Satisfactory implementation of the economic program supported by the Policy Support Instrument has helped Rwanda during the global economic downturn. The program focuses on maintaining a sustainable fiscal position; strengthening monetary and exchange rate policies; and supporting growth with structural reforms to diversify the export base and improve the business environment. The authorities are committed to assess the inflation to safeguard the gains made in macroeconomic stability that currently underpin the economic recovery. Executive Directors emphasized the need to maintain macroeconomic stability to achieve sustainable growth.

Abstract

Satisfactory implementation of the economic program supported by the Policy Support Instrument has helped Rwanda during the global economic downturn. The program focuses on maintaining a sustainable fiscal position; strengthening monetary and exchange rate policies; and supporting growth with structural reforms to diversify the export base and improve the business environment. The authorities are committed to assess the inflation to safeguard the gains made in macroeconomic stability that currently underpin the economic recovery. Executive Directors emphasized the need to maintain macroeconomic stability to achieve sustainable growth.

My Rwandan authorities would like to thank staff for the fruitful discussions held in Kigali during their last visit. They would also like to extend their gratitude to the Executive Board and Management for their continued support which has helped Rwanda reach important milestones on the path of economic progress.

The achievements on the fronts of macroeconomic stability and building an enabling environment for a private sector led growth have engineered robust and sustained output over the last decade and also strengthened the resilience of the Rwandan economy to crises. Thus, after suffering the impact of the global slowdown over the past two years, the economy is resuming its momentum, thanks to the appropriate policies my authorities are implementing under the PSI to cope with the various shocks stemming from the crisis. Despite an unfavorable international environment and other challenging domestic conditions, my authorities have posted a satisfactory performance over the period under review, meeting all quantitative assessment criteria and making good progress on key structural reforms.

Going forward, my authorities are cognizant of the daunting challenges still facing the economy and the country as a whole. Efforts should be stepped up to diversify growth engines, reduce aid dependency, and curb down the still high poverty rate as envisaged in the government’s Economic Development and Poverty Reduction Strategy (EDPRS) 2008-2012. My authorities are committed to keeping up their track record of sound policymaking while they endeavor to address those challenges.

I. Recent Economic Developments and Performance under the PSI

The satisfactory implementation of the PSI has helped Rwanda turn around the adverse impact of the global crisis and improve the overall economic situation as evidenced by recent developments. Real GDP growth is expected to reach 6.5 percent at end-year 2010, higher than the 4.1 percent in 2009, though still well below its pre-crisis level of 11.2 percent in 2008. Key drivers that suffered the impact of slowing global demand are recovering buoyancy, notably, exports, services, tourism, and construction. This recovery is taking place in a more stable macroeconomic environment, with inflation lying in low single digits. The external sector is benefiting from the export rebound and reserves are projected to cover 4.6 months of imports at end-year.

Fiscal performance was on track. Domestic revenue exceeded targets by about 0.7 percent of GDP, as a result of overperforming taxes on goods and services and direct taxes. Spending was in line with the program, though foreign financed capital projects suffered delays in external loan disbursements. My authorities’ fiscal policy was also marked by a large stimulus in 2009/10 – of about 2 percent of GDP- as a response to the global crisis. Going forward, my authorities are committed to gradually unwinding the fiscal stimulus and renewing with their efforts of fiscal consolidation.

Monetary and exchange rate policy has been accommodative to boost growth in the face of the adverse international situation. The NBR pursued a twofold strategy of repeated cuts in the policy rate and lowering of reserve requirement on bank deposits. Owing to the cautious attitude of banks and the still weak monetary policy transmission mechanism, credit growth has taken time to respond, but is expected to increase to 10 percent by December 2010 against 6 percent at end-December 2009. My authorities will continue their efforts of deepening the financial sector with the view to improving monetary policy transmission channels and thus enhancing credit to the private sector. Overall, they are committed to further improving the conduct of monetary and exchange rate policy, including by building capacity, improving the functioning of the monetary policy committee, and fine tuning the mix of instruments.

As regards the financial sector, my authorities and staff share the view that the banking sector generally remains sound, profitable, and well capitalized. The capital adequacy ratio of the banking system stood at 17.6 percent as of June 30, 2010. Asset quality slightly improved, with NPLs decreasing from 13.1 percent in December 2009 to 12.2 percent at end June 2010. Bank profitability also increased; at end June 2010, return on equity and return on assets increased respectively from 6.4 percent to 10.3 percent and from 0.9 percent to 1.3 percent compared to June 30, 2009. Still, my authorities are well aware of the steps that need to be taken to build a strong financial sector covering the large unbanked segments of the population and capable of supporting a robust private sector activity.

II. Challenges and Policies Going Forward

My Rwandan authorities are committed to pursuing the good implementation of the PSI. Their agenda for the period ahead encompasses policies that will help maintain macroeconomic stability and achieve robust and sustainable broad-based growth and poverty reduction. In that regard, my authorities intend to take measures to further unleash growth potential. Fiscal and monetary policies will be conducted accordingly. My authorities will also work expeditiously to address a number of bottlenecks and weaknesses that still constrain the economy.

Boosting competitiveness to realize growth potential

My Rwandan authorities fully agree with staff on the favorable economic outlook and will conduct policies to boost competitiveness and realize growth potential. Their core objective in this regard is to post real output growth well above 7 percent over the medium term. To this end, my authorities intend to pursue reforms aimed at creating an enabling environment for the private sector, provide economic infrastructure through strategic investments, develop further the financial sector to boost credit, and implement an export strategy to tap into external markets.

Specifically, building on the favorable ranking in the 2010 global competitiveness indicators and World Bank Doing Business rankings, my authorities will step up efforts to attract more private investment, by granting tax incentives and exemptions. My authorities are determined to lift infrastructure bottlenecks by implementing an ambitious investment strategy through mechanisms such as PPPs. As for exports, the exchange rate policy will accommodate the need to remain competitive, while a diversification strategy will be pursued away from traditional products, for which niche markets will be explored.

Gradually fostering fiscal consolidation

My authorities have conducted countercyclical policies over the past period to dampen the impact of the global crisis. The fiscal stimulus that was implemented in this regard has served the country well, but also adversely impacted the overall deficit. As the recovery takes hold, my authorities are committed to resuming their effort of medium term fiscal consolidation. Over the next three years, my authorities plan to conduct a twofold strategy of reducing the level of spending by 0.2 percent of GDP per annum on average and boost domestic revenue mobilization by 0.6 percent of GDP per annum on average.

As for the revenue loss stemming from the membership in the East African Community (EAC) and COMESA (Common Market for Eastern and Southern Africa), my authorities have taken temporary measures of spending cuts and intend to conduct extensive analysis on the issue with the view to adopting permanent measures. My authorities’ fiscal policy will also emphasize enhanced reforms in PFM, drawing on the PEFA assessment as well as their continued partnership with the donor community and the IMF’s East AFRITAC.

Strengthening the financial sector

Cognizant of the need to build a deep financial sector as an underlying condition for a dynamic private sector, my authorities are taking important steps, both to strengthen the banks and financial companies and improve regulation and supervision. In terms of deepening and diversifying the financial market, the authorities recently granted licenses to some 400 Savings and Credit Cooperatives (SACCOs) to operate as deposit-taking institutions, before later granting them lending licenses as well. Banking regulations have been adopted this year, as well as other elements of the legal framework. The NBR will strengthen its supervision by building adequate capacity, and will put particular emphasis on microfinance institutions with its newly adopted package of regulatory and institutional reforms.

Further reducing poverty

With 57 percent of the population living below the national poverty line in 2006, reducing poverty remains the overarching goal of my Rwandan authorities as reaffirmed in their EDPRS. Progress has been made in this regard. The government’s development program in the agriculture sector, where most poor populations live, is recording appreciable results. The country is now on track to achieve health and education-related MDGs, including increasing the coverage and the quality of basic and tertiary education, and strengthening technical and vocational education and training. It has already achieved MDGs related to gender equality and has also made good progress towards increasing access to water and sanitation for its population. Progress has also been made in the improvement of basic infrastructure, including roads and electricity provision. My authorities are committed to stepping up their efforts aimed at further empowering the most vulnerable segments of the population with the view to lifting them out of poverty.

Conclusion

The PSI program offers an adequate framework to my Rwandan authorities to consolidate the impressive results achieved in policymaking over the past decade with the support of the international community including the Fund. During the period under review, my authorities have successfully dealt with an adverse global environment marked by a deep crisis that turned into recession. Despite the severe impact on the Rwandan economy, my authorities have taken appropriate measures that helped maintain output in relatively good shape, and a stable macroeconomic situation.

The performance under the PSI has been satisfactory, and the economy is regaining momentum. My authorities are fully committed to fostering this recovery by keeping pace with the reforms. In this endeavor, my authorities continue to count on the support of their partners, especially the Fund to help make further inroads on the path of growth and poverty reduction.