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.
My Rwandan authorities would like to thank staff for the constructive discussions held in Kigali during their recent missions in connection with the sixth review of the PRGF arrangement. My authorities would also like to thank the Executive Board and Management for the continued support to Rwanda in the pursuit of its PRGF program and broader development goals.
Rwanda is at an important juncture in its relationship with the Fund and the donor community. After successive PRGF-supported programs, albeit the daunting challenges that still lie ahead, Rwanda has strengthened macroeconomic stability and made important strides in establishing the base for sustained growth and further poverty reduction. My authorities have all through the course of their PRGF program demonstrated ownership as evidenced by the commendable performance recorded. Amid the global economic slowdown, real output grew by 11.2 percent in 2008, inflation was subdued, and the country has continued to foster structural change in key sectors of the economy. In light of these achievements, my Rwandan authorities would like to request the support of the Board for the completion of the sixth review under the PRGF arrangement and waivers of nonobservance of performance criteria.
I. Recent Economic Developments and Achievements under the PRGF
Owing to my authorities’ determined implementation of sound policies, Rwanda continues to post significant output growth and poverty reduction. For the first time over the last five years, real GDP grew by double-digit, reaching 11.2 percent in 2008 despite the global slowdown. The main drivers of this performance were the robust expansion in agriculture, manufacturing, services and construction sectors. Inflation that accelerated to above 20 percent in the second half of 2008 as a result of high world commodity prices declined sharply to 12.7 percent in May 2009, and my authorities are committed to bringing it down to single digit.
Rwanda was largely unaffected by the current global economic crisis until early 2009. In 2008, the country recorded buoyant receipts from traditional exports, coffee and tea, and mining. External resources, notably foreign direct investment (FDI), donor aid, and concessional public borrowing were also flowing in at a steady pace. Despite rising imports related to the strong economic growth, the current account deficit was comfortably covered and at year-end 2008, Rwanda accumulated international reserves to over 5 months of imports. As a consequence of the crisis, the first months of 2009 witnessed a reversal of this momentum, with a sharp decline in exports receipts and domestic activity, particularly in the construction, mining, and tourism sectors.
Notwithstanding the negative spillovers from the world economic crisis, my Rwandan authorities’ recent performance under the PRGF has been satisfactory. All quantitative performance criteria for the sixth review were met. The underperformance on some targets was either temporary or due to factors out of the authorities’ control. In the fiscal area, my authorities posted higher revenues than envisaged under the program, amid the impact of the global crisis. Moreover, the cautious approach used by my authorities to save and accumulate deposits up to 1.8 percent of GDP in 2008, provided a buffer to the government to make up the delayed donor disbursements in the first quarter of 2009. On the expenditure side, my authorities have emphasized spending on capital projects, thus keeping up their overall goal of strengthening the infrastructure base of the economy. In addition, key spending on priority sectors was safeguarded. In the monetary sector, my authorities have acted promptly to address the liquidity shortages that arose in early 2009. By repaying a substantial amount of T-bills and reducing the reserve requirement from 8 percent to 5 percent, large amounts of liquidity (up to 1.5 percent of GDP) were injected into the banking system. My authorities intend to step up actions to further remove structural impediments to deposits in the banking system.
The PRGF-supported program has also helped my authorities to garner donor support while keeping pace with debt sustainability. As a post-HIPC and post-MDRI country, Rwanda had to strike the right balance between mobilizing the financial resources for its development needs without building up new unsustainable public debt. In that regard, the ending low-access PRGF helped mobilize highly concessional assistance from donors, bringing Rwanda’s rating of debt distress risk from high to moderate in late 2008.
II. The Way Forward
Building on the commendable results achieved under the PRGF, my Rwandan authorities have laid out their policies for the fiscal year 2009/10 and for the medium term as well. These policies especially address three main factors that will influence the macroeconomic outlook for the period ahead, namely: (i) the return of agriculture to normal growth trend; (ii) the impact of the global economic crisis; and (iii) the effect of liquidity shortages on the economy. To achieve the growth rate for 2009 projected at 5.3 percent, my authorities intend to intensify investment and extension service activities in agriculture as the lead sector.
Fiscal policy and debt management
My authorities’ fiscal policy will encounter an important milestone beginning this year as Rwanda aligns itself to the EAC budget calendar and starts to implement the EAC Common External Tariff from 1st July 2009 under the Customs Management Act. To make up for the revenue loss resulting from this change and from the slowing economic activity, my authorities envisage a number of measures including: (i) additional revenue measures of about 0.4 percent of GDP; and (ii) a stimulus by withdrawing government deposits at the NBR up to 1 percent of GDP. Total spending is set to decline compared to 2008, by about 1 percent of GDP, while safeguarding priority spending on priority areas notably, agriculture, energy, roads, ICT, education and health, water and sanitation.
Over the medium term, my authorities are committed to preserve fiscal and external sustainability. Revenue is projected to recover from the effects of the current slowdown and increase by at least 0.2 percent of GDP per year, reflecting also greater efficiency of tax collection. Based on current grants pledges, donor support is projected to decline by 2 to 3 percent compared to its 2009/10 level. To fill the financial gap, my authorities are cognizant of the need to step up efforts to strengthen domestic revenue and contain expenditure growth. A gradual contraction, reflecting the reduction in externally financed capital projects, should edge down expenditure from 26.9 percent of GDP in 2009/10 to 25.2 percent in 2010/12. Should the fiscal measures not suffice to meet the government financial needs, my authorities are committed to recurring to external borrowing only on concessional terms. As for the recent contracting of new nonconcessional external debt from China ExImBank, my authorities have liaised with developments partners and put forward factors such as the project’s viability, confirmed by the World Bank and the minor impact on the overall debt outlook.
Monetary and exchange rate policy
My authorities’ monetary program will be geared toward maintaining inflation to single digits while providing sufficient liquidity to the banking system to support private activity. To address the inflation issue, reserve money will remain the anchor of the monetary program of my authorities for the fiscal year 2009/10. In that regard, the limit on reserve money growth will be set at about 6.5 percent and 7.5 percent respectively for the July-December 2009 and January-June 2010 periods. To face an unexpected deterioration of the balance of payments stemming from the global crisis, the authorities will allow greater flexibility in the exchange rate.
As regards the liquidity issue, my authorities have decided to temporarily move part of government deposits at the NBR to commercial banks that increase the stock of their investment lending with maturity of over 3 years. This measure will help increase liquidity and boost private lending in the short run. Furthermore, my authorities will take actions to improve the functioning of the banking system and bank supervision. First, they will finalize and implement a new liquidity regulation, which will require banks to comprehensively report on maturity of assets and liabilities, and on this basis, a new and more comprehensive liquidity ratio will be developed. Other initiatives include: (i) implementation of the recently approved regulation on classification of nonperforming loans and provisioning; (ii) strengthening of risk-based bank supervision and augmentation of the supervisory capacity of the NBR; and (iii) enforcement of better risk management practices and corporate governance in the commercial banks.
Structural policies
For the fiscal year 2009/10 and the medium term, my Rwandan authorities’ structural policies will focus on enhancing the productivity of the agricultural and export sectors, improving conditions for the private sector development and strengthening the effectiveness of public financial management. On export promotion, a National Export Board will be established soon to deal with all agricultural exports while the strategy will continue to focus on enhancing the productivity in traditional sectors and diversifying the export base. The Financial Sector Development Plan is expected to be fully implemented by June 2010. It encompasses key goals such as improving access to credit, raising the gross national savings from 8.5 percent of GDP in 2008/09 to 10 percent by 2012, improving the pension sector, and completing a regulation and legal framework for the insurance industry.
My authorities attach a particular importance to the improvement of the business climate with the view to lowering the cost of doing business. A key step in this endeavor will be the modernization of Rwanda’s business registration. As well, online operations will be further developed, and it is planned to make it possible to register a business on-line by the end of 2009. My authorities also intend to develop a Public Private Partnership framework to foster private sector participation in infrastructure provision, while enhancing the government’s capacity to manage related fiscal risks. Consistent with their fiscal sustainability goal, the authorities will continue to further structural change in the PFM and the whole fiscal sector. Tax reforms will accommodate and enhance the effectiveness of the decentralization process. Measures will be taken to enhance taxpayer compliance and increase efficiency of operations and minimize transaction costs by decentralizing tax services away from headquarters and closer to businesses.
Conclusion
Under the framework of the PRGF arrangement, my Rwandan authorities have continued to achieve good results towards their overall goal to deliver better living standards to populations. Beside the improved domestic policymaking, the assistance of the Fund and the donor community has been instrumental in posting these results. Furthermore, the structural change taking hold and improvements on several fronts such as accountability and governance have contributed to strengthen Rwanda’s stature in the international community.
Going forward, it is my authorities’ strong belief that the achievements in macroeconomic stability and structural reforms can be consolidated by further program relationship with the Fund. My authorities’ leaning is towards a Policy support Instrument which they view as the best-suited framework for future cooperation with the Fund.