Rwanda: First Review Under the Policy Support Instrument

This paper discusses Rwanda’s First Review Under the Policy Support Instrument. Rwanda continues to face the challenge of sustaining high growth while reducing its reliance on aid and preventing the build-up of imbalances. After using foreign exchange reserves over the past few years to support the economy, the room for maneuver is more limited and it will be important to rebuild policy buffers. Growth is projected to increase to 6 percent in 2014. In the short term, the need to support growth and preserve the level of foreign reserves requires a cautious fiscal stance while maintaining priority spending and leaving scope for private sector credit expansion.

Abstract

This paper discusses Rwanda’s First Review Under the Policy Support Instrument. Rwanda continues to face the challenge of sustaining high growth while reducing its reliance on aid and preventing the build-up of imbalances. After using foreign exchange reserves over the past few years to support the economy, the room for maneuver is more limited and it will be important to rebuild policy buffers. Growth is projected to increase to 6 percent in 2014. In the short term, the need to support growth and preserve the level of foreign reserves requires a cautious fiscal stance while maintaining priority spending and leaving scope for private sector credit expansion.

The Context

1. Rwanda continues to be affected by the reduction in budget support suffered during FY12/13 and the resulting spillovers on the government’s investment program and the services sector. Moreover, weak agricultural growth in the second half of 2013, resulted in the weakest growth rate in a decade. The shock to foreign aid in FY12/13 also required the government to use some of its foreign exchange reserves to cushion the impact on growth.

Outlook for Foreign Financing

(In percent of GDP)

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2. The outlook for foreign grants suggests a rebound from the trough of almost 8 percent in 2012/13 to 9½ percent of GDP by 2014/15. Early indications by donors suggest that grant and loan commitments over the medium term will remain at around 11 percent of GDP.

3. The authorities are aware of the need for private sector led capital investments and have identified some projects that are likely to require public support, either directly, or in the form of guarantees. Having prioritized the projects and identified those that require non-concessional financing, the authorities are requesting an increase in their borrowing room in the coming fiscal year.

Recent Developments

A. Growth and Inflation

4. The Rwandan economic activity slowed down significantly in 2013. Real GDP grew by 4.6 percent amid poor performance in the agricultural sector as well as delays in the disbursement of budget support and the resulting spillovers on the government’s investment program and the services sector (Table 1, and Figures 1 and 2). The latter accounts for about half of GDP. The real GDP series has recently been rebased to 2011, but the exercise had limited effect on the level of GDP which rose by 1 percent relative to earlier estimates (Box 1).

MEFP ¶ 3,4

Table 1.

Selected Economic and Financial Indicators, 2009–18

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Sources: Rw andan authorities and IMF staff estimates and projections.

Projections are based on the program exchange rate of RWF 670.1 per U.S. dollar.

Figures for net domestic assets, domestic claims, domestic credit and private sector in Country Report 13/77 were in percent of broad money.

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 expenditure and spending on demobilizing and integrating militia groups) minus domestically financed capital expenditure.

Data from 2009 onward includes SDR allocation.

Figure 1.
Figure 1.

Economic Developments Across the EAC

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

Source: IMF staff estimates.
Figure 2.
Figure 2.

Recent Performance

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

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

The Effects of Rebasing Gross Domestic Product

The National Statistics Institute of Rwanda rebased national accounts figures from 2006 to 2011 base prices.1 A number of improvements were made since the previous benchmark. These included the introduction of the intermediate consumption matrix, estimates of informal cross-border trade, the development of new estimates for the construction sector, estimates of crop production from the new Seasonal Agricultural Survey, including season C for the first time, and better estimates for the output of the livestock sector including increases in stocks (capital formation).

The restatement of gross domestic product figures in 2011 prices displayed very slight changes in the growth rates prior to 2010, but slower growth rates subsequently The slower growth rates were in part the result of the lower agricultural sector growth rates in 2011 base prices, as its share accounts for around a third of the total output. In terms of the level of output, the revisions raised nominal GDP by less than 1 percent, considerably less than in many other countries (see REO May 2013).

A01ufig1

Real Gross Domestic Product: Percentage growth rates

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

The rebasing indicated that agricultural and industrial sectors’ contributions to output for the period 2006 to 2012 were less than the 2006 price based GDP suggested. The share of the agricultural sector has also trended lower overtime, while the industrial sector displayed a slightly upward bias. As a share of total output, services accounted for an average of 46 percent in terms of the 2011 prices between 2006 and 2012 relative to 45 percent in 2006 prices over the same period. Trends in services were mainly driven by the value added in the wholesale and retail trade; and real estate and business services sub-sectors.

1 Quarterly GDP data based on the updated prices will be released in June 2014

5. Inflation declined along with the slowdown in economic growth. The year-on-year headline inflation stood at 3.6 percent in 2013, as food, energy and import prices decelerated (Figure 2). Inflation in March 2014 continued to decline to reach 3.4 percent, partly reflecting that domestic demand was yet to recover, and inflationary pressures, both domestic and external, remained subdued.

B. BOP Developments

6. The current account improved considerably in 2013 and together with the Eurobond issuance helped to raise the import cover to above four months. The improvement in the current account resulted from a combination of strong export growth, mainly in mining, and flat imports (Table 2). A number of foreign companies have recently invested in the mining sector and contributed to the surge in mining exports. The flat imports reflected the adverse effects of delays in government-financed projects (especially the Kigali Convention Center) and weaknesses in private consumption due to the slowdown. The rebound in public sector external grants also helped to strengthen the current account.

MEFP ¶ 5

Table 2.

Balance of Payments, 2009–18

(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.

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.

The BNR measures reserve adequacy using imports of goods c.i.f. excluding imports incurred from informal cross-border trade and other items not captured in custom.

Government official transfers comprises budgetary grants and capital grants. Official transfers in the BOP includes grants and non-grant elements (e.g., transfers to the sector and humanitarian assistance).

C. Fiscal Developments

7. The fiscal position switched to a surplus in the second half of 2013. This reflected lower wages and capital spending, and sharply lower net lending. Despite the slowdown in the economy, total revenues were close to the initial target due to the larger than expected disbursements for Rwanda’s role in peace-keeping operations (Table 3). Moreover, grants were above initial expectations due to a sharp increase in Global Fund disbursements. Overall spending was lower than expected on account of delays in recruitments and in the implementation of capital projects, although capital spending has surged relative to current spending in recent years (Figure 4). In particular, net lending was sharply curtailed because of a slower pace in building the convention center.

MEFP ¶ 6

Table 3.

Operations of the Central Government, Fiscal-Year Basis,1 2009/10–2017/18

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Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.

Total revenue minus noninterest expenditure.

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.

Figure 3.
Figure 3.

Selected High Frequency Indicators of Economic Activity

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

Source: Rwandan authorities’ estimates.
Figure 4.
Figure 4.

Fiscal Developments

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

1 PSI countries are Mozambique, Senegal, Tanzania, and Uganda.Sources: IMF staff and Rwandan authorities’ estimates.

D. Monetary Policy, the Exchange Rate, and the Financial Sector

8. The NBR has maintained its policy rate unchanged at 7.5 percent since June 2013. The NBR noted that inflationary pressures remained subdued and explained its unchanged policy stance as driven primarily by a need to avoid pressures on the foreign exchange market that could result from too rapid an increase in credit to the private sector (Figure 5). While market rates, particularly at the level of interbank and government treasuries have been declining, lending rate rigidities in a context of declining inflation have contributed to an increase in real rates (Figure 6). Credit to the private sector slowed to 10.8 percent in 2013, after expanding by 34 percent in 2012. Reserve money was in line with the target. Reflecting its commitment to greater exchange rate flexibility, the NBR allowed the currency to be driven primarily by market conditions (Table 4). The Rwandan Franc depreciated by 6.1 percent last year, following a depreciation of 6 percent in 2012. Pressures in the foreign exchange market have subsided, and the spread between the official and market rates is now below 2 percent.

MEFP ¶ 7

Figure 5.
Figure 5.

Inflation Developments

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

Sources: IMF staff and Rwandan authorities’ estimates.
Figure 6.
Figure 6.

Monetary Developments

Citation: IMF Staff Country Reports 2014, 185; 10.5089/9781498393195.002.A001

Sources: IMF staff and Rwandan authorities’ estimates.
Table 4.

Monetary Survey, 2010–14

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Sources: National Bank of Rwanda (NBR) and IMF staff estimates and projections.

For program purposes NFA from December 2011 onward are at program exchange rates.

Reserve money as an assessment criteria is measured as the average of the months in the quarter. The actual reserve money is measured as the daily average of the three months in the quarter.