of the staff.

45. On the upcoming SDR allocation, this will increase the Net International Reserve position of Rwanda. While this will provide an additional buffer to gross reserves, it will not impact Rwanda’s Net Foreign Assets position because both foreign assets and liabilities will increase. Because Rwanda’s reserve cover in our baseline scenario is projected to be reduced from 5.3 months of imports to about 4 months of imports in the medium term, and the proposed fiscal stance is appropriate, we will save the SDR reserves as a safeguard against potential balance of payments pressure in the medium term. Should the balance of payments deteriorate more than expected, the use of the SDR allocation will be revisited at that time.

VI. Structural Policies for Fiscal Year 2009/10

46. The focus on the structural side will remain on enhancing the productivity of the agricultural and export sectors, improving conditions for the private sector and effectiveness of public financial management.

47. Export Promotion

  • Our export promotion strategy will continue to focus on enhancing the productivity in traditional sectors and diversifying our export base. New developments include the formation of a National Export Board which is to be established in July 2009 and will incorporate promotion of all agricultural exports under one institution. In the tea sector, 2009/10 will see the privatization of three factories which is hoped to improve productivity. For coffee, a Marketing Alliance will be established in 2009/10 to improve marketing. On tourism, a new regional approach aims to market EAC as one destination with a diversification of activities within. Rwanda will continue to focus on high-end cultural and eco-tourism.

48. Financial Sector

  • The Financial Sector Development Plan (FSDP) is expected to be fully implemented by June 2010. The multifaceted FSDP has the task of strengthening and deepening the financial sector in Rwanda from microfinance to long term capital markets. Areas still to be completed include:

  • Improving access to credit. Regulations for the newly developed Savings and Credit Cooperatives (SACCOs) and Micro Finance Institutions are ready for gazetting, thereafter they will be implemented. A private credit reference bureau which has been be set up will commence work to improve the quality of information and the assessment of risk posed by banks credit customers.

  • Savings. Implementation of the National Savings Mobilization Strategy and the Umurenge SACCO’s strategy (adopted by Cabinet in early 2009) will commence soon. These strategies will aid the Government in reaching the gross national savings target of 10 percent of GDP by 2012 (8.5 percent in 2008/09).

  • Improving the Pensions Sector. Liberalization of the pension sector will be achieved by setting up a legal framework for the private pension scheme and personal retirement saving accounts. The law is expected to be officially published in early 2010.

  • Regulation and Legal Framework for the Insurance Industry. NBR will work on legal and structural issues in the coming year to ensure a well regulated insurance sector.

  • Modernization of the National Payment System. The NPS framework and strategy among others encapsulates the vision and projects will be undertaken to continue to modernize the Rwandan Payment Systems. The aim of this strategy is to have a clear vision and plans that we will enable us to set up an efficient, safe, fast and reliable payment system and expedite high value funds transfer. Many stakeholders are involved as indicated in the membership of the National Payments Council (NPC) where there is a wide range of representation.

49. Cost of Doing Business

  • Efforts to improve the business climate will continue. A key development will be the modernization of Rwanda’s business registration. A registry for secured transactions and intellectual property rights will be established. Moreover, businesses will benefit from the developments in online taxation, as well as other online applications and issuance of certificates; for example, it is planned to make it possible to register a business on-line (by the end of 2009).

50. Public Investment and Public Private Partnerships

  • The Government will utilize its new National Public Investment Policy to improve resource allocation, quality, and efficiency of the investment portfolio and increased level of project execution rates. In 2009/10 it will strengthen the newly established instruments for public investment. These include the Public Investment Committee and the Technical Team. In addition, we will finalize the institutional framework as well as the operational guidelines. Care will be taken to ensure alignment of public investment with the new Public Private Partnership program and Rwanda’s development goals.

  • To foster private sector participation in infrastructure development, while enhancing the government’s capacity to manage related fiscal risks, the Government will develop a Public Private Partnership (PPP) framework. During the year, the Government shall develop and adopt an agreed PPP framework that will set the scope of PPP program, detailed institutional and legal framework, regulations and procedures, procurement and negotiation, and the appropriate distribution of risks between the public and private sectors.

51. Fiscal Structural Reforms

  • Tax administration reforms will continue to achieve our targets for widening the tax base. To achieve the goal we will focus on three areas in 2009/10:

  • Enhancing taxpayer compliance. To widen the tax base we will effectively implement the Block Management System for which a pilot program has begun and a national roll out is expected by January 2010. Since employers will be forced to declare the same figures for PAYE tax and social security compliance levels are expected to rise.

  • Increasing efficiency of operation and minimizing transaction costs. We are planning to increase the amount of transactions customers can carry out online. This will increase the use of banks for payments, and tax services will be decentralized away from headquarters and closer to businesses.

  • Facilitating trade. Cargo scanners will be introduced by January 2010 to assist in expediting the clearance of cargo, and so reducing the need for timely physical verification of imported goods. We will continue to provide incentives to compliant taxpayers and enforce appropriate sanctions to the non compliant.

52. Specific tax reforms will be imposed to enhance the effectiveness of the decentralization process. The RRA will strengthen its presence in the provinces and computerize all provincial offices by the end of 2010. At the district level the Government will undertake a study to identify new revenue sources available at the local level. It will recommend possible policy actions to widen revenue base.

53. Public Financial Management

  • The Government will undertake a range of measures in continuation of Public Financial Management (PFM) reforms. Some of the activities for 2009/10 include:

  • The MTEF process will be revitalized and integrated fully into budget preparation focusing on strengthening performance based budgeting. The costing of all major sectors for MTEF purposes will continue in 2009/10. Gender budgeting and performance-based budgeting will be mainstreamed into the budget process. Furthermore, Government will ensure that all externally financed projects and programs which managed by Government are fully reflected in the budget in order to minimize extra-budgetary funding.

  • Strengthen the newly established Rwanda Public Procurement Authority (RPPA). A new organizational structure and human resources strategy will be adopted by the RPPA, which is linked with anti-corruption institutions.

  • IT improvements—’Smartgov’. The budget IT system will be developed to increase coverage of expenditures which are carried out outside the treasury system. This includes self-generated revenues of agencies and districts and donor-funded expenditures. Improvements also include the management of government bank accounts. This will assist the monitoring of project execution rates. The pilot for this new system should begin in July 2009.

  • District level reforms. Pilot projects have begun in the installation of new software for Tax Management Systems for districts, it is expected that this can begin to be rolled out to districts by end-2009. Training of local government staff in financial management procedures and reporting, focusing on local revenue mobilization will be carried out.

Att. 1. Table 1:

Rwanda: Quantitative Performance Criteria and Benchmarks for 2008

(Billions of Rwandan francs, unless otherwise indicated)

(Quantitative benchmarks* and performance criteria on test dates**)

article image
Sources: Rwandese authorities and IMF staff estimates and projections.

At the program exchange rate of RF545/US$ for 2008.

Targets are calculated as an arithmetic average of the stock of reserve money on the last day of each calendar month in the quarter. Program projections are done quarterly.

Numbers are cumulative from December 31, 2007.

The domestic fiscal balance targets will be adjusted by the amount of grants exceeding or below programmed grants with the adjusters as specified in the TMU of February 12, 2008. Also the priority spending targets will be adjusted by the amount of grants exceeding or below programmed grants.

This is a continuous performance criterion. Excluded from the criterion are changes in indebtedness resulting from refinancing credits and rescheduling operations of existing debt, credits extended by the Fund, and US$97.7 million in credit from the Exim Bank of India with concessionality of 40 percent for the construction of the hydro power plant at Nyabarongo.

Excludes arrears on obligations that are subject to rescheduling.

Ceiling on the stock of external debt (excluding normal imported-related credits) owed or guaranteed by the central governments, local government, or the NBR with original maturity of up to, and including one year.

Figures indicate the NPV projections based on debt contracted at the test date.

Numbers show end of period stocks. The stock of debt at end-2007 was revised from RF200.3 billion to RF236 billion, which prompted revision of the program numbers for September and December 2008.

Excluding external donor financing for demobilization and peacekeeping.

Att. 1. Table 2.

Rwanda: Quantitative Indicative Targets and Benchmarks for 2009–10

(Billions of Rwandan francs, unless otherwise indicated)

article image
Sources: Rwandese authorities and IMF staff estimates and projections.

At the program exchange rate of RF555/US$ through June 2009 and RF576.8 from September 2009 to June 2010.

Targets are calculated as an arithmetic average of the stock of reserve money on the last day of each calendar month in the quarter.

This is a continuous indicative target.

Excludes arrears on obligations that are subject to rescheduling.

Ceiling on the stock of external debt (excluding normal imported-related credits) owed or guaranteed by the central governments, local government, or the NBR with original maturity of up to, and including one year.

Figures indicate the NPV projections based on debt contracted at the test date.

Numbers show end of period stocks.

Excluding external donor financing for demobilization and peacekeeping.
1

From July 30, 2008, the intervention exchange rate was based on the weighted average of the rates (average reference rate or ARR) applied by banks in their transactions with their clients during the week. In November 2008 the mechanism was changed from the ARR to the NBR’s selling rate which is fixed at a margin of 0.6 percent above the ARR. The exchange rate was also recalculated and applied daily instead of weekly.

2

The sixth review covers performance criteria for end-December 2008 and indicative targets for March 2009.

3

The one-off receipts amounted to nearly 2 percent of GDP, and included telephone license fee of US$60 million, arrears collection and revenues from ID cards distribution.

4

The loan has a maturity of 20 years (including a grace period of 6 years) and an annual interest rate of 2 percent. It also bears an upfront 1 percent management fee and a 0.3 percent commitment fee.

5

While some donors are frontloading disbursements to mitigate the impact of the world economic crisis, medium-term projections include only grants already committed by donors.

6

Private imports are adjusting with a considerable lag, while the government imports still remain high.

7

Recommendations of the MCM TA mission to Rwanda (September 22–October 7, 2008).

8

The larger banks have approached such institutions as FMO, EIB, IFC, and the ADB with requests for foreign currency loans.

1

Beneficiaries of all formal financial services (including microfinance institutions) increased from 1.4 million in 2007 to 1.8 million in 2008.

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Cover IMF Staff Country Reports
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
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 264
Publisher:
International Monetary Fund
ISBN:
9781451833492
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9781451833492.002
  • Figure 1.
    View in gallery
    Figure 1.

    Rwanda: GDP Growth, Inflation and Exchange Rate, 2003–09

  • Figure 2.
    View in gallery
    Figure 2.

    Rwanda: Program Performance in 2008 and 2009

  • Figure 3.
    View in gallery
    Figure 3.

    Rwanda: Liquidity Developments, 2006–09

  • View in gallery

    Rwanda. External PPG Debt-to-Exports Ratio Under Alternative Scenarios

    (All scenarios include the China ExImBank loan, unless otherwise noted)

Figure 1.

Rwanda: GDP Growth, Inflation and Exchange Rate, 2003–09
Figure 2.

Rwanda: Program Performance in 2008 and 2009
Figure 3.

Rwanda: Liquidity Developments, 2006–09

Rwanda. External PPG Debt-to-Exports Ratio Under Alternative Scenarios

(All scenarios include the China ExImBank loan, unless otherwise noted)