Rwanda : Request For Disbursement Under The Rapid Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
18 Jun 2020
eISBN:
9781513548043
Language:
English
Keywords:
ISCR; CR; financing; spending needs; emergency support; financing gap; RCF request; market financing shock; economic recovery; COVID-19; Economic recovery; Debt service; Global; financing pressure; dynamics equation; sustainability framework; financing strategy; market financing; Stress testing; breach of the market-financing risk indicator
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Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Rwanda

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Rwanda

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While Rwanda’s debt remains sustainable, the risk of external and overall debt distress has moved to moderate from low relative to the previous DSA in April 2020 due to the impact of the global COVID-19 crisis. The baseline macroeconomic scenario reflects negative effects of the COVID-19 shock on growth, exports, and revenues, which sharply raise external and domestic financing needs in 2020.3 This DSA assumes that the Rapid Credit Facility (RCF), debt service relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT), World Bank financial support, 4 and prospective concessional financing from other development partners fill the external financing gap created by the shock. The authorities have not yet requested debt service suspension from official bilateral creditors as envisaged under the Debt Service Suspension Initiative (DSSI), supported by the G-20 and Paris Club.5 Compared to the previous DSA, the pandemic impact coupled with higher concessional loans from multilateral and bilateral donors and larger external borrowing related to an scaling up of the new international airport project is expected to entail a higher pace of accumulation of public and publicly guaranteed (PPG) external debt in the medium term, leading to a present value (PV) of total public debt peaking at 53 percent of GDP in 2025.6

The stress tests highlight that Rwanda is more susceptible to external shocks when compared to the pre-pandemic period even after the initial impact of the COVID-19 shock dissipates, and, as a result, indicate the moderate risk of debt distress (Figure 1 and 2)7 Solvency indicators for the PV of external debt-to-GDP ratio and the PV of total public debt-to-GDP ratio are below the indicative threshold/benchmark under both the baseline scenario and the most extreme risk shock. However, the sharp decline in exports due to the COVID-19 shock makes one solvency indictor (the PV of external debt-to-export ratio) and one liquidity indicator (the external debt service-to-exports ratio) temporarily breach their relevant thresholds in 2020 under the baseline scenario. This risk is, however, mitigated by adequate reserves and external financing that had already been lined up. There are also multiple breaches to these indicators under the most extreme shock through heightened uncertainty surrounding exports. The servicing spike in external debt service in 2023 (due to the rollover of the 10-year Eurobond issued in 2013) causes a one-off breach to the other liquidity indicator of debt service-to-revenue ratio under the baseline scenario. This indicator also shows another one-off breach in 2028 under the most extreme shock, which is caused by the market financing shock halving the maturity of the 10-year Eurobond expected to be issued in 2023 In order to reduce the rollover risks, the authorities should pursue a proper debt management strategy, such as holding enough liquidity buffers for the crisis and smoothing out the debt servicing profile. A breach of the market-financing risk indicator also signals market financing pressures, which means that Rwanda may face liquidity pressures due to deteriorating market sentiment (Figure 6). Overall, while every solvency and liquidity indicator has at most only one short-lived breach under the baseline scenario, some indicators have multiple breaches under the most extreme shock, which indicates a moderate risk of debt distress. The government needs to adopt a credible fiscal consolidation path as soon as the COVID-19 crisis abates.

Figure 1.
Figure 1.

Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30 1/2/

Citation: IMF Staff Country Reports 2020, 207; 10.5089/9781513548043.002.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 2030. 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, 2020–30 1/

Citation: IMF Staff Country Reports 2020, 207; 10.5089/9781513548043.002.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 2030. 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 2020, 207; 10.5089/9781513548043.002.A002

1/ Compared to 2014 DSA scaling up scenario2/ Difference between anticipated and actual contributions on debt ratios.3/ Distribution across LICs for which LIC DSAs 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.
Figure 4.
Figure 4.

Rwanda: Realism Tools

Citation: IMF Staff Country Reports 2020, 207; 10.5089/9781513548043.002.A002

Figure 5.
Figure 5.

Rwanda: Qualification of the Moderate Category, 2020–20301/

Citation: IMF Staff Country Reports 2020, 207; 10.5089/9781513548043.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
Figure 6.
Figure 6.

Rwanda: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2020, 207; 10.5089/9781513548043.002.A002

Sources: Country authorities; and staff estimates and projections.

The evolution of public debt going forward is dominated by developments in the primary fiscal deficit and real GDP growth as in the past (Figure 3). Compared to the past five years, higher primary deficit due to the COVID-19 shock is expected to raise public debt despite higher GDP growth (Figure 4). Realism tools also illustrate that the baseline growth path is relatively conservative considering the envisaged fiscal consolidation by cutting domestically financed public investment and other expenditures. Furthermore, a granular assessment of the moderate risk rating shows that Rwanda has limited space to absorb shocks (Figure 5).

The current macroeconomic framework, which underpins this DSA, reflects currently available information. However, updates with respect to the economic impact and policy response to the COVID-19 crisis are rapidly evolving and risks to the debt outlook and sustainability are heavily tilted to the downside considering the potential of a more prolonged and deeper pandemic shock.

Table 1.

Rwanda: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ 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.3/ 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.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ 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 y ears.
Table 2.

Rwanda: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ 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.2/ 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.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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.5/ 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.6/ 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, 2020–30

(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.

Table 4.

Rwanda: Sensitivity Analysis for Key Indicators of Public Debt, 2020–30

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

This debt sustainability analysis was conducted using the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF) that was approved in 2017. The fiscal year for Rwanda is from July–June; however, this DSA is prepared on a calendar year basis.

2

Rwanda’s debt-carrying capacity remains strong as its Composite Indicator (CI) score of 3.26 remains above the upper threshold of 3.05. This is based on the October 2019 WEO and CPIA 2018. There has been no change in debt coverage since the last DSA (July 2019, IMF CR 19/211), which covers the central government and state-owned enterprises (SOEs).

3

The DSA incorporates the expected impacts of the COVID-19 pandemic, with a sharp decline in real GDP growth (down by 6 percentage points relative to the pre-pandemic projection), exports of goods and services (40 percent decline), tax revenues (20 percent decline), and a significant widening of the fiscal deficit (up by about 6 percentage points of GDP). Following the COVID-19 shock in 2020, it assumes economic recovery from 2021, with the economy gradually reverting to its pre-pandemic trend in the medium term.

4

To support the Government of Rwanda in the implementation of the COVID-19 National Preparedness and Response Plan the World Bank has prepared a US$14.25 million COVID-19 Emergency Response Project. In addition, as part of its support to Rwanda’s anti-crisis resource mobilization, the World Bank prepared and delivered a supplemental DPO based on the series of Rwanda Energy DPOs in an amount of US$100 million.

5

Participation in the DSSI, which provides a time-bound suspension of official bilateral debt service payments to IDA-eligible and least developed countries as defined by the UN, would free up additional resources in the near term.

6

On the financing of the new Bugesera international airport project, it’s assumed that the government will take on 40 percent of the total cost of US$1.3 billion as guaranteed debt under commercial loan financing conditions, while Qatar Airways will take on 60 percent as FDI.

7

In the historical scenario, the PV of external debt-to-GDP ratio increases sharply since it assumes the recurrence of several large past external shocks (donor withdrawal, commodity prices, and drought) as well as large external imbalances, which were corrected over 2015–17, primarily through a large exchange rate adjustment, as envisaged under the PSI/SCF-supported program.

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Cover IMF Staff Country Reports
Rwanda: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Rwanda
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 207
Publisher:
International Monetary Fund
ISBN:
9781513548043
ISSN:
1934-7685
Pages:
42
DOI:
https://doi.org/10.5089/9781513548043.002

Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30 1/2/

Rwanda: Indicators of Public Debt Under Alternative Scenarios, 2020–30 1/

Rwanda: Drivers of Debt Dynamics––Baseline Scenario1/

Rwanda: Realism Tools

Rwanda: Qualification of the Moderate Category, 2020–20301/

Rwanda: Market-Financing Risk Indicators