Rwanda: Staff Report for the 2019 Article IV Consultation and Request for a Three-year Policy Coordination Instrument—Debt Sustainability Analysis1
Author: International Monetary Fund. African Dept.
Publication Date:
03 Jul 2019
eISBN:
9781498324410
Language:
English
Keywords:
ISCR; CR; Rwanda; debt; financing; Rwandan authorities; burden indicator; issuance plan; debt distress; dynamics equation; SOE debt; Debt sustainability; Public and publicly-guaranteed external debt; Africa; debt indicator
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Staff Report for 2019 Article IV Consultation and a Request for a Three-Year Policy Coordination Instrument-Press Release; Staff Report; and Statement by the Executive Director for Rwanda

Abstract

Staff Report for 2019 Article IV Consultation and a Request for a Three-Year Policy Coordination Instrument-Press Release; Staff Report; and Statement by the Executive Director for Rwanda

Rwanda: Risk Rating Summary

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An updated joint assessment of Rwanda’s debt sustainability suggests continued low risk of external debt distress. External debt burden indicators remain below risk thresholds, except for a short and temporary breach of debt service indicators in 2023, when the Eurobond issued in 2013 matures. The main risk to debt sustainability––and macroeconomic stability––remains external shocks. Balancing Rwanda’s still-strong public investment needs with maintaining low risks of debt distress, the government is focused on carefully choosing the highest return projects, financed under the most favorable terms. These principles are laid out in Rwanda’s Medium-Term Debt Strategy, as are options for help mitigating potential risks. More broadly, the government is focused on creating a larger and more diversified export base while encouraging more private investment, to help secure high and resilient growth over the long term. Forthcoming results of fiscal risk analysis will help identify if there could be additional contingent liabilities that should be included in the next DSA.

Background

1. Rwanda’s public and publicly-guaranteed debt has increased, including to support investment scaling up envisaged under the recently completed 2013–18 program supported by the Policy Support Instrument, while maintaining a low risk of debt distress. During that period, guarantees were issued and borrowing undertaken to support a large scaling up of public investment projects to support trade and tourism. These include three large-scale projects which are being completed through a series of PPPs and external guarantees, totaling US$465 million at end-2018.2 As a result, nominal public and publicly guaranteed (PPG) external debt has risen from 21.8 percent at end-2013 to 41.6 percent in 2018 (Text Figure 1).3 The debt continues to be dominated by multilateral lending (Text Figure 2), resulting in a PV of PPG external debt-to-GDP ratio of 29.0 in 2018. Total nominal public debt stood at 53.1 percent of GDP in 2018, which is similar to previous DSA projections. External debt remains about two-thirds on concessional terms. The yield on the outstanding Eurobond has fallen to around 5.8 percent in early-2019, while rates on domestic T-bills and T-bonds range from 5.5 percent (28 days) to 12.9 percent (15 years).

Text Figure 1.
Text Figure 1.

Nominal Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

Text Figure 2.
Text Figure 2.

Composition of Nominal PPG External Debt

(2018*, Percent of total)

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

* Preliminary data for 2018Source: Rwandan authorities and IMF Staff Calculations

2. The DSA covers the central government, guarantees, and state-owned enterprises (Text Table 1). The Ministry of Finance and Economic Planning publishes annual debt data, covering domestic and external debt of the central government, broken down by multilateral, bilateral and commercial debt, as well as information on guarantees and debt held by all state-owned enterprises (SOEs). There is no debt stemming from extra budgetary funds, long term central bank financing of the government, nor the state-owned social security fund. External debt is defined on a currency-basis.

Text Table 1.

Rwanda: Coverage of Public and Publicly Guaranteed Debt and Parameters for Contingent Liability Shocks for the Tailored Stress Test

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The state-owned social security fund (Rwanda Social Security Board, RSSB) has no outstanding debt and there are no extra-budgetary funds (EBFs).

There is no short-term financing from the central bank (BNR) to the government.

The default shock of 2 percent of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0 percent.

When PPP stock is less than 3 percent of GDP, as reflected in the World Bank’s database, then test is set to zero. Rwanda’s PPP stock is shown as 2 percent of GDP.

Source: Rwandan authorities and World Bank’s Private Participation in Infrastructure Database.

Underlying Assumptions

3. The DSA assumes the adoption of a new fiscal framework, consisting of a debt ceiling anchor and an operational deficit ceiling. The fiscal framework would: (i) maintain the East African Community 50 percent PV of debt to GDP ceiling as a fiscal anchor; and (ii) introduce an operational rule with deficit to GDP ceiling of 5.5 percent for the budgetary central government (BCG) over a 5-year rolling window4. The BCG deficit ceiling is well below that needed to keep the PV of debt below the ceiling; this is to provide a buffer for unanticipated developments and debt contracted or guaranteed outside the BCG. The fiscal framework is designed to support spending for implementation of Rwanda’s National Transformation Strategy (NST), while providing operational guidance and maintaining debt at a sustainable level. As a result, the gross borrowing needs of the public sector have been increased over the DSA horizon, with an assumption that the majority of additional financing would be accessed on concessional terms and used for investment spending (capital and labor). The main assumptions and projections for key macroeconomic variables are summarized in Box 1 and Text Table 2.

Text Table 2.

Key Macroeconomic and Debt Assumptions—Comparison with the Previous Debt Sustainability Analysis

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Sources: Rwandan authorities; IMF and World Bank staff estimates and projections.

4. Despite higher growth in the near-term, the DSA takes a more conservative approach to long-run growth compared to previous DSAs. Growth is expected to be somewhat higher in the near term as compared to the previous DSA, given the assumption of higher investment spending and recent evidence of higher growth potential in agriculture and manufacturing. Over the next five years, the additional investment spending and large construction projects should sustain growth at almost 8.0 percent, before tapering off to around 6.5 percent in 20 years, consistent with an economy where population growth could slow over time. While the public sector is expected to remain the main driver of growth in the near term, the private sector is expected gradually to play a more import role in growth and job creation over time. The current account deficit is expected to remain around 7.5 percent over the medium term, and narrow modestly over the long term as exports in new lines expand (including horticulture, new minerals, and textiles).

5. The DSA assumes continued support from bilateral and multilateral development partners over the medium-term. The new fiscal framework should provide space to support NST implementation, while maintaining macroeconomic stability. Over the first 5 years of the DSA horizon, larger financing needs of the government are expected to be met by increased support from official bilateral and multilateral partners. From 2025 onwards, the financing mix is assumed to: (i) shift gradually away from concessional financing to market-based financing, as income levels rise, and (ii) shift from external to domestic financing, as the local bond markets develop.

6. The DSA also takes a conservative approach to financing mix (Text Table 3). The grant component of new external financing is assumed to decline as Rwanda develops. As a result, grant-equivalent external financing5 declines from 71 percent of total external financing in 2019 to 58 percent in 2028 to 39 percent by 2039, while average effective real interest rates on domestic debt rise from 1.6 percent in 2009–18 to 3.4 percent in 2030–39.

Text Table 3.

Financing Mix (2019–39)

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Notes:

In percent of external financing.

Calculated as the ratio of budgetary grants in total budgetary grants and loans in budgetary central government.

Calculated as the ratio of project grants in in total project grants and loans in budgetary central government.

Sources: Rwandan authorities; IMF and World Bank staff estimates and projections.

7. Rwanda’s recent public investment drive has resulted in large accrual of public debt, but has been appropriately managed in order to keep debt risks low. A scaling up of public debt, among other things to finance large projects, was anticipated in the 2013 DSA, with Rwanda’s debt sustainability assessed against different borrowing scenarios to determine the fiscal space available.6 The actual pace of the scaling up of debt was larger than anticipated in the scaling up scenarios of the 2013 DSA. Faster exchange rate depreciation agreed under the PSI/SCF to correct external imbalances, and higher primary deficits, due to lower-than-assumed donor grants, were the main factors in the larger-than-expected accrual of debt (Figure 3).

Figure 1.
Figure 1.

Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–29 1/2/

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Rwanda: Indicators of Public Debt Under Alternative Scenarios, 2019–29 1/

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Rwanda: Drivers of Debt dynamics—Baseline Scenario1/

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

1/ Compared to 2013 DSA scaling up scenario2/ Difference between anticipated and actual contributions on debt ratios.3/ Distribution across LICs for which LICDSAs were produced.4/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

Macroeconomic Framework for the DSA

The medium- and long- term framework underpinning the DSA assumes that Rwanda continues to enjoy robust growth, with low and stable inflation. A limited growth dividend is implied from the broad public investment in infrastructure to support greater export diversification, and to improve agricultural productivity and resilience. Mobilizing the private sector as the main engine for growth and job creation will be critical, along with sustained levels of investment—consistent with the NST or meeting the MDGs—and increased human capital. Key highlights include:

Growth: The near-term growth outlook maintains growth around 8 percent through 2022, declining to 7.2 percent by 2028, and to 6.5 percent by 2039. Relative to previous DSAs, this is a slight upward revision to growth in the near term, but a more conservative growth projection over the medium- to long- term, consistent with an economy where population growth is slowing over time. Upside risks around the long-term growth potential of the economy exist, particularly from faster TFP growth.

External Sector: Exports of goods and services are expected to grow steadily (11 percent on average during 2019–39), roughly in line with historical rates, but below recent very rapid growth. This reflects, in part, strategic public investments and export promotion, and development plans. Import needs are expected to remain high, particularly in the near term as high public and private investment rates are maintained, declining slightly over the medium term. Consequently, while Rwanda’s current account is projected to remain in deficit, it is expected to narrow somewhat over the DSA horizon, reaching 7 percent by 2039.

Inflation: Inflation is expected to remain at the authorities’ medium-term target of 5 percent over the medium- to long- run.

Reserves: Reserve coverage is expected to remain in the range of 4–5 months of prospective imports over 2020–22 and remain above 4.5 months of imports in the outer years.

Domestic Revenue Mobilization. There is assumed to be a gradual rise in domestic revenues, from 19.3 percent in 2018 to 22.3 percent by 2039, reflecting tax revenue measures already in the pipeline (e.g. fixed asset taxes, electronic billing machines), as well as additional measures agreed under the new program (e.g. tax expenditure analysis aimed to streamline incentives, additional administrative measures.

Grants. The DSA assumes a tapering of external assistance from development partners over the projection period. Grants decline steadily from 4.9 percent of GDP in 2018 to 2.3 percent by 2029, and 1.1 percent by 2039.

Public Spending and Deficit: The fiscal deficit is assumed to average slightly below the 5.5 percent of GDP ceiling over the duration of the forecast horizon, resulting in higher gross borrowing needs of the public sector as compared to previous DSAs.

External borrowing. The assumptions for new external borrowing vary over the assessment period. With development of local bond markets and some improvement in the current account position, reliance on external borrowing is expected to moderate. Compositionally, from 2019–2022, the framework assumes higher public borrowing needs, which are met by increased disbursements of external multilateral and bilateral debt. From 2022 onward, the framework assumes that such needs will be financed with a progressively larger share of non-concessional borrowing. The share of external financing relative to total financing declines from around 61 percent in 2019 to 55 percent by 2029 and remains at around 55 percent thereafter. The Eurobond is assumed to be rolled over in 2023, and again in 2033, at an interest rate of 7 percent and a maturity of 10 years.

Domestic borrowing. The framework assumes that, over the medium- to long-term, net domestic borrowing will increase with a gradual lengthening of maturities, as Rwanda intensifies efforts to develop the domestic bond market. New domestic borrowing is expected to be contracted at an average nominal interest rate of 7.9 percent over the next five years, rising gradually to 8.3 percent in the long run as the government shifts to longer maturities.

Foreign Direct Investment. The framework assumes an increase in FDI, driven by the NST, the Compact with Africa, and other efforts to provide incentives to attract foreign direct investment. FDI increases from 3 percent of GDP in 2018 to 4.5 percent by 2039

8. Realism tests illustrate the near-term growth contribution of higher investment spending for the NST and agricultural productivity (Figure 4). Compared to the previous DSA, the primary fiscal deficit is 2.0 percentage points of GDP higher in 2022, reflecting higher investment spending. The addition to growth is less than would be implied by the additional fiscal impulse. This DSA assumes an unchanged direct growth contribution from the construction of Bugesera airport. Compared to the previous DSA, there is more public investment which has a direct impact on growth.7

Figure 4.
Figure 4.

Rwanda: Realism Tools

Citation: IMF Staff Country Reports 2019, 211; 10.5089/9781498324410.002.A002

9. Rwanda’s debt carrying capacity is assessed as “strong”8 (Text Tables 4a and b). The composite index (CI) for Rwanda, which measures the debt carrying capacity in the new LIC-DSF, stands at 3.24, above the cut-off value of 3.05 for strong capacity countries. Underlying inputs for the calculation of the CI were sourced from the IMF’s October 2018 WEO, and an update of the World Bank Country Policy and Institutional Assessment (CPIA) to 2017 levels. The CI score is driven largely by Rwanda’s high CPIA score and adequate reserve coverage.9 The government’s medium-term debt strategy (MTDS) for FY18/19–FY20/21 examines various potential risks to debt sustainability, including rolling over the Eurobond in 2023. For contingency planning should potential risk scenarios materialize, the MTDS outlines several alternative debt management strategies. Overall, risks to debt sustainability are mitigated by a large average time-to-maturity for the entire portfolio of 12 years, reflecting the large share of concessional external borrowing and the increasing average maturity of domestic debt, as well as the relatively small size of the Eurobond. The MTDS underscores the importance of maintaining a low risk of debt distress in order to maintain concessional financing windows by several development partners, and that non-concessional borrowing will be contracted only on an exceptional basis, cognizant of debt limits in the IMF-supported program and based on a careful consideration of the economic rate of return of proposed projects.

Text Table 4a.

Rwanda: Debt Carrying Capacity

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Text Table 4b.

Rwanda: Applicable Thresholds, and Benchmarks

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Debt Sustainability Analysis

External Debt

10. Rwanda’s external debt stock indicators remain below the threshold under the baseline and all stress scenarios. The higher investment spending provided for under the revised framework is expected to lead to a gradual accumulation of PPG external debt over time, with the present value (PV) of debt peaking at 34.6 percent of GDP in 2039 (Table 1). The PV of external debt-to GDP (PVDY) and the PV of external debt-to-exports (PVDE) remain well below their respective thresholds of 55 and 240 percent, respectively, throughout the projection period and under all the standardized shocks (Figure 1).10 The PVDY rises gradually to 33.0 percent by 2029, while the PVDE ratio declines to 126.2 percent (Table 3), consistent with the NST strategy for more export diversification and job creation in the tradable sector. The most severe shocks are the export (for the PVDE) and combination shocks (for the PVDY).

Table 1.

Rwanda: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(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.

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

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).

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

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

11. The historical scenario increases sharply as a result of the sharp adjustment of external balances over the period 2015–17 (Table 3). The PVDY and PVDE ratios both rise sharply and continuously under the historical scenario. This is due primarily to the large current account deficit and negative GDP deflator calibrated using historical averages, which covered a period including several large shocks (donor withdrawal, commodity prices, and drought) as well as large external imbalances, which were corrected over the 2015–17, primarily through a large exchange rate adjustment, as envisaged under the PSI/SCF-supported program. After the large exchange rate adjustment, the real exchange rate is now well aligned with fundamentals and the government is committed to maintaining that alignment to preserve external sustainability. The large current account deficit and negative GDP deflator account for almost all of the divergence between the baseline and historical scenarios in these stock indicators.

Table 2.

Rwanda: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government plus social security and extra budgetary funds, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Currency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

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

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 and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 3.

Rwanda: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

(In percent)

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Sources: Country authorities; and staff estimates and projections.

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

Includes official and private transfers and FDI.