Good Policies Pay Off, Visiting IMF Managing Director Lagarde Says of Rwanda, interview by Christine Lagarde, Managing Director, International Monetary Fund

January 30, 2015

Interview by The New Times
Rwanda, January 26, 2015

The Managing Director of the International Monetary Fund, Christine Lagarde, will today begin her three day visit to Rwanda, her first since she came to the helm of the institution in 2011. In an e-mail correspondence with The New Times’ Kenneth Agutamba, Lagarde sheds light on her institution’s current relationship with Rwanda and commends the country’s transformative and inclusive policies that have seen a significant decline in poverty levels.

You come here 20 years after the 1994 Genocide against the Tutsi. In your view, what has been the trigger for Rwanda’s rapid economic renaissance?

My main message to Rwanda is that “Good policies pay off.” Let me set this in a broader context by saying that I am very happy to have the opportunity to visit Rwanda at such a pivotal moment in its history. The horrific events that occurred 20 years ago tore the social and economic fabric of the country, and it is uplifting to see the progress in rebuilding, in peace efforts, and in improving the welfare of all Rwandans.

This truly is an example in terms of social and economic transformation. It proves that effective policies and inclusive growth can be transformational.

The economic performance has been remarkable, with strong annual growth for the past 15 years. This has helped Rwanda make progress towards achieving the Millennium Development Goals. The poorest have benefited from a focus on inclusive growth, with the poverty rate falling to 45 per cent of the population in 2011 from 60 per cent in 2000.

Of course, this rate is still high, but it is definite progress and we see the trend continuing. So, while there has not been a magic bullet or a single trigger, a holistic approach, that also included a focus on the agricultural sector, employment, and gender equality, has been instrumental in sharing the fruits of high growth more widely.

What is the status of IMF relations in Rwanda at present?

We have a very close economic policy dialogue and the IMF is currently supporting the government with a Policy Support Instrument (PSI) – designed for low-income countries that have graduated from financial support but still seek to maintain a close policy dialogue.

The PSI signals the strength of a country’s policies to donors, multilateral development banks, and markets. We also provide technical assistance as part of the Fund’s efforts to increase local capacity and know-how. We have an office in Kigali, where a resident representative, currently Mitra Farahbaksh, ensures our presence in the field.

Rwanda’s PSI, which is in its second year, supports Rwanda’s own policy priorities for strong and inclusive growth, with an emphasis on domestic resource mobilization, private sector development, export diversification, regional integration, and financial sector development.

We recently reviewed this programme and welcomed the country’s continued strong performance. We also agreed with the government that more work needs to be done to further reduce Rwanda’s reliance on aid and increase its resilience to external shocks.

What is your economic outlook for the country between now and 2020?

Our outlook for Rwanda is positive. The economy is recovering from a weak performance in agriculture and delays in related project implementation in recent years. Growth rebounded last year and inflation remains well contained. We expect GDP growth rates to rise gradually towards 7-7.5 per cent in the medium term, while inflation remains within the medium-term target of 5 per cent.

I am particularly impressed with the government’s continued commitment to poverty reduction.

As part of my stay here, I will be visiting the Agaseke Handicraft Cooperative and the ICT hub (knowledge Lab) in Kigali to see firsthand how the government has managed to improve the welfare of vulnerable and disadvantaged groups such as women and youth.

As your readers are aware, the Economic Development and Poverty Reduction Strategy for 2013–18 focuses on economic transformation, rural development, and youth employment. The strategy is rightly aimed at further reducing poverty.

I think that the continued rollout of planned measures and the successful inclusion of the private sector in leading economic development will help make sizeable inroads in making growth even more inclusive and in reducing inequality.

In a recent advisory by the IMF Board, they encouraged Rwanda to widen its tax base and put emphasis on domestic revenue sourcing. What is your advice on this?

We are devoting a significant portion of our technical assistance to support Rwanda’s efforts to reduce its dependence on foreign aid. The focus is appropriately on widening the tax base – not higher taxes, but all paying a fair share.

The government has already made significant progress in the areas of revenue administration.

The push to increase the number of registered VAT payers through the introduction of electronic billing machines, and the switch in the collection of local taxes and fees from the local governments to the revenue authority, should be useful in bringing more businesses under the tax system.

The introduction of tax regimes for agriculture and mining, and improvements in property taxation, should also help achieve the goal of providing budgetary resources for key expenditures, particularly those aimed at scaling up social spending and infrastructure in a context where donor resources are likely to be limited.

Lately, Rwanda has taken to raising money through bonds, do you think this is viable?

Rwanda’s successful Euro-bond issuance in 2013 demonstrated that market financing can play a complementary role in financing investment plans. Several other African countries have followed suit over the past year.

The key is to ensure that Rwanda’s debt remains sustainable. I welcome the government’s commitment to fully explore concessional financing options and private sector participation before considering the use of non-concessional resources.

At the same time, the government’s decision to begin issuing domestic currency bonds in 2014 was an important step in the process of developing and deepening local capital markets.
http://www.newtimes.co.rw/section/article/2015-01-26/185319/

Creating jobs remains a high priority for this country, but as you know the private sector is also still young. What should Rwanda do to address these two issues?

On private sector development, Rwanda’s potential depends critically on full implementation of ongoing reforms to attract foreign investment and boost exports. These include reducing the cost of doing business; improving infrastructure; supporting skills development; and tapping into regional markets.

The increased provision of lower-cost electricity and improved transportation should help facilitate diversification and business development.

On creating jobs, the government has identified three key priorities: skills development, the fostering of entrepreneurship for small- and medium-sized enterprises, and supporting household enterprises. We at the Fund share this emphasis on building the capacity of Africa’s greatest resource–its people. Increased investment in infrastructure can help put people to work.

The IMF’s latest Regional Economic Outlook for Sub-Saharan Africa projects regional GDP growth to pick up from about 5 per cent in 2013/14 to 5.75 per cent in 2015. That isn’t a big leap, is it? Can you elaborate on this?

Sub-Saharan Africa has made impressive progress over the past two decades, with growth averaging around 5 per cent. We expect that to continue in 2015, despite the impact of lower oil prices on some of Africa’s major oil exporting economies.

So there has been real progress, as growth has allowed for reducing poverty and improving living conditions.

For example, the number of people living on less than $1.25 a day in Africa has fallen significantly since 1990. But extreme poverty remains unacceptably high and not all countries are making progress. Some countries are still facing internal conflict and/or fragility.

Looking ahead, there are a number of longer-term demographic, technological and environmental challenges that need to be addressed in order to realise the ‘big leap’ that you refer to.

For instance, how can we tap into the productive capacity of Africa’s youth? How can Africa take advantage of technological innovation?

And how can we address the implications of climate change? Three broad policy priorities are crucial: building infrastructure, building institutions, and building people. Africa must also strengthen its institutional and governance frameworks to better manage its vast resources.

But the focus must be on people—with programmes aimed at boosting health and education and other essential social services. In fact, Rwanda is one of the countries that are effectively implementing policies in many of these areas.

The Ebola outbreak in West Africa has dealt a major blow to several African economies in the region. Can the effects of this blow spread to other parts of the continent?

The Ebola outbreak is a severe human, social and economic crisis that requires a resolute response. And the focus must be on isolating the virus, not the countries.

Strong efforts are underway in Guinea, Liberia and Sierra Leone, but it is unlikely to be brought under control before the second half of 2015.

The economic outlook for these countries has already worsened since September, when the IMF disbursed $130 million to the (three) countries to boost their response to the outbreak.

If the outbreak remains limited to the three countries, the economic outlook for the rest of sub-Saharan Africa remains favourable. Some neighbouring countries like The Gambia have seen an impact on tourism.

We are working with the governments of the three affected countries to provide additional interest-free financing of about $160 million, and expect our Board to make a decision in the next few days.

Following the endorsement by the G-20 leaders in Australia, we are also looking at further options to provide additional support to the Ebola-hit countries, including through the provision of donor-supported debt relief.

International oil prices have been tumbling, is this good for Rwanda and the other members of the EAC?

Indeed, oil prices have fallen recently, affecting both oil producers and consumers. Overall, we see the price decline as positive for the global economy. As an oil importer, Rwanda and indeed the East Africa region should benefit given that lower prices will most likely have a positive impact on growth whilst also easing inflation.

Countries can make use of this window of opportunity to reduce universal energy subsidies and use the savings toward more targeted transfers that benefit the poor.

Recently, the East African Community, a regional bloc to which Rwanda subscribes, reached a landmark Economic Partnership agreement (Epa) with Europe. Do you think that these countries need such agreements?

The EPA is designed to enhance commercial and economic relations, supporting a new trading dynamic in the region and deepening cooperation in trade and investment. It can serve as an important instrument of development in many respects.

It can promote sustained growth, increase the productive capacity of EAC economies, foster diversification and competitiveness, and, of course, boost trade, investment and employment. Rwanda is a key member of the EAC that has worked hard to create a conducive and transparent business environment. So it should benefit from this agreement.

**************************

About Lagarde

Christine Lagarde assumed the mantle of the International Monetary Fund in July 2011. A Frenchwoman, she was previously French finance minister from June 2007, and had also served for two years as France’s minister for foreign trade.

Lagarde also has had an extensive and noteworthy career as an anti-trust and labour lawyer, serving as a partner with the international law firm of Baker & McKenzie, where the partnership elected her as chairman in October 1999.

The IMF is an organisation of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

IMF COMMUNICATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100