Statement by Mr. Yambaye, Executive Director for Rwanda and Mr. Alle, Senior Advisor to the Executive Director, January 15, 2016

Growth in 2015 has been stronger than expected. Growth was driven by strong activity in agriculture, construction, and services, with the projection for the year increased from 6.5 to 7.0 percent. Inflation remains well contained, although the monetary stance remains accommodative, with higher than expected credit growth. Fiscal policy has been broadly in line with expectations. Recent household survey results show good progress in poverty reduction. However, the outlook for 2016 is darker. An external shock is currently unfolding: mining exports have been almost halved in recent months, due to lower prices and demand in export markets. Combined with US dollar appreciation, this has put strong downward pressure on the Rwandan franc, and prompted a drawdown of international reserves by the banking system. Deterioration of the current account in 2015 is expected to continue in 2016, including due to public infrastructure imports for the Kigali convention center and expansion of RwandAir's fleet.

Abstract

Growth in 2015 has been stronger than expected. Growth was driven by strong activity in agriculture, construction, and services, with the projection for the year increased from 6.5 to 7.0 percent. Inflation remains well contained, although the monetary stance remains accommodative, with higher than expected credit growth. Fiscal policy has been broadly in line with expectations. Recent household survey results show good progress in poverty reduction. However, the outlook for 2016 is darker. An external shock is currently unfolding: mining exports have been almost halved in recent months, due to lower prices and demand in export markets. Combined with US dollar appreciation, this has put strong downward pressure on the Rwandan franc, and prompted a drawdown of international reserves by the banking system. Deterioration of the current account in 2015 is expected to continue in 2016, including due to public infrastructure imports for the Kigali convention center and expansion of RwandAir's fleet.

1. On behalf of our Rwandan authorities, we would like to thank the Board, Management and Staff for their continued support. Fund assistance has been valuable to Rwanda in helping to achieve macroeconomic stability, sustain growth and reduce poverty over the past decades. Staff’s recent visit to Kigali offered another opportunity to deepen the understanding of the challenges facing the economy and discuss policies aimed at furthering the country’s strides towards its development goals. The authorities broadly share the thrust of the staff report.

2. Over the past period, Rwanda has maintained its steady pace of economic transformation with enviable results. In spite of adverse external conditions, growth was robust in 2015, backed by a strong commitment to reforms and enhanced efforts of economic diversification. The PSI anchor was instrumental in helping the authorities in fine-tuning their policy mix to address short-term challenges without jeopardizing long-term goals set in the Economic Development and Poverty Reduction Strategy for 2013-2018 (EDPRS 2). Sound policymaking will be particularly critical in the period ahead as the economy weathers the shock of falling mining exports. The authorities are committed to the objectives of the program and to adjust policies accordingly and would welcome the Board support for the conclusion of the 4th review under the PSI.

Recent Developments and Program Performance

3. Performance under the PSI continues to be strong. All end-June quantitative assessment criteria were met and all but one indicative targets were also observed. The implementation of structural benchmarks was also satisfactory.

4. Favorable developments over the recent period led to a revision in growth projections for 2015 from 6.5 percent to 7 percent. The main drivers of this performance are agriculture, construction and services. Headline inflation was kept low, standing at 2.9 percent y-o-y in October. Owing to enhanced revenue collection, the fiscal deficit was slightly lower than programmed, at 5.2 percent of GDP against 5.3 percent.

5. The sharp fall both in mineral export prices and production translated into a deteriorating external position. Strong construction activity and the ensued capital goods imports have added up to the sharp drop in exports to cause a larger-than-anticipated trade deficit of 14.5 percent. The authorities are closely monitoring the developments on the external front, including the depreciation of the Franc, and will take the appropriate adjustment measures, if necessary.

Outlook and Medium-Term Policies

6. The decline in the mining sector and related consequences remain the main risk to the outlook. Nonetheless, the authorities have agreed with staff to gather more data on the unfolding shock and not to significantly modify the program’s quantitative objectives at this stage. This approach should help strike the right balance between addressing the external shock and preserving the track of policies for long-term development goals. To this end, policy objectives for the period ahead should evolve around four building blocks: (i) boosting domestic revenue for development financing; (ii) enhancing monetary policy and financial deepening; (iii) strengthening debt management; and (iv) diversifying the economy. The authorities are confident that their efforts in those areas will help them mitigate the impact of the adverse external environment, while enhancing the long-term resilience of the economy.

7. Boosting domestic revenue for development financing. Pursuing a fiscal policy coherent with their development objectives and challenges is paramount to our authorities’ strategy. In this regard, they attach a particular importance to reforms needed to boost domestic revenue collection and improve public financial management, with the view to increase the domestic share of their development financing. The EDPRS 2 has identified critical projects for which a blend of domestic and foreign financing is needed. For FY15/16 for instance, priority projects include the hiring of more teachers for training programs, power projects, and the extension of the one-cow-per-family program which has proved very effective in poverty reduction.

8. An array of tax policy and tax administration measures has been identified to boost revenue, including the rollout of a new road fund levy, an excise tax for strategic reserve, higher taxes on tobacco, and changes to the mining tax regime. Measures to enhance e-tax are also being implemented to improve compliance and streamline tax payment. The authorities also continue to explore new avenues to broaden the tax base, including the potential of agriculture taxation for which a benchmarking study should help develop an agricultural income taxation model for Rwanda.

9. Our authorities’ fiscal policy should also be reinforced by a set of measures meant to improve public financial management, notably in the areas of state-owned enterprises and public investment. The recent separation of the water and electricity company into two entities and the tariff raise should help cover production costs and minimize fiscal risks. Likewise, the establishment of the Public Investment Committee aimed at helping in prioritization, planning, monitoring, and evaluation of investment projects should improve value-for-money in public investment.

10. Enhancing monetary policy and financial deepening. Monetary policy has supported the authorities’ overarching goal of enhancing growth, while balancing its specific objective of price stability. In the face of the unfolding shock and the drawdown on reserves, the authorities are mindful that a close attention should be paid and the monetary stance be adjusted, if needed. Furthermore, they remain committed to further enhance transmission mechanisms to ease the conduct of monetary policy and bolster financial deepening. The financial sector is sound and NPLs are declining owing to strong economic activity. Our authorities have embarked on a set of reforms to enhance the supervisory framework, including through draft laws to improve the central bank oversight on non-bank financial institutions. The reform of the SACCOs is also proceeding well with the aim of fostering financial inclusion. The establishment of new institutions such as private pensions and the revision of the deposit insurance law should also help broaden the financial architecture and serve a larger share of the population.

11. Strengthening debt management. Our authorities welcome the conclusion of the staff’s DSA that Rwanda continues to face a low risk of external debt distress. Though the downturn in the mining sector has somewhat highlighted external vulnerabilities, our authorities are confident that the economy will enhance its resilience going forward as diversification efforts bear fruits. As regards the slight increase in public sector debt pointed out by staff- 29.9 percent of GDP at end-2014, of which 23.7 percent for the external debt and 6 percent for domestic debt – it financed critical investment projects, including RwandAir and the Kigali Convention Center (KCC). As evidenced by the current dynamism and growing activity of RwandAir, the authorities are confident that the returns on those investments will more than balance the costs in the near future. Going forward, our authorities attach a high importance to preserving the hard-won debt sustainability as they strengthen their Debt Management Unit and smoothly transition to the IMF new debt limit policy.

12. Diversifying the economy. Economic diversification has been at the center of our authorities’ development strategy as highlighted in their successive EDPRS. They are convinced that a broad export base underpinned by a dynamic and diversified private sector is the ultimate driver of growth and engine of economic resilience. Although fiscal and monetary policies can provide buffers against external vulnerabilities in the short run, the authorities are of the view that diversifying away from traditional commodity exports will yield more sustainable buffers. This rationale has been driving the authorities’ economic transformation agenda and export diversification strategy.

13. The Rwanda Development Board (RDB) has been set as the implementation body of this strategy, with the view to promote Rwanda as a high spot for doing business. Projects like KCC and the overhauling of RwandAir fall under the business tourism aspect of this strategy. The development of the ICT sector has started to bear fruits around emerging young entrepreneurs whose innovations have recently attracted global investors. These strategies and operations are being complemented with other initiatives to further ease the doing of business, including the development of Special Economic Zones, the strengthening of tieswith neighboring countries, and the speeding up of the integration within the East African Community.

Conclusion

14. The Rwandan authorities have kept pace with their sound policymaking record that has underpinned the country’s impressive achievements over the past decades. As a result, growth continues to be robust and sustained and progress is being made in economic transformation and poverty reduction.

15. Yet, vulnerabilities remain as evidenced by the adverse impact of the global commodity market downturn on the shallow export base. The authorities are cognizant of these vulnerabilities and are committed to step up their efforts to adjust policies with the aim of dampening their impact on the economy. Going forward, the authorities are determined to press ahead with their reforms and strategies to diversify the economy around a dynamic private sector as the ultimate way to enhance resilience, entrench growth and create jobs. Our authorities appreciate the Fund’s continued support in this challenging endeavor.

Rwanda: Fourth Review Under the Policy Support Instrument-Press Release; Staff Report; and Statement by the Executive Director for Rwanda
Author: International Monetary Fund. African Dept.