Abstract
This supplement provides an update of economic policy developments since the staff report for the third review under the PSI was issued. New information received by staff indicates nonobservance of the continuous assessment criterion (AC) on the contracting and guaranteeing by the public sector of new nonconcessional external debt. However, on the basis of appropriate corrective action, staff supports the authorities’ request for a waiver for breaching the AC. In other respects, this report does not alter the thrust of the staff appraisal and staff continues to recommend the completion of the third review. Staff also continues to recommend the modification of the assessment criteria for end-December 2011, setting the end-June 2012 assessment criteria, and approval of the additional structural benchmarks for FY 2011/12 under the PSI-supported program based on Rwanda’s continued strong performance and commitment under the program.
1. Staff learned last week that in September 2011 the Rwanda Development Bank (BRD), a state-owned bank, contracted a nonconcessional loan from the European Investment Bank. The loan, amounting to Euro 8 million (0.18 percent of GDP), was not discussed with the staff during the October mission. The authorities attributed this oversight to weaknesses in information flows within the government which resulted in a failure to bring up the new loan contract to the fore of the policy discussions.
2. The new loan results in nonobservance of the continuous quantitative assessment criterion on the contracting and guaranteeing by the public sector of new nonconcessional external debt. Under the TMU the definition of public sector includes the BRD.1 The US$240 million nonconcessional debt limit set under the three-year PSI-supported program is tied to two projects, the Kigali Convention Center and the purchase of a new fleet of airplanes for Rwandair. While the credit line to BRD (Euro 8 million) does not exceed the ceiling (to date the authorities have borrowed US$180 million under the ceiling), it results in nonobservance of the assessment criteria as it was contracted outside the above mentioned two projects. Staff has calculated that the concessionality element of the loan is at most 17.13 percent (depending on the disbursement currency used in the calculation), falling well short of the minimum 35 percent threshold.2
3. The new debt is a liability of the BRD and not directly of the central government, with minimal potential impact on the budget. In the event the BRD fails to repay, the credit line would increase the external debt stock of the central government (which stood at 14.6 percent of GDP at end-2010) by just 0.18 percent of GDP. The BRD has a track record of non-concessional borrowing (contracted prior to the PSI program) and has repaid these loans without recourse to the government.
4. Given the modest size of the new loan and the efforts the authorities have made to upgrade their debt management capacity, staff considers that the loan does not alter significantly the macroeconomic framework and does not pose a risk to external debt sustainability. The latest DSA puts Rwanda at a moderate risk of debt distress and this additional borrowing by itself would not change that assessment. Moreover, the authorities have continued to make efforts to upgrade their debt and public financial management capacities. As a result, Rwanda was recently assessed as having stronger macroeconomic management capacity resulting in recent upgrade to higher capacity category under the Fund’s debt limit policy.
5. The authorities attributed this oversight to weaknesses in information flows within the government, and have committed to taking remedial measures to prevent reoccurrence of such an incident. The BRD did not notify the government before contracting the line of credit. To prevent similar incidents from occurring in the future, the government has already communicated the terms of the PSI to all state-owned enterprises (SOEs) to ensure that they understand the consequences of such miscommunication. The authorities have also communicated a requirement for all SOEs to seek prior approval of the Ministry of Finance before contracting any new nonconcessional loan. In addition, over the medium term, the government will strengthen standardized reporting requirements for all SOEs.
6. Staff supports the authorities’ request for a waiver on the nonobservance of the continuous assessment criterion on nonconcessional borrowing and continues to recommend the completion of the third review. Staff also continues to recommend the modification of the assessment criteria for end-December 2011, setting the end-June 2012 assessment criteria, and approval of the additional structural benchmarks for FY 2011/12 under the PSI program based on Rwanda’s continued strong performance and commitment under the program.
Under the TMU, the public sector comprise the general government (the central government, the NBR, local governments which include provinces and districts) and entities in which the government holds a controlling state - owning more than 50 percent of the shares or the ability to determine general corporate policy.
The line of credit could be disbursed in multiple currencies (Euros, US$, and Rwandan Francs) and tranches with repayment maturities varying from 4 to 10 years, a grace period of a maximum of two years, and semi-annual repayment frequencies. The interest rate consists of a base rate, which can be fixed or floating, plus a margin ranging from 1.36 percent for the Euro/U.S. dollar tranches to up to 5.7 percent for the tranches in Rwandan francs.