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International Monetary Fund. African Dept.
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Publication Date:
29 Jun 2022
eISBN:
9798400212864
ISBN:
9798400212864
Language:
English
Keywords:
inflation expectation; interest-rate-based monetary policy framework; transparency policy; NBR's inflation benchmar k; monetary policy analysis; Monetary policy instruments; Inflation; Fiscal consolidation; COVID-19; Global; program's inflation target band
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IMF Country Report No. 22/200

Abstract

IMF Country Report No. 22/200

Copyright Page

IMF Country Report No. 22/200

RWANDA

SIXTH REVIEW UNDER THE POLICY COORDINATION INSTRUMENT AND MONETARY POLICY CONSULTATION CLAUSE—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR RWANDA

June 2022

In the context of the Sixth Review Under the Policy Coordination Instrument and Monetary Policy Consultation Clause, the following documents have been released and are included in this package:

  • A Press Release including a statement of the Acting Chair of the Executive Board.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 22, 2022, following discussions that ended on April 6, 2022, with the officials of Rwanda on economic developments and policies underpinning the IMF arrangements under the Policy Coordination Instrument and Monetary Policy Consultation Clause. Based on information available at the time of these discussions, the Staff Report was completed on June 3, 2022.

  • A Statement by the Executive Director for Rwanda.

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.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2022 International Monetary Fund

Press Release

IMF Executive Board Completes the Sixth Review of the Policy Coordination Instrument for Rwanda

FOR IMMEDIATE RELEASE

  • Rwanda continues to implement its Economic Recovery Plan while confronting the lingering effects of the pandemic and the spillovers from the war in Ukraine.

  • Rising inflationary pressures, exacerbated by rising commodity prices, are compounding the policy challenges of balancing economic recovery with maintaining price stability.

  • The Policy Coordination Instrument (PCI) continues to support the authorities’ efforts in mitigating the impact of the ongoing external shocks, maintaining macroeconomic stability, and implementing medium-term fiscal consolidation, while advancing the structural reform agenda for more inclusive and sustainable growth.

Washington, DC-June 23, 2022. On June 22, 2022, the Executive Board of the International Monetary Fund (IMF) completed the sixth review of the Policy Coordination Instrument (PCI)1. The PCI was approved on June 28, 2019 (Press Release No. 19/258) to facilitate macroeconomic and financial stability, while advancing an ambitious reform agenda under Rwanda’s National Strategy for Transformation (NST). Program performance remains broadly satisfactory, with all quantitative and standard continuous targets through end-December2021 met. However, the 12-month headline inflation average in 2021 fell outside the lower bound of the program’s inflation target band, triggering consultation with the IMF Executive Board. All six reform targets through end-April 2022 were also implemented.

Real GDP growth rebounded strongly to 10.9 percent in 2021, but spillovers from the war in Ukraine are compounding pandemic challenges by weighing down growth, increasing inflationary pressures and social needs, and straining fiscal balances amid high uncertainty and rising food insecurity concerns. Growth is expected to moderate to 6 percent in 2022 while headline inflation is projected to rise from 0.8 percent in 2021 to 9.5 percent in 2022. The near-term outlook is marred by uncertainty from the geopolitical risks that could prolong the spillovers from the war in Ukraine, but the medium-term outlook remains favorable, supported by the authorities’ commitment to macroeconomic stability and structural reforms.

Headline inflation has been on the rise since the beginning of the year. The National Bank of Rwanda (NBR) raised the policy rate by 50 basis points to 5 percent in February but kept it unchanged in May, though inflationary pressures persist. The fiscal deficit for FY22/23 is projected at 6.9 percent of GDP and envisages fuel, fertilizer, and public transport subsidies and social protection interventions to mitigate the impact of rising food and fuel prices. The current account deficit is projected to widen in 2022 but expected to narrow over the medium term financed by FDI and concessional loans. A medium-term fiscal consolidation, exchange rate flexibility, and reforms to strengthen Rwanda’s external competitiveness are expected to cement macroeconomic and financial stability.

Policies under the PCI continue supporting the recovery from the pandemic, the response to mitigate the headwinds from the war in Ukraine while maintaining macroeconomic stability, and the implement the medium-term fiscal consolidation strategy to preserve debt sustainability. The PCI also supports reform efforts, such as financial inclusion, digitization, and green public financial management (PFM) to deliver a more inclusive and sustainable growth.

Following the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, issued the following statement:

“Despite a strong economic rebound in2021,theCOVID-19 pandemic has left Rwanda with high unemployment, rising poverty, and learning losses that risk reversing hard-won social gains. These pandemic scars will likely be exacerbated by the spillovers from the war in Ukraine, which, through higher commodity prices and additional inflationary pressures, are raising social needs and food security concerns, putting pressure on fiscal balances, and limiting the policy space to support an inclusive recovery.

“The authorities’ plan to use the existing social safety nets to respond to economic fallouts from the war in Ukraine is commendable. They should focus on increasing the coverage and benefits of existing social protection programs in a targeted manner and phase out fuel subsidies as planned.

“In view of rising inflation, the National Bank of Rwanda should stand ready to tighten monetary policy more aggressively to anchor inflation expectations. Implementation of the interest-rate-based monetary policy framework should continue with g reater exchange rate flexibility to ensure external sustainability. Closely monitoring and containing credit risks through targeted and time-bound interventions, without relaxing regulatory and supervisory requirements will be important to safeguard financial stability. The authorities should continue to enhance the AML/CFT framework.

“Anchoring medium-term fiscal discipline through a credible and growth-friendly fiscal consolidation plan should be fast-tracked. Authorities should step up efforts to broaden the tax base, phase out tax exemptions, enhance tax compliance, and identify cost-savings, including through digitalization, efficiency gains, and prioritization. These efforts should be complemented by measures to contain fiscal risks and enhance fiscal transparency.

“The authorities’ commitment to structural reforms should be sustained to minimize pandemic scaring, build resilience to climate shocks, and achieve higher and more inclusive growth.”

Table 1.

Rwanda: Selected Economic Indicators, 2019–27

article image
Sources: Rwandan authorities and IMF staff estimates.

From FY 19/20 (2020) to FY 25/26 (2026). Fiscal year runs from July to June. FY19/20 and FY20/21 are actuals.

For purposes of the PCI the overall balance (GFSM 1986, incl. policy lending) is used for monitoring.

Overall deficit excl. spending on materialized contingent liabilities and other items already incl. in the DSA.

Based on prospective import of goods (excluding gold) and services. SDR allocation included in 2021.

Title page

RWANDA

SIXTH REVIEW UNDER THE POLICY COORDINATION INSTRUMENT AND MONETARY POLICY CONSULTATION CLAUSE

June 3, 2022

EXECUTIVE SUMMARY

Recent economic development. The economy has emerged from the COVID-19 pandemic with scars that would likely take time to reverse. Supported by the authorities’ policy support, growth rebounded strongly to 10.9 percent in 2021. Spillovers from the war in Ukraine are compounding pandemic challenges by weighing on growth, increasing inflationary pressures and social needs, and straining fiscal balances amid high uncertainty and rising food insecurity concerns. Lower external demand and higher global commodity prices are projected to lower growth to 6 percent in 2022. Headline inflation is projected to rise from 0.8 percent in 2021 to 9.5 percent in 2022, exceeding the central bank’s benchmark level (5 percent). The National Bank of Rwanda (NBR) raised the policy rate by 50 basis points in Feb ruar y 2022. While the near -ter m outlook is marred by uncertainty from the geopolitical risks that could prolong the spillovers from the war in Ukraine, the medium-term outlook remains favorable, supported by the authorities’ commitment to structural reforms. The change in World Bank financing terms under IDA20 will increase the volume of loans, hence the debt-to-GDP ratio for Rwanda, but given the higher concessionality of the loans, the expected impact on the present value of debt path is marginal.

Program implementation. Program performance remains broadly satisfactory with all quantitative and standard continuous targets through end-December 2021 met. However, the 12-month headline inflation average triggered the monetary policy consultation clause (MPCC) as average inflation in 2021 fell below the outer lower bound of NBR’s inflation benchmar k . All six reform targets (RTs) due through end-April 2022 were completed, but only two were met in a timely fashion. Staff recommends completion of the Sixth Review under the Policy Coordination Instrument (PCI).

Policy recommendations. The near-term agenda should focus on mitigating the severity of the combined shocks, containing inflationary pressures, and advancing measures that would support the envisaged fiscal consolidation to reduce debt vulnerabilities and external stability while preserving policy space to respond to shocks.

  • Fiscal Policy. A targeted approach should be implemented to protect the vulnerable from the impact of rising food and fuel prices. The reduction in fuel levy to mitigate the pa s s -thr ough of higher energy import costs s hould be temporary and p hased out by end-FY22/23, if not sooner. On fiscal consolidation, the implementation of spending rationalization measures for FY22/23 and the med ium-term revenue strategy (MTRS) should advance as planned. Given the current debt level and the uncertain outlook, efforts to contain risks should be stepped up.

  • Monetary and Financial Policies. NBR should tighten monetary policy more aggressively to curb inflation expectations and help ensure the return of inflation to the target by end-2023. Policies should also focus on implementing the interest-rate-based monetary policy framework, deepening money and government securities markets, promoting more flexible exchange rates, and safeguarding financial stability.

  • Structural Reforms. To lay the foundations for more sustainable, inclusive, and resilient growth, policies to mitigate the pandemic scars and continued efforts to advance the climate resilience agenda will be important.

Approved By

Catherine Pattillo (AFR) and Eugenio M. Cerutti, (SPR)

A hybrid mission comprised H. Teferra (head), V. Duarte Lledo, S. Choi, G. Pula, and C. Aoyagi (all AFR); A. Ceber (FAD); S. Mulema (MCM); and A. Miksjuk (SPR). L. Nankunda (OED) also joined the mission in person. The mission was assisted by P. Ruta buzwa a nd J. Kayemba (staff of the resident representative’s office in Kigali). Y. Hul, and I. Miller (ICD) provided remote support on the Quarterly Projection Model for monetary policy analysis. E. Chueca Montuenga and F. Morán Arce (AFR) assisted in the preparation of this report. Discussions were held in Kigali during March 21–April 6, 2022, while part of the team joined remotely from Washington, D.C. The team met with the Minister of Finance and Economic Planning, Dr. Uzziel Ndagijimana, Governor of the National Bank of Rwanda, John Rwangombwa, as well as, the Ministers of Agriculture, Local Government, Infrastructure, and Trade, and Permanent Secretaries for Ministries of Health and Environment. The mission also held discussions with the Parliament Budget Committee, development partners, and private sector stakeholders.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS AND PROGRAM PERFORMANCE

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Fiscal Policy

  • B. Monetary, Financial Sector, and External Sector Policies

  • C. Structural Policies

  • PROGRAM MODALITIES AND CAPACITY DEVELOPMENT

  • STAFF APPRAISAL

  • BOXES

  • 1. Rwanda’s Fiscal Responses to Rising Energy and Food Prices

  • 2. Recent Steps on Climate Agenda

  • FIGURES

  • 1. Pandemic Overview

  • 2. Employment

  • 3. Overview of Recent Economic Developments

  • 4. Fiscal Developments

  • 5. Monetary and Financial Sector Developments

  • 6. External Developments

  • TABLES

  • 1. Selected Economic Indicators, 2019–27

  • 2a. Budgetary Central Government Flows, GFSM 2014 Presentation FY20/21–26/27 (Billions of Rwandan francs)

  • 2b. Budgetary Central Government Flows, GFSM 2014 Presentation FY20/21–26/27 (Percent of GDP)

  • 3. Decomposition of Public Debt and Debt Service by Creditor, 2021–23

  • 4. Monetary Survey, 2020–27

  • 5. Financial Soundness Indicators, March 2018–December 2021

  • 6. Balance of Payments, 2021–27

  • 7. Quantitative Program Targets (December 2021)

  • 8. Reform Targets (June 2019–May 2022)

  • 9. Review Schedule Under the PCI Arrangement

  • ANNEXES

  • I. Risk Assessment Matrix

  • II. Capacity Development Strategy for FY22/23

  • APPENDIX

  • I. Letter of Intent

    • Attachment I. Program Statement

    • Attachment II. Technical Memorandum of Understanding

1

The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing fro mother official creditors or private investors.

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Cover IMF Staff Country Reports
Rwanda: Sixth Review Under the Policy Coordination Instrument and Monetary Policy Consultation Clause-Press Release; Staff Report; and Statement by the Executive Director for Rwanda
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2022: Issue 200
Publisher:
International Monetary Fund
ISBN:
9798400212864
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9798400212864.002