I.  Introduction

1. Rwanda is recovering from tragic human and economic destruction that has few, if any, parallels. The genocide of 1994 resulted in the destruction of the country's social fabric, its human resource base, institutional capacity, and economic and social infrastructure. At least 1 million people were killed, about 2 million fled to camps in neighboring countries, and another 1 1/2 million were displaced internally. In parallel, economic activity declined by about 50 percent. The Government of National Unity, a coalition of the Rwanda Patriotic Front (RPF) and four other political parties, assumed office in July 1994. The new government has provided a bold vision for the future and is determined to reestablish peace and put effective governance on a sustainable path. Peace has been restored to most of the country, and a total of 3.8 million persons, including internally displaced and returned old- and new-caseload refugees, are being resettled and reintegrated into society. In 1997, the government adopted a transition program to consolidate the fragile socioeconomic recovery attained during 1995-96 and lay the basis for national reconciliation, sustainable growth, participatory decision making, and poverty reduction.

2. Successful transition will require continued strong efforts by the Rwandese people and exceptional support from the international community, including the Bretton Woods institutions. To overcome the legacy of the genocide, Rwanda faces formidable challenges that justify its treatment as a special case for international assistance. These challenges are (i) to build and develop human capital; (ii) to enhance national reconciliation and stability in the subregion (to do otherwise could undermine peace and development efforts for generations); (iii) to improve the welfare of the population and reduce poverty, which would in itself facilitate the reconciliation and reintegration process; (iv) to promote an economic system that allows effective participation; and (v) to address the large external debt burden facing the country. Strong international support is needed to ensure national reconciliation and a smooth transition to a sustainable development path, and to contribute to the stability of the countries in the subregion.

3. The government's strategy for high, sustainable, and equitable growth and poverty reduction is based on the following key elements: (i) maintenance of macroeconomic stability; (ii) economic diversification, export promotion, and services development; (iii) improvement in agricultural productivity and rural infrastructure; (iv) maintenance of export competitiveness through a further liberalization of the trade, exchange, and investment regimes; (v) promotion of private, small-scale enterprises in the rural and urban areas; (vi) support for skills formation through vocational, technical, and management training programs, as well as enhancement of the role of women; and (vii) effective mobilization of domestic and foreign resources to finance investment and growth.

4. The priorities for shifting the focus from emergency assistance and rehabilitation to sustainable development are to continue to address the social, political, and economic effects of the upheavals of the last decades; to return the economy to the pregenocide level by the year 2000 through appropriate macroeconomic policies; and to reinforce public sector capacity and private sector skills. The government of Rwanda considers it imperative that the institutional and policy framework for economic growth and poverty reduction be characterized by national ownership. Moreover, this framework must be linked to the development of local human resources and institution building to enhance the capacity for designing and implementing poverty-reducing growth policies.

5. Rwanda has made remarkable progress on the economic and social fronts since the genocide of 1994. The government, with the support of the international community, has been working to address the consequences of the genocide and the inherited socioeconomic problems, resettle returning refugees, promote national reconciliation, and rehabilitate administrative, judicial, and social institutions. Starting in late 1996, the authorities resettled a large number of internally displaced persons and returning refugees, and provided assistance to vulnerable groups. Progress was also made in bringing detained persons to trial for their alleged involvement in the genocide.

6. The thrust of the government's policy has shifted from emergency and humanitarian assistance to rehabilitation and development. Progress has been made in restoring basic social and physical infrastructure. Key economic institutions, notably the National Bank of Rwanda (NBR) and the Ministry of Finance and Economic Planning, have been largely rehabilitated. These developments have enabled the government to embark on economic policy reform, improve revenue administration, reinstate the budget and public investment program, and resume the compilation of basic economic statistics. These capacity-building efforts have benefited from the technical and financial support of the international community. At the same time, the macroeconomic policies and structural reforms embarked upon by the government in mid-1994 were developed and implemented in close consultation with the Bretton Woods institutions, including in the context of Fund staff-monitored programs in 1996 and 1997; the latter program was supported by the IMF's post-conflict emergency assistance policy, and by the World Bank through two emergency recovery credits.

7. In the past three years, the economy partially recovered in all sectors, the domestic financial imbalances declined, and the external position improved, reflecting the adoption of prudent financial policies by the authorities. Real GDP, which fell by about one half in 1994, is estimated to have rebounded by about 37 percent in 1995 and an average of 12 percent a year in 1996-97; in 1997, real output reached 85 percent of its average level during 1990-93. Meanwhile, the annual rate of inflation (as measured by the consumer price index for Kigali) fell from about 64 percent in 1994 to 9 percent in 1996. In 1997, inflation picked up, reaching almost 17 percent by year's end, owing mainly to food price increases, which were driven by demand pressures from the return of refugees, as well as by security problems in some food-producing regions. On the external front, gross international reserves recovered from the equivalent of 1 1/3 months of imports in 1994 to about 5 1/2 months of imports in 1997, reflecting financial support from donors, concessional borrowing for balance of payments support, and the partial recovery of the export base.

8. The fiscal situation improved significantly, mostly because of the efforts to raise revenues through adjustment in tax rates and reforms in tax and customs administration. In the event, the revenue-to-GDP ratio rose from 4 percent in 1994 to over 10 percent in 1997. Nevertheless, a number of planned revenue-enhancing measures were delayed by lengthy parliamentary procedures. The government has made significant efforts to contain expenditure by (i) setting upper ceilings for travel budget allocations for all ministries, with very little possibility for supplementary funding; (ii) limiting the size of foreign travel missions; (iii) introducing cash rations for the army in lieu of food in kind to avoid cost overruns; (iv) introducing a ban on purchases of government vehicles; (v) promoting private participation in the construction and ownership of schools; and (vi) introducing a strengthened Central Tender Board. However, there was little progress in controlling recurrent expenditure related to government vehicles or in limiting the size of the civil service (excluding teachers), owing to weak control of recruitment and larger personnel requirements for priority sectors.

9. The government has made good progress in structural reforms, albeit less than expected because of administrative capacity constraints. In the fiscal area, several steps were taken in 1997: a new income tax law was adopted, reducing the maximum personal and company income tax rates and subjecting public enterprises to income tax; excise taxes on consumption goods were significantly increased and brought onto an ad valorem basis; and budget and treasury management was strengthened. On the external side, the exchange system was liberalized, and commercial banks and foreign exchange bureaus were allowed to buy and sell foreign exchange at market-determined prices; the surrender requirement on coffee and tea export receipts was reduced in steps and abolished by end-1997; and a new tariff code was adopted with fewer rates and significantly lower average and maximum rates than in the prewar era. Regarding the financial sector, efforts were made to rehabilitate the banking system with adequate recapitalization and provisioning, and the two largest commercial banks and the Rwanda Development Bank improved their financial positions during 1996-97. Moreover, a revised central bank statute underpinning the NBR's independence in conducting monetary policy was adopted in mid-1997, and the government's nonperforming debt to commercial banks was restructured late in the year. In March 1996, the National Assembly passed a law providing the legal and institutional framework for the divestiture program. However, implementation of the program has been hampered by administrative constraints; in the event, three enterprises were privatized, and another eight offered for sale during 1997. The demobilization program was initiated with the departure of a first tranche of 5,000 soldiers by September 1997.

10. Notwithstanding these efforts, the support of the international community, and the improvement in macroeconomic performance, Rwanda continues to face deep-seated social, financial, and economic problems. These problems include (i) widespread poverty and unemployment, in the context of extreme land fragmentation, diminishing land resources, low agricultural productivity, severe environmental degradation, and rapid population growth; (ii) a low level of human resource development; (iii) inadequate remuneration and incentives for civil servants; (iv) underdeveloped and underfunded social infrastructure and services; (v) low savings, a weak financial sector, and heavy dependence on foreign aid; (vi) a weak and inefficient economic infrastructure; (vii) a narrow export base, with the bulk of export earnings derived from coffee and tea; (viii) a heavy external debt burden, with the net present value (NPV) of debt-to-exports ratio of about 550 percent in 1997; and (ix) a weak private sector. In the period ahead, there is a pressing need to initiate the reforms necessary for high and sustainable economic growth aimed at improving social conditions, as the government continues to deal with the problems of reintegration and national reconciliation.

11. In line with the overall strategy outlined above, the medium-term economic strategy for broad-based equitable growth will focus on (i) improving public resource mobilization and management; (ii) maintaining macroeconomic stability conducive to private savings and investment; (iii) establishing an institutional, legal, and infrastructure framework that is supportive of private sector activity and external competitiveness; (iv) strengthening institutional and administrative capacity; (v) prioritizing expenditures toward human resource development and skills formation (science and technology); (vi) developing agriculture and reducing poverty; and (vii) consolidating the progress made with respect to national reintegration, reconciliation, governance, and transparency.

12. Based on this strategy, the macroeconomic objectives are to (i) achieve annual average real GDP growth of 8 percent a year during the period 1998-2000; (ii) reduce inflation to 5 percent by end-1999 and maintain it at that level thereafter; (iii) lower the external current account deficit (excluding official transfers) to about 17 percent of GDP in 2000; and (iv) maintain the level of gross official reserves at an average level of about 5 1/2 months of imports c.i.f. during the period. In the first two years, the growth targets are expected to be mostly achieved through the full use of existing capacity. Beyond that, sustained growth would require a significant increase in investment from its current low level (estimated at 11 percent of GDP in 1997) to about 17 percent of GDP in 2000. With government investment expected to stabilize at about 9 percent of GDP, private investment will need to recover strongly (from 2 percent of GDP in 1997) to its prewar level of over 7 percent of GDP. To finance the required investment while reducing the reliance on foreign savings, national savings would need to rise by about 6 percentage points of GDP during the 1998-2000 period, with an improvement in government saving contributing about 1 percentage point. Nevertheless, significant amounts of foreign savings, including assistance to reduce the external debt burden, will remain essential for Rwanda to achieve high and sustainable growth.

13. The envisioned investment and savings levels would require the restoration of confidence in the economy, buttressed by progress in social reintegration and accelerated structural reforms. These reforms include improving the efficiency and transparency of economic management; streamlining the regulatory framework for private sector activity; pursuing trade and investment reforms in line with the Cross-Border Initiative (CBI); and promoting market-based agriculture, accelerating land reform, and improving rural credit institutions. The economic reforms will be supported by efforts to promote national reconciliation through good governance, rule of law, and grassroots participation.

14. During 1998/99-2000/01, fiscal policies will support the goal of reducing financial imbalances in the economy while ensuring adequate financial support for poverty reduction and reintegration programs, vulnerable groups, basic social services (particularly education and health), and the restructuring of the public sector. The underlying objective will be to significantly improve government savings, so as to lay the basis for a gradually decreasing reliance on foreign financing of government investment, and for a sustainable debt situation in the medium term. The improvement in government savings (of 1 percentage point during 1998-2000) will come mainly from enhanced revenue performance, given the need for higher social sector spending and adequate remuneration of civil servants. Reflecting a temporary acceleration of government investment and the costs of structural reforms, the deficit (excluding grants) is projected to widen in 1998 to 13 1/2 percent of GDP (from 10 percent of GDP in 1997) before narrowing to 9 percent of GDP by 2000, in line with improved savings and a stabilization of government investment at 9 percent of GDP by the same year. The government's efforts will focus on redressing the historically weak tax revenue performance; improving the prioritization, monitoring, and control of budgetary expenditure; and enhancing the incentive structure and qualifications of the civil servants.

Revenue

15. The government aims at improving the revenue-to-GDP ratio by 1 1/2 percentage points of GDP over the three-year period. Efforts will focus on further strengthening tax administration (through the newly established Rwanda Revenue Authority (RRA)), broadening the tax base, and introducing a value-added tax (VAT) while reducing reliance on trade taxes. The capacity of the staffs of the new Customs and Tax Departments in the RRA is being strengthened through replacement and training. Furthermore, a large-enterprise unit, combining the functions of assessment, collection, and audit, is being set up, and unique tax identification numbers will be assigned to all enterprises before end-1998. The base for income and profit tax is being broadened by starting collection, during 1998, of a presumptive turnover tax of 4 percent on all enterprises with annual turnover of up to RF 100 million.

16. The customs administration is being strengthened through the use of preshipment inspection to reduce underinvoicing, the implementation of procedures to reduce fraud, and a strict monitoring of petroleum imports and transit trade. The government is in the process of limiting import exemptions for nongovernmental organizations (NGOs) and diplomats and introducing a system of tax credits for imports related to public investment projects (these measures have been effective since early 1998). A review of statutory exemptions will be undertaken in the course of 1998, with a view to substantially curtailing them. The sales tax rate was increased from 10 percent to 15 percent in early 1998, and its coverage will be broadened and remaining exemptions eliminated. In addition, excise tax collection for consumption (soft drinks, alcoholic beverages, and cigarettes) will be improved, and, as an intermediate step toward a VAT, sales tax exemptions on imported capital and transport equipment will be eliminated (and an input credit mechanism established for large enterprises).

17. To bolster revenue over the medium term, the government will concentrate on further strengthening tax administration by improving tax arrears collection, auditing procedures, and computerization, and by reviewing the penalty structure to ensure tax compliance. The authorities will also undertake the legal and administrative steps to pave the way for the introduction of a VAT by 2000.

Expenditure

18. Consistent with the medium-term targets for savings and revenue, the government aims at containing current expenditure (excluding exceptional social expenditure) to the equivalent of about 11 percent of GDP during the three-year period, while creating room for increased social spending through a reduction in unproductive spending. In addition, the program provides for exceptional social expenditure associated with the costs of (i) assistance to the victims of genocide; (ii) demobilization/reintegration of soldiers; (iii) educational assistance to returned refugees; (iv) civil service reform; and (v) the establishment of governance institutions (equivalent to a total of about 1 1/2 percent of GDP in 1998, and about 1 1/4 percent of GDP in both 1999 and 2000). The government is seeking donor support for these programs, and their implementation will be phased in line with the availability of financing. To the extent that more external financing is available, these programs will be extended and their implementation accelerated, taking into account the government's implementation capacity and the program's macroeconomic objectives.

19. The government aims at containing the wage bill (excluding the planned monetization of fringe benefits in 1999) at about 4 1/2 percent of GDP during the three-year period, while improving the quality and incentives structure for the civil service. Efforts will focus on removing ghost workers, replacing unqualified civil servants by qualified ones, and--after a wage freeze in 1998 -- significantly enhancing the level and structure of pay and incentives. The size of the civil service will not exceed 38,000 (of which 25,200 teachers) at end-1998, but new recruitment will be allowed in priority areas such as health, justice, and agriculture. For later years, the target civil service size will be determined -- within an affordable wage bill -- by taking into account the scope for further retrenchment of unqualified or nonperforming workers and the need for adequate incentives.

20. Government expenditure will be reoriented toward basic health and education, as real spending for these sectors, including adequate provision for material supplies, will be increased significantly from its very low current levels. Accordingly, the share of basic social spending in the recurrent budget (excluding exceptional social expenditure) is projected to rise from 18 percent in 1997 to 25 percent in 1998 and to just over 30 percent in 2000. To ensure adequate support for human resource development, the government will, with assistance from the World Bank, undertake a public expenditure review of the health and education sectors in September 1998. Subsequently, the social spending targets for 1999 and the medium term will be reconsidered in light of this review, the availability of sustainable external support, the government's implementation capacity, and the program's macroeconomic objectives. The envisaged increase in social spending will be accompanied by improved monitoring of social and poverty indicators (see the subsection on human resource development below). Furthermore, to create further room for expenditure on essential social and economic services, the government will keep spending on fuel, vehicle and housing maintenance, utilities, and travel abroad to a minimum. To this end, government assets (vehicles and houses) will be sold and spending by ministries kept within budgeted limits.

21. Beginning with the 1998 budget, the government is strengthening the preparation and monitoring of public investment projects, with technical assistance from the African Development Bank (AfDB), World Bank, and donors. The three-year rolling public investment program will place stronger emphasis on project prioritization and coordination of donor support while ensuring adequate domestic funding of recurrent cost and counterpart requirements. In this context, the government is establishing an External Aid Mobilization and Project Coordination Bureau within the Ministry of Finance and Economic Planning, with a view to increasing the effectiveness of project aid. It will be financed through administrative cost sharing with donors, partly through contributions by projects.

Expenditure management

22. The above-mentioned objectives will require continued emphasis on strengthening expenditure control and treasury management systems. Control over expenditure commitments will be enhanced to avoid any accumulation of domestic arrears. Improvements will be made in the system of forecasting cash receipts and payments under which funds are released to spending ministries on a quarterly basis, provided resources are available. Furthermore, the accuracy of the fiscal reporting system will be improved, and its forecasting and analytical capacity developed. A program will be launched, with technical assistance funding from the AfDB, to computerize budget and treasury operations. The system under which significant aspects of expenditure management have been delegated to spending ministries will be closely monitored by the Ministry of Finance and Economic Planning, and steps will be taken to improve the staffing of ministries for budget management, including appropriate development of internal auditing and control. To avoid slippage in the wage bill, particular attention will be paid to effective payroll management by ministries.

23. To enhance budgetary accountability and transparency, as well as to provide assurance that financial control systems are working adequately, an Auditor-General's Office will be established. Budget accountability and transparency will also be strengthened through the development of a system of public accounts; the incorporation of all extrabudgetary accounts into the national budget; the transfer of the bank accounts of ministries to the treasury account at the NBR; and the regulation and monitoring of government purchases by the strengthened Central Tender Board. An ongoing framework for budget preparation and implementation will be reflected in a new organic budget law in 1999. Furthermore, to ensure that government priorities are properly reflected in budget allocations, regular public expenditure reviews will be undertaken to determine expenditure priorities between and within individual sectors, and to improve information on outputs and outcomes of expenditure programs. The integration of the recurrent and development budgets will be further developed with World Bank and donor assistance; to this effect, the government will initiate a program-budgeting approach, starting with the health and education sectors.

24. Monetary and credit policies will aim at further reducing the rate of inflation, and the authorities will continue to monitor closely developments in both reserve money and broad money. In a first stage, the NBR will continue to absorb any banks' excess liquidity through its weekly call for bids on the money market. At the same time, with a view to developing more flexible indirect monetary policy instruments, the NBR is preparing the issuance of treasury bills, which will also serve to meet the needs of the treasury. It is envisaged that such new negotiable treasury bills will progressively replace the outstanding stock of consolidated debt held by commercial banks and will allow the development of a secondary market for government paper. The government will ensure adequate coordination between the Ministry of Finance and the NBR, consistent with the program's fiscal and monetary objectives.

25. The exchange rate will continue to be market determined, with the NBR's intervention in the exchange market confined to smoothing out excessive fluctuations in the exchange rate, subject to the goal of meeting the official reserves target. The NBR will continue to improve the functioning of the exchange market by informing economic agents about the cost advantage of bank settlements instead of cash transactions (currently causing a premium for dollar bills) and the development of a forward market. The exchange system will be kept free of any restrictions on current account transactions, and the NBR will ensure that all bona fide requests for foreign exchange are met.

26. Various financial reform measures will be implemented during the program period, with a view to strengthening the conduct of monetary policy and the process of financial intermediation. A revised banking law -- to be adopted by mid-1998 -- will provide for more effective prudential regulation of commercial banks, including strict rules for capital adequacy (Basle standards), provisioning, and external audits. The government will complete a new round of external auditing of all commercial banks, with the objective of updating financial restructuring plans already agreed with some commercial banks and developing, as necessary, new plans for others, including the rural cooperative savings and loans associations. These plans, which include measures to recover overdue loans, accelerate the provisioning for nonperforming assets, and provide for recapitalization, are expected to be fully in place by September 1998. Furthermore, the government intends to complete the ongoing financial restructuring of all commercial banks by 2001, including the realization of their mortgage guarantees in accordance with the law. Within the framework of the new banking law, the NBR is also preparing regulations adapted to the needs of nonbank financial institutions, in particular, existing and future rural savings and loans cooperatives. The efforts will be paralleled by a further strengthening of the NBR's capacity to supervise and regulate the banking system.

27. Poverty levels have worsened significantly since the 1980s. The ability of a typical household to afford basic necessities, such as food, shelter, clothing, medical care, and educational services, has declined sharply in the 1990s. The proportion of households below the poverty line has increased from 40 percent in 1985 to 53 percent in 1993; with the sharp decline in income that followed the genocide, it has dramatically increased to 70 percent. Social indicators, particularly survival rates have worsened considerably. Owing to the genocide, female and minor-headed households, which now account for over 34 percent of the population, are the most vulnerable groups among the poor. Structural reforms and investments in social and economic services are urgently needed to generate high and sustainable growth that, in turn, will create employment, reduce poverty, and improve social conditions.

28. As poverty in Rwanda is essentially, but not exclusively, a rural phenomenon, revitalizing the rural economy by increasing agricultural productivity and incomes and creating nonagricultural employment is essential for its reduction. Investment and job creation in urban areas through vigorous efforts to develop the private sector and exports will also be necessary to reduce urban poverty. The government emphasizes that investing in human capital, improving the well-being of the population, and building a healthy and skilled workforce are needed to sustain productivity increases in both agricultural and nonagricultural activities. The growing urban population will require a sound social and economic infrastructure to improve living conditions and attract the investment needed to create jobs.

29. To monitor poverty and basic social indicators, the government will set up an observatoire in the Ministry of Gender, Family, and Social Affairs, which will work closely with the Statistics Directorate of the Ministry of Finance and Economic Planning and other concerned social ministries.

Business environment

30. The private sector is essential for the growth and development of Rwanda. The strategy of the government for private sector development is based on the following elements: (i) maintaining a stable macroeconomic framework and eliminating distortions in incentives; (ii) establishing a liberal and transparent legal, labor, trade, and tax framework for the private sector; and (iii) reducing business costs through the provision of infrastructure and public utility services at competitive costs. Work on revising the labor code to facilitate labor mobility, reduce labor costs, and eliminate gender discrimination is under way.

31. In the course of 1998, the government will, under the aegis of the Investment Promotion Act, establish the Rwanda Investment Promotion Agency, which will serve as a one-stop center to promote and facilitate private investment, exports, and business development. A framework for a structured dialogue between the private sector and the government is being developed, with the conversion of publicly controlled industry associations into private institutions. This development should lead to an improved climate for private sector activities.

32. Employment creation and poverty reduction are more likely to result from the establishment of small- and medium-size enterprises in urban and rural areas. The government will take specific steps to promote these enterprises through the restructuring of the rural savings and loans cooperatives, improvements in markets and transport infrastructure (particularly in rural areas), the simplification of licensing and taxation requirements, and the relaxation of controls on the movement of labor.

Public enterprises and privatization

33. The government has decided to accelerate the privatization process and has adopted an action plan and time schedule for the divestiture of the remaining 55 public enterprises during 1998-2001, including coffee and tea factories and public utilities (by 1999). To this effect, the technical support unit of the National Privatization Commission is being strengthened (with technical assistance from the World Bank and the United Nations Development Program) to accelerate the evaluation and offer for sale of identified enterprises. The government will further extend the advertising of enterprises for sale and will intensify the media campaign to inform the public about the privatization process. The government will also adopt by end-1998 a regulatory framework permitting private sector participation in the telecommunications sector, thereby laying the basis for the privatization of the telecommunications company (Rwandatel) in 1999. Furthermore, the management contract between the electricity, water, and gas company (Electrogaz) and a private operator is expected to become effective by end-September 1998. The government is also considering the restructuring of Electrogaz, including its possible separation into electricity, water, and gas companies and the privatization of certain functions; a decision will be made before end-June 1999. A regulatory framework for private sector participation in the energy sector will also be prepared in 1999.

34. By late 1998, the government, with the assistance of the International Labor Organization, will complete the financial, organizational, and legal audits of the Caisse Sociale du Rwanda (CSR), as well as an actuarial study of the CSR's future financial liabilities and required assets. Based on these reviews, the government will decide on a new organizational structure and the type of social security system and associated financial requirements; these decisions will be followed, in the course of 1999, by the consolidation of the government's debt to the CSR. The government will remain current on its employer contributions to the CSR and -- pending the consolidation of its debt -- will pay the required amount of arrears to ensure the functioning of the CSR.

35. External policies will be aimed at strengthening the balance of payments position by accelerating the recovery of traditional exports, developing nontraditional exports, encouraging foreign investment, and regularizing external debt obligations. Since coffee and tea account for about three-fourths of export receipts, the stagnation of coffee production after its drastic fall in 1994 has increased Rwanda's dependence on external aid to finance imports.

36. The government has liberalized the processing, marketing, and exports of coffee, which has enabled farmers to receive higher and competitive producer prices without resorting to government subsidies. To accelerate the recovery of the coffee sector, the government intends to progressively remove the remaining taxes on coffee exports and revise coffee laws and regulations to promote efficient, market-based transactions. For the tea sector, the government recognizes the need to increase the producer price for green leaf tea, pending the privatization of the tea estates and factories. Subsequently, the government will review the regulatory framework for the tea industry to ensure that privatization enhances competition and efficiency and that the small producers are adequately protected.

37. Rwanda has the potential for nontraditional exports, including manufactures for regional markets, mineral products, and high-value horticulture. The government recognizes that diversification of exports will require sustained efforts to attract private investment and to promote regional and international trade. As noted above, the government is establishing an agency to promote and facilitate investment, exports, and business development. Furthermore, the government will reduce tariffs in line with the CBI objectives from 1999 onward. A new tariff code to be presented in the 1999 budget will have lower average trade-weighted tariff of about 15 percent, a maximum rate of no more than 25 percent, and a zero "intraregional" tariff. During 1999, the government will, with assistance from the World Bank, conduct a study of the constraints on Rwanda's external competitiveness.

38. With its landlocked status, small economy, and high population density, Rwanda stands to benefit significantly from regional integration, as this would help it exploit its strategic location and relatively good internal infrastructure. The government is committed to integrating the Rwandan economy into the East Africa/Great Lakes region, and it will work, jointly with the private sector, with its counterparts in the region to liberalize intraregional trade and investment.

Transport and telecommunications

39. The government's objective in transportation and telecommunications is to enhance Rwanda's integration into the regional economy and to make it a regional trade and transit center. In the course of 1999, the government will elaborate, in collaboration with the World Bank, a transport sector investment strategy aimed at expanding and improving Rwanda's infrastructure, including by establishing a railway system linked to neighboring countries, protecting existing capital investments, and improving road safety. The government also intends to strengthen the management of the Road Fund and increasingly contract out road maintenance. Furthermore, the government will encourage the reestablishment of truck cooperatives in rural areas to improve the distribution of agriculture produce. As noted above, the government will establish a policy and regulatory environment to liberalize the telecommunications sector, privatize Rwandatel, and attract private investment.

Water and sanitation

40. Water provision has been identified by both rural and urban dwellers as the highest- priority public service. Women, many of whom have become household heads, spend a large part of their day in obtaining water, which considerably constrains their access to the labor market. In this light, the government has defined a strategic framework for the sector that sets out the roles and responsibilities of the various actors to ensure that the growing demands for water are met in an efficient and financially sustainable way. The new framework involves strong community participation (especially in rural areas) and gives priority to capacity building to enhance the technical skills of local operators and to reinforce planning and management by municipalities and central administration. The government intends to improve the access and availability of water in urban areas and to raise, through information and educational programs, the population's awareness of the importance of sanitation. The critical element for sanitation is to build the institutional capacity of urban administrations, in particular the Kigali urban authorities, to effectively manage sanitation services.

Energy

41. The government's objective is to expand and diversify energy supplies at competitive costs, promote the efficient utilization of Rwanda's energy resources, and minimize the potential adverse environmental impacts. The immediate priorities of the government are to improve the operational efficiency of Electrogaz; build the capacity for policy development and investment planning in key subsectors, such as hydropower, methane gas, petroleum products, and rural electrification; rehabilitate key power facilities; and develop renewable energy resources. The government is preparing a strategic and regulatory framework that will address both urban and rural needs and encourage the private sector to progressively harness and distribute energy. This strategy will emphasize the efficient and sustainable use of energy sources based on natural resources by reducing the use of wood and wood fuel (particularly in urban areas), while encouraging the use of efficient wood- and charcoal-burning stoves. The expansion and regeneration of forest resources is also an important element of the strategy.

Housing and urban development

42. The government will continue to assist in providing permanent shelter to returnees (old and new refugees), victims of genocide, and other vulnerable persons. In rural areas, assistance will be provided to enable the affected population to reconstruct and/or rehabilitate their own houses, and to supplement external support and efforts under self-help schemes. The situation in urban areas has become more acute as the population in Kigali and other urban centers has more than tripled since the genocide. Consequently, the demand for housing and other urban services has increased dramatically, overtaxing the ability of the urban administrations to deal with the basic needs of the population. In order to deal with the problems in Kigali and other urban centers, the government will develop a comprehensive strategy to strengthen the capacity of urban communities to meet the increased demand for housing and urban services. This approach will focus on dealing with structural issues in the provision of housing by the private sector through the development of a cadastre and land-titling system. Such a system would facilitate the functioning of land and housing markets in urban areas; it would also provide the basis for securitizing urban assets, thus giving all income groups greater access to housing finance and enhancing the urban tax base for improved provision of infrastructure and services.

43. To support housing development, the government will provide an enabling regulatory framework and focus on (i) the preparation and adoption of a Land Use Master Plan, including a sites and services program, for Kigali and other urban areas; (ii) the design and implementation of water supply and sanitation systems for Kigali and the development of an appropriate institutional structure to ensure the operation and maintenance of future systems of production, treatment, and distribution that will rely on the private provision of such utility services; (iii) the development of community-based urban rehabilitation programs that ensure security of tenure in the built-up areas and provide incentives for the reconstruction of dilapidated housing, the filling of vacant sites, and the preservation of public space for urban networks (streets, water, and sanitary systems) and other public usage; (iv) targeted self-help programs within community structures to help returnees and vulnerable groups obtain housing and shelter; and (v) the establishment of a Housing Fund to provide to low-income groups targeted subsidies that will, in turn, enhance their access to housing finance on affordable terms.

44. The government's development strategy is based on private sector-led economic growth, with a limited but more effective role for the state. The government has decided to reduce the size of the civil service and reorganize it to improve its efficiency, effectiveness, transparency, and accountability. After reducing the number of ministries from 22 to 18 in early 1997, the government is further streamlining its organizational structure, including shifting certain activities to the private sector (such as road maintenance). The government is conducting an assessment of institutional capacity, covering the public and private sectors, as well as civil society. The results of this assessment will help the designing of a comprehensive capacity-building program and underpin the systematic reorganization of the public sector and its agencies.

45. To begin reorganizing the civil service and rebuilding its capacity, the government will establish a high-level task force to consult with the wider society on developing a vision for the civil service. The task force will also make recommendations on the role of the govern-ment, the institutional structure and the staffing required to carry out its mission, the strategy for capacity building, and the process for comprehensive reforms of the civil service. Until such comprehensive reforms are under way, the government will take measures to strengthen capacity in key areas, closely monitor and control recruitment into the civil service, progressively remove unqualified staff and improve training, and reintegrate an additional number of qualified former civil servants who have returned from exile (in addition to 5,000 former teachers who were already reinserted between September 1997 and January 1998).

46. The government will take a census by mid-1998 of the civil service that will facilitate the removal of identified ghost workers from the payroll. In the course of 1998, it will carry out a job description and classification exercise for all positions, with technical assistance from World Bank. To improve incentives, the government will adopt by end-1998 -- for implementation in the 1999 budget -- a revised pay structure for the public service based on a progressive move toward a "living wage" and the monetization of all or most fringe benefits. The government will also remove unqualified staff from the civil service, with an appropriate severance and retraining package, and selectively recruit qualified staff, consistent with an overall target of 38,000 civil servants (including 25,200 teachers) by end-1998. By early 1999, the government will establish an independent Public Service Commission to oversee the public service reform, including staffing levels, recruitment, job training, and the organizational structure of ministries. To promote adequate ethical standards, an Anti-Corruption Bureau and Inspector-General of Government will be established in the course of 1999.

Education

47. Rwanda puts a high priority on restoring its human resource base. The quality of primary and secondary education is low because of the lack of trained teachers and appropriate school materials, as well as the outdated curricula, which are largely devoid of scientific and technical subjects. Furthermore, the management of the education system is overcentralized and hampered by weak management capacities at all levels, and the involvement of parents is limited. The current technical and vocational training system does not meet the requirements of the labor market, and there are severe shortages of skilled manpower. Government priorities are to address the shortage of skilled manpower by improving the quality and practical relevance of education at all levels; strengthening training in science and technology and higher-level management; and emphasizing vocational training. The government's objectives are to increase the net primary school enrollment ratio from the current 70 percent to 80 percent in 2000, and to achieve universal primary education by 2005. Furthermore, the government aims at increasing the transition rate from primary to secondary education from the current 10 percent to 30 percent in 2000 and to 40 percent in 2005, particularly in rural areas. Taking into account the projected population growth, achieving this objective will require considerable recurrent and capital resources.

48. The government has reinserted a significant number of returning qualified teachers into the school system, and is accelerating the in-service training of existing teachers and the removal of unqualified and nontrainable teachers. In addition, new curricula are being introduced into primary and secondary schools. Furthermore, the government will emphasize enlarging the access of women to higher education and improving educational opportunities in rural areas, including nonformal education.

49. The government recognizes that underfunding education is a major factor in the poor quality of education and constrains the reorientation of the educational system needed to support the development of the society and economy. The government intends to progressively raise the proportion of the budget allocated to education, including adequate funding for school infrastructure, so as to increase real per capita government expenditure. Work is under way to prepare a comprehensive sector strategy and an expenditure framework that will provide the basis for seeking enhanced donor support for the sector.

Health

50. In the decade preceding the events of 1994, health standards deteriorated as a result of the rapidly rising population, underfunding of public health programs, increasing incidence of drug-resistant malaria and AIDS, and growing food insecurity and malnutrition. The health system has been rehabilitated since the genocide, but the main challenges of malaria, AIDS, malnutrition, and access to clean water remain. Moreover, the system is affected by a serious shortage of trained personnel and receives a relatively small share of the budget (about 3 percent of the 1998 recurrent budget), although there is also significant expenditure by NGOs.

51. The priorities of the government for the health sector are to strengthen the delivery of primary health care -- vaccination, nutrition, water supply and sanitation, and prevention of malaria, AIDS and other infectious diseases -- and improve access to quality health care throughout the country. The government has developed a sector strategy with the following elements: (i) a decentralized primary health care system; (ii) an increase in the number of trained medical and nursing staff, especially in rural areas; (iii) the strengthening of the National AIDS Control Program; (iv) the establishment of an autonomous National Pharmacy Office (OPHAR); and (v) improved coordination of donor support and the activities of NGOs and the private sector. Furthermore, community participation, information sharing, and education will be used to facilitate the delivery of primary health services, with special emphasis on public hygiene and other preventive practices. A system of cost sharing between government and beneficiaries will be implemented flexibly to ensure access to all health services by the poor and indigent.

52. As the emergency interventions by donors and NGOs are expected to gradually decrease, the government intends to significantly increase budget allocations to the health sector, so as to achieve an increase in real per capita government expenditure on health. Moreover, the government will prepare a framework for health sector expenditure, including a public investment program, that addresses the priority issues in the sector.

Population

53. At current population growth rates of 3.6 percent per annum, Rwanda's population will double in 20 years. The government intends to formulate a population policy, intensify information, education, and communication among target groups, and train health workers in family planning skills.

Gender and role of women

54. Women constitute the majority of the population and its labor force, particularly in agriculture, but they continue to face substantial constraints on their participation in the economy and society. They are poorly rewarded for taking part in economic activities, owing to discriminatory laws and practices that limit their access to education and training, land, and credit. The onerous responsibilities of home management and motherhood constrain their participation in the labor market. As Rwanda recovers from the economic and social impacts of the genocide, many women find themselves in vulnerable positions as widows and single heads of households.

55. The government is drafting a law to eliminate legal discrimination against women. The adoption of the law will be followed by a public education program to ensure compliance. The government's program to enhance women's integration in the development process consists of: (i) measures to raise access to formal and informal education (with targets to increase the enrollment, retention, and progression of girls) and to provide training to build entrepreneurial capacity; (ii) adult education and training programs for women in rural areas; (iii) measures to strengthen women's organizations at the grassroots level; (iv) pilot credit schemes to support women's enterprises; (v) measures to improve access to judicial processes for redressing grievances; (vi) education and training to change perceptions of women's role in the society; (vii) improvements in water supply, health care, and home energy supplies to reduce the constraint on women's participation in the labor market; and (viii) betterment of the working conditions for women within the framework of a new and revised labor code. Real participation by women in the design of these programs will give greater assurance that the long-term interests of women are enhanced and protected.

Increasing productivity in agriculture

56. For over a decade, agricultural productivity has been declining, impoverishing the country, in particular the rural population. The major causes of the decline include the exhaustion, fragmentation, and overexploitation of available agricultural land, owing to rapid rural population growth; the degradation of the soil and the environment; and the lack of use of modern inputs and weak research and extension services.

57. The government has developed an agricultural strategy with the objectives of increasing rural incomes, enhancing food security, and converting agriculture into a viable sector by moving it away from a subsistence- to a market-based activity. The main elements of the strategy are to (i) promote market-based agriculture by developing markets for both inputs and products; (ii) improve soil conservation and management; (iii) extend available land by developing swamplands in an environmentally sustainable framework; (iv) promote the livestock and fisheries subsectors; (v) improve farming methods through research, extension and information services, and intensification of the use of inputs; (vi) promote rural credit and other financial mechanisms for rural-based activities; (vii) promote the formation of farmers' groups and professional associations; and (viii) improve storage and farm-to-market roads. These approaches will be complemented by the adoption of laws on land tenure, labor market, and gender, and by the removal of the coffee export tax and the increase in tea producer prices.

Renewing natural resources

58. The natural resource base of Rwanda -- land, forests, wildlife, and water -- has been an important source of household and national income, providing the basis for farming, fishing, energy production, and tourism. These resources have been degraded by excessive demand for them for agriculture and household energy, owing to high population growth rates and the lack of effective policies to preserve biodiversity. Environmental degradation has been a major factor in the decline of agricultural production. The genocide and the subsequent efforts to resettle displaced populations have accelerated the destruction of natural resources.

59. The government believes that resettlement must be carried out in a way that does not further damage the resource base, and it attaches a high priority to the restoration, protection, and effective management of the natural resource base. The government's strategy involves a number of elements, including, a population policy that targets a reduction of the fertility rate; the creation of nonfarm employment to relieve the pressure on the land and forests; the adoption of a land law that encourages efficient land use; the undertaking of environmental impact assessments of major sectoral projects; and the promotion of national consciousness on environmental issues. This strategy will be integrated into the National Environmental Action Plan.

60. The objective of resettling the refugees and reintegrating them into society has been to ensure that their basic human needs are met and to help them become self-sustaining. The process has focused on providing immediate survival assistance and, subsequently, permanent shelter, social services, and assistance for income-generating activities, based on community and national sectoral interventions. Since the genocide, these activities have received support from emergency programs of UN relief agencies, bilateral donors, development agencies, and NGOs. In the transition period, the support for economic and social reintegration will focus more on interventions by communities themselves, in combination with government sectoral programs. Community interventions will be encouraged by decentralizing decision making and by following other strategies designed to help rebuild social capital by galvanizing communities around mutually beneficial activities that directly address rural poverty.

61. The government has established a fund to assist the victims of the genocide overcome the trauma and economic and social deprivation that it has caused. The genocide victims include widows and widowers, orphaned and unaccompanied children, sexually abused children and women, elderly without the traditional social support, handicapped, and those rendered homeless and landless. By law, the government contributes 5 percent of the annual current budget to the fund, and it is seeking additional financing from other domestic and foreign sources. The fund will help victims of genocide build sustainable livelihoods through assistance for shelter, education, medical care, social rehabilitation, and income-generating activities. It will also raise public awareness of the problems of these victims, and assist them in exercising their human and property rights. The program will be implemented with the active participation of beneficiaries and rely on existing structures, including ministries, associations and NGOs, and social development committees.

Justice and political governance

62. The government has emphasized the need to end the "culture of impunity," to promote a sustainable national reconciliation, and to ensure justice and the rule of law. Achieving these goals requires the building of an effective police force and the capacity for a strong and independent legal system. The government will strengthen the policing and judicial capacity at the communal level and reinforce the capacity of the judicial system to carry out the genocide trials expeditiously. Improving political governance, with emphasis on the rule of law, decentralization in decision making, and broad participation in the political and economic arenas at the grassroots level, will facilitate the achievement of national reconciliation, sustainable peace, and political stability. The government will establish a Commission for National Reconciliation to promote a broad dialogue in the country on rebuilding the society and facilitating the coexistence of all Rwandans. The government has also established a Human Rights Commission to promote respect for human rights and a Commission on Legal and Constitutional Affairs to propose the arrangements that will facilitate and sustain peace and political stability.

Demobilization and reintegration

63. The government demobilized 5,000 soldiers in 1997, and it plans to continue with the demobilization process over the next two years. In the current fragile economic and social environment, it is critical that these demobilized soldiers are reinserted into productive civilian life. The demobilization program provides cash payments to demobilized soldiers. It also provides for counseling to assist with the immediate resettlement of demobilized and returned soldiers into their communities, as well as for assistance for long-term economic and social reintegration, including microcredit and vocational training schemes. The government is seeking donor financial support to implement these programs.

64. The government's ability to implement reforms, monitor economic developments, and formulate timely policy responses has been impaired by deficiencies in many areas of economic and financial statistics, owing in part to the genocide. The government has undertaken significant efforts to rehabilitate Rwanda's statistical database, with extensive technical assistance from the Fund and other external agencies. However, further improvements are necessary, in particular, in the areas of money and banking, balance of payments, and national accounts and price statistics. The government will press ahead with the implementation of technical assistance recommendations, including through the provision of human and other resources to statistical agencies, and it will strengthen its capacity-building efforts, which will require continued external assistance.

65. Rwanda's balance of payments is expected to remain weak during 1998-2000, and exceptional financing will therefore be required. Taking into account the potential impact of the external policies outlined above, export volumes and receipts are expected to grow at a moderate rate, to a large extent reflecting the slow recovery of coffee production and the expected decline in international prices during the three-year period. Import volumes are projected to increase at a yearly average rate of about 10 percent, owing to the continuation of the rebuilding and rehabilitation efforts and the expected modernization of enterprises associated with the privatization process. The terms of trade are forecast to weaken by a cumulative 28 percent during the period, and the deficit on the service accounts is projected to remain large.

66. Based on these projections, the external current account deficit (excluding official transfers) is expected to be the equivalent of about 18 percent of GDP on average during 1998-2000. Taking into account scheduled amortization, repayment of external arrears, and the objective of maintaining gross official reserves on average at the equivalent of about 5 1/2 months of imports, the financing requirements during 1998-2001 (March) are projected at US$1.6 billion. This total is expected to be met through project grants (US$465 million), project loans (US$235 million), and nonbudgetary official transfers (mainly humanitarian assistance, estimated at US$450 million), leaving a residual financing gap of about US$470 million for the period. This gap is expected to be covered through IMF disbursements; debt relief from the Paris Club (on Naples terms, i.e., a reduction of 67 percent of debt eligible for relief) and at least comparable debt relief from non-Paris Club official bilateral and commercial creditors; budgetary support from the World Bank, AfDB, European Union, and other multilateral creditors; and assistance from bilateral donors.

67. Rwanda's external debt at end-1997 is estimated at approximately US$1.2 billion, equivalent to about 63 percent of GDP. Over two-thirds of the debt is highly concessional and owed to multilateral creditors. Nevertheless, Rwanda faces a burdensome external debt, and -- assuming that it receives debt relief from Paris Club on Naples terms and non-Paris Club bilateral and commercial creditors -- the ratios of debt service-to-exports and net present value of debt-to-exports are projected to reach an average of about 35 percent and 600 percent during 1998-2000, respectively. Over the program period, the government will avoid contracting or guaranteeing any loans on nonconcessional terms. To ensure the implementation of a sound medium-term financial strategy and a better outlook for the country's debt problem, Rwanda will be seeking in 1998 multiyear debt relief (including the liquidation of arrears) from the Paris Club creditors on Naples terms and at least comparable relief from non-Paris Club official bilateral and commercial creditors. Debt relief will be sought for debt before the cutoff date (to be agreed with Paris Club creditors), and for the current maturities during the three-year period. Rwanda will also seek the equivalent of a concessional refinancing of the accumulated arrears and current maturities falling due during the period from multilateral creditors (other than the World Bank, AfDB, and International Fund for Agricultural Development). The management of the external debt units in the Ministry of Finance and Economic Planning and the NBR will be strengthened in order to ensure the timely production of adequate external debt statistics, with technical assistance from the AfDB. Specifically, the government will monitor its external debt through a recently established committee, including representatives of the Ministry of Finance and Economic Planning and the NBR, whose main functions are to reconcile debt figures, review the debt situation, and provide regular debt updates to relevant government agencies.

68. During 1998-2000, Rwanda will need to make further progress in capacity and institution building in the areas of macroeconomic management, economic and financial statistics, and public administration, including through continued training of a large number of government officials. The effectiveness of the technical assistance efforts will require close collaboration between the government and the international community in coordinating capacity-building efforts in the Ministry of Finance and Economic Planning, the NBR, and the Ministry of Public Services, and the programming and budgeting units of the line ministries. The program for technical assistance in the macroeconomic management area, in place since 1995, has recently been updated, and priorities have been established. While part of the funding has been ensured through an AfDB grant, the government is seeking financial support from other multilaterals and donors to cover the remaining needs.

69. Coordination of technical assistance within the government and with donors will be strengthened through enhanced vertical and horizontal integration of the technical assistance machinery. This integration will help improve the design, funding, and staffing of technical assistance programs; it will also improve the placement, supervision, and utilization of technical assistance within government departments, thereby maximizing the impact on the development process. To enhance coordination, the government has established a technical assistance steering committee, composed of senior staff from the above ministries and a support unit within the Ministry of Finance and Economic Planning, which will be in close contact with the supporting multilateral institutions and donors.