Introduction

1. Our Rwandan authorities would like to express their gratitude to Management and the Executive Board for the Fund’s continued support. They also thank staff for their proactive engagement during these challenging times, which led to two timely disbursements under the Rapid Credit Facility (RCF-1 and RCF- 2) in April and June. The swift emergency financing was instrumental in supporting the authorities’ early response to the COVID-19 crisis and keeping on track the program backed by the Policy Coordination Instrument (PCI). This third review of the program has provided the opportunity for constructive discussions and the authorities broadly agree with the thrust of the staff report, which gives a fair assessment of challenges facing the economy and policy priorities.

2. After several years of strong macroeconomic performance, the COVID-19 outbreak and the related decline of global economic activity are having an adverse impact on Rwanda’s economy in 2020. The strong growth momentum has been interrupted as a result of lower external demand, weaker FDI and remittances, near-cessation of tourism and disruptions in global, regional and domestic supply chains. GDP growth in 2020 should drop sharply to -0.2 percent from 9.4 percent in 2019, putting additional pressures on public finances and the balance of payments. Headline inflation declined to 4.2 percent y/y in November—driven by a decrease in public transport fares and moderation of food inflation—and is expected to decline further going forward.

3. Amidst these adverse developments, program implementation has suffered setbacks. As the authorities ease up containment measures, they are committed to pursuing their reform agenda to make the economy more resilient through broad-based and more inclusive growth. In the near-term, their policy priorities under the program will include supporting the economy while maintaining fiscal responsibility and resuming structural reforms.

Recent Developments, Program Performance, and Outlook

4. The Rwandan government has been implementing innovative measures including leveraging digitalization in healthcare to combat the pandemic and limit its spread. Concrete digital solutions include: (i) contact tracing with infections being traced through the paperless Open Data Kit application that can be downloaded on a mobile device; (ii) a health facility digital reporting surveillance system used to monitor Influenza-like illnesses and severe acute respiratory infections in real time to provide an early warning of suspected COVID-19 cases and; (iii) infection prevention where robots are used in healthcare settings to check temperatures and monitor patients and thus reduce exposure of healthcare workers.

5. On the economic front, the authorities have continued to roll out their Economic Recovery Plan (ERP) to support vulnerable households and affected businesses. In this regard, households have benefited from social protection and food provision. In addition, the National Bank of Rwanda (BNR) also deployed liquidity and regulatory measures to shore up the financial sector and boost activities.

6. Program implementation was strong prior to the outbreak, but performance under the PCI has been negatively affected by COVID-19. All end-June quantitative targets (QTs) were met except the ceiling on the debt-creating overall deficit due to the fiscal package deployed to respond to the COVID-19 and shortfalls in domestic revenue collection. The impact of the pandemic on fiscal revenue, coupled with the measures to support households and businesses, are bringing the overall deficit this fiscal year to about 8.5 percent of GDP. Regarding structural measures, two out of four reform targets (RTs) were met, and the two others missed due to delays caused by the pandemic. On the positive side, the reform target related to the production of financial and managerial reports from the IT system for all of Rwanda Social Security Board (RSSB) schemes was met ahead of the end-December 2020 deadline.

7. As regards the outlook, our authorities are mindful of the downside risks both at the national and international levels. They are committed to stepping up efforts on factors under their control to support the recovery and limit the adverse effects of depressed global conditions. Moreover, they are optimistic that the recent developments regarding vaccines will significantly stop the spread of the coronavirus and hence help improve the global economic outlook. The authorities will also keep a close eye on the fiscal stance and contingent liabilities, to prevent the public debt profile from worsening further. Overall, the authorities remain confident and stand ready to take policy measures to counterbalance risks to the extent possible.

Macroeconomic Policies Post- Pandemic and Structural Reforms

8. As the pandemic abates, our Rwandan authorities are committed to reverting to fiscal consolidation while supporting the recovery and stepping up structural reforms for furthering economic transformation as per the country’s development agenda. The economy is expected to recover with GDP growth projected to reach 8 percent by 2023 while inflation would be kept under control. Our authorities’ medium-term policies are geared towards sustaining improvements in the business environment for private sector development and increasing productivity through strategic infrastructure investments. These policies are underpinned by continued efforts in enhancing domestic revenue mobilization, maintaining prudent monetary policy, and fostering financial deepening.

Fiscal Policy and Debt Sustainability

9. For FY2020/2021, fiscal policy priorities have shifted towards striking the right balance between support to the recovery and a gradual fiscal consolidation as the crisis abates. Fiscal measures in the recent period have accommodated the difficult times for the taxpayer. The Rwanda Revenue Authority enacted tax relief measures that included the suspension of tax audits; the extension of deadlines for filing and paying corporate income tax (CIT); a waiver for taxes for the hospitality sector and private schools; and VAT exemptions for face masks and other essential medical equipment.

10. In the period ahead, the authorities will step up reforms to enhance revenue mobilization and public financial management while continuing the implementation of the Economic Recovery Plan (ERP), including maintaining an adequate level of priority spending to support inclusive growth. Revenue mobilization efforts will be geared on their Medium-Term Revenue Strategy (MTRS). On the expenditure side, the focus will be on the rationalization of current spending, and the re-prioritization of public investment. These combined actions should help achieve the objective of the large deficit reduction of 1.4 percentage points of GDP through FY2022/2023.

11. Preserving debt sustainability is of the utmost importance to our authorities. They are cognizant of the need for additional effort in this regard, Rwanda having slipped from low to moderate risk of debt distress. As the pandemic recedes and growth momentum resumes, fiscal consolidation will support debt converging to its medium-term anchor by 2028. Sound debt management, including monitoring fiscal risks related to SOEs, will add to these efforts to preserve debt sustainability going forward.

Monetary and Financial Sector Policies

12. Monetary policy in response to the pandemic consisted of cutting the central bank’s policy rate, adopting other liquidity support measures, and allowing the restructuring of performing loans of borrowers facing temporary cash flow challenges. Our authorities will continue to pursue prudent monetary policy to maintain price stability and keep inflation expectations well-anchored. They also remain committed to a flexible exchange rate as the main shock absorber. The authorities are transitioning to an interest rate-based monetary policy framework. In this respect, they will continue to undertake reforms, including revising the monetary policy committee’s decision-making process and strengthening communication tools to better anchor inflation expectations.

13. The financial sector remains broadly sound, underpinned by strong regulatory and supervisory frameworks. The sector has largely remained resilient despite deteriorating asset quality, owing to its robust pre-COVID-19 capital and liquidity buffers, notably with the aggregate liquidity coverage ratio. The banking sector’s capital adequacy ratio exceeds the minimum requirement. The non-performing loans (NPLs) ratio has increased in the context of the pandemic, particularly in the microfinance sector. Important progress has been made towards greater financial inclusion with the expansion of microfinance activity, including the Savings and Credit Cooperatives (SACCOs). Similar steps are worth noting in reforming the banking sector’s legal, regulatory, and supervisory frameworks. The authorities have also strengthened the deposit guarantee fund for banks and microfinance institutions.

Structural Reforms and Transformation Agenda

14. Through the Vision 2050, the Rwandan authorities aim to the structural transformation of the economy to achieve middle-income status by 2035. To operationalize this vision, they have started implementing their 2017–24 National Strategy for Transformation (NST), which is articulated around three main pillars, namely, economic transformation, social transformation, and transformative governance. The NST’s sectoral strategies are also well aligned with Rwanda’s Strategic Development Goals (SDGs).

15. The development of the private sector as the engine of growth is at the center of the transformation strategy. Policies will therefore emphasize further improving the business climate to boost and sustain private investment. The authorities will also continue their efforts for the emergence of a knowledge-based economy driven by innovation and higher value-added services and industries. As well, the tourism sector will benefit from strategic investments such as the new Bugesera Airport.

Transparency, Accountability, and Governance

16. The Rwandan authorities attach a special price to the transparent use of public funds. In this regard, they will undertake ex-post audits and publish all expenditures related to the Pandemic. They also contemplate the possibility of publishing beneficial ownership information for companies that have been awarded COVID-19-related government contracts as part of strengthening the public procurement system. Regarding overall governance, the Rwandan Government has institutionalized a policy of zero-corruption tolerance and the principle of accountability for citizens and the leadership.

Conclusion

17. In a context of unprecedent crisis, our Rwandan authorities have striven to maintain the PCI afloat while swiftly addressing the emergency health challenges and the economic effects of the pandemic. For the period ahead, they remain committed to sound policies and reforms to further enhance macroeconomic stability and achieve a robust and sustained economic recovery. In view of the authorities’ commitment to the program objectives, we would appreciate Executive Directors’ support for the completion of the third review under the Policy Coordination Instrument.