Rwanda
Request for a Three-Year Policy Support Instrument: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Rwanda

Rwanda has achieved high growth and macroeconomic stability under three successive Poverty Reduction Growth Facility (PRGF) arrangements. Executive Directors welcomed the new Private Sector Investment (PSI) program, which aims to consolidate macroeconomic stability and achieve sustained broad-based growth while reducing Rwanda’s aid dependency. They emphasized that this can be achieved by maintaining sustainable fiscal position, strengthening monetary and exchange rate policies, and supporting growth with structural reforms. In view of this, Directors approved a three-year PSI for Rwanda for preserving macroeconomic stability, consistent with the authority's poverty reduction and growth strategy, Economic Development and Poverty Reduction Strategy (EDPRS).

Abstract

Rwanda has achieved high growth and macroeconomic stability under three successive Poverty Reduction Growth Facility (PRGF) arrangements. Executive Directors welcomed the new Private Sector Investment (PSI) program, which aims to consolidate macroeconomic stability and achieve sustained broad-based growth while reducing Rwanda’s aid dependency. They emphasized that this can be achieved by maintaining sustainable fiscal position, strengthening monetary and exchange rate policies, and supporting growth with structural reforms. In view of this, Directors approved a three-year PSI for Rwanda for preserving macroeconomic stability, consistent with the authority's poverty reduction and growth strategy, Economic Development and Poverty Reduction Strategy (EDPRS).

I. Background

1. Rwanda has achieved high growth and macroeconomic stability under three successive PRGF arrangements, but challenges remain. Real GDP growth averaged 8 percent a year during 1998-2008, up from 2 percent a year in the 1980s. Growth in Rwanda has been comparable to other countries in the region and higher than the average for SSA countries (Figure 1). Inflation, though volatile, is now in single digits, reserves are at comfortable levels, and external debt has been reduced significantly thanks to prudent policies and substantial debt relief.1 Nevertheless, Rwanda remains a poor country, with a narrow export base, low government revenues, inadequate basic infrastructure, and large development needs. The financial sector remains shallow by regional standards, and there are weaknesses in supervision. Rwanda also remains heavily dependent on donor aid.

Figure 1.
Figure 1.

Rwanda: Recent Performance, Achievements and Challenges

Citation: IMF Staff Country Reports 2010, 200; 10.5089/9781455207633.002.A001

Source: Rwandan Authorities, IMF staff estimates, World economic Outlook, Regional Economic Outlook, and UNDP Human Development and Poverty Indicators.
uA01fig01

Real GDP Growth rate

(percent)

Citation: IMF Staff Country Reports 2010, 200; 10.5089/9781455207633.002.A001

2. The authorities have requested a three-year PSI to anchor macroeconomic policies and support further reforms to ensure high and sustained broad-based growth and poverty reduction. The authorities believe that a PSI is the appropriate successor to the recently-expired PRGF arrangement2, given Rwanda’s lack of need of financial support from the Fund and track record of prudent macroeconomic policies. The government also favors such an arrangement to maintain a close policy dialogue with the IMF and signal to development partners its commitment to sound policies. The proposed program’s three-year time frame is broadly in line with the remaining implementation period of Rwanda’s Economic Development and Poverty Reduction Strategy (EDPRS) (covering 2008-12). 3

II. Recent Economic Developments

3. Growth slowed sharply in 2009, although staff and the authorities’ views differ on the extent of the slow down, while inflation declined significantly (Table 1). After growing by 11.2 percent in 2008, staff estimates point to a slowdown in growth to 4 percent in 2009, compared with the authorities’ estimate of 6 percent growth. Staff estimates are based on a more pronounced slowdown in wholesale and retail trade, construction, real estate, and manufacturing (Figure 2)—sectors that are particularly vulnerable to the global slowdown and tightened domestic liquidity conditions. Staff and the authorities agreed that the official GDP estimates are preliminary and subject to revision, while a number of methodological weaknesses in compilation of national accounts need to be addressed (¶ 25). Inflation in 2009 declined more rapidly than expected, from 22.3 percent in December 2008 to 5.7 percent in December 2009, reflecting lower world commodity prices and the slowdown in economic activity. Inflation declined further to 2 percent in March 2010 before edging upwards slightly to 3 percent in April, reflecting seasonal factors.

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2006–15

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Sources: Rw andan authorities; and IMF staff estimates and projections.

Projections are based on the program exchange rate of Rw F per US dollar of of 571.24.

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

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

On a fiscal year basis (Julky-June).For example, the column ending in 2011 refer to FY2010/11.

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

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

Data from 2009 onw ards includes SDR Allocation

Figure 2.
Figure 2.

Rwanda: Selected Indicators of Economic Activity, Jan 2006-Feb 2010

Citation: IMF Staff Country Reports 2010, 200; 10.5089/9781455207633.002.A001

Source: IMF staff and Rwandan authorities estimates.

4. Performance under the macro framework agreed with Fund staff for 2009/10 has been broadly satisfactory.4 All but two indicative fiscal targets for end-December 2009 were met (MEFP Table 1). Net credit to the government was missed due to delays in disbursement of budgetary grants, which has since been disbursed. The zero ceiling on nonconcessional external borrowing was also missed due to a loan guarantee for the government-owned airline, Rwandair, one of the government’s strategic investment projects. There were no structural benchmarks in the 2009/10 macro framework, but the authorities took significant steps to enhance revenue administration and public financial management, including by expediting the collection of tax arrears and a complete restructuring of the public procurement authority.

MEFP ¶3

5. Fiscal policy is continuing to inject a stimulus in 2009/10. 5 The overall fiscal deficit (excluding grants) is expected to reach 13.7 percent of GDP in 2009/10, from 11.5 percent in 2008/09 and compared to 10 percent of GDP in 2007/08 and earlier, reflecting continued high levels of spending (Table 2 and Figure 3). Total expenditures and net lending is expected to remain unchanged at about 26 percent of GDP in 2009/10, up nearly 4 percent of GDP over the past 2 years. Net lending has increased as a share of GDP in 2009/10 owing to net lending to Rwandair and the Kigali International Convention Center project, two of the government’s strategic investments. Domestically-financed capital spending, on the other hand, has declined in 2009/10, owing to ongoing delays in completing project tender documents. Domestic revenues are expected to decline in 2009/10 as a share of GDP. Total grants rose sharply higher-than-expected in 2009/10, mainly from higher budgetary grants in response to the global economic crisis.

Table 2.

Rwanda: Operations of the Central Government, Fiscal Year Basis1, 2006/07-14/15

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

Fiscal year runs from July to June.

Total revenue minus noninterest current expenditure (excluding exceptional expenditure) minus domestically financed capital investment.

Total revenue minus current expenditure (excluding interest ion external debt), domestically financed capital expenditure, and net lending

A negative sign indicates a reduction.

A negative number implies an underestimate of financing.

Figure 3.
Figure 3.

Rwanda: Fiscal Developments, 2004–09

Citation: IMF Staff Country Reports 2010, 200; 10.5089/9781455207633.002.A001

1 Current PSI countries are: Cape Verde, Mozambique, Senegal, Tanzania, and Uganda.Source: IMF staf f and Rwandan authorities estimates.

MEFP ¶5-6

6. Monetary policy was accommodative in 2009 and so far this year. Significant progress was made in improving monetary management as both within-month and end-period reserve money targets were met in 2009 (Figure 4). Broad money growth (12-month) declined to 13 percent in 2009, compared to growth rates in excess of 20 percent in the previous three years, reflecting a sharp decline in credit growth to the private sector (Table 3). Following a period of tightened domestic liquidity, growth in credit to the private sector declined from 73 percent in 2008 to 5.7 percent in 2009. Bank liquidity improved during the year, as real deposit interest rates turned positive (for the first time in three years), though commercial banks remained cautious in extending credit amid a recent up tick in non-performing loans (Table 4). The National Bank of Rwanda (NBR) lowered its policy rate twice for a cumulative 200 basis points since early 2009. In a further effort to deepen the domestic financial market, the NBR entered into a swap agreement with the IFC in November 2009, which could provide additional resources for long-term lending to the private sector.6

Figure 4.
Figure 4.

Rwanda: Monetary and Financial Developments, 2004–09

Citation: IMF Staff Country Reports 2010, 200; 10.5089/9781455207633.002.A001

Source: IMF staf f and Rwandan authorities estimates.
Table 3.

Rwanda: Monetary Survey1, 2006-15

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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.

For program purposes NFA from 2010 onwards are at program exchange rates.

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).

Reserve money as an Assessment Criteria is measured as the average of the months in the quarter. The actual rerserve money is measured as the daily average of the last month in the quarter.

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).