KEY ISSUES Main challenges: Rwanda continues to face the challenge of sustaining high growth in a context of uncertain donor flows, while avoiding the build-up of imbalances. Efforts to mobilize domestic revenue need to be reinvigorated, while judiciously using the limited borrowing space to finance priority projects and maintain debt sustainability. Outlook and risks: Growth is projected to moderate to 6.5 percent in 2015, with inflation well contained on account of the lower food and oil prices. The overall outlook is stable, but downside risks emanate from shocks to agriculture, lower export growth, and delays in donor disbursements. Policy discussions focused on the short and medium-term economic challenges: • In the short term, fiscal policy will need to support growth and accelerate measures to mobilize domestic revenue. The tight monetary stance remains appropriate given risks to the inflation outlook and the balance of payments. • In the medium term, the challenge remains that of continuing Rwanda’s transition from a public sector-led, aid-dependent economy to a more private sector-led economy. Faced with large investment needs and limited debt space, policy priorities are mobilizing more revenue, accelerating export growth, and removing impediments to private sector development. Management of the public investment program needs to be strengthened at all stages to contain fiscal risks and safeguard debt sustainability.

Abstract

KEY ISSUES Main challenges: Rwanda continues to face the challenge of sustaining high growth in a context of uncertain donor flows, while avoiding the build-up of imbalances. Efforts to mobilize domestic revenue need to be reinvigorated, while judiciously using the limited borrowing space to finance priority projects and maintain debt sustainability. Outlook and risks: Growth is projected to moderate to 6.5 percent in 2015, with inflation well contained on account of the lower food and oil prices. The overall outlook is stable, but downside risks emanate from shocks to agriculture, lower export growth, and delays in donor disbursements. Policy discussions focused on the short and medium-term economic challenges: • In the short term, fiscal policy will need to support growth and accelerate measures to mobilize domestic revenue. The tight monetary stance remains appropriate given risks to the inflation outlook and the balance of payments. • In the medium term, the challenge remains that of continuing Rwanda’s transition from a public sector-led, aid-dependent economy to a more private sector-led economy. Faced with large investment needs and limited debt space, policy priorities are mobilizing more revenue, accelerating export growth, and removing impediments to private sector development. Management of the public investment program needs to be strengthened at all stages to contain fiscal risks and safeguard debt sustainability.

Recent Developments

MEFP ¶ 1-9

1. The Rwandan economy bounced back in 2014. Real GDP grew by 7 percent, compared to 4.7 percent in 2013. The pick-up in growth was driven by construction and services, especially information and communication, real estate, wholesale and retail trade, and strong agricultural performance. High frequency coincident indicators suggest economic activity maintained its momentum in the first quarter of 2015 (figure 3).

Figure 1.
Figure 1.

Rwanda: Economic Developments Across the EAC

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

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

Rwanda: Recent Performance

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: Rwandan authorities, IMF staff estimates, the IMF World Economic Outlook, and the African Department’s Regional Economic Outlook.
Figure 3.
Figure 3.

Rwanda: Selected High Frequency Indicators of Economic Activity

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Source: Rwandan authorities’ estimates.

2. The headline inflation rate declined as a result of falling food and oil prices. Domestic fuel prices have declined by about 20 percent since end-June 2014. Year-on-year headline inflation stood at 2.1 percent in December, while core inflation (excluding fresh food and fuels) was also low (figure 5). Inflation remained subdued, at 0.8 percent, in March.

Figure 4.
Figure 4.

Rwanda: Fiscal Developments

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: IMF staff and Rwandan authorities’ estimates.1 Regional aggregates are calculated with the latest WEO data and reflect country weights(PPP GDP).
Figure 5.
Figure 5.

Rwanda: Inflation Developments

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: IMF staff and Rwandan authorities’ estimates.

6. The current account deficit widened in 2014, but import cover remained above four months (figure 7). Imports increased sharply, driven by higher imports of capital, intermediate and consumer goods, which more than compensated for the reduced oil prices and lower energy bill. Meanwhile, exports grew modestly as weak prices resulted in declines in traditional exports of tea and minerals, only marginally offset by rising coffee and non-traditional exports.

Figure 6.
Figure 6.

Rwanda: Monetary Developments

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: IMF staff and Rwandan authorities’ estimates.
Figure 7.
Figure 7.

Rwanda: Medium-Term Outlook

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: IMF staff and Rwandan authorities’ stimates.

7. The fiscal deficit was smaller-than-expected in the first half of the fiscal year (second half of 2014) owing to lower capital expenditures and net lending. Revenues were lower-than-expected on account of weaker VAT receipts associated with slower-than-expected usage of the electronic billing machines and lower budgetary grants. Current expenditures were in line with the budget. Capital expenditures were lower, associated with delays in implementing infrastructure projects in the energy sector. Net lending was also lower, largely reflecting continued delays with the convention center. The lower deficit resulted in a build-up of government deposits by end 2014. However, due to timing differences between expenditures and budgetary loans, delayed government payments (0.6 percent of GDP) were registered in the second half of 2014.

8. The tax revenue ratio is expected to remain flat in FY14/15 due to three reinforcing tendencies. First, PAYE (pay as you earn) payments have been considerably weaker than expected on account of weak employment developments. Second, the usage of electronic billing machines remains spotty and, up to now, stronger oversight has not made a large difference in collection efficiency. Third, the rising share of goods from EAC countries (not taxed) has dented receipts from international trade. The confluence of these factors resulted in the tax revenue ratio remaining at about 15 percent of GDP.

9. Donor announcements suggest financial support (project and budgetary loans and grants) is expected to fall to its lowest level in a decade this year, slightly above 12 percent of GDP. The decline is accompanied by a switch from grant to loan financing from the African Development Bank and World Bank in the context of Rwanda’s low debt distress rating.

A01ufig1

10. The National Bank of Rwanda (NBR) has maintained the policy rate at 6.5 percent since June 2014 (figure 6). The NBR explained its unchanged policy stance in a context of muted inflationary pressures as a reflection of caution; with private sector credit growth seen as ample, further easing could boost demand for credit and create unwelcome pressures in the forex market given that reserve buffers are somewhat lower. Broad money growth remained robust at 19 percent in December, while reserve money evolved in line with the program. Credit to the private sector expanded by nearly 20 percent in 2014, after expanding by 11 percent in 2013. Real lending rates remained sticky at 16 percent. The Rwandan franc depreciated by 3½ percent against the dollar in 2014, after depreciating by a cumulative 12 percent in the previous two years.

11. Financial sector indicators, on aggregate, have continued to improve. After the deterioration in 2013 due to the economic slowdown and easing of lending standards, non-performing loans (NPLs) are back to 2012 levels and overall returns on equity have also improved. Profitability in Rwanda’s banking system continues to be affected by high operational costs and inefficiency, with a resulting stickiness in lending rates.

Program Performance

MEF ¶ 10

12. Compliance with the end-December quantitative criteria and structural benchmarks was satisfactory. All QACs were met (MEFP Table 1). The indicative target on revenue mobilization was narrowly missed owing to weaker than expected usage of electronic billing machines for VAT collection. In response to delays in donor disbursements and delays in project implementation, the government consolidated its expenditure (resulting in lower priority spending) and some domestic payments were delayed, the clearance of which is well underway. Both structural benchmarks (SBs) were missed (MEFP Table 2). Publication of the quarterly fiscal execution report was delayed due to late data provision by the central bank, and preparation of the mining tax proposal remains at the technical level.

Table 1.

Rwanda: Selected Economic and Financial Indicators, 2010–18

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Sources: Rwandan authorities and IMF staff estimates.

Defined as excluding food and fuel.

From 2014 onward, there is a substantial change in the mix between grants and loans associated with Rwanda’s low debt distress risk rating.

The savings rate excludes grants.

Imports for 2017 reflect purchases of two aircrafts.

Table 2.

Rwanda: 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 customs data.

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 private sector and humanitarian assistance). Given its current low risk rating Rwanda receives only concessional loans, and no grants from IDA and AfDB from 2014.

Outlook and Risks

MEFP ¶ 11

13. The economic outlook is stable. The authorities and staff agreed on a central growth projection of 6.5 percent for 2015. Growth is expected to remain broad-based. The outlook reflects favorable terms of trade, while the agricultural sector is projected to continue its strong performance on account of favorable climatic conditions (which contributed to a strong yield for the first harvest this year (season A)) and productivity gains. Inflation is expected to remain subdued at 3.5 percent by December, lower than the NBR’s medium-term target of 5 percent.

14. Risks linger mainly on the external front. The main risks include adverse weather conditions, lower than expected exports, and further delays in project implementation, which could all reduce the medium-term growth potential of 7.5 percent. The risk of export growth weakening relative to current projections would have adverse effects on financing for imports and curtail growth prospects (Box 2). Delays in donor disbursements also pose risks for growth, although the impact would be short-lived.

Policy Discussions

15. The discussions focused on the key policy challenges for the authorities, which remain those of supporting growth, while preventing the build-up of imbalances and strengthening the economy’s resilience to shocks. Fiscal policy will aim to sustain efforts on revenue mobilization, adjust current spending to available resources, minimize domestic financing, and protect priority spending. Monetary policy will aim to minimize inflationary risks and prevent a build-up of pressures in the foreign exchange market. The authorities’ medium-term investment program will be implemented in line with available financing, with the authorities committed to a prudent approach of fully exploring concessional financing and engaging the private sector and development partners.

A. Fiscal Policy

MEFP ¶ 12-16

16. The government is targeting an increase of 0.7 percent of GDP in the revenue ratio for the FY15/16 budget, to be achieved mostly through new tax measures:

  • an increase in the road fund levy and the introduction of an excise tax on petroleum to fund a strategic oil reserve (about 0.2 percent of GDP);

  • higher excise taxes on tobacco, the introduction of an import tax on imports sourced outside the EAC, and increased usage of the electronic billing machines through closer monitoring and increased tax audits (0.3 percent of GDP);

  • increased local government fees (0.2 percent of GDP).

Text Table.

Rwanda: Revenue Outcomes and Projections, Fiscal-Year Basis,1 2013/14–17/18

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Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.

These efforts to mobilize more revenue will more than offset the prospective drop arising from a lower import base through falling import prices and a rising fraction of goods consumed from within the EAC that are not taxed (similar to the experience this year).

17. The overall fiscal deficit is projected to decline to 4.6 percent of GDP in FY 15/16. Rising revenue will help partly offset a large projected decline in grants (-1.5 percentage points of GDP) to the lowest level this decade. Faced with a reduced resource envelope (revenue and grants), the government is adjusting by containing spending in line with available resources, while trying to protect priority spending (figure 4).

18. Over the medium term, the overall deficit is projected to level off at about 4 percent of GDP, helping to stabilize the debt ratio close to current levels. While revenues are projected to continue to increase, the expected decline in grants will result in lower resources and force the containing of current spending within a tight envelope, which the government aims to achieve by sustaining efficiency gains. Net domestic financing is projected to level off, helping to ensure credit availability to the private sector. The authorities will continue to strengthen their public financial management framework, including by implementing the so-called “imihigo” (performance) contracts, to strengthen accountability and service delivery (Box 1).

Performance Contracts in Rwanda

Performance contracts (Imihigo) are used as a means of planning, increasing accountability, and improving the speed and quality of execution of government programs, thus making public agencies more effective. Each year, the President of Rwanda signs binding performance contracts with the government institutions and the line ministries. These contracts are also prepared at Ministries, Districts, and sub-District levels. Program effectiveness is measured against an agreed set of governance, economic and social indicators known as performance indicators.

Contracts are focused on results, making them tools in the planning, accountability and monitoring and evaluation processes. Performance of government institutions and senior policymakers are debated at annual evaluation meetings chaired by the President. This approach is also used by the local government to set priorities and annual targets and to define activities that lead to achieving them. Best performers are recognized in a ceremony presided over by the President at the national level. Below average performers are provided remedial training. Consistently poor unjustified performance may have wider implications ranging from institutional reform to dismissal.

When elaborating its Imihigo, each local government administrative unit determines its own objectives taking into account national priorities highlighted in strategic documents such as the MDGs, Vision 2020, EDPRS, District Development Plans, and Sector Development Plans. The Imihigo, at both planning and reporting phases, are presented to the public for accountability and transparency. Where they do not have earmarked resources, line ministries must identify how the resources, whether financial or non-financial, can be mobilized. Central government consolidates the priorities paying special attention to areas of quick wins, synergy, and avoiding duplication.

Performance contracts are loosely linked to budgetary allocations where activities to be delivered have financial implications. However, targets set in contracts do not necessarily have direct links with the budget, such as mobilization of modern agriculture inputs through cooperatives.

The performance contract process has been very successful in increasing accountability. Nevertheless, some problems persist, including the monitoring of agreed indicators and the setting of targets that may be too ambitious, especially if they do not allow for adjustments in line with exogenous factors. Ensuring the contracts are properly inserted into Rwanda’s wider planning and budgeting processes also remains a challenge.

B. Investment, Export Prospects, and Debt Sustainability

MEFP ¶ 17-20

19. The discussions focused on the pipeline of projects and the need for adequate phasing and implementation in line with available financing and capacity. Staff discussed the list of medium-term investment projects under consideration, including regional projects (the railway and the oil pipeline) and the new airport for which financing have not yet been identified and for which the authorities would like to maximize private sector participation. Given the limited debt space, staff reiterated the need for the authorities to proceed cautiously and to prioritize these medium-term projects so as to maintain Rwanda’s low risk of external debt distress. Staff also emphasized, and the authorities concurred, that the finalization of key strategic projects already started, such as the convention center, need to be accelerated to facilitate the structural transformation of the economy. The government is exploring public-private partnerships in sanitation, water provision, and cement, in line with the prevailing institutional arrangements regarding the management of PPPs, as part of their overall financing strategy for infrastructure development.

20. The authorities are keen on expanding the narrow export base and promoting greater export diversification. Rwanda’s export performance over the past five years has been strong. However, this is largely from a low base and it remains concentrated in commodities. Diversifying exports is needed to enhance the resilience of the economy, particularly in light of the volatility of commodity prices, and to help bring much-needed foreign exchange into the country (Box 2). The government strategy follows a multi-pronged approach that involves improving the receipts from traditional exports, tapping more business and tourism markets, and galvanizing production for regional markets.

21. Rwanda remains at low risk of external debt distress. Consistent with the DSA analysis under the alternative scenario, which also shows Rwanda at low risk of debt distress, the non-concessional borrowing ceiling for end-June has been raised to US$500 million, to accommodate the financing of two new airplanes in addition to the US$250 million already identified as part of the previous review1.

Rwanda: Sensitivity of Growth to Changes in Export Performance

The ability to generate foreign exchange is a clear component of a developing country’s growth strategy because of its ability to extend the production possibility frontier through new productive techniques and help unlock needed finance to pay for imports. The EAC countries are characterized by large import bills and small but growing export sectors, and financial support from abroad has proved critical to maintaining growth momentum. This is especially true for Rwanda but the situation is changing: the gradual decline in foreign aid has begun to put pressure on the import coverage of foreign exchange reserves. Over the medium term, aid is projected to continue to decline, while exports remain robust and help to stabilize reserves coverage at 4 months of imports.

A01ufig2

Financial Support and Reserves Coverage

(in percent of GDP)

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: Rwanda authorities and IMF staff estimates.

Of course, the assumption about export growth may not materialize with consequences for growth. Annual export growth of 6 percent for 2017-20 compared to the current projection of 9 percent would lead to a fall in imports of goods and services, assuming the current reserves coverage target is maintained. This would limit finance for investment and have knock-on effects on the rest of the economy, including by lowering total factor productivity.

The reduction in imports associated with weaker export growth would likely contribute to a reduction in the economy-wide annual growth rate by up to 2 percentage points. This can be seen in two ways. First, it mirrors in some respects the growth response in 2013 following the reduction in aid resources. Second, it is consistent with factor use. Over the next few years, labor force growth is projected at 2.6 percent per annum while the real capita stock grows at 5 percent per annum. With factor content ratios of 0.6 and 0.4, respectively, and an import content of investment of 0.7, the growth rate from factor inputs would be 2½ percent, assuming full adjustment through imports. With an assumption of a 2½ percent per annum growth contribution from TFP, the economy would only grow at about 5 percent per annum.

A01ufig3

Imports and Exports Scenarios

(Imports and Exports left scale (millions of US dollars); reserves coverage right scale (months of imports))

Citation: IMF Staff Country Reports 2015, 141; 10.5089/9781513595399.002.A001

Sources: Rwanda authorities and IMF staff estimates

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

MEFP ¶ 21-26

22. In an environment of low inflation, the authorities and staff agreed that the current monetary stance was appropriate. The 2015 monetary program targets broad money growth of 15.6 percent, while private sector credit growth is expected to remain broadly at 2014 levels. Continued exchange rate flexibility will help preserve policy buffers and support economic diversification. The authorities will monitor developments closely with a view to reassess policies should growth disappoint and inflation expectations remain benign.

23. Measures to improve the transmission mechanism need to be strengthened. While significant progress has been achieved under the PSI (see IMF SR14/343), there remains considerable scope for improvement, particularly as regard development of the interbank and secondary markets. Transaction levels have increased from a low base, but the value of the transactions continues to be low. A more fundamental issue remains that of bringing down inefficiencies at the level of commercial banks to tackle the rigidity in the lending rates. The NBR has increased the maturity of its bonds issuance, to both develop the financial sector and absorb excess liquidity. Policies aimed at bolstering financial inclusion are ongoing (Box 3).

24. Efforts to bolster the legal and supervisory frameworks are underway. The consolidation of the informal cooperatives (Umurenge SACCOs) into one cooperative bank has been initiated and is expected to be completed by end-2015. The NBR law, banking law, and the deposit insurance laws have already gone through Parliament. These laws will increase the supervisory oversight of the central bank to the non-banks and contribute to further bolster confidence in the financial system. The preparations of the insurance laws and pensions law remain in the initial stages.

D. Program Issues

MEFP ¶ 27

25. The MEFP Table 1 contains revised end-June QACs and indicative targets and new QACs for end-December under the PSI. The authorities propose, and the staff supports, modifications of end-June 2015 QACs. These are consistent with the macroeconomic framework described in the report and with understandings reached with Fund staff. The authorities’ request, and staff supports, the modification of the ceiling on non-concessional borrowing to allow for the implementation of already identified projects. The introduction of a fixed asset tax has been redesigned into a land tax with specific benchmarks for property to facilitate implementation (MEFP Table 2).

26. The authorities are seeking to strengthen the monitoring of donor-financed government projects (Box 4). The number of accounts for donor financed projects is very large. Efforts by the government to better track these flows in real time are important to help improve monitoring of budget financing, which should help the authorities to better track fiscal developments.

Financial Inclusion in Rwanda

Fostering financial inclusion ranks high on the government’s agenda. The main principles underlining the financial inclusion strategy are embodied in the EDPRS2 and the FSDP2. The main measures aim to enhance financial literacy while simultaneously improving access to services, increasing the number of products, and raising the quality of services for both households and firms, particularly small and medium enterprises. There has also been significant emphasis on ensuring financial inclusion does not lead to a significant increase in risk.

One of the main constraints to financial inclusion in Rwanda is the limited access to banking services, particularly since a large part of the economy remains informal. To bridge this gap, the government has put in place cooperatives and microfinance institutions (MFIs), particularly savings and credit cooperative (SACCOs). This has provided access to more than 1/3 of the population. There has also been significant emphasis on improving the quality of services provided by semi-formal providers such as Village Savings and Loan Associations (VSLA). The literacy program was expanded to provide training to cashiers, clerks and loans officers. To improve the overall soundness of the sector and improve regulatory and supervisory oversight, the Umurenge SACCOs will be consolidated into one bank.

Efforts to improve the range of products and cost of access to financial services have been accelerated. A regulatory framework has been put in place to support the provision of these new services. This has allowed the emergence of new savings and deposit products for historically excluded clients; mobile money transfers (MMT), mobile and internet banking, agent banking, micro insurance and micro leasing. Much of the innovation has come from non-traditional players—mobile phone operators, or new entrants to the Rwandan banking market rolling out agency banking models. The authorities have revamped their supervisory framework to adjust to the new environment and ensure the push for greater financial access does not lead to higher risk undertakings and remains consistent with safeguarding financial stability.

All these developments have contributed to Rwanda making significant advances as regards financial inclusion (Table 1). Relative to other countries at similar levels of development, Rwanda also compares favorably across a number of indicators (see Box Figures).

A01ufig4
Source: IMF, Financial Access Survey.

Rwanda: Aid Effectiveness and the Use of National Systems

Rwanda is often perceived as a forerunner in aid effectiveness. This is partly due to the facilities it has put in place to effectively manage and coordinate the donor support it receives. These facilities include formalized regular interactions between donors and the government, the Donor Performance Assessment Framework (DPAF), the Development Assistance Database (DAD), and a clear division of labor among donors.

Rwanda’s aid coordination and development partnership framework is guided by the key principle of national ownership and leadership. The formal aid coordination and development partnership framework/structure includes the quarterly meetings of the Development Partners Coordination Group (DPCG), chaired and co-chaired by the government and the Development Partners (DPs), respectively. The DPCG sets the framework for dialogue between the government and the DPs on matters relating to policies and procedures for increasing the effectiveness of aid. It allows the government to coordinate the development efforts, take ownership of the development process, and ensure that aid flows in accordance with government priorities to where the needs are greatest.

Launched in 2009, the DPAF forms a part of a mutual review process designed to strengthen mutual accountability. It reviews the performance of bilateral and multilateral donors against a set of established indicators on the quality and volume of development assistance. The 22 indicators are drawn from the Paris Declaration indicators on quality of aid– and indicators agreed on at country level. The DPAF is presented both in aggregate form (comprising all development assistance to Rwanda), and disaggregated by donor to allow for comparison, individual reflection on performance, accountability and peer pressure, which are recognized as key ingredients to the successful implementation of the global aid effectiveness agreements and Rwanda’s aid policy.

The DPAF assessment is undertaken on the basis of data from the DAD. Launched in March 2006, DAD Rwanda was developed to enable the government to drive the processes of aid management by establishing a single repository for all official assistance. It allows the government to conduct “gaps analyses”, and facilitate planning process and resource mobilization. DAD incorporates the DPAF indicators, and allows for tracking the flow of development assistance to Rwanda. It also allows sharing of information and reduction in transaction costs in the collection of information on official aid. Finally, DAD enables the government to plan, monitor, and account for the use of resources.

In September 2014, the DPAF indicators and targets underwent a light revision taking into account changes in aid modalities to Rwanda, namely the suspension in the provision of general budget support. As Rwanda moves away from donor aid toward increased trade, investment, and public-private partnerships, it plans to develop additional framework to enhance mutual accountability with the DPs.

Staff Appraisal

27. Rwanda’s performance under the PSI has been satisfactory. The authorities are to be commended for meeting all QACs. The performance on indicative targets and structural benchmarks was more uneven and it will be important to maintain the momentum of reforms, including on revenue mobilization while strengthening project implementation.

28. Growth in 2015 is expected to remain strong, while the outlook is stable. The cautious fiscal stance and monetary policy are consistent with the need to preserve policy buffers. Continued exchange rate flexibility will support these objectives and economic diversification.

29. The framework for the FY2015/16 budget is in line with PSI objectives. The budget prioritizes the public investment program in line with available resources, includes measures to improve domestic revenue mobilization, protects priority spending, and limits the crowding out of credit to the private sector.

30. Sustaining progress on domestic revenue mobilization will be critical to sustaining investment. Recent efforts to adopt the electronic billing machines is yet to gain full traction and the agenda on agricultural and property taxation has yet be carried out. Accelerating efforts to broaden the tax base and strengthen tax administration and compliance remain key. The government’s ability to mobilize more of Rwanda’s own resources should help reduce reliance on donor resources, and coupled with rising exports, should help increase the resilience of the economy.

31. The current monetary policy stance remains appropriate. The economy has been operating in a low inflationary environment, an amply liquid banking system, and ample credit to the private sector. Efforts to improve the regulatory framework have been advancing satisfactorily and the consolidation of the SACCOs into one cooperative will further improve the supervisory oversight. The authorities are encouraged to balance measures aimed at fostering financial inclusion with financial stability.

32. Rwanda’s infrastructure investment needs remain significant, and it will be critical to carefully select and prioritize investments in line with available resources to maintain debt sustainability. The authorities aim to safeguard their low risk of debt distress which requires appropriate phasing of investment projects in line with available resources and administrative capacity, especially with a view to prevent costly implementation delays. The pipeline of projects envisaged by the government should help foster structural transformation and remove impediments to private sector and export development, much needed in light of the projected gradual decline in donor resources inflows, already materializing this year.

33. Staff recommends the completion of the third review under the PSI. Staff supports the request for modification of the end-June QACs and setting of end-December 2015 QACs.

Table 3.

Rwanda: Operations of the Central Government, Fiscal-Year Basis,1 2011/12–2017/18

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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,

A negative sign indicates a reduction.

A negative number implies an underestimate of financing. The figure nets out about RWF 18 billion in PKO funds that do not transfer through the Budget

Agaciro Development Fund expenditure reflects the transfer of the Fund to a private agency.