Rwanda: Staff Report for the 2017 Article IV Consultation, Seventh Review Under the Policy Support Instrument, and Second Review Under the Standby Credit Facility—Debt Sustainability Analysis Update
Author: International Monetary Fund. African Dept.
Publication Date:
13 Jul 2017
eISBN:
9781484309926
Language:
English
Keywords:
ISCR; CR; debt; real GDP; Rwanda; GDP deflator; burden indicator; debt sustainability threshold; committed-but-undisbursed debt; creating flow; Public and publicly-guaranteed external debt; Debt sustainability
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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

Background

1. Growth in the Rwandan economy decelerated in 2016. Real GDP grew by 5.9 percent in 2016, compared to 8.9 percent in 2015, mainly due to the impact of drought on agricultural production, and to a lesser extent the completion of large investment projects in the second half of the year, and adjustment policies intended to address external imbalances. Lower commodity prices put a drag on mining exports. Despite the growth slowdown, imports increased in the first half of the year due to large public and private investment projects, causing an increase in the current account deficit. However, adjustment policies—notably sizeable exchange rate adjustment—lowered demand for imports and boosted export competitiveness in the second half of the year, such that the deterioration of the current account balance was less than forecast. In 2017, continued suppression of import demand, a levelling off in commodity prices, and robust export volume growth are projected to lead to a reduction of the current account deficit from 14.4 percent of GDP in 2016 to 10.2 percent. Real GDP growth is also projected to recover gradually, reaching 6.8 percent by 2018.

2. Rwanda’s public sector debt has increased with an investment push in recent years, but remains comfortable in absolute terms. At end-2016, the external debt of the public sector stood at 35.8 percent of GDP (Table 1). That ratio has increased by 14 percentage points since 2013 reflecting a sustained public investment push, including by external guaranteed debt associated with large investment projects including expansion of RwandAir and completion of the Kigali Convention Center (KCC) (Figures 1 and 2).3 Rwanda’s debt portfolio has been further affected by a shift in the composition of official development assistance away from grants toward concessional borrowing. Looking forward, a new international airport capable of handling more and larger aircraft is under construction, with the government taking a minority share in a public-private partnership. The project, for which the government is expected to take on around US$37 million in external debt over 2017–19, is included in the DSA4.

Figure 1.
Figure 1.

Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A002

Sources: Rwandan authorities and IMF Staff calculations
Figure 2.
Figure 2.

Composition of PPG External Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.A002

Table 1.

Rwanda: External Public Debt

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Source: Rwandan authorities and IMF staff.

3. Rwanda’s domestic public debt has also increased to develop a broader domestic market in recent years, but also remains low in absolute terms. Domestic public debt was 8.6 percent of GDP at end-2016 (Table 2) close to 2 percent higher than in 2013. The increase has been driven by both short-term debt and the issuance of medium-term treasury-bonds for capital market development purposes.

Table 2.

Rwanda: Domestic Public Debt

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Source: Rwandan authorities and IMF staff.

Underlying Assumptions

4. The medium and long-term macroeconomic framework underlying the DSA is consistent with the baseline scenario presented in the Staff Report for the 7th review of the PSI-supported program. The main assumptions and projections for key macroeconomic variables are summarized in Box 1 and Table 3. The main differences between the current assumptions and those underlying the last DSA in 2015 are: i) GDP growth projections has been revised slightly down in 2018–19; ii) a slightly higher fiscal deficit is assumed due to lower projected revenues serving to increase debt and debt service measured against revenue, and iii) an improvement in the current account balance throughout the projection period, due to short and longer term adjustment policies. The reduction in external imbalances reflects, in large part, a reassessment of trade growth given stronger than expected adjustment to date—at 14.4 percent of GDP, the trade deficit was significantly lower than previously forecast in 2016, and improvements continued into Q1 2017 with contracting import volumes—particularly for consumer goods and construction goods— and robust non-traditional export volume growth, reflecting implementation of policies to encourage import substitution and promote export diversification.5

Table 3.

Selected Macroeconomic Indicators, Current vs. Previous DSA

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Source: Rwandan authorities, IMF and World Bank staff.

Macroeconomic Framework for the DSA

The medium-term and long-term framework underpinning the DSA assumes that Rwanda continues to enjoy rapid growth, with low and stable inflation.

Key highlights:

Growth: Projected long-run growth stands at 7.5 percent, unchanged from previous analysis and close to historical growth rates, and thus conservatively does not reflect a growth dividend from significant public investment in recent years. 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 to be fruitful.

External Sector: Exports of goods and services (as a percent of GDP) are expected to grow consistent with historical rates reflecting, in part, strategic public investments and export promotion. Import needs are expected to remain high, although import growth rates are anticipated to be slightly below historical averages, as domestic production of certain items—such as concrete—supports import substitution. Consequently, while Rwanda’s current account is projected to remain in deficit, it is expected to narrow over the period under consideration.

Inflation: Inflation is expected to remain contained. Although inflation had risen to 7.3 percent by the end of 2016, it is expected to decline to and be maintained at the authorities’ medium-term target of 5 percent.

Reserves: Reserve buffers are expected to gradually increase toward 4.5 months of prospective imports, consistent with the monetary integration process among East African Community members.

Fiscal Outlook. There is assumed to be a gradual and consistent rise in domestic revenues reflecting the authorities’ commitment to raise Rwanda’s revenue collection efforts to a comparable level observed in other countries in the region. Primary expenditures are forecast to remain high, however, reflecting the ongoing need for significant capital and current spending.

Grants. The DSA assumes a tapering of external assistance from development partners in real terms over the projection period, reflecting reduced access to grants and greater capacity to mobilize and use domestic revenue.

External borrowing. The assumptions for new external borrowing vary over the assessment period. With the development of local bond markets and improvement in the current account position, external borrowing is expected to decline from close to 5 percent of GDP on average over the last 5 years to under 2 percent of GDP. Compositionally, from 2016-2021, the framework assumes central government external borrowing needs are met mainly by disbursements of already contracted external multilateral and bilateral debt.1 From 2022 onward, the framework assumes that such needs will be financed with a progressively increasing share of commercial debt, including bonds issued in the international capital markets.

Domestic borrowing. The framework assumes that, over the long-term, net domestic borrowing will increase gradually from 1.4 percent of GDP on average in the last 5 years to 2.6 percent by 2037, reflecting efforts to both deepen and strengthen the domestic debt markets. Over time, the composition of that borrowing is expected to shift towards medium and long-term debt as the authorities intensify efforts to develop local government bond markets.

Domestic interest rates. New domestic borrowing is expected to be contracted at a nominal interest rate of 8 per cent—slightly below current short-term T-bill rates.

1 Over this period, committed-but-undisbursed debt is equivalent to around 90 percent of estimated external financing needs.

Debt Sustainability Analysis

A. External DSA

5. Based on the assumptions outlined above, Rwanda’s debt is assessed to be sustainable with low risk of debt distress (Figure 3 and Tables 4 and 5). Like 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 (more accommodative) debt sustainability thresholds compared to countries operating in a weak policy environment.

Figure 3.
Figure 3.

Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2017–2037 1/

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.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 2027. 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.

Rwanda: External Debt Sustainability Framework, Baseline Scenario, 2014–2037 1/

(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 for Key Indicators of Public and Publicly Guaranteed External Debt, 2017–2037

(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.

6. Under the baseline scenario, all but one debt burden indicator are projected to remain below the policy-dependent thresholds. The only breach occurs in 2023 when the PV of debt service-to-revenue ratio just exceeds its threshold, although that breach is temporary in nature (lasting one year) and relates to when the 2013 Eurobond is set to mature. The PV of debt service-to-exports ratio also peaks in 2023, although with a small breach of the indicative threshold under the largest stress scenario—a shock to export growth. Other indicators remain well below their thresholds even under the most extreme stress scenarios. Using the probability approach, based on country-specific CPIA and historical growth information to focus on the evolution of the probability of debt distress over time, all baseline indicators remain well below their thresholds.

7. Aside from some potential liquidity pressures when the 2013 Eurobond is set to mature, the risks to the forecast are low. While medium term GDP assumptions are high compared to other countries, they are lower than Rwanda’s historical averages: in any case, the low risk rating is robust even with somewhat lower assumptions. As the debt-service breach from the Eurobond is temporary, and considering the relatively low level of external debt, strengthening indicators of repayment capacity (the expansion of the export base and tax revenues), and that Rwanda is assumed to refinance the maturing Eurobond, also given the relatively strong capacity to develop a medium-term debt management strategy, the final assessment for Rwanda’s external public and public guaranteed debt remains low risk of debt distress. However, risks have increased in recent years in line with large public investment projects. A projected continued gradual tapering of budget support and shift away from grants requires a focus on domestic revenue collection.

B. Public DSA

8. The results of the analysis are not altered by adding domestic public debt to external debt (see Figure 4 and Tables 6 and 7). The evolution of total public debt indicators broadly follows that of external debt under the baseline—peaking in 2019 before receding as the primary deficit begins to decline. In PV terms, debt remains significantly below the LIC DSA public debt benchmark of 74 percent for those countries with strong policies and institutions.

Figure 4.
Figure 4.

Rwanda: Indicators of Public Debt Under Alternative Scenarios, 2017–2037 1/

Citation: IMF Staff Country Reports 2017, 217; 10.5089/9781484309926.002.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 2027.2/ Revenues are defined inclusive of grants.
Table 6.

Rwanda: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014–2037

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Refers to gross debt of the central government.

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.

Table 7.

Rwanda: Sensitivity Analysis for Key Indicators of Public Debt 2017–2037

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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.