Statement by Mr. Daouda Sembene, Executive Director for Rwanda Mr. Marcellin Koffi Alle, Senior Advisor to the Executive Director and Ms. Loy Nankunda, Advisor to the Executive Director July 12, 2017

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


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

The Rwandan authorities appreciate the instrumental role that the PSI and SCF arrangements have played in supporting their macroeconomic policies and contributing to the impressive achievements made by Rwanda toward economic transformation and poverty reduction over the past several years.

Rwanda has maintained its momentum of high growth and far-reaching reforms underpinned by strong country ownership of IMF-supported programs and political commitment. The PSI and the SCF-supported programs have served as appropriate anchors for policies aimed at addressing the external imbalances and adjusting to exogenous shocks such as inclement weather conditions. Sustained implementation of a sound reform and policy agenda translated into a broadly satisfactory program performance, thus helping make strides towards the country’s ambitious development goals set in the authorities’ Vision 2020. Going forward, the Rwandan authorities are committed to maintaining macroeconomic stability, while advancing bold reforms conducive to private sector development, economic transformation, job creation and further poverty reduction.

The authorities are thankful to IMF staff for the constructive policy discussions held in Kigali in the context of the 2017 Article IV Consultation, the seventh review under the Policy Support Instrument Program (PSI), and the second review under the Standby Credit Facility (SCF). We also welcome the informative Selected Issues paper which addresses issues of great interest for the authorities.

Recent Economic Developments and Program Performance

The authorities’ reform efforts and sound policymaking have contributed to economic outcomes despite the adverse impact of a severe drought on agricultural production and other unfavorable domestic and external developments. GDP grew by 5.9 percent in 2016, broadly in line with projections but tempered notably by the impact of the drought on agricultural production, maturing of large infrastructure projects and a tightening of the policy stance. After rising to about 8 percent in February, headline inflation has begun easing in the second quarter, largely reflecting improved food availability. Core inflation hovered around 4.9 percent in May. The external position improved because of an improvement in the trade balance.

Program performance remained strong under the PSI and SCF arrangements. All end-December 2016 quantitative performance and assessment criteria and most indicative targets were met. Similarly, most structural benchmarks (SB) through end- March 2017 were observed. One SB related to the submission of the National Investment Policy to Cabinet for approval was observed with a slight delay. The submission to Parliament of a revised legislation on fixed asset is now expected to be completed by the next review along with the transition of fiscal reporting into the GFS14 framework with a view to facilitating recording of donor project implementation.

Outlook and Medium-Term Policies

The Rwandan authorities remain optimistic about the economic outlook, given the favorable weather conditions and the expected impact of their medium-term policies. Growth in 2017 is expected to pick up to 6.2 percent and will remain strong over the medium term, supported by a rebound in agriculture production and a strong service sector driven by buoyant activity in business tourism. Inflation is also expected to meet the medium-term target of 5 percent, as food price inflation abates.

The authorities are aware of the downside risks to the outlook and they remain committed to taking necessary actions to enhance economic resilience and maintain the strong growth momentum. Their medium-term policies are designed accordingly and are geared toward enhancing domestic revenue mobilization, maintaining a prudent monetary policy, fostering financial deepening and inclusion, and spurring private sector development and economic transformation.

Fiscal policy

The authorities are committed to the programmed fiscal deficit of 3.7 percent of GDP. To this end, their strategy for the period ahead is aimed at increasing fiscal revenue through appropriate measures to broaden the tax base and enhance tax collection. Thus, far, revenue mobilization has slightly exceeded the target by 0.1 percent of GDP for FY 2016/17 due to strong collection of corporate income taxes. The large taxpayer audits and the phasing out of financial sector tax exemptions have also contributed to this performance. In addition, several measures were implemented to enhance revenue administration, including expanding the use of electronic domestic tax filing and billing, building a taxpayer database, and ensuring strict tax compliance, while integrating e-payment with the mobile money system and using the visa card service operators.

Going forward, the authorities will implement new and forward-looking revenue and administrative measures, including a new property tax law to be sent to Parliament this summer, increases on excise taxes, a revenue-enhancing expansion of the use of electronic billing machines, and the introduction of using big data and data analytics to improve tax compliance, combat fraud and increase tax revenue. These efforts will contribute to further increasing the tax-to-GDP ratio and offset revenue shortfalls stemming from the tax incentives granted as part of the “Made in Rwanda” campaign. Though this campaign is expected to affect revenue in the short run, the authorities strongly believe that its yields in the medium-to-long term will outstrip costs, as the goal is to enhance private sector output and hence broaden the tax base. In this regard, the authorities intend to produce a report assessing the growth-enhancing aspects of these incentives after a full year of implementation.

On the expenditure side, the authorities are committed to sustaining their focus on investment spending, while maintaining current spending such as the wage bill in check. Furthermore, they will move towards the EAC medium-term deficit objective of 3 percent of GDP, notably with a view to preserving fiscal and debt sustainability. The authorities are also in the process of transitioning to a new fiscal statistics framework with the aim of improving fiscal transparency and public financial management.

Monetary policy and financial sector development

The authorities have continued to pursue a prudent monetary policy, consistent with the dual objective of maintaining low and stable inflation and supporting growth. Inflationary pressures observed during last year and early 2017 are largely driven by the drought-caused high food prices and the exchange rate pass-through to domestic prices. As pressures were easing in 2017 thanks to stronger agricultural performance, the BNR lowered its policy rate by 25 basis points to 6.0 percent in June 2017, with the aim to support private sector credit growth and economic growth. Going forward, the authorities are committed to the medium-term inflation target. They will monitor private sector credit growth, inflation developments and economic activity, and stand ready to adjust the policy stance if needed. Furthermore, they will continue to make steps towards improving the monetary policy transmission mechanisms to pave the way for a smooth transition to inflation targeting.

The financial sector remains sound, notably with banks being well capitalized. For the period, ahead, the authorities will make further strides in financial deepening, while paying attention to the need to safeguard financial stability and the effectiveness of monetary policy. In this vein, efforts will be stepped up to develop the interbank market and capacities strengthened in the overall system. The BNR will also continue to strengthen its regulatory and supervisory frameworks for banks. In particular, NPLs which have slightly increased since last year partly due to the slowdown in growth and strict supervisory requirements by BNR will be kept in check.

Financial inclusion has significantly improved in recent years owing to increased access to financial services, promotion of the use of technology, and the strength of financial institutions. The authorities have put in place various measures to support innovation in this regard, while limiting risks to stability, including through the implementation of Basel II and III supervisory frameworks and enacting new or revising legal and regulatory frameworks for both banks and non-banks.

External sustainability

Securing external sustainability was one of the main endeavors under the SCF arrangement. Adjustment policies implemented thus far have helped to stem the loss of reserves and further improve the external position. The authorities will continue to maintain this momentum, including by relying on exchange rate flexibility, stimulating foreign investment, and implementing export promotion strategies. In addition, import substitution will be promoted, including through the Made in Rwanda Initiative which aims to encourage domestic production of certain goods currently imported and promote export diversification, with a view to strengthening external stability and fostering growth in the medium term.

Debt management

The authorities welcome staff assessment that Rwanda’s DSA indicates continuation of low risk of debt distress. They are committed to keeping pace with prudent debt management, prioritizing high-yield public investments, and mobilizing financing with the most favorable terms. The authorities are also working to develop domestic debt markets.

Structural reforms, private sector development and economic transformation

Our authorities have embarked on structural reforms in other sectors to contribute to the overall objective of creating broad-based growth and advance economic transformation, as set forth in their Vision 2020. It is their strong belief that sustaining the important achievements in terms of poverty reduction and reduced reliance on aid dependency will hinge on developing a vibrant private sector, and making it a key provider of job opportunities, especially for the youth. To this end, they continue to improve the business environment with the aim of attracting more private sector investment. In this regard, they welcomed the G20 “Compact with Africa” initiative and expect their participation in it to help stimulate both domestic and foreign investment in Rwanda. As part of the Compact for Rwanda, they are working to lift bottlenecks to private investment, including by reducing the cost of doing business and addressing the infrastructure gap. As well, the authorities will pursue their efforts with their counterparts to step up integration within the EAC.


The Rwandan authorities have made great strides in maintaining macroeconomic stability, supporting strong and inclusive growth, and reducing poverty. Fund arrangements over the past years have supported the country’s overall development goals identified in their successive EDPRS and Vision 2020. Along these lines, the current PSI and SCF have been instrumental in improving the external position and anchoring inflationary pressures, while paving the way for sustaining strong growth.

Cognizant of the challenges still lying ahead, the authorities are committed to keeping pace with their reform momentum with a view to enhancing private sector development and economic transformation. In this ambitious endeavor, the Fund engagement will continue to be valuable, particularly in the context of the formulation and implementation of Vision 2050 and EDPRS III.

Considering the above, we would appreciate Directors’ support for the conclusion of the second review under the SCF and seventh review under the PSI.

Rwanda: Staff Report for the 2017 Article IV Consultation, Seventh Review Under the Policy Support Instrument, and Second Review Under the Standby Credit Facility- Press Release; Staff Report; and Statement by the Executive Director for Rwanda
Author: International Monetary Fund. African Dept.