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IMF Country Report No. 21/1
RWANDA
THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT—PRESS RELEASE; STAFF REPORT; AND STATEMENTS BY THE EXECUTIVE DIRECTOR AND STAFF REPRESENTATIVE FOR RWANDA
January 2021
In the context of the Third Review Under the Policy Coordination Instrument program, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on December 16, 2020, following discussions that ended on October 23, 2020, with the officials of Rwanda on economic developments and policies underpinning the IMF arrangement under the Policy Coordination Instrument. Based on information available at the time of these discussions, the staff report was completed on December 1st, 2020.
A Debt Sustainability Analysis prepared by the Staffs of the IMF and the International Development Association (IDA).
Statements by the Executive Director and by the Staff Representative for Rwanda. The documents listed below have been or will be separately released:
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
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Front Matter Page
RWANDA
THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT
December 1, 2020
Executive Summary
Recent economic developments. The COVID-19 pandemic is having an adverse impact on Rwanda’s economy, despite a sizeable policy response. Output in 2020 is projected to contract by 0.2 percent, compared to an 8 percent increase expected pre-pandemic. The government’s early actions helped contain the spread of the virus and mitigate its economic impact, supported by financing from Rwanda’s development partners, including from the IMF under the RCF. With the number of infections contained, the authorities are gradually easing up containment measures.
Program implementation. An interim performance update was issued to the Executive Board in September as completion of the second PCI review within the three-month window of the review date was not feasible due to the need to shift efforts to respond to the COVID-19 outbreak. The near-term policy priorities have shifted to supporting the economy through the crisis. The associated spending needs have caused deviations from the earlier fiscal program targets under the program and the crisis has also affected progress on structural reforms. The remainder of the program aims to strike a balance between sustaining the economic recovery and maintaining fiscal responsibility. Staff recommends completion of the third review under the Policy Coordination Instrument.
Policy recommendations.
Crisis measures. The large fiscal package targeting economic and social needs to limit the impact of the crisis is broadly appropriate. Containing fiscal risks and contingency measures should guide policies given the uncertain outlook. With the projected drop in inflation, the accommodative monetary stance remains appropriate, along with liquidity support for banks and financial markets as needed.
Fiscal policy. The fiscal stance should balance support to the economic recovery with a return to credible fiscal consolidation once the crisis abates. In the absence of large economic surprises, the fiscal deficit in FY20/21 should be contained to about 8.5 percent of GDP. Under the baseline, debt will remain sustainable with a moderate risk of debt distress. Effective and transparent implementation of measures to address the crisis will be critical in the near term.
Structural reforms. The near-term agenda should focus on fast-tracking efforts to strengthen fiscal risk management, including of state-owned enterprises (SOEs), and monitoring financial sector risks.
Risks. Risks to the outlook are substantial given the heightened uncertainty about the duration and magnitude of the COVID-19 shock and its economic impact.
Approved By
Mary Goodman (AFR) and Delia Velculescu (SPR)
Discussions were held remotely from Washington, D.C. to Kigali during October 5–23, 2020. The mission comprised H. Teferra (head), V. Duarte Lledo, K. Gyesaw, M. Woldemichael (all AFR), S. Kaihatsu (SPR), S. Mbaye (IMF Resident Representative), and J. Kayemba (local economist). L. Nankunda (OED) also attended mission meetings. The mission was facilitated by the staff of the resident representative’s office. T. Gursoy, R. Iyer, and F. Morán Arce (AFR) assisted in the preparation of this report.
Contents
RECENT DEVELOPMENTS
PROGRAM PERFORMANCE
OUTLOOK AND RISKS
PROGRAM POLICY DISCUSSIONS
A. Fiscal Policy: Supporting the Economic Recovery While Safeguarding Debt Sustainability
B. Monetary Policy: Supporting the Interest Rate-Based Operational Framework and Safeguarding Financial Stability
C. Structural Policies: Sustaining Inclusive Private Sector-Led Growth
PROGRAM MODALITIES AND CAPACITY DEVELOPMENT
STAFF APPRAISAL
BOXES
1. The Social Impact of the Pandemic: An Initial Assessment
2. Economic Recovery Fund: Implementation Challenges
3. Digitalization and Financial Inclusion During the Pandemic
FIGURES
1. Pandemic Overview
2. Overview of Recent Economic Developments
3. External Developments
4. Fiscal Developments
5. Monetary and Financial Sector Developments
6. Impact of COVID-19 and Adverse Scenario, 2019–25
TABLES
1. Selected Economic Indicators, 2019–25
2a. Budgetary Central Government Flows, GFSM 2014 Presentation, FY19/20–24/25 (billions of Rwandan Francs)
2b. Budgetary Central Government Flows, GFSM 2014 Presentation, FY19/20–24/25 (percent of GDP)
2c. Budgetary Central Government Flows, GFSM 1986 Presentation, FY19/20–24/25 (billions of Rwandan Francs)
2d. Budgetary Central Government Flows, GFSM 1986 Presentation, FY19/20–24/25 (percent of GDP)
3. Monetary Survey, 2019–25
4. Financial Soundness Indicators (March 2018 – September 2020)
5. Balance of Payments, 2019–25
6. Quantitative Program Targets (December 2019 – June 2020)
7. Reform Targets (June 2019 – June 2020)
8. Review Schedule Under the Policy Coordination Instrument, 2019–22
ANNEXES
I. External Sector Assessment
II. Risk Assessment Matrix
III. Alternative Scenario
IV. Recalibrating Rwanda’s Post-COVID-19 Fiscal Path
V. Capacity Development Strategy for FY2021
APPENDIX
I. Letter of Intent
Attachment I. Program Statement
Attachment II. Technical Memorandum of Understanding
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RWANDA
THIRD REVIEW UNDER THE POLICY COORDINATION INSTRUMENT—DEBT SUSTAINABILITY ANALYSIS1
December 1, 2020
Approved By
Mary Goodman and Delia Velculescu (IMF), and Marcello Estevão (IDA)
The Debt Sustainability Analysis (DSA) was prepared jointly by the staffs of the International Monetary Fund and the International Development Association.
Rwanda: Joint Bank-Fund Debt Sustainability Analysis
Rwanda: Joint Bank-Fund Debt Sustainability Analysis
| Risk of external debt distress | Moderate |
| Overall risk of debt distress | Moderate |
| Granularity in the risk rating | Limited space to absorb shocks |
| Application of judgment | No |
Rwanda: Joint Bank-Fund Debt Sustainability Analysis
| Risk of external debt distress | Moderate |
| Overall risk of debt distress | Moderate |
| Granularity in the risk rating | Limited space to absorb shocks |
| Application of judgment | No |
The present Bank/Fund assessment of Rwanda’s debt sustainability analysis indicates a moderate risk of external and overall public debt distress. The current debt-carrying capacity is consistent with a classification of ‘strong’. 2 The baseline macroeconomic scenario reflects the negative effect of the COVID-19 pandemic on growth, exports, and revenues, which sharply raises external and domestic financing needs in 2020. The adverse economic impact of the pandemic, coupled with higher loans, though mostly concessional from multilateral and bilateral partners, is expected to entail a higher pace of accumulation of public and publicly- guaranteed debt. The stress tests highlight that Rwanda is more susceptible to external shocks compared to the pre-pandemic period even after the initial impact of the COVID-19 dissipates. The authorities are encouraged to further enhance their debt management capacity to mitigate heightened risks in the context of the COVID-19 crisis; adopt a credible fiscal consolidation path to facilitate a return to the pre-pandemic debt trajectory, and strengthen the oversight and management of state-owned enterprises (SOEs) and public-private partnerships (PPPs) to reduce fiscal risks. In this context, a fiscal consolidation following the temporary and necessary pandemic support, together with the improved concessionality of debt, is expected to bring the PV of public debt-to-GDP ratio down to below the EAC’s fiscal anchor of 50 percent in 2025.,
