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.
On behalf of my Rwandan authorities, I would like to thank the Board, Management and Staff for their continued support. My authorities very much appreciate the candid and open policy discussion with the staff, and value the exchange of views on key policy issues aimed at supporting the successful implementation of the PSI. The flexibility provided by the PSI framework has helped my authorities design policy responses to dampen the impact of the global crisis and allow the economy to rebound. Furthermore, over the past years, the hard-earned macroeconomic stability has been enhanced and significant dents made in the process of building a broad-based economy and reducing poverty. Staff’s last visit in Kigali has offered another opportunity to discuss an array of recent developments as well as my authorities’ policies going forward.
My authorities regret the miscommunication that occurred over a small nonconcessional loan contracted by Rwanda Development Bank, a state-owned enterprise (SOE). In view of the remedial measures being taken, my authorities request the Board’s support for a waiver on the nonobservance of the continuous assessment criterion on nonconcessional borrowing.
Recent developments and performance under the PSI
Performance under the program was satisfactory. All PSI end-June quantitative assessment criteria were comfortably met. Structural benchmarks were partially met, some with delays due to technical difficulties. The authorities have now worked out these difficulties and are endeavoring to meet the capacity needs for an enhanced public service.
Growth has regained momentum, real GDP is expected to stand at 8.8 percent at end-2011, against 7.5 percent in 2010 - and after declining to 4.1 percent in 2009 due to the global crisis. The key drivers of this performance were robust exports and strong agriculture output. Moreover, my authorities’ policy mix supported a steady expansion of private credit and a strong domestic demand over the past period. Inflation has risen somewhat recently, but is kept under check. High international food and fuel prices paired with some domestic factors have contributed to this upward push. My authorities have responded by raising the central bank policy rate and are closely monitoring developments on the ground of their medium term inflation objective and of regional and international factors as well. The external position exhibits a benign situation of the overall balance, investment capital inflows making up for the current account deficit.
My Rwandan authorities are committed to steadfastly implementing the program and to address the continued challenges, with the view to foster growth and to significantly reduce poverty. These goals determine their policy agenda for the coming period.
Policies Going Forward
Fiscal policy over the first half of 2011 was marked by a strong performance in revenue mobilization, with total revenue (excluding grants) exceeding program target by 0.4 percent of GDP. On the expenditure side, capital outlays are catching up in the second half after underperforming in the first half, compared to current spending.
The 2011/12 budget is built around a package of fiscal measures set to yield a total of 0.2 percent of GDP increase in revenue. This package includes a newly-introduced gaming tax, measures to improve VAT efficiency, and tax base broadening reforms that would derive from a study to be finalized by December 2011. Outlays will mainly finance priority expenditures in education, energy and growth-enhancing projects.
My authorities have also made progress in implementing revenue administration measures, some of which are set to proceed under the 2011/12 budget. These measures include: (i) introducing Electronic Sales Register for recording taxpayers’ transactions and limit VAT evasion and help track potential taxpayers; (ii) introducing e-filing and e-payment systems to cut red tape for taxpayers and improve service delivery; and (iii) establishing a One-Stop-Border concept at Kagitumba and Rusumo border posts with 24 hours operations to facilitate cross-border trade. Other measures are planned to enhance public financial management, taking account of the findings of the mid-term review of the government PFM reform strategy.
Monetary policy has been managed over the past years with the goal of striking the right balance between maintaining price stability and supporting economic growth. On this ground, and through a joint committee comprising the central bank (NBR) and the ministry of finance, my authorities have been coordinating monetary and fiscal policies accordingly. Appreciable results have been achieved, in light of high growth rates recorded and the decline in inflation. As a response to the current hedging up of inflation, the NBR increased the central bank policy rate (Key Repo Rate) from 6 to 6.5 percent last October. My authorities are closely monitoring inflation drivers, both domestic and external, and stand ready to take additional measures. It is their belief that the current developments need no further action, as inflation is still subdued.
Financial sector development remains a key objective for my Rwandan authorities. Past efforts to strengthen the banking sector for a better financing of economic activity have started to bear fruit. Banks remain highly liquid and profitable, credit to the private sector has been expanding and nonperforming loans declined from 10.8 percent at end-2010 to 9.2 percent at end-June 2011. My authorities attach a particular importance to the development of Savings and Credit Cooperatives (SACCOs) for improving access to finance for unbanked segments of the population, especially in rural areas. In this regard, they are taking steps to design a supervisory framework for SACCOs. Looking ahead, my authorities have begun to implement the recommendations of the recent FSAP, notably regarding the supervision and regulation of banks, MFIs and SACCOs. With the assistance of First Initiative, an action plan will be designed by year-end to implement the whole recommendations.
My authorities’ medium-term debt strategy is being prepared for end-2011. The government has created a debt management committee aimed at conducting regular assessment of maturity and exchange rate risks and cash flow and roll-over risks of non concessional borrowing. As for the Euro 8 million nonconcessional loan contracted by Rwandan Development Bank, my authorities appreciate staff advice in addressing this issue, and their assessment that the loan is modest and does not affect Rwanda’s debt profile. My authorities have taken remedial measures to avoid such developments going forward. Steps are being taken to improve the information flow within the government and to better inform SOEs on their PSI-related borrowing responsibilities. Looking forward, my authorities are committed to preserving medium-term debt sustainability.
The government’s large investment projects were meant either to add capital to existing activities (Rwandair) or provide essential infrastructures which could encourage a variety of new private activities (Kigali Convention Center). Other specialized sectors, which can contribute significantly to growth, such as ICT and ecotourism are also being developed and would help to reduce the vulnerability of the economy. The financing of the projects in these sectors remains a key challenge for Rwanda, given the difficult international environment and debt sustainability concerns. My authorities appreciate and consider the recent changes in the IMF’s debt limit policy as an important milestone in the right direction and a part of the response to a long-stalling issue facing Rwanda as well as other low-income countries.
Conclusion
Under difficult circumstances of domestic challenges and still adverse international developments, my Rwandan authorities have strived to develop their economy with appreciable results over the past period. The PSI-supported program is well on track, with strong output growth and the economy is making steady progress towards generating enough revenue to lessen the aid dependency. In this effort, my authorities are well aware of the challenges they still face to fine-tune the policy mix and encourage a more robust and sustained growth while maintaining price stability. They appreciate the Board’s help and support in this regard. In view of the satisfactory implementation of the program, my Rwandan authorities request the Board’s support for the completion of the third review of the PSI and a waiver on the nonobservance of the continuous assessment criterion on nonconcessional borrowing.