Statement by Mr. Yambaye, Executive Director for Rwanda and Ms. Loy, Advisor to the Executive Director for Rwanda, June 8, 2016

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.

Introduction

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 and thereby focus on its goals for sustainable growth and poverty reduction. 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 development efforts. The authorities broadly share the thrust of the staff report.

The Rwandan economy grew strongly in 2015, at 6.9 percent. However, the decline in mineral prices has resulted in a near halving of mining exports which, along with weaker services balance, led to a deterioration of the current account deficit to 13.5 percent of GDP. This has put pressures on the foreign reserves, which nevertheless covers 3.6 months of prospective imports.

Looking forward, it is expected that still lower mineral exports in 2016 and exchange rate depreciation will dampen the growth in overall export receipts and further impact the current account balance. Real GDP growth is projected to lower modestly at 6 percent in 2016 and 2017, with tightening fiscal and monetary policy stance, exchange rate adjustment, and efforts to address external imbalances. Requested IMF financing under the Standby Credit Facility would provide more buffer for foreign reserves.

Against this backdrop, our Rwandan authorities are requesting for an 18-months arrangement under the Stand-by Credit Facility (SCF) to support adjustment efforts while bolstering foreign reserves. They also request an extension of the PSI-supported program to End-December 2017 in order to maintain their medium-term macroeconomic and growth signaling engagement with the Fund.

Recent Developments and Program Performance

Performance under the PSI continues to be strong. All the assessment criteria were met and all but one indicative targets were observed. The implementation of structural benchmarks was also satisfactory. Favorable developments over the recent period led to a revision in growth projections for 2015 from 6.5 percent to 7 percent. This performance has been underpinned by buoyant activity whose main drivers 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. Strong construction activity and the ensued strong capital goods imports have added up to the large in trade deficit. Facing this imbalance, the authorities are closely monitoring developments on the external front, including the depreciation of the Franc, and will take the appropriate adjustment measures as needed.

Outlook and Medium-Term Policies

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 priorities 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.

  • Boosting domestic revenue Pursuing a fiscal policy mobilization

coherent with their development objectives 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.

Moreover, 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.

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 help improve value-for-money in public investment.

  • 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 stand ready to adjust monetary policy stance if required. They also remain committed to further enhance transmission mechanisms, with the view to ease the conduct of monetary policy and bolster financial deepening. The financial sector is sound and non-performing loans (NPLs) are declining owing to strong economic activity. The 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 help broaden the financial architecture and serve a larger share of the population with financial services.

  • Strengthening debt management

Our authorities welcome the conclusion of the staff’s debt sustainability analysis (DSA) that Rwanda continues to face a low risk of external debt distress. Although the downturn in the mining sector has somewhat highlighted external vulnerabilities, the 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 in their report—29.9 percent of GDP at end-2014, of which 23.7 percent for the external debt and 6 percent for domestic debt—it is worth noting that the related borrowing aimed at financing critical investment projects, including RwandAir and the Kigali Convention Center (KCC). As evidenced by the current dynamism and growing activity of RwandAir and the projection of 20 international events expected to be hosted at the KCC in 2016/2017, those investments are expected to yield returns above costs. Going forward, the authorities attach a high importance to preserving the hard-won debt sustainability as they strengthen their Debt Management Unit.

  • Diversifying the economy through structural reforms

Economic diversification has been at the center of the 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 the 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.

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 ties with neighboring countries, and the speeding up of the integration within the East African Community (EAC).

The authorities’ medium-term plans are to boost growth-enhancing public investment within the limits of debt sustainability, and to support private investment. They will continue efforts to reduce reliance on donors and increase domestic revenue collection by broadening the tax base, enhancing tax administration, and improving tax compliance as highlighted above. Priority will also be given to improving public spending efficiency, including through better investment planning, more transparent budget execution, and improved public financial accounting.

Conclusion

The PSI remains an important instrument in helping Rwanda to continue its economic progress, and the authorities remain fully committed to the policies and measures therein and, therefore, request an extension of the PSI through December 2017 along with two additional semi-annual reviews. The authorities are confident that the combination of an extended PSI and for the granting of an SCF arrangement will appropriately support and signal their medium-term macroeconomic and growth priorities while bolstering reserves coverage and strengthening the country’s external position. Accordingly, we will appreciate the Board support for the conclusion of the 5th review under the PSI, their request for extension of the PSI, and their request for an arrangement under the SCF. We call on the Board to respond favorably to these requests.