Rwanda
2012 Article IV Consultation and Fifth Review under the Policy Support Instrument and Request for Modification of Assessment Criteria —Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Rwanda

The article summarizes the positive economic development of Rwanda and its internal and external policies. Rwanda’s economy is referred to as a success story, but it also faces certain challenges. The country is focused on maintaining macroeconomic stability, sustaining sturdy growth, and reducing poverty without foreign dependence. Fiscal and monetary policies have played key roles in economic growth. External stability is manageable, as it has significant profit in the global market. The authorities review this remarkable success of Rwanda’s economy as a great achievement.

Abstract

The article summarizes the positive economic development of Rwanda and its internal and external policies. Rwanda’s economy is referred to as a success story, but it also faces certain challenges. The country is focused on maintaining macroeconomic stability, sustaining sturdy growth, and reducing poverty without foreign dependence. Fiscal and monetary policies have played key roles in economic growth. External stability is manageable, as it has significant profit in the global market. The authorities review this remarkable success of Rwanda’s economy as a great achievement.

The Context

1. Rwanda has been an economic success story. Real GDP growth averaged above 8 percent a year in the last decade; inflation has been subdued since 2009; foreign reserves has been kept at adequate levels; poverty declined from about 57 percent in 2005/06 to below 45 percent in 2010/11, and income inequality declined notably.

2. Strong policies have played a key role in Rwanda’s continued success:

  • Fiscal and monetary policies centered on maintaining macroeconomic stability (Box 1).

  • Concerted efforts to improve public financial management (PFM), maintain good governance, and reform the business environment—placing Rwanda among the top African economies in the World Bank’s Doing Business Index.

  • A deliberate focus on mobilizing and using foreign aid in support of economic development and poverty reduction.

  • An economy that increasingly benefits from opening up to new products and new markets.

  • A strong emphasis on homegrown and adapted interventions to enhance the inclusiveness of growth, and strengthen the provision of social services, especially to the rural poor, as shown in the recent household survey.

3. The mission took place amid high uncertainty regarding donor assistance. A number of bilateral and multilateral donors have delayed budget support disbursements for FY2012/13. The delayed budget support envelope is estimated at about 3 percent of GDP.

4. The challenges ahead are sustaining this good economic performance under highly uncertain prospects for donor aid and the global environment; and, in the medium term, sustaining strong growth and poverty reduction while gradually winding down Rwanda’s high dependence on foreign aid.

5. Overcoming these challenges will require continued prudent economic management in the near term, and further progress addressing Rwanda’s key vulnerabilities in the medium term: low government revenue, high aid dependency, narrow export base, and weak infrastructure.

Rwanda’s Response to the 2010 Article IV Consultation’s Key Recommendations

  • Fiscal policy. Unwind fiscal stimulus and embark on a medium-term path of fiscal consolidation; complement revenue mobilization efforts with tax policy reforms

    Progress: fiscal policy has been aligned with the macroeconomic framework agreed on with the IMF. Revenue mobilization efforts centered until recently on tax administration, and are now being complemented by tax policy recommendations from a recent Fiscal Affairs Department (FAD) technical assistance (TA) mission.

  • Monetary policy. Review regularly the monetary stance to enable timely response to inflationary pressures; use more actively the policy rate, and introduce reforms toward greater exchange rate flexibility.

    Progress: monetary policy has been generally accommodative, in the context of low inflation. The national Bank of Rwanda (NBR) has become more proactive recently, raising the key repo rate in May for the third time since October 2011.

  • Export diversification. Improve business environment and step up efforts to broaden the export base.

    Progress: the authorities have developed a National Export Strategy (NES), and established a high-level coordinating body, the Industrial Development and Export Council (IDEC), to oversee its implementation. The IDEC is to identify priority expenditures to advance the NES within the existing budgetary envelope.

  • Access to finance. Enhance the competition in the banking sector, and strengthen the supervisory capacity of microfinance institutions, while improving access to finance.

    Progress: the 2011 FSAP update found that the banking system has recovered from a period of restructuring and banks are well capitalized, and competition among banks has increased. Challenges relate to the strengthening of the frameworks for the supervision of credit cooperatives.

Positive Economic Developments

6. Growth continued to be strong in the first half of 2012, but is projected to slow in the second half of the year. The Rwandan economy grew by 8.6 percent year-on-year in the first half of 2012, driven by the construction and services sectors (Table 1, and Figures 1 and 2). However, for the whole of 2012, real GDP growth is projected to ease to about 7.7 percent, in part because of weaker agricultural output in the second half of the year and lower-than-planned government spending caused by delays in budget support disbursements by some donors.

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2008–17

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Sources: Rwandan authorities and IMF staff estimates and projections.

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

As a percent of the beginning-of-period stock of broad money.

On a fiscal-year basis (July–June). For example, the column ending in 2011 refers to FY 2010/11.

Revenue excluding grants minus current expenditure except interest due and exceptional expenditure (AU peacekeeping expenditure 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 2013, 077; 10.5089/9781484387672.002.A001

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

Rwanda: Selected High-Frequency Indicators of Economic Activity, Jan. 2008–Sept 2012

Citation: IMF Staff Country Reports 2013, 077; 10.5089/9781484387672.002.A001

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

7. Inflation has declined, mainly in response to slowing import prices for food and petroleum products. Headline inflation declined to 5.6 percent in September 2012 while core inflation was down to 2.1 percent (Figure 4). Inflation is however, expected to pick up toward the end of the year, to 7.5 percent, buoyed by increased domestic fresh food prices owing to poor weather and the lagged effects of higher exchange rate depreciation since mid 2012.

Figure 3.
Figure 3.

Rwanda: Fiscal Developments

Citation: IMF Staff Country Reports 2013, 077; 10.5089/9781484387672.002.A001

1 PSI countries are Cape Verde, Mozambique, Senegal, Tanzania, and Uganda.Sources: IMF staff and Rwandan authorities estimates.
Figure 4.
Figure 4.
Figure 4.

Rwanda: Inflation Developments and Outlook

Citation: IMF Staff Country Reports 2013, 077; 10.5089/9781484387672.002.A001

Source: IMF staff and Rwandan authorities estimates.

8. The current account deficit has widened because of strong import growth and delays in aid inflows. Exports of goods and services have remained strong in 2012, because rising mineral exports and markedly higher tea prices have more than offset lower prices for a number of traditional exports, including coffee. Meanwhile, imports have increased rapidly driven by higher imports of capital goods and materials for the construction sector. Moreover, aid delays have resulted in lower official transfers. As a result, the current account deficit (including aid inflows) has widened and, for 2012, is projected to reach about 11.3 percent of GDP.

9. Efforts at fiscal policy consolidation continued in FY2011/12. The overall fiscal deficit (cash basis, after grants), was 0.7 percent of GDP lower than targeted (Table 3). This was the result of greater-than-projected revenue and lower spending. The higher revenue reflected higher income tax revenue on account of an unexpectedly large clearance of arrears and higher revenue from taxes on goods and services and international trade (boosted by higher imports). On the spending side, higher-than-budgeted current spending, mainly on wages and salaries, was more than offset by under-execution of domestically financed capital expenditures.

Table 2.

Rwanda: Balance of Payments, 2008–17

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

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Sources: Rwandan authorities and IMF staff estimates and projections.

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

Revision of methodology resulted in a sharp increase of tourism revenues from 2008, thus increasing export of services.

Including interest due to the IMF.

Current transfers include disbursed budgetary and HIPC grants and humanitarian and technical assistance.

Includes project and budgetary loans.

Excluding payments to the IMF.

Other capital includes long-term private capital, commercial credit, change in the net foreign assets of commercial banks, and unrecorded imports.

Table 3.

Rwanda: Operations of Central Government, Fiscal-Year Basis, 2008/09–16/17

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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.