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).
My Rwandan authorities would like to thank staff for the constructive discussions held in Kigali and in Washington, in preparation of the Policy Support Instrument. My authorities would also like to thank the Executive Board and Management for their continued support which has helped Rwanda make important strides in the pursuit of its development goals.
After successfully implementing three successive PRGF arrangements over the past years, Rwanda has demonstrated program ownership and posted strong results on the fronts of macroeconomic stability and output growth, which can fairly qualify the country as a mature stabilizer. Despite the challenges still facing the economy in terms of dependence on foreign assistance and narrow export base, much has been achieved in public financial management, bringing inflation down, building an enabling environment for businesses, enhancing governance, modernizing the economy and reducing poverty. In the PSI framework, my authorities are committed to stepping up their effort in the construction of a broad-based economy capable of posting high and sustained growth rates and reducing poverty further as envisaged in the government’s Economic Development and Poverty Reduction Strategy (EDPRS) 2008-2012.
I. TRACK RECORD AND THE CASE FOR A PSI ARRANGEMENT
Achievements under past programs
Over the 1998-2008 period, my authorities have recorded appreciable policy implementation performances. As a result, real GDP growth averaged 8 percent a year during that period, up from 2 percent a year in the 1980s, and higher than the average for SSA countries. Though inflation sometimes peaked up, mainly as a result of exogenous factors, it has currently been brought down to single digits. My authorities have also significantly improved public financial management by strengthening human resource capacities, including in the areas of economic management and budgeting, financial management and reporting, public procurement and budget execution oversight. Fiscal policy was geared towards the overarching goal of increasing the revenue to GDP ratio with the view of reducing the country’s high dependence on foreign aid. In that regard, tax administration notably the Rwanda Revenue Authority has made major improvements and my authorities are committed to continuing on the same path.
With the support of their partners, my authorities have also improved overall policymaking, notably in laying down their strategies in many policy areas, such as public investment, medium term debt management, private sector development and financial sector development. As regards debt management, in the face of pressing development needs, my authorities have maintained the favorable outlook achieved since reaching HIP completion point and MDRI, which improved the risk of debt distress from high to moderate. By keeping up their debt management guiding principle of ensuring that the financing requirements and repayments are met at least cost for economically and financially viable projects, my authorities have garnered donor support while keeping pace with debt sustainability. Under past programs, my authorities have also strengthened their ability to manage exogenous shocks and crises. In that regard, though the recent global crisis negatively affected exports receipts and FDI, my authorities responded appropriately, including through fiscal adjustment measures.
Recent Economic Developments
My authorities have maintained a determined good policy implementation as evidenced by the broadly satisfactory performance under the macro framework agreed with Fund staff for 2009/10. Growth slowed as a consequence of the global crisis, from 11.2 percent in 2008 to 6 percent in 2009. Inflation sharply declined from 22.3 percent in December 2008 to 5.7 percent in December 2009, then to 3 percent in April 2010. The fiscal stance is reflecting the slowdown in economic activity, with declining domestic revenue and high levels of spending. My authorities expect the fiscal deficit to narrow as the economy recovers and revenue regains momentum with their measures for the coming period.
My authorities pursued an accommodative monetary policy in 2009 and began to solve the liquidity issue that persisted in 2008, affecting banks’ profitability, increasing NPLs and causing a sharp decline in credit growth to the private sector. Bank liquidity improved during 2009, and the initiatives taken by the National Bank of Rwanda (NBR), including the lowering of its policy rate and the swap agreement with the IFC in November 2009, will help provide additional resources for long-term lending to the private sector. As regards the external position, the overall balance of payment benefited from resuming FDI inflows, private-sector external borrowing and SDR allocations, despite the widening of the current account deficit due to underperforming exports. Official reserves increased to a comfortable level of 5.1 months of imports.
II. GROWTH-ENHANCING POLICIES AND REFORMS
My Rwandan authorities are determined to build on the progress made over the past years. For my authorities, macroeconomic stability should be maintained and serve as the basis for a more ambitious program that emphasizes bold initiatives and strategies for a sustained and broad-based high growth of 6-7 percent a year. In that regard, they remain committed to the provision of public investment, inducing private investment, as the key driver of the ambitious acceleration of economic growth underpinning the macroeconomic framework of the EDPRS. The policies and reform agenda set forth should cover the PSI period and beyond. The government will seek to consolidate macroeconomic stability by: (i) establishing a sustainable fiscal position, with strong revenue efforts needed to reduce Rwanda’s aid dependency; (ii) strengthening monetary and exchange rate policies to ensure low and stable inflation; and (iii) pursuing structural reforms that deepen the financial sector, diversify the export base, and improve the business environment.
Pursuing fiscal consolidation
My authorities’ fiscal policy will balance the competing objectives of supporting the growth and poverty reduction goals as envisaged in the EDPRS while preserving fiscal and debt sustainability over the medium term. The effort should bring the overall fiscal deficit (including grants) from 3.6 percent of GDP in 2010/11 to less than 1 percent of GDP by 2012/13. To that end, revenue is set to increase by 2 percent of GDP over the PSI period. The strategy also envisages prioritization of expenditures to accommodate additional spending associated with some of the six government strategic investment projects. Further reforms in revenue administration and in PFM will underpin the medium-term fiscal performance.
Strengthening monetary and exchange rate policies
My authorities intend to strengthen monetary policy with the view to better addressing issues such as liquidity shortages and inflation concerns that persisted in the past. The inflation target for 2010 is set at 7 percent, and should stabilize at 5 percent over the medium term. Accordingly, some changes have been introduced to make monetary policy more proactive. The NBR’s Monetary Policy Committee will now meet quarterly and the key repo rate will be reviewed regularly to respond to changing fundamentals. In addition, the NBR will improve communication around monetary policy decisions with the view to helping shape expectations of markets and the public. My authorities are also working to move towards greater exchange rate flexibility and to enhance interbank market.
Scaling up infrastructure investments while maintaining debt sustainability
My Rwandan authorities’ strong belief that underpinned the EDPRS and development strategies for years is that the construction of a flourishing and broad-based economy that raises the national income and provides opportunities for everyone is the ultimate means to reduce poverty in a sustainable manner. That is why the scaling up of economic infrastructure investments to foster growth is key and remains an unwavering policy stance of my authorities in the dialogue with partners. While being cognizant of the need to maintain debt ratios at sustainable levels, my authorities have continuously drawn the attention of their partners on the fact that debt management concerns should accommodate countries’ pressing and huge needs of infrastructures and capital goods.
Two of my authorities’ strategic investment projects, the expansion of Rwandair (the national air carrier) and the building of the Kigali International Convention Complex, fall under the solutions to infrastructure constraints to a service sector-led growth. While these projects will require some nonconcessional borrowing, staff assessed that it will not unduly increase Rwanda’s risk of debt distress. In addition, the borrowing takes into account the limited availability of concessional financing, a shallow domestic capital market, and the need to avoid crowding out the private sector. As regards the viability of the projects, the authorities have conducted feasibility studies, with assistance from international consultants, which show they are expected to have rates of return above financing costs.
Deepening structural reforms over the medium term
Beyond the structural measures to be implemented in 2010/11, my authorities are planning further structural reforms over the medium term in revenue administration, PFM, financial sector, economic integration within the EAC, and export promotion. Revenue administration measures will include introducing e-taxes at RRA headquarters, and rolling out to district and provincial offices, automating the tax audit function by introducing computer-based risk assessments and case selection, and automating collection of social security contributions. PFM will be improved in priority areas such as rolling out of the Integrated Financial Management Information System (IFMIS) core modules to all budget agencies; further strengthening the MTEF through end-user sensitization; continuing fiscal decentralization; and providing further training for procurement officers.
In the financial sector, my authorities will enforce full compliance with the 25 Basle core principles as well as standardization of legal and regulatory framework across EAC, both by December 2012. Their agenda also encompasses measures to better supervise the MFIs and deepen the financial sector, with the view to increasing the financial inclusion rate from 21 percent in 2008 to 30 percent by 2012. My authorities intend to become full member of the EAC to foster economic integration within the region. They are participating in the ground work on macroeconomic convergence criteria prior to the establishment of a monetary union. As regards export promotion, my authorities, through the Rwanda Development Board, are preparing a Comprehensive National Export Diversification Strategy and action plan to be submitted to Cabinet by end-August 2010. The strategy focuses on increasing the value added of existing export sectors and developing new products and services centered around six clusters, including fruits and vegetables processing, specialized tourism especially business tourism, and information technologies. The strategy will also address bottlenecks to make local products more competitive.
CONCLUSION
The appreciable results achieved by my authorities in macroeconomic stability and the structural transformation of the Rwandan economy over the past decade have set the stage for more ambitious goals in terms of policymaking for broad-based growth and further poverty reduction. The authorities’ program for the period 2010-13, underpinned by their core strategies set forth in the EDPRS goes in that direction. The key pillars of this program evolve around maintaining macroeconomic stability, furthering fiscal consolidation to reduce aid dependency, deepening the financial sector as a strong fuel to private sector activity, and strengthening structural reforms to improve the business climate and broaden the economic base.
With the assistance of their development partners, my authorities believe that Rwanda will continue to make progress towards its main goal of becoming an emerging economy in the near future. In that line, my Rwandan authorities would like to request the support of the Board for a three-year PSI to anchor macroeconomic policies, promote sustained and broad-based growth and make further progress in poverty reduction.