Rwanda: Fifth Review Under the Policy Support Instrument and Request for Extension, and Request for an Arrangement Under the Standby Credit Facility—Debt Sustainability Analysis

The existing PSI and new SCF arrangement will support the country's efforts to address growing external imbalances, thereby supporting continued strong growth and durable poverty reduction. The SCF arrangement adds a financing component to the existing PSI-supported program, which aims to promote private-sector led growth through safeguarding macroeconomic stability, including through external sustainability, fiscal sustainability based on continued improvements in domestic resource collection, low and stable inflation, and enhancing access to credit and deepening the financial sector.

Abstract

The existing PSI and new SCF arrangement will support the country's efforts to address growing external imbalances, thereby supporting continued strong growth and durable poverty reduction. The SCF arrangement adds a financing component to the existing PSI-supported program, which aims to promote private-sector led growth through safeguarding macroeconomic stability, including through external sustainability, fiscal sustainability based on continued improvements in domestic resource collection, low and stable inflation, and enhancing access to credit and deepening the financial sector.

Background

1. The Rwandan economy grew strongly in 2015, but recent weak mineral exports have highlighted external vulnerabilities. Real GDP grew by 6.9 percent in 2015. But while output has remained strong, the decline in mineral prices has resulted in a near halving of mining exports compared to the previous year. Along with weaker services balance, the current account deficit deteriorated to 13.5 percent of GDP in 2015, increasing strain on the foreign reserves, which now cover 3.6 months of prospective imports. Weak mineral prices are projected to lower mineral exports further in 2016, and this will dampen the growth in overall export receipts. Combined with aircraft purchases by RwandAir, the current account balance will deteriorate further to 16.5 percent of GDP, intensifying pressure on the foreign reserves. Real GDP growth is projected to be modestly lower at 6 percent in 2016 and 2017, as the fiscal and monetary stances are tightened, along with exchange rate adjustment, to slow the pace of import growth and address external imbalances. Requested IMF financing under the Standby Credit Facility would provide more buffer for foreign reserves.

2. Rwanda’s public sector debt remains low, but it is increasing. At end-2015, total public sector debt was 35.4 percent of GDP—with the external debt of the public sector at 28.5 percent of GDP and mainly comprised of multilateral and commercial debt, and domestic debt at 6.9 percent of GDP. These debt ratios compare favorably with those of other countries in the region. The public debt-to-GDP ratio has increased steadily over the last three years, reflecting new borrowing, in particular large disbursements under multilateral concessional loans as Rwanda’s low-risk rating of debt distress has shifted donor support towards more concessional lending rather than grants. Public external guaranteed debt has been rising mainly due to the expansion of RwandAir’s fleet of aircraft.

Table 1.

Rwanda: External Public Debt

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Source: Rwandan authorities and IMF staff.

Underlying Assumptions

3. The medium and long-term macroeconomic framework underlying the DSA is consistent with the baseline scenario presented in the Staff Report for 5th review of the PSI-supported program. The main assumptions and projections for key macroeconomic variables are summarized in Box 1 and Table 2. The main differences between the current assumptions and those underlying the last DSA update are: (i) GDP growth is lower in 2016 and 2017; (ii) additional IMF financing in 2016 and 2017 under the Standby Credit Facility and other additional potential financing is included; and (iii) an improved fiscal position and consequently lower net domestic financing over the long term. Table 3 shows the near-term differences in the underlying baseline assumptions between the current and previous DSAs.

Table 2.

Key Assumptions

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Source: Rwandan authorities, IMF and World Bank staff.

Includes publicly guaranteed external borrowing.

Table 3.

Baseline External DSA Compared to the Previous DSA Update, 2016-18

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Sources: Rwandan authorities, IMF, and World Bank staff.

See IMF Country Report No. 16/24, January 2016.

Includes publicly-guaranteed external borrowing.

Macroeconomic Framework for the DSA

Despite near-term weakness in the mining sector, the medium-term and long-term framework underpinning the DSA assumes that Rwanda continues to enjoy rapid growth, and low and stable inflation.

Key highlights:

  • Growth: Long-run growth is unchanged, projected at 7.5 percent. The composition of growth is anticipated to shift toward the private sector and net exports as measures designed to expand and diversify the export base and promote import substitution are assumed fruitful.

  • External sector: Near-term weakness in mineral exports will be partially offset by buoyancy in exports of coffee and tea, non-traditional exports and tourism. Exports of goods and services (as a percent of GDP) are expected to gradually rise over the projection horizon; and import needs are expected to remain high, reflecting continued high investment needs in the economy. Consequently, Rwanda’s external current account is projected to remain in deficit throughout the period under consideration, though the gap is expected to narrow.

  • Inflation: Inflation is expected to remain contained. At the end of 2015 inflation was 4.5 percent and is expected to rise and be maintained at the authorities’ medium-term target of 5 percent.

  • Reserves: Reserve buffers are expected to recover from their current level and attain coverage of 4.5 months of prospective imports by 2023, consistent with the monetary integration process among East African Community members.

  • Fiscal outlook. The key fiscal assumption is that there would be a gradual and consistent rise in domestic revenues (excluding grants) from 2018 to 2036. This reflects the authorities’ commitment to raise Rwanda’s revenue collection efforts to comparable level observed in other countries in the region. Primary expenditures are forecast to remain high, reflecting the need for ongoing significant capital and current spending.

  • Grants. The DSA assumes a tapering of external donor assistance, reflecting reduced access to grants, given Rwandan’s improved debt distress risk rating, and greater capacity to mobilize and use domestic revenue

  • External borrowing. The assumptions for new external borrowing vary over the assessment period. From 2016-2021, the framework assumes central government external borrowing needs are met mainly by disbursements of contracted external multilateral and bilateral debt, and financing under the IMF Standby Credit Facility; while public guaranteed external borrowing associated with RwandAir’s expansion and the completion of the Kigali Convention Center is done via commercial debt. From 2022 onward, the framework assumes that the external financing needs of the central government will be financed by new external debt, with a progressively increasing share from commercial debt, including bonds issued in the international capital market.

  • Domestic borrowing. The framework assumes that over the long-term net domestic borrowing will be 0.5 percent of GDP. Over time, the composition of domestic borrowing is also expected to shift towards medium- and long-term debt as the authorities intensify efforts to develop the local government bond market.

  • Domestic interest rates. New domestic borrowing is expected to be contracted at a nominal interest rate of 8 percent.

Debt Sustainability Analysis

A. External DSA

4. Based on the assumptions outlined above, Rwanda’s debt is assessed to be sustainable with low risk of debt distress (Figure 1 and Tables 4 and 5). Similar to the last DSA update, Rwanda is classified as a “strong” performer, based on the quality of the country’s policies and institutions as measured by the 3-year average of the ratings under the World Bank’s Country Policy and Institutional Assessment (CPIA). This is reflected in higher debt sustainability thresholds compared to countries operating in a weak policy environment.3 Under the baseline scenario all debt burden indicators are projected to remain below the policy-dependent thresholds. Standard stress tests show in 2023 (when the Eurobond issued in 2013 is set to mature) temporary breaches of the debt service-to-revenue ratio, and the debt service-to-exports ratio thresholds. These findings highlight the vulnerability of the Rwandan economy to external shocks and liquidity pressures at the time the Eurobond matures. However, as the breaches of these debt service ratios are temporary, and taking into account the relatively low level of external debt and strengthening indicators of repayment capacity (the expansion of Rwanda’s export base and tax revenues), and that Rwanda is assumed to refinance the maturing Eurobond, the final assessment for Rwanda’s external public and public guaranteed debt is a low risk of debt distress.

Figure 1.
Figure 1.

Rwanda: Indicators of Public and Public Guaranteed External Debt under Alternative Scenarios, 2016-2036 1/

Citation: IMF Staff Country Reports 2016, 153; 10.5089/9781484390610.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Table 4.

External Debt Sustainability Framework, Baseline Scenario, 2013-20361/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 5.

Rwanda: Sensitivity Analysis of Key Indicators of Public and Publicly Guaranteed External Debt, 2016-20361/

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

B. Public DSA

5. Adding domestic public debt to external debt does not change the results of the analysis (see Figure 2 and Tables 6 and 7). The evolution of the total public debt indicators broadly follows that of external debt under the baseline. The DSA suggests that public debt remains stable under the baseline. Based on the 3 indicators examined—PV of public debt-to-GDP, PV of public debt-to-revenue and debt service of public debt-to-revenue—the long-term path of total public debt is projected to be broadly stable in the baseline (Figure 6). PV of public debt-to-GDP remains comfortably below the indicative benchmark throughout the assessment period. The sharp increase in the PV of debt-to-revenue indicator when the primary balance is assumed fixed at 2016 level highlights the importance of securing the revenue gains assumed under the baseline.

Figure 2.
Figure 2.

Rwanda: Indicators of Public Debt under Alternative Scenarios, 2016-20361/

Citation: IMF Staff Country Reports 2016, 153; 10.5089/9781484390610.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.2/ Revenues are defined inclusive of grants.
Table 6.

Rwanda: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013-20361/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Indicate coverage of public sector.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Residuals in 2016 and 2017 arise mainly because guaranteed non-concessional loans are excluded from the fiscal accounts and additional IMF financing is used to increase reserves buffer.

Table 7.

Rwanda: Sensitivity Analysis for Key Indicators of Public Debt 2016–2036

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.