Rwanda: Staff Report for the 2017 Article IV Consultation, Seventh Review Under the Policy Support Instrument, and Second Review Under the Standby Credit Facility
Author: International Monetary Fund. African Dept.
Publication Date:
13 Jul 2017
eISBN:
9781484309926
Language:
English
Keywords:
ISCR; CR; debt; real GDP; Rwanda; GDP deflator; Rwandan franc; trade balance; per capita income; business tourism strategy; core inflation; Imports; Loans; Africa; Global
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Staff Report for the 2017 Article IV Consultation, Seventh Review Under the Policy Support Instrument, and Second Review Under the Standby Credit Facility

Abstract

Staff Report for the 2017 Article IV Consultation, Seventh Review Under the Policy Support Instrument, and Second Review Under the Standby Credit Facility

Context

1. Rwanda has implemented an ambitious development program over the past two decades (text charts, Figure 1). Its policies have resulted in high and inclusive growth, poverty reduction, improved living standards, and sharpened competitiveness. These policies were implemented in the context of a 20-year “Vision 2020” strategy that envisages the country moving to middle-income status by 2020. This has been implemented through 5-year policies under successive “Economic Development and Poverty Reduction Strategies” (Box 1). Under these strategies, the government has channeled significant public investment into programs to improve social outcomes, increase agricultural productivity and transform the economy to higher value added activities, improve gender equality, and foster financial inclusion, among other things.

Figure 1.
Figure 1.

Rwanda: Human Development Indicators

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Source: UNDP, Human Development Report, 2016.
uA01fig01

Public Investment Spending

(percent of GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

uA01fig02

Real GDP growth

(y/y change)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

uA01fig03

GDP per Capita

(US dollars)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

2. High and inclusive growth has increased incomes and reduced poverty. In the past decade, the sustained focus on high and inclusive growth, combined with maintenance of macroeconomic stability, has achieved tangible results: growth rates have averaged around 7½ percent per year, close to doubling per capita income. At the same time, concerted policies have reduced gender inequality to the lowest level in Sub-Saharan Africa (SSA), reduced poverty from around 60 percent to under 40 percent, and lowered income inequality, with the Gini coefficient dropping from 0.52 in 2005 to 0.45 in 2014.

uA01fig04

Poverty

(percent of population)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

3. At the same time, policies have been implemented to improve the business environment and competitiveness. The 2017 World Bank’s Doing Business survey ranks Rwanda ranks 56 out of 190 countries, #2 in Africa after Mauritius. For example, online business registration has reduced the time to start a new business down to 4 days, and an electronic case management system for judges and lawyers helped reduce the time for contract enforcement to 230 days, shorter than many more advanced economies. For competitiveness and productivity, the 2016/17 World Economic Forum’s Global Competitiveness Index ranks Rwanda as the fourth most improved country in Africa compared to two years earlier, garnering the highest scores for improving its institutional quality and labor market efficiency while diversifying the economy. Rwanda is currently ranked at 52 out of 138 countries, outperforming SSA averages in all pillars except for market size.

uA01fig05

Rwanda: World Economic Forum Global Competitiveness Index

(Higher rank = better score)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

4. Rwanda has boosted domestic revenues to reduce donor reliance. Rwanda’s past achievements have relied substantially on official development assistance. However, faced with declining aid flows to finance its investment strategy, Rwanda has taken numerous tax policy and revenue administrative measures to boost domestic revenues, which increased some 6 percentage points of GDP from 2010 to 2016 (Box 2).

5. Policy recommendations from the 2014 Article IV were implemented (Annex I). Growth-enhancing infrastructure investment has continued, with projects carefully chosen to maintain Rwanda’s low debt risk rating, while domestic revenues and external financing have increased and domestic financing was limited. Supervisory frameworks have been strengthened, and exchange rate flexibility has been the centerpiece of adjustment policies to address external imbalances.

Rwanda: Development Strategies

Vision 2020. Issued in 2000 and revised in 2012, Rwanda’s Vision 2020 seeks to transform Rwanda to middle-income status (per capita income US$1240) by the year 2020 (from US$229 in 2000). By 2020, it also seeks to reduce poverty below 20 percent (around 60 percent in 2005), and increase life expectancy to 66 years (from 49 years in 2000). This vision was based on 6 pillars: good governance; improved labor skills; private sector-led growth; infrastructure development; improved agricultural productivity; and regional integration. Inter-woven among the pillars are gender equality, environmental protection, and use of science and technology.

EDPRS I and II. The 20 year “Vision” has been supplemented by shorter five-year “Economic Development and Poverty Reduction Strategies (EDPRS).” Rwanda is currently implementing EDPRS II which extends through 2018 and has 4 thematic areas: (1) Economic Transformation, to boost growth through reorienting the economy to higher value-added industry and services, notable business tourism; (2) Rural Development, aimed at further reducing poverty; (3) Productivity and Youth Employment, to create 200,000 jobs per annum by targeting skills of youth; (4) Accountable Governance, to improve overall service delivery. Within these areas, community-based “Umurenge” programs provide direct social protection to the poorest households, with a national program to provide cows. School feeding programs help reduce drop-out rates, and children are provided free laptops. A “Crop Intensification Program,” aims to boost agricultural productivity through distribution of seeds and fertilizer, land consolidation, and improved extension and storage services. Policies and laws are communicated via monthly community meetings, following short obligatory community service (Umuganda).

Achievements: These programs, abetted by strong political will, community-inclusion, and supporting legal frameworks and institutions, have helped Rwanda nearly to double per capita income to US$729 (2016), reduce poverty to 39 percent (2014) and increase life expectancy to 64 years (2014) in the past decade.

Follow up strategies Vision 2050 and EDPRS III are already under development with the objective of reaching upper middle income status by 2035 and high income status by 2050. EDPRS III is being extended to align with the new 7-year presidential term that starts this year. Policy makers have studied growth drivers in Malaysia, Botswana, and China, and innovation in Singapore and Finland. Using these cross-country comparisons and the identification of current gaps in Rwanda, priorities for the new strategy will focus on export diversification; energy distribution and supply to broaden access and reduce costs; consolidated land use and irrigation to improve agricultural productivity and food security; educational and vocational training matched to labor skill needs; national schemes to boost private savings; and further improving public project planning and monitoring.

uA01fig06

GDP per Capita Objectives US$ terms

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Source: Rwandan government

Rwanda: Domestic Revenue Collection

Rwanda has made significant strides in raising tax revenues through better administration and tax policy measures. In the past decade, domestic revenue collection has grown by more than 6 percentage points of GDP. Increasing domestic revenues has been a key feature of the current PSI-supported program.

uA01fig07

Total domestic revenue

(% GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Gains in recent years have been primarily a result of improvements in revenue administration, including the collection of local taxes at the central level, improvements in auditing procedures, and closer scrutiny of large taxpayers. Tax policy measures have included VAT on mobile airtime, royalty taxes on mining, and taxes for special petroleum and infrastructure funds. Following the use of a Tax Administration Diagnostic Assessment Tool (TADAT) in 2015, the Rwandan Revenue Authority (RRA) is implementing a work program focused on strengthening taxpayer registries and electronic filing, and reducing outstanding stock of arrears more efficiently.

uA01fig08

EAC Revenue Mobilization

(% GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

In recent years IMF technical assistance (TA) has focused mining and property taxation and analyzing the VAT gap. The authorities have used this advice to formulate royalty taxes and the long-awaited revised Fixed Asset Tax legislation, which provides for new rates and a property valuation system based on market prices. Both taxes provide an upside risk to revenue projections over the medium term. On amendments have been associated with narrowing various incentive schemes to strategic sectors e.g. exports, manufacturing, energy, ICT, financial services, construction, and agriculture.

uA01fig09

Rwanda: Tax and Non-Tax Revenues

(Fiscal years, in percent of GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Sources: Authorities, staff calculations.

Recent Economic Developments

6. Growth decelerated sharply in 2016 (Figure 2, Table 1). Cumulative quarterly y/y growth slowed from 8.9 to 5.9 percent over the course of 2016, reflecting the effect of an extensive drought on agricultural production, completion of large public investment projects for tourism, and adjustment policies, aimed at tempering import demand to address external imbalances. Indeed, adjustment policies were more extensive than envisaged under the original program, with 9.7 percent depreciation, higher than projected under the program, a lower fiscal deficit for FY15/16 (3.4 vs. 5.0 percent of GDP), and a tighter monetary stance contributing to a sharp decline in private sector credit growth (7.8 vs. 15.7 percent envisaged for end-2016).

Figure 2.
Figure 2.

Rwanda: Overview of Recent Economic Developments

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Sources: Rwandan authorities, and IMF staff estimates.
Table 1.

Rwanda: Selected Economic Indicators, 2015–20191

article image
Sources: Rwandan authorities and IMF staff estimates.

All figures are based on the rebased GDP, except 6th PSI review figures.

Defined as excluding fresh products and energy

Imports for 2016 reflect purchases of two aircrafts.

uA01fig10

GDP Growth and Contribution by Sector

(Cumulative y/y, Percent)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

uA01fig11

Rwanda: Rebased National Accounts

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

7. The rise in headline inflation reflected mainly food prices. Food price inflation peaked at 17.6 percent y/y in February 2017 and headline inflation at 8.1 percent. May food inflation dropped to 14.3 percent (headline 6.5 percent). With the resumption of normal rainfall patterns, food inflation is expected to abate by mid-2017. Core inflation has risen and stood at 4.9 percent in May, reflecting the first-round effects of exchange rate pass-through on prices.

uA01fig12

Inflation

(monthly y/y)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

8. Fiscal outcomes in the first three quarters of 2016/17 were consistent with program targets (Figure 3, Table 2).

  • Revenue and grants were on target, with slight shortfall in taxes on goods and services and international taxes, due to lower imports of used clothes and cement. This was partly offset by overperformance in direct taxes.

  • Expenditures were also in line with expectations. Higher current expenditures in the first three quarters of the fiscal year (including higher spending for peacekeeping in Central African Republic and South Sudan, court-mandated salary increases for teachers, and higher transfers to districts) reflects spending that was programmed for the whole year and should not alter full-year spending levels. Lower investment spending in the first three quarters was due to delays in externally-financed project disbursements compared to projections, and delays in the procurement and invoicing processes.

Figure 3.
Figure 3.

Rwanda: Fiscal Developments

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A001

Sources: Rwandan authorities, and IMF staff estimates.

Rwanda: Operations of Central Government

(in percent of 2016/17Q1-Q3 GDP)

article image
Table 2a.

Rwanda: Central Government Flows, FY 2015/16–19/201

(Billions of Rwandan Francs)

article image
Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes peacekeeping operations, spending on demobilisaton/reintegration, and genocide relief.

A negative sign indicates a reduction.

A negative number implies an overerestimate of financing. The non-zero errors and omissions in 15/16 is due to H1 outcomes.

Table 2b.

Rwanda: Central Government Flows, FY 2015/16–19/201

(Percent of GDP)

article image
Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes peacekeeping operations, spending on demobilisaton/reintegration, and genocide relief

A negative sign indicates a reduction.

A negative number implies an overerestimate of financing. The non-zero errors and omissions in 15/16 is due to H1 outcomes.

Table 2c.

Rwanda: Financial Operations of the Central Government, GFSM 2014 Presentation1

(Billions of Rwandan Francs)

article image
Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.

Table 2d.

Rwanda: Financial Operations of the Central Government, GFSM 2014 Presentation1

(Percent of GDP)

article image
Sources: Rwandan authorities and IMF staff estimates and projections.

Fiscal year runs from July to June.