Rwanda
Third Review Under the Policy Support Instrument: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Rwanda.
Author: International Monetary Fund
Publication Date:
26 Jan 2012
eISBN:
9781463934514
ISBN:
9781463934514
Language:
English
Keywords:
ISCR; CR; government; authority; MEFP; broad money; economic activity; exchange rate; aggregate demand; money market; Inflation; Commercial banks; Global
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This paper presents key findings of the Third Review under the Policy Support Instrument (PSI) in Rwanda. Program performance was broadly satisfactory. All end-June quantitative assessment criteria were met. Structural benchmarks were partially met as the pace of implementation of structural benchmarks has slowed somewhat either owing to technical difficulties or capacity bottlenecks. Fiscal consolidation in FY2011/12 and FY2012/13 remains on track and is expected to further anchor macroeconomic stability. The authorities have introduced additional revenue measures for FY2012/13 to preserve the revenue objective of the PSI.

Abstract

This paper presents key findings of the Third Review under the Policy Support Instrument (PSI) in Rwanda. Program performance was broadly satisfactory. All end-June quantitative assessment criteria were met. Structural benchmarks were partially met as the pace of implementation of structural benchmarks has slowed somewhat either owing to technical difficulties or capacity bottlenecks. Fiscal consolidation in FY2011/12 and FY2012/13 remains on track and is expected to further anchor macroeconomic stability. The authorities have introduced additional revenue measures for FY2012/13 to preserve the revenue objective of the PSI.

I. Recent Developments and Program performance

1. Growth has been strong in 2011. Real GDP growth is expected to reach 8.8 percent for the year, higher than previously expected, and up from 7.5 percent in 2010 (Table 1 and Figure 1). Economic activity was driven mainly by a strong harvest, robust exports, and strong domestic demand supported by an expansion of credit to the private sector (Figure 2).

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2008–16

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

Projections are based on the program exchange rate of RwF per US dollar of RWF571.24 for 2010 and RWF594.45 thereafter.

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.

On a fiscal-year basis (July-June). For example, the column ending in 2011 refers 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 net lending.

Data from 2009 onward includes SDR allocation.

Figure 1.
Figure 1.

Rwanda: Recent Performance

Citation: IMF Staff Country Reports 2012, 015; 10.5089/9781463934514.002.A001

Sources: Rwandan authorities, IMF staff estimates, the IMF, World Economic Outlook, and AFR’s Regional Economic Outlook.
Figure 2.
Figure 2.

Rwanda: Selected High-Frequency Indicators of Economic Activity, Jan 2008–Sep 2011

Citation: IMF Staff Country Reports 2012, 015; 10.5089/9781463934514.002.A001

Sources: IMF staff and Rwandan authorities estimates.1 A denotes Season A (Sep–Jan/Feb) and B denotes Season B (Mar–Jun/Jul).

2. Inflation has risen rapidly during the year. Headline inflation increased from 0.2 percent at end-2010 to 7.8 percent in October 2011, partly reflecting higher global food and fuel prices, and is projected to reach 8.7 percent by end-2011. The authorities have responded so far by reducing fuel taxes—starting in July 2011 with a second phase planned for January 2012—bringing forward an already planned measure intended to align Rwanda’s fuel taxes with the rest of the region. At the same time, second-round effects of food and fuel prices have become embedded in the inflation process. Core inflation has risen sharply from 0.2 percent at end 2010 to 8.9 percent in October 2011, lately exceeding headline inflation (Box 1).

Assessing Underlying Inflationary Pressures on the Basis of Various Measures of Core Inflation

Signs are present of underlying inflationary pressures. Looking at trends in core inflation, which excludes items in the CPI basket such as food and fuel that are considered directly affected by external prices, can provide an early indication of whether overall inflation is driven mainly by external factors, or whether underlying domestic pressures are also at play. In Rwanda, five different measures of core inflation (excluding different food and fuel items in the CPI basket) have all been trending upward since the beginning of 2011—markedly since July. The measure of core inflation the National Bank of Rwanda (NBR) monitors (the CPI excluding fresh products and energy) reached 8.9 percent y-o-y in September 2011, while headline inflation dropped to 6.6 percent. This suggests that second-round effects of rising food and fuel prices have indeed become embedded in the inflation process, and the rising trend in headline inflation this year has not been driven merely by external factors.

A01ufig01

CPI Inflation (y-o-y)

Citation: IMF Staff Country Reports 2012, 015; 10.5089/9781463934514.002.A001

3. The balance of payment surplus is moderately lower than previously projected, but reserves are at comfortable levels (Table 2). Exports in 2011 are on track to grow by more than a third compared to 2010 and exceed PSI projections, thanks to sharply higher prices, swift implementation of the mineral certification process,1 increased fertilizer use in agricultural export crops, and strong informal cross-border exports, while tourism also is rebounding strongly. Imports are also up sharply, however, in part because of higher international prices for food and fuel, strong construction activity, and implementation of large capital projects. The current account deficit is expected to exceed 10 percent of GDP for 2011, while the overall balance is expected to end the year in surplus, thanks in part to inflows to finance large public and private investment projects. International reserve coverage is expected to stay above four months of prospective imports. The exchange rate has remained stable throughout 2011.

Table 2.

Rwanda: Balance of Payments, 2007–16

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

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

From 2010 onwards includes the results of the informal cross-border trade survey.

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.

4. Fiscal performance during the second half of FY 2010/11 (January-June 2011) was strong. Total revenue (excluding grants) exceeded program levels for the second half of the fiscal year by 0.4 percent of GDP, mainly driven by higher direct taxes and taxes on goods and services. Meanwhile, the stronger revenue performance was offset by higher expenditure and net lending—exceeding targets by about 0.3 percent of GDP—leaving the overall fiscal deficit (excluding grants) for the fiscal year as a whole in line with the program (Table 3 and Figure 3).

Table 3.

Rwanda: Operations of the Central Government, Fiscal Year Basis,1 2006/07-15/16

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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 on external debt), domestically financed capital expenditure, and net lending.

A negative sign indicates a reduction.

A negative number implies an underestimate of financing.