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The following item is a Letter of Intent of the government of Rwanda, which describes the policies that Rwanda intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Rwanda, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
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Kigali
November 6, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, DC 20431
U.S.A.

Dear Mr. Köhler:

1.   We recently held discussions with the Fund staff on the second review of Rwanda's program for 1999/2000, which is supported by the second annual arrangement under the Poverty Reduction and Growth (PRGF), approved by the Executive Board of the Fund on November 19, 1999. We also held discussions on Rwanda's 2000/2001 program to be supported by the third annual arrangement under the PRGF.The discussion focused on progress made under the second year arrangement and policies and actions to be pursued during the remainder of this calendar year and in 2001—in particular to bolster revenue performance and to strengthen the foreign exchange system. Unfortunately, under the difficult circumstances that the country continues to face in 2000, seven of the program's nine quantitative performance criteria for end-September 2000 were missed. These included the floors on the net foreign assets of the BNR and social spending, and the ceilings on the net domestic assets of the BNR, the net credit to government from the banking system, the primary fiscal deficit, the stock of external non-reschedulable arrears, and the net accumulation of domestic arrears. The structural performance criterion on the completion of audits of the 1999 accounts of 5 ministries was also missed, as was the performance criterion on the elimination of the import surcharge which was carried out with a delay of about one month.

2.   The attached memorandum of economic and financial policies (MEFP) reviews progress in implementing the second year arrangement and provides details of policies to be undertaken in the third year arrangement. In particular, it describes the revenue and expenditure measures that the government is committed to implement so as to attain a primary fiscal balance close to the original program target for 2000. It also describes in detail the extensive set of revenue measures the government will be implementing so as to achieve a fiscal target for 2001 that is consistent with macroeconomic stability and a movement towards fiscal sustainability over the longer term.

3.   The fiscal target would also permit a significant increase of resources allocated in the budget toward anti-poverty spending. The MEFP also describes an important number of structural reforms, including the decision of the BNR to implement a system of foreign exchange auctions to ensure market determination of the exchange rate. Given the difficulties Rwanda was confronted with in 2000 and the remedial measures and commitments undertaken as described in the MEFP, the government of Rwanda requests the approval of the third year arrangement under the PRGF.

4.   As the second annual arrangement expired on November 18, 2000, we request that the undisbursed amount for the third loan under the second annual arrangement be rephased and that the amount equivalent to SDR 4.75 million be made available during the third annual arrangement. The government requests the first disbursement of SDR 9.52 million under the third year arrangement following the approval of the third annual arrangement by the Fund's executive Board. The government understands that consideration by the Executive Board of Rwanda's request for approval of the third year arrangement will be subject to Rwanda's taking a wide array of prior actions as indicated in the attached MEFP.

5.   The government of Rwanda will continue to provide the Fund with such information as the Fund requires assessing Rwanda's progress in implementing the policies described in this letter and the attached memorandum. Moreover, Rwanda will continue to consult with the Fund on its economic and financial policies, in accordance with the Fund's policies and practices on such consultations.

Yours Sincerely,

 
/s/
François Mutemberezi
Governor
Banque Nationale du Rwanda
  /s/
Donald Kaberuka
Minister of Finance
and Economic Planning

 

Memorandum of Economic and Financial Policies
of the Government of Rwanda for 2000/2001

I.  Performance under the 1999/2000 Program

1.   Performance under the second-year PRGF program (October 1999-September 2000) has been mixed. The first review of the second annual PRGF arrangement was originally expected to be based on performance through end-December 1999. However, mainly due to revenue shortfalls and partial implementation of expenditure cuts, there were fiscal slippages of the order of 1.5 percent of GDP, and four quantitative and two structural performance criteria at end-1999 were missed. To address these issues, the government revised its fiscal program for 2000 to include temporary revenue measures to partly offset the revenue shortfalls, and strong expenditure reductions vis-à-vis the 2000 budget, all aimed at keeping the primary deficit target unchanged. The government also committed to implementing a set of structural reforms as prior actions. In the event, fiscal performance through end-May 2000—the revised test date for completing the first review under the second annual PRGF arrangement—was in line with or better than the agreed targets, the structural prior actions were taken, and, as a result, the first review was completed on July 31, 2000.

2.   Real GDP growth, which had declined to 5.9 percent in 1999, decelerated to an estimated 5.2 percent in 2000, which—although still quite strong—represented a slow-down of the booming Rwandan economy of the 1996-98 reconstruction period. Growth in 2000 was constrained by drought in some areas and the rise in international petroleum prices and other transportation costs. After posting an annual average inflation rate of -2.4 percent in 1999, which reflected falling food prices, Rwanda's inflation increased to 2.8 percent by September 2000, partly on account of the drought's impact on food prices and higher fuel prices. The external current account deficit (excluding official transfers), which narrowed in 1999, is estimated to have widened substantially in 2000 to 16.8 percent of GDP, reflecting weaker export receipts caused by lower coffee volumes and prices, higher fuel and food import prices, and a one-time large increase in international transportation costs.

3.   The deterioration in the current account in 2000 also reflects the effects of the relaxed monetary policy followed in 2000, as evidenced by the NBR repeatedly exceeding the net domestic asset ceilings. In this context, the currency depreciated by about 15 percent during 2000 vis-à-vis the U.S. dollar. Moreover, the net foreign asset targets of the NBR were not attained as a result of substantial sales of gross foreign exchange reserves by the NBR to commercial banks in an effort to restrain the depreciation. The NBR felt comfortable doing so given the relatively high level of its foreign exchange reserves at over six months of imports. The fiscal stance contributed to the monetary relaxation, as the fiscal deficit and domestic financing targets were missed. With a view to improving adherence to its monetary targets, the NBR has recently clarified that foreign budgetary assistance will require an adjustment to the monetary targets, irrespective of whether these flows pass through the central bank.

4.   The primary fiscal balance—a performance criterion under the program—for September 2000 was RF -0.8 billion (-0.1 percent of GDP) compared with the program target of RF 1.8 billion. Once again this reflected significant revenue shortfalls that were partially offset by expenditure cuts. Revenues fell short of the September 2000 target by RF 5.2 billion (0.8 percent of annual GDP), mainly due to (a) lower-than-programmed corporate profit taxes, as many companies declared—still to be audited—losses; (b) lower beer and soft drink excise receipts, as taxed sales remained extraordinarily depressed; (c) lower trade taxes, due to lower declared import volumes; and (d) the expected improvements in tax (in particular customs) administration not being realized. At the same time, in an effort to contain the deficit overrun, the government limited current expenditure by about RF 3.8 billion below the September 2000 target. It adjusted purchases of goods and services for civilian (nonsocial) purposes and transfers, while protecting social spending. Military expenditures were contained within their programmed levels.

5.   At end-September 2000, foreign-financed capital spending (which accounts for almost all public investment projects) is reported to have been about 24 percent of the fiscal program allocation for the year, owing to delays in project preparation, weak implementation capacity within the line ministries, and complicated procedural requirements of donors. Domestically financed capital expenditure was also well below target, at 35 percent of the annual fiscal program allocation. In this context, the overall fiscal deficit to end-September was contained to 3.8 percent of GDP, compared with the program target of 7.8 percent of GDP. While this year's fiscal performance contributed to overshooting the domestic bank-financing target under the program, the major factor behind the latter has been the higher-than-programmed payment of expenditures committed in 1999. These payments were made by ministries and projects under their auspices drawing down on their ministerial accounts with the NBR in an amount equivalent to about 0.5 percent of GDP. To avoid the recurrence of an unanticipated drawdown in ministerial accounts and with a view to improving budget monitoring and control, the government from November 16, 2000 eliminated all independent ministerial accounts. All project accounts not subject to agreements with donor agencies were also ordered closed so that henceforth all expenditures be paid out of the treasury account.

6.   In the second quarter of 2000, the government identified for the first time RF 2.3 billion of domestic arrears accumulated during earlier periods and undertook to repay these arrears, as well as RF 2.2 billion of arrears that had been properly tracked and previously included in the fiscal program for 2000. However, the total net payment of arrears fell behind schedule and by September there was a net accumulation of RF 0.9 billion compared with a programmed reduction of RF 2.5 billion. The government has now moved to strengthen the monitoring of all government expenditures and bank accounts, as mentioned above, and has by and large completed an investigation to ensure that no domestic arrears remain unidentified.

7.   The investigation, which was carried out by the internal audit department of the Ministry of Finance, showed that there may be up to RF 27 billion (about 4 percent of 2000 GDP) in arrears that had not been previously identified, with the majority of them incurred before or during the war. These latter arrears had not been previously identified partly because the war disrupted the recording system while archives remained in a state of disarray and are only now beginning to be computerized. In addition, even in the 1995-97 period, there were not yet clear guidelines as to who would bear the costs of various utility services, prison expenses, etc.—the bills for which have now been identified as outstanding arrears. Finally, there is an acute capacity problem in the internal audit department, which had to carry out the tasks of identifying and verifying outstanding claims on the government.

8.   A large number of arrears from before 1998 may not be legitimate, as suppliers have not always provided adequate documentation, mostly claiming losses during the war. Regarding arrears claims, which the government has not recognized, the approach the government will follow is explained in paragraph 28. Of the RF 27 billion newly identified arrears, RF 2.3 billion—the amount accumulated in 1998 and 1999—relating to purchases of goods and services has been verified. The government has committed to eliminating these and any further verified arrears in accordance with a timetable by end-2002.

9.   With regards to external arrears, Rwanda signed bilateral rescheduling agreements with all its Paris Club creditors in 1998-99, and is seeking agreements with its non-Paris Club bilateral creditors on terms at least comparable to those granted by Paris Club creditors. Rwanda was late on debt-service payments on refinanced/rescheduled amounts during the third quarter of the second annual PRGF arrangement, breaching a performance criterion for the second review. All arrears have been eliminated since mid-October 2000.

10.   There was some progress in structural reforms in the first nine months of 2000. By March 2000, agreements had been reached with five large public enterprises on the settlement of cross debt, while agreements with some commercial banks on their restructuring plans, as well as a consolidation agreement between government and the social security fund, were reached by June 2000. A revised action plan was adopted for the Rwanda Revenue Authority (RRA) in June 2000, and audits were initiated in May 2000 for five key ministries (including the Ministry of Defense) originally planned to be completed by end-October 2000. However, there were delays in completing the audits due to the training needs of the Auditor General's staff, and all audits, except that of the Ministry of Health, are now expected to be completed by mid-December 2000. Regarding public service reform in 2000, the government retrenched 13 percent of core civil servants, initiated redeployment within ministries in line with the cadres organiques, continued regularizing previously unpaid teachers, removed all remaining unqualified teachers, and eliminated ghost workers from the payroll. However, there have been delays in the publication of the necessary prime ministerial decree to formally adopt the cadres organiques and in some preparatory steps at the level of the préfectures. In August 2000, the authorities submitted to parliament a civil servants' code with significant governance implications, but its adoption is still pending.

11.   In 2000, the government has implemented a number of measures to improve governance. In the area of budget preparation, a new functional budget classification was adopted and used for the preparation of the 2001 budget. As part of the ongoing reforms, the government has introduced a medium-term expenditure framework (MTEF) process covering the period 2001-03 to improve transparency, comprehensiveness, predictability, and the ability to prioritize expenditure. The 2001-03 budgets are being prepared based on medium-term programs developed by each ministry. Moreover, an organic budget law was submitted to parliament, albeit with slight delay. In the area of public accounts preparation and auditing, the Auditor General's office has become fully operational through hiring and training of its staff, and auditing operations have begun. Moreover, the law on public accounts was submitted to parliament. The authorities have initiated the strengthening of bank supervision and the bank regulatory framework by improving the on-site inspection of banks and adopting international capital adequacy, loan classification, and provisioning standards. Moreover, banks (including those with state participation) have made progress in implementing their restructuring plans, including strengthening their capital adequacy, provisioning, and lending procedures. However, there have been delays in improving the legal environment for the recovery of nonperforming loans. The arbitrage center, though formally established, continues to lack capacity and still faces some administrative and legal impediments, which the government has committed to remove. In addition, improvements in the system of the voie parée are still under consideration by an interministerial committee. With a view to improving governance and economic efficiency, the authorities submitted a regulatory framework in preparation for the offer for sale of Rwandatel, approved a policy framework for the privatization of tea factories/estates, and decided to put Electrogaz (the electricity/water company) under private management as a prelude to its privatization. However, there have been delays in the privatization process envisaged for each of these major institutions, due to lack of financing of the privatization consultant. From the 22 companies targeted to be brought to the point of sale by end-September 2000, 15 companies were offered for sale but for three there were no bids. Finally, the audit of government arrears to the social security fund (CSR) was completed.

12.   The government successfully completed the interim Poverty Reduction Strategy Paper (I-PRSP) after conducting an extensive first round of consultations at the préfecture (province) level that included a wide range of stakeholders. The I-PRSP was discussed with the Fund and World Bank staff and presented to the donors at the November 7-9, 2000 meeting in Kigali.

13.   Under the difficult circumstances faced by the country in 2000, with respect to performance criteria under the PRGF, seven quantitative criteria for end-September 2000 and two structural performance criteria were missed. One of the two structural performance criteria—on the elimination of the import surcharge—was achieved with a delay, while four structural benchmarks were either missed or implemented partially.

II.  Medium-Term Policy Framework

14.   The primary development goal of the government is to achieve sustained poverty reduction through the pursuit of policies and reforms that would maintain economic growth at high and sustainable levels, while at the same time implementing policies that have a direct effect on poverty. Given a 3 percent population growth rate, Rwanda's macroeconomic policies are aimed over the medium term at maintaining real GDP growth of at least 6 percent a year (which is consistent with a realistic annual growth rate of about 2 percent in total factor productivity), keeping inflation below 5 percent, gradually reducing the external current account deficit (excluding official transfers) from 16.8 percent of GDP in 2000 to about 10.7 percent in 2004, and maintaining an adequate—given the vulnerability to shocks—level of gross official reserves of at least six months of imports. A fundamental aim of the government will be to maintain—assuming HIPC Initiative debt relief—debt at sustainable levels as defined by the net present value (NPV) of debt-to-exports ratio of 150 percent and other internationally accepted indicators.

15.   In the 1990s, Rwanda's economic condition was greatly affected by the 1994 genocide and the ensuing social and military developments. The result has been the emergence of very large external current account imbalances reflecting very low or negative savings-to-GDP ratios for both the private and government sectors. While the external imbalances have so far been covered by foreign savings provided through donor flows catalyzed by the international response to the genocide, the sustainability of such finances over the long run is uncertain. In this context, it is important that Rwanda begin to take the necessary steps to reduce the current excessive reliance on donor funds and eventually integrate itself into international capital markets. If the existing fiscal and external imbalances were to continue over time, chances are that private sector savings and investment (both from local and foreign sources) would not adequately recover.

16.   Thus, to ensure that macroeconomic stability and growth will be sustainable over the long term, the government will aim to progressively reduce its fiscal deficit with a view to setting in motion a reduction of the external current account deficit and to consolidate the debt sustainability gains expected to be attained through the application of the HIPC Initiative. This in turn would have beneficial effects on the perception of local and foreign investors of the sustainability of macroeconomic stability in Rwanda and complement the positive effects on private sector perceptions of a debt reduction under the HIPC Initiative. In the government's medium- and long-term macroeconomic framework, this approach is reflected in an expected gradual increase in the savings rates of the government and the private sector, to the levels—in the first stage—that prevailed on average in the 1980s.

17.   To achieve the envisaged gradual increase in government savings—which is necessary for reducing the fiscal deficit (excluding grants) from a projected 9.6 percent of GDP in 2001 to about 7.8 percent by 2004—the government has carried out a realistic assessment of the current and long-term fiscal revenue potential and identified the steps necessary for moving from attainable revenue targets in 2001 to ambitious medium- and long-term targets. In the context of the effort to reduce poverty, the measures envisaged will explicitly make an effort to shift the tax burden from the poor. Increases in government savings would also depend on making expenditure more efficient and accelerating civil service and public enterprise reforms. The regular conduct of public expenditure reviews and the introduction of an MTEF covering expenditure programs of all ministries with the 2001 budget, is expected to improve the costing, facilitating prioritization, and enhance efficiency and transparency of government expenditure. The links to performance indicators would also be strengthened. The government has also initiated a further decentralization of budget execution to the préfectures and to a smaller extent the communes.

18.   As mentioned above, an important element of the medium- and long-term macroeconomic framework adopted by the government is the envisaged increase in private sector savings and investment over time. To this effect, it will be necessary to achieve unfailing progress toward fiscal and debt sustainability and to consistently maintain macroeconomic stability so as to build the necessary confidence of the private sector in the policy environment and its sustainability. Maintaining low inflation will also have a significant effect on the livelihoods and savings of the poor as the inflation tax falls predominantly on them. Equally important for increasing private sector savings (and investment), the government will aim to accelerate financial sector reform (including in the first stage, a strengthening of the banking system and subsequently a gradual capital account liberalization), make financial instruments accessible to a greater proportion of the population, and establish a legal and regulatory framework conducive to private sector activity and external competitiveness. The government is also committed to good governance, by ensuring transparency and accountability in public resource management, as well as by establishing a fair and level playing field for the private sector, be it domestic and foreign.

19.   While the goal of poverty reduction can be served by creating an environment with low uncertainty, which supports high economic growth and increasing employment, specific policies and measures are also needed to ensure that the benefits of growth will reach all parts of society, especially the poor. In this regard, the government envisages increases in social/antipoverty spending over the next years using the PRSP process as the framework of all actions and interventions. Some of these policies and measures, in the areas of education, health, water and sanitation, rural infrastructure, and agricultural sector reform, are already reflected in the government's program under the PRGF, but more needs to be done. During the consultative process to be used in preparing the full PRSP, the government expects to gain a deeper understanding of the type of policies and programs that would be more effective in reducing poverty. As a result, the MTEF that will be introduced in 2001 will be continually refined to ensure that adequate resources are provided to such programs and that resources are reallocated to them from lower-priority areas. At the same time, the government will continue to develop the input and outcome social indicators and monitoring mechanisms to gauge the effectiveness of these programs in achieving established objectives.

III.  The Economic Program for 2000/01

20.   In line with the medium-term objectives outlined above, the program for 2001 aims at consolidating macroeconomic stability while (a) initiating progress toward a sustainable reduction in the underlying macroeconomic imbalances, and (b) taking clear steps toward poverty reduction. The macroeconomic targets are (i) achieving output growth of 6 percent; (ii) maintaining inflation at about 3 percent; and (iii) maintaining gross international reserves at about 6.5 months of imports.

A.  Macroeconomic Policies

Fiscal policy

21.   The government is persuaded of the need to achieve the fiscal deficit targets for 2000 despite the significant shortfall in revenue and avoid a weakening of the initial conditions for the program for 2001. It is, therefore, making every effort to restrain nonsocial expenditure and to contain the revenue shortfall through revenue measures in November-December 2000 so as to achieve virtually the same primary fiscal balance (-0.1 percent of GDP) as the one envisaged under the program for 2000 (0.1 percent of GDP). To this effect, the measures taken by the government are described in Box 1. It is expected that these steps would contain the shortfall of revenue from the target envisaged under the program to about 0.4 percent of GDP, and total revenue would amount to 10.2 percent of GDP in 2000. Expenditures will be

Box 1. Revenue Measures To Be Taken in 20001

Action
Effective Date
A. In the Context of the Revised Budget for 2000
To improve customs collection
  •  
Monthly reconciliation of SGS valuation with that of customs and justification of eventual differences between taxation proposed by SGS and effective taxation by customs. Requires only an administrative directive.* Immediately
  •  
Enact and implement ministerial decrees to reduce delays in clearance of goods and improve revenue collection: Nov.1, 2000
- Increase Magerwa storage fees, the levy of penalties for late withdrawal after customs declaration, and reduce period from date of storage after which the goods shall be considered abandoned and auctioned from 12 to 3 months
- Accelerate from quarterly to monthly, the transfer to the treasury of three-quarters of the 4 percent of the c.i.f. value as handling fee (1 percent for imports exempt from import duties).

- Limit Magerwa's insurance coverage for goods stored in its warehouses to three months
  •  
Enact and implement directive to reduce transit fraud by limiting the time periods of transit journeys between borders and borders, borders and Gikondo, and imposing progressive penalties. Oct. 11, 2000 Done
  •  
Enact and implement ministerial decree to reduce customs fraud evasion by introducing mandatory clearance by professional customs clearing agents ("customs broker"). End-November 2000
  •  
Improve the coverage of imports subject to preshipment inspections (above US$5,000) to 90 percent; andreport on a monthly basis PSI coverage, based on PSI documents (in addition to customs declaration forms), import value, and tax collected by customs. Ongoing
Nov.1, 2000
To improve tax collection
  •  
Enact and implement a revised law on fiscal procedures to reduce the legal delays and the taxpayer's response time to the revised tax assessment between the notice to start a tax audit and the confiscation of assets to collect the tax from 123 to 76 days. January 1, 2001
  •  

Accelerate the auditing
of enterprises:

- complete 1998 tax audits (risk-based) for at least 100 large enterprises with assistance from external auditors under the UK-DFID support project;* December 15, 2000
- thereafter complete at least 20 audits of large enterprises per month; and 2001
- increase the number of ICHA/VAT issue-oriented audits to significantly improve compliance, in particular for small and medium enterprises Immediately
  •  
Strengthen tax collection through the extension of the avis-à-tiers détenteur to clients of enterprises in arrears, and exclusion of such enterprises from public auctions for at least six months. End-January 2001
B. Other Measures
  •  
Strengthen control of exit of excisable goods from factories. Immediately
  •  
Collect dividends from state enterprises. November 2000
  •  
Ensure that fees for services and other nontax revenue are collected in accordance with the services delivered (nontax revenue). Immediately

* An asterisk indicates a prior action for issuance of the staff report to the Executive Board.

restrained below the program target in the areas of nonsocial sector purchases of goods and services and domestically financed capital expenditure. As exceptional social expenditures and foreign-financed capital expenditures are also expected to be lower than under the program, the overall fiscal deficit in 2000 is projected at 9.3 percent of GDP, compared with 11.2 percent in the program. In addition, the government will ensure that the reduction in domestic arrears envisaged under the program is carried out and that there is no loosening of the monetary program on account of inter alia increases in the net credit to government from the banking system.

22.   The government intends to limit the 2001 overall fiscal deficit (commitment basis and excluding grants) to 9.6 percent of GDP and to achieve a primary surplus of 0.2 percent of GDP, in order to allow for a significant increase in bank credit to the private sector, while initiating a gradual decline in the external current account deficit. A more ambitious fiscal stance is not envisaged in 2001 in order to accommodate an upfront large increase in antipoverty (social) spending and reflecting the expectation that revenue improvements on account of measures will occur gradually. This deficit target is consistent with possible external financing for 2001.

23.   The government's budget for 2001 envisages an increase in revenue from the updated projections for 2000 of 10.2 percent of GDP to 10.8 percent in 2001. Revenue performance is expected to improve progressively on account of improvements in tax and customs administration, in particular the strengthening of the administrative capacity of the Rwanda Revenue Authority and political commitment behind measures to enforce tax laws, combat tax evasion, and address corruption. Such measures include inter alia strengthening income tax recovery, improving transit and warehouse control, broadening the tax base, reducing exemptions, increasing the presumptive tax on small- and medium-size enterprises' profits, and implementing fully the liberalized petroleum pricing mechanism. On January 1, 2001, the government will also introduce a value-added tax (VAT) with a rate of 15 percent, a turnover threshold of RF 15 million, and minimal exemptions, that would make the VAT at least revenue neutral. The authorities are committed to monitoring closely the outturn of the VAT receipts and make adjustments in the rate and/or threshold, if required to ensure adequate revenue performance. The specific measures that are envisaged to deliver the revenue projections for 2001, including the timetable for their implementation, are shown in Box 2.

24.   In the area of expenditures, the goal of the government in 2001 will be to significantly increase those expenditures, which have been identified to have the greatest antipoverty impact while containing total government expenditure to 20.5 percent of GDP, compared with a revised projection of 19.6 percent of GDP for 2000. In the government's budget, the wage bill will be kept to 5.1 percent of GDP in 2001, marginally lower as a percent of GDP than in 2000. This would allow large increases in the social sector wage bill to be offset by decreases in other areas. More generally, with a view to reallocating expenditure toward antipoverty areas, the government will aim to reduce military spending to 3.2 percent of GDP in 2001 (from 3.8 percent in 2000), in line with its announced intention for gradual reductions in such spending over the medium term.

25.   The government has sought to arrive at a more accurate definition for social/antipoverty spending to reflect only those expenditures by the ministries of education and health that are important for poverty reduction while, at the same time, adding to the definition other expenditures with a significant effect on the welfare and earning capability of the poor, such as in the areas of water and sanitation, rural development and infrastructure, human settlements, gender programs, and youth job creation. It has aimed to prioritize such expenditure in the context of the first MTEF for 2001-03, on the basis of some preliminary costings and taking into consideration the conclusions of the I-PRSP. It has also worked to identify the ways these expenditures and their impact will be monitored under the program. The redefined social/antipoverty spending is envisaged to increase to 4.9 percent of GDP in 2001 from about 4.1 percent in 2000, partly made possible by the expected interim assistance under the enhanced HIPC Initiative.2 Regarding exceptional social spending, the budget for 2001 envisions that it will remain stable at 1.5 percent of GDP, which should allow the government to press ahead with the demobilization plan given that other expenditure needs under that category are expected to decline over time. The government has also identified the spending programs in this category on which any additional financing beyond the programmed amounts may be spent.

26.   Regarding capital expenditure, the government has reviewed the implementation capacity of the investment budget in recent years and on that basis determined a realistic target for such spending in 2001, which is also consistent with the macroeconomic goals under the program. The 2001 fiscal program would increase capital expenditure to 7.6 percent of GDP, compared with a projected 7 percent for 2000.

27.   The government has identified contingency measures in the areas of fiscal revenue and nonsocial expenditure that would yield RF 3 billion, to be taken in the event of fiscal revenue shortfalls or expenditure overruns.

28.   The government will begin implementation of a quarterly program to reduce the domestic arrears identified and verified under the recent audit in order to eliminate all verified arrears by end-2002, either through cash payments or securitization. Regarding arrears claims not currently recognized by the government, the latter will approach the Auditor General or a private sector auditor to carry out audits by end-June 2001 in order to identify any further obligations of the government to be cleared by end-2002. To avoid the reemergence of arrears and monitoring the existing arrears, as well as strengthening expenditure monitoring in general, the government will implement the steps outlined in Box 4. In this context, the government has also requested from the Fund a treasury advisor. Gains in expenditure monitoring and control are important not only for improving the conditions for fiscal discipline but also for effectively monitoring antipoverty expenditure under the HIPC Initiative and PRSP.

Box 2. Revenue Measures To Be Taken in the
Context of the 2001 Budget and During 20011

Action
Effective Date
Customs
  •  
Eliminate tax exemption for imports of petroleum products for embassies and international organizations. January 1, 2001
  •  
Adoption with 2001 Budget Law of 5 percent withholding tax on imports, deductible from profit tax, effective March 1, 2001.* January 1, 2001
Enact and implement simplified and unified systems for exemptions for import duty and taxes; and End-December 2000
  •  
report on monthly basis on import tax collection by category of imports, tariff rate, and the value of imports officially exempted (by law and treasury checks). Ongoing
  •  
Computerize the operations of both the large taxpayer unit and small and medium taxpayer unit. End-September 2001
  •  
Strengthen and formalize link between tax collection department and customs, and improve collection of information from wholesalers with a view to improving tax collection. End-June 2001
Income Tax
  •  
Introduction of 5 percent withholding tax on purchase from wholesalers. July 1, 2001
  •  
Submit to parliament TPR Law to make all salary allowances in cash and in kind fully subject to TPR. June 2001
  •  
Complete census to identify and register all direct taxpayers. July 1, 2001
  •  
Maintain or achieve voluntary declaration and payment compliance rates of at least 95 percent for large enterprises and at least 40 percent for SME (from 95 percent and 10 percent, respectively, in 1999). End-September, 2001
  •  
Achieve collection rate of 75 percent of tax assessment within one month of assessment through strict application of reminder and enforcement procedures. End-September 2001
  •  
Increase the presumptive tax from 2 percent to 5 percent of annual turnover. January 1, 2001
Excises
  •  
Submit to parliament a law to subject excisable goods (beer, soft drinks, wine/liquor, cigarettes, and petroleum products—gasoline and diesel) to the VAT while reducing the excise rate so as to keep the overall rate of domestic taxation unchanged; and to increase the excise rate on mineral and soda water to that on soft drinks. 2001 Budget Law
  •  
Implement tax stamps for beer and cigarettes. 2001 Budget Law
VAT
  •  
Implement adequate refunding system including by: January 1, 2001
- Strictly adhering to one-month delay for refunding claims owed by the RRA. January 2002
- Implementing any exemption, within the limit of quotas, for diplomats and investors under the Investment Code through refund.
- Reporting VAT revenue net of refunds owed by the RRA.

- Eliminate VAT exemption from the investment code.
Other measures
  •  

Announcement by the government, * concurrent with the presentation of Budget to parliament, of the decision to tax petroleum products on the basis of a revised petroleum pricing mechanism with implementation in five equal installments—between February 2001 and June 2001—by:

December 2000
- applying a three-month moving average of international petroleum prices, and February 2001 until June 2001
- adjusting the reference price for taxation in line with the three-month moving average.
  •  
Strengthen and formalize the link between Revenue Protection Service and Customs department . End-September, 2001
  •  
Enact a decree to revise fees for services offered by the government (nontax revenue). End-January 2001

* An asterisk indicates a prior action for issuance of the staff report to the Executive Board.

Monetary policy

29.   The monetary program for 2001 aims at achieving the inflation and reserve targets of the government while providing room for a strong increase in credit to the private sector so as to help achieve the real GDP growth objective and the desired increase in private investment. The NBR will stand ready to use fully its sterilization instruments, including by introducing sales of its own paper, to keep within the net domestic asset ceilings, and to meet the targets for net foreign assets by allowing the needed exchange rate flexibility. With a view to increasing monetary control (and encouraging the development of an interbank foreign exchange market), the NBR will redefine reserve money so as to exclude the use of foreign currency by banks to fulfill the reserve requirement and will aim to reduce the large holdings of excess reserves by banks. The government and the NBR will increase their coordination through weekly meetings so as to improve financial management and avoid departures from the monetary program on account of fiscal and foreign financing developments.

30.   On the exchange regime, the NBR is firmly committed to the market determination of the exchange rate, with its intervention aimed only at meeting its net foreign asset target. The NBR has reassessed the operation of the market for foreign exchange in Rwanda, with a view toward removing distortions, ensuring a transparent market determination of the exchange rate, and encouraging the development of an interbank market for foreign exchange. To this effect the NBR will conduct weekly auctions to sell foreign exchange to the highest bidder among the commercial banks at whatever rate clears the auction. The NBR would still be able to buy foreign exchange outside the auction or reduce the amount it sells at the auction if it is needed to meet its net foreign asset target. The authorities, in designing the auction process, will request assistance by the Fund's MAE department. The intention of the NBR is to complete the steps toward adopting the new institutional arrangement for the foreign exchange market by January 31, 2001, after receiving technical assistance from the Fund's MAE department.

31.   In the interim, the NBR will take steps to move toward market determination of the interbank exchange rate by ensuring that the margin between that rate and the parallel market rate is further reduced from its current level of 6 percent. It will do so by applying an exchange rate in its transactions with banks calculated as a weighted average of exchange rates used the previous day in commercial banks' transactions with their clients. The NBR will ensure equal treatment to all the banks when intervening in the interbank foreign exchange market (i.e., when selling or buying foreign exchange). It will publish on a weekly basis the list of sales made to banks indicating the demands and amounts sold. The Central Bank will ensure that all demands will be processed within 48 hours. With a view to encouraging and monitoring exchange rate flexibility, the NBR will report weekly on the difference between the parallel market rate and the weighted weekly average rates of NBR intervention in the interbank market for purchases and sales, respectively. This difference should not exceed 12 percent.

32.   The government assigns particular importance to the restructuring of the banking sector and of the financial system more generally, as this is a necessary condition for increasing the private savings rate and investment over the medium term. The current low levels of both variables in part result from weaknesses that will be addressed by carrying out the financial sector reforms outlined in Box 3. Progress in strengthening the banking system is also essential for the intended gradual liberalization of the capital account.

External sector

33.   The external current account deficit (excluding official transfers) is projected to decrease from 16.8 percent of GDP in 2000 to 14.7 percent in 2001, as the effects of the drought on food and export crops are reversed, the price of fuel imports decreases, and financial policies become more prudent. Over the medium term, the development of the balance of payments is predicated on continued fiscal adjustment, a strengthened banking system, and robust economic growth of about 6-6.5 percent. The government envisages a gradual improvement of the current account to about 10.7 percent of GDP in 2004, based on an acceleration of export growth in volume terms due to increases in output of traditional exports of coffee and tea,3 and the development and improvement of other exports such as horticultural products, artisanal products, hides and skins, and textiles. In addition, the services account is also expected to improve due to a gradual resumption of tourism, higher investment income, and a decline in interest on public debt. The capital account is also scheduled to improve owing to greater confidence in the banking system and in the economy as a whole, as well as the progressive capital account liberalization. Private capital is expected to flow into Rwanda over the medium term as residents bring money held abroad back into the domestic banking system and as the Rwandese diaspora increases both portfolio and direct investment flows. Foreign investors are also expected to make direct investments into new export-oriented sectors, as stability is entrenched in Rwanda and access to the markets of industrial countries improves for African-made products.

Box 3. Financial Sector Reforms Under the 2000/01 Program

  • The NBR will continue to strengthen bank supervision according to the existing action plan of recruitment and training supervisors, reorganizing the supervision department, and computerizing the bank supervision process. The target is to begin carrying out on site inspections of all banks every year, starting in 2001. January 1, 2001
  • The government to introduce tax deductibility of loan provisioning by banks by end-December 2001.
  • The commercial banks to continue with the restructuring plans agreed in the first half of 2000. In the case of BCR, for which there is a need to reevaluate the restructuring plan, to agree on a transparent and monitorable plan with the NBR by December 2000. January 1, 2001

With a view to improving the recovery of nonperforming loans:

  • (i) the arbitrage center—with the necessary legal authority and without any remaining administrative and legal impediments—will become fully operational by end-June 2001; and Ongoing
  • The diagnostic/strategic audit of the UBP—the major microfinance vehicle in Rwanda—will be completed by end-December 2000 and an agreement will be reached on an appropriate restructuring plan, in consultation with the World Bank, by end-March 2001.
  • A new diagnostic audit of the Caisse hypothéquaire du Rwanda (CHR) and an action plan for CHR's restructuring/privatization will be adopted by end-March 2001.
  • An agreement will be reached by end-March 2001 on the treatment of government arrears to the Caisse sociale du Rwanda (CSR).
  • A comprehensive plan for the restructuring of CSR will be adopted by June 2001.

34.   Regarding trade policy and regional integration, the application of the zero rate for imports from COMESA and the Regional Integration Facilitation Forum (RIFF, which replaced the Cross-Border Initiative) countries has been delayed. The government remains committed to regional integration and the free-trade area provisions of the COMESA treaty. To this extent, it has already signed the African Guarantee Fund agreement. However, concerning the application of the zero rate, the government is carrying out background studies on transportation costs and the impact on domestic industry and fiscal revenue. It subsequently intends to submit a formal request to the EU and other donors for access to the compensation fund and set a timetable of implementation. In addition, the government plans to convert the 4 percent warehouse tax (Magerwa) into a 1 percent statistical tax and will come up with an appropriate timetable for its implementation, taking into account the revenue implications.

35.   The macroeconomic framework for Rwanda shows a financing gap for 2001 (after expected project grants and loans, and before exceptional financing) of about US$76.7 million, which can be met with current pledges. This amount is covered by already obtained debt relief and refinancing from Paris Club creditors, as well as from non-Paris Club creditors, and by possible budgetary support from the World Bank, EU, AfDB, and bilateral donors. Given that the existing Paris Club agreement ends in May 2001, Rwanda will need an extension of the Paris Club rescheduling agreement for the second half of that year.

B. Other Structural Policies

36.   The government intends to undertake structural reforms (as indicated in Box 4) with the assistance of the World Bank in the areas of the civil service, privatization, governance, regulatory environment, and infrastructural services with a view to creating an enabling environment for sustainable private sector-led growth.

IV. Program Coordination and Monitoring

37.   The government is committed to improving program monitoring and coordination, as well as improving transparency through strengthening collection, reconciliation, and reporting of data. Recognizing the need for closer policy coordination, the authorities will establish a working committee comprised of technical representatives from the NBR and the Ministry of Finance, who will meet on a weekly basis to discuss progress made in the implementation of policies under the economic program, as well as propose a coordinated response to problems. The group will report its findings to the Minister of Finance and the Governor of the NBR on a regular basis.

Performance criteria, benchmarks, and reviews

38.   In light of the nonobservance of seven quantitative performance criteria and two structural performance criteria, the government has implemented a number of revenue measures designed to improve fiscal revenue performance in 2000 as well as in 2001. The NBR has reaffirmed its commitment to a floating exchange rate regime, and has agreed to

Box 4. Structural Reforms Under the 2000/01 Program1

Implementation Date
Civil service reform
  •  
Publication of the prime ministerial decree of the cadres organiques. End-November 2000
  •  
Completion of job descriptions and cadre organiques for all prefectures. End-March 2001
  •  
Retrenchment of the remaining unqualified core civil service staff. End-January 2001
  •  
Computerization of civil servants' database extended to all other ministries. End-December 2001
  •  
Adoption of civil servants' code submitted to parliament. January 1, 2001
  •  
Enforce procedures for hiring of teachers, enforcing also qualification criteria. November 1, 2000
  •  
Develop a plan for gradual increase of qualified teachers and phasing out of occasionnels in line with enrollment and pupil/teacher targets. End-March 2001
Privatization
  •  
Put Electrogaz under private management. End-June 2001
  •  
Offer 51 percent of Rwandatel to a strategic investor. End-November 2001
  •  
Establish a concrete timetable for the privatization of tea factories/estates. End-December 2000
  •  
Bring two tea factories/estates to the point of offer for sale as pilot cases. End-June 2001
  •  
Establish a realistic timetable with the assistance of the World Bank for the privatization of remaining companies in government's privatization plan. End-March 2001
Budget preparation, implementation, monitoring, and control
  •  
Revise the RRA's plan outlining improvements to be made in tax administration. The plan should incorporate specific benchmarks and timetable for implementation. End-December 2000
  •  
Consider changing the incentive structure of the RRA, including through making salaries dependent on fiscal revenue performance. End-March 2001
  •  
Ensure that regulations and procedures on enforcement of tax collection, as well as suspension of enforcement, are strictly followed. December 1, 2000
  •  
Adopt revised functional budget classification for the recurrent and development budgets and begin implementing it in the 2001 budget, with a view to improving the budget preparation process. Jan. 1, 2001
  •  
Develop a system for monitoring poverty-related expenditures on a monthly basis. January 1, 2001
  •  
Ensure that adequate reporting mechanisms and budgetary controls are put in place for monitoring the expenditure budgets of prefectures. End-March 2001
  •  
Improve public debt monitoring and management on the basis of a plan prepared with assistance from donors. End-September 2001
  •  
Prepare financial instructions as provided for in the organic budget law in order to promote effective expenditure control. End-June 2001
  •  
Improve the capacity of CEPEX to gather data on disbursements on donors and expenditures on projects in order to improve monitoring of project implementation in a way that is consistent with the new Budget classification. End-June 2001
  •  
Identify weaknesses in the current system of internal audit and devise a plan—with the assistance of the Fund—for improvement in these areas, including a timetable and monitorable benchmarks, and End-June 2001
  •  
implement the plan. End-December 2001
Governance
  •  
Prepare the public accounts for 2000 with the revised budget classification (excluding government assets other than cash and submit them to the Cour des Comptes; complete quarterly public accounts with a four-month delay). End-July 2001
  •  
Complete the audits of the 1999 accounts of the Ministries of Public Works, Transport, and Communication; Energy, Water, and Natural Resources; Defense; and Education; December 1, 2000
  •  
and of the Ministry of Health. End-March 2001
  •  
The Auditor General will initiate and complete the audits of the Ministry of Justice, including the most important jails and several courts, the Presidency, three embassies, the Ministry of Agriculture, including autonomous bodies and projects; the National Tender Board, the Secretary of Privatization, and the Office Rwandais des Recettes. End-December 2001
  •  
Prepare a monitorable action plan for further strengthening the Auditor General's office, including inter alia by recruiting qualified staff and training and by preparing a strategy and timetable for delivering a full audit of public accounts annually. End-February 2001
  •  
Adopt the law covering public tendering. End-March 2001
  •  
Strengthen capacity at the National Tender Board (NTB), line ministries, and local levels to adequately monitor, analyze, and audit the tendering process, before decentralizing the tendering process. End-September 2001
  •  
To ensure transparency and fairness in the tendering process:
(i) There will be no soliciting of bids only from the list maintained by the NTB ; December 1, 2000
(ii) the availability of the minutes of the NTB will be advertised in the tender announcements; End-May 2001
(iii) an appeals board, provided for by the law, will be set up with some members from civil society; and End-May 2001

(iv) the National Tender Commission will include some members from civil society. End-May 2001
  •  
Put in place regulations applying to blacklisted suppliers of the government. End-March 2001
  •  
Take stock of all extrabudgetary funds, projects, and transactions. End-June 2001
  •  
Incorporate extrabudgetary projects and transactions, including voluntary contributions to national defense and their use, into the budget. 2002 Budget
  •  
Put in place a mechanism to deal with all identifiable cases of corrupt officials in accordance with the law. End-May 2001
  •  
Establish a Tribunal de Commerce and a Tribunal Fiscal. End-December 2001
  •  
Require that all noncentral government public institutions develop a strategy to prevent any further accumulation of arrears, and to eliminate the outstanding pending bills after appropriate verification. March 2001
  •  
Establish widely publicized and legally effective rules that exonerate the government from paying for expenditure committed outside the existing financial regulations End-March 2001
  •  

Complete a review of all waivers and exemptions from import duties and taxes, produce a plan that provides for their elimination by a specific date (with the exception of those established under international treaties) and propose in accordance with this plan that some of the waivers or exemptions will be eliminated with effect for the 2002 budget.

End-September 2001
Regulatory environment
  •  
Strengthening of the operational capacity of the newly established Investment Promotion Agency to ease administrative and regulatory constraints, limiting business creation and improve its investor assistance function.
- preparation of an investor roadmap;
- preparation of five-year corporate plan, and
- preparation of a marketing plan.
  •  
Restructure CPMER (Centre de Promotion des Petites et Moyennes Entreprises) to provide technical, managerial, and financial services to support emerging or existing SMEs. End-June 2001
  •  
Strengthening of the operational capacity of the newly established Private Sector Federation. End-September 2001
  •  
Systematic elimination of the legal and judicial impediments to private sector development. End-August 2001
Infrastructural services
  •  
Promotion of private investment in all telecommunication market segments through open competitive licensing regime, and build institutional capacity for policy development and sector regulation. End-September 2001
  •  
Ensuring financial self-sufficiency of Office National des Postes (ONP) for sustained delivery of affordable services. End-September 2001

* An asterisk indicates a prior action for issuance of the staff report to the Executive Board.

implement a system of foreign exchange auctions by January 31, 2001, subject to technical assistance by the MAE department of the Fund. All external arrears have been eliminated. Regarding the breached structural performance criterion on ministerial audits, four still outstanding audits will be completed by December 15, 2000—a prior action—and another by end-March 2001. An additional five prior actions—critical to the success of the 2001 program—are to be completed before presenting the government's request for a third annual PRGF agreement to the IMF Board (Table 1).

39.   The program supported by the third annual agreement under the PRGF will be monitored on a continuous basis with quantitative and structural performance criteria, benchmarks, and indicative targets. The first review of the program will be based on quantitative performance criteria and benchmarks at end-March 2001 and structural performance criteria and benchmarks through end-June 2001, and will be completed by mid-July 2001. The second review will be carried out on the basis of quantitative performance criteria and benchmarks as of September 30, 2001 and structural performance criteria and benchmarks through end-September 2001, and will be completed by mid-December 2001. Quantitative performance criteria will include floors on net foreign assets of the NBR, the primary fiscal balance, and social spending, and ceilings on net domestic assets of the banking system, net credit to the central government by the banking system, external debt, and regarding the nonaccumulation of new external payment arrears except for external arrears that are subject to debt-rescheduling negotiations (to be monitored on a continuous basis). Given Rwanda's very unsustainable debt situation, a prudent debt strategy will be pursued. All external borrowing will be on concessional terms (enforced by a ceiling) defined as loans having a grant element of at least 50 percent. In addition, there will be an indicative ceiling on reserve money, a floor on budget revenue, and a ceiling on the government wage bill. A complete list of quantitative and structural performance criteria, as well as structural benchmarks, is included in Tables 2 and 3, respectively.


1The new budget classification used in the 2001 budget has permitted an easier identification of those line items and programs, which are priorities for poverty reduction.
2Social spending according to the previously used definition would also increase from 4.1 percent of GDP in 2000 to 4.9 percent of GDP in 2001.
3The ongoing rehabilitation of coffee plantations (with increased microfinance assistance to smallholders), the planned improvements in tea processing, and the privatization and restructuring of the tea sector, in the context of clarified land/property rights, expanded feeder roads, and improved extension services, are projected to raise output by over 10 percent a year for coffee and tea.

 

Technical Memorandum of Understanding Between the Government of Rwanda and the International Monetary Fund

December 11, 2000

1.   This memorandum outlines the understandings between the Rwandese authorities and the IMF mission with regard to the definitions of the quantitative and structural performance criteria, and quantitative benchmarks and indicators for the three-year poverty Reduction and Growth Facility (PRGF) arrangement. It also sets out the modalities and data reporting requirements for monitoring the program.1

2.   Revisions since the last version of the Technical Memorandum of Understanding (TMU) include a specification of the adjustment to the reserve money target of the National Bank of Rwanda (NBR) if the NBR's required reserve ratio changes; a new definition of net credit to government; a new definition of domestic arrears; a new definition of social/antipoverty spending; and a definition of net domestic assets of the banking system.

I. Adjustments to Performance Criteria and Benchmarks (Table 1)

A. Financed Excess Social/Antipoverty Spending Adjustment (FESSA)

3.   A priority of the program is to provide funds for social purposes. In that spirit, if excess external financing is available, the authorities will have the option either to save the excess in the banking system or to spend some or all of it on additional social spending, as long as the increase is agreed to between the authorities and the staffs of the Fund and the World Bank.2 Similarly, if social spending targets are not met, then the funds that were not spent should be saved in the banking system and not be used for other purposes. The adjustment that will incorporate these goals into the performance criteria and benchmarks shall be referred to as the Financed Excess Social Spending Adjustment (FESSA). The FESSA will be added to the targets for the primary fiscal balance.

4.   Definition: The FESSA is equal to actual social spending minus programmed social spending, subject to the limitation that if it is positive (excess spending) it cannot be larger than the surplus in external budgetary support defined below.

B. External Budgetary Support and Social Spending Adjustment (EBSSSA)

5.   Program targets are designed taking into account an expected level of external budgetary support. Differences between the program projections and the realizations for external budgetary support will affect the ease or difficulty with which program targets may be met. Programs are also designed so as to provide room for spending on social programs, so incentives should exist for surpluses in external budgetary support to be spent on social and/or exceptional social programs. Meanwhile, funds that are saved because of shortfalls in spending on these programs should be saved in the banking system and not be spent for other purposes.

6.   The External Budgetary Support and Social Spending Adjustment (EBSSSA) accounts for differences between program projections and actual outcomes for external budgetary support and social and exceptional social spending. Rwanda is neither penalized nor rewarded for changes in external budgetary support that are beyond its control, and is encouraged to meet its targets for spending on social and exceptional social programs and to spend any surplus of budgetary support on them. The EBSSSA is a figure which, whether it is positive (in the case of a shortfall of budgetary support) or negative (in the case of a surplus of budgetary support, or a shortfall in social spending), is added to the targets for NCG and net domestic assets of the banking system, and subtracted from the target for net foreign assets of the banking system. The adjustment will be necessary whether the external budgetary support is channeled through the NBR or through the commercial banks.

7.   Definition: The EBSSSA is equal to the shortfall in external budgetary support, defined below, plus the financed excess social plus exceptional social spending adjustment (FESESSA). However, it is subject to the limitation that if it is positive (a shortfall in budgetary support) it cannot be larger than RF 9 billion in September 1999, RF 12 billion in December 1999, RF 9 billion in March 2000, RF 11 billion in June 2000, RF 13 billion in September 2000, RF 15 billion in December 2000, RF 9 billion in March 2001, RF 11 billion in June 2001, RF 13 billion in September 2001, RF 15 billion in December 2001.3 There is no lower limit on the EBSSSA adjustment.

8.   Other definition: The Financed Excess Social plus Exceptional Social Spending Adjustment (FESESSA) is equal to actual social plus exceptional social spending minus programmed social plus programmed exceptional social spending, subject to the limitation that if it is positive (excess spending) it cannot be larger than the excess in external budgetary support defined below. There is no lower limit on the FESESSA.

9.   Other definition: The shortfall (positive—a surplus would be negative) in external budgetary support is calculated by taking the programmed budgetary support minus the sum of the actual budgetary support and the shortfall in the repayment of debt to the CSR (total debt due minus total debt paid).4 This difference is then converted to Rwanda francs at the program exchange rate.

II. Quantitative Performance Criteria and Benchmarks (Table 1)

A. Net Foreign Assets of the National Bank of Rwanda (NBR)

10.   Definition: net foreign assets of the NBR in Rwanda francs are defined, consistent with the definition of the Special Data Dissemination Standards (SDDS) template, as external assets readily available to, or controlled by, the National Bank of Rwanda (NBR) net of external liabilities of the NBR. Pledged or otherwise encumbered reserves assets including, but not limited to, reserve assets used as collateral or guarantee for third party external liabilities, are to be excluded. Foreign assets and foreign liabilities in U.S. dollars are converted to Rwanda francs by using the U.S. dollar/Rwanda franc program exchange rate. Foreign assets and liabilities in other currencies are converted to U.S. dollars by using the actual end-of-period U.S. dollar/currency exchange rate. Foreign liabilities include, inter alia, use of IMF resources (CCFF and post-conflict emergency assistance purchases and SAF/ESAF/PRGF disbursements).

11.   Adjustments: The EBSSSA will be subtracted from the floor on net foreign assets of the NBR.

12.   Reporting requirement: Data on foreign assets and foreign liabilities of the NBR will be transmitted to the African Department of the IMF on a weekly basis within seven days of the end of each week; data on external budgetary support will be transmitted on a monthly basis within three weeks of the end of each month. Data on the NBR's foreign exchange liabilities to commercial banks (held as required reserves with the NBR) and the exchange rate used for their conversion into Rwanda francs will be shown separately.

B. Net Credit to Central Government (NCG)

13.   Definition net credit to central government from the banking system is defined as the difference between:

(a) credit to central government from the banking system, including outstanding central government debt instruments; government debt to the NBR incurred as a result of the 1995 devaluation (RF 9 billion) and the overdraft to the prewar government (RF 2 billion), and

(b) total central government deposits with the banking system, including project accounts, counterpart funds, fonds publics affectés, and privatization proceeds with the NBR. The central government comprises treasury and line ministries (including the fund for assistance to genocide survivors).

14.   NCG is not affected by credit to or deposits of public enterprises and autonomous public agencies.

15.   Reclassifications: All six reclassifications described in Annex B—for the currency overdraft to the prewar government, for the foreign exchange losses incurred by the NBR as a result of the 1995 devaluation, for the reclassification of deposits with commercial banks of the central government, for the reclassification of deposits with commercial banks of the nongovernment public sector, for the reclassification of deposits with the NBR of the CSR and other autonomous public agencies, and for the reclassification of deposits with the NBR of the 15 newly identified autonomous public agencies—affect net credit to the government from the banking system.

16.   Adjustments: The EBSSSA will be added to the ceiling on net credit to central government from the banking system.

17.   Reporting requirement: Data on net credit to central government (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits) will be transmitted on a monthly basis within three weeks of the end of each month. Deposits of the central government with the NBR and with the commercial banks will be separated from the deposits of the public enterprises and autonomous public agencies.

C. Net Domestic Assets of the Banking System

18.   Definition: net domestic assets of the banking system are defined as the sum of net credit to central government, credit to public enterprises and other autonomous public agencies, credit to the private sector (including other financial institutions), and other items net. To reflect the valuation of net foreign assets at the program exchange rate, other items net (and therefore total net domestic assets) is adjusted as follows: net foreign assets of the banking system converted from dollars into Rwanda francs at the actual exchange rate minus net foreign assets of the banking system converted from dollars into Rwanda francs at the program exchange rate is added to other items net evaluated in Rwanda francs. (This last step is necessary to maintain the identity that broad money be equal to net foreign assets of the banking system plus net domestic assets of the banking system.)

19.   Reclassifications: net domestic assets of the NBR is affected by the reclassification of the currency overdraft to the prewar government, and the reclassification of deposits of the CSR and other autonomous public agencies (from credit to central government to reserve money).

20.   Adjustment: The EBSSSA will be added to the ceiling on net domestic assets of the banking system.

21.   Reporting requirement: the balance sheet of the NBR will be transmitted on a weekly basis within seven days of the end of each week; the balance sheets of the commercial banks, including the monetary survey, will be transmitted monthly within three weeks of the end of each month.

D. Ceiling on Contracting or Guaranteeing by the Central Government, Local Governments, and the NBR of New Nonconcessional External Debt with Original Maturity of More Than One Year

22.   Definition: This performance criterion applies not only to debt as defined in point No. 9 of the guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000 by the IMF Executive Board, but also to commitments contracted or guaranteed for which value has not been received. Concessional debt is defined as having a grant element of 50 percent or more. For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rates (CIRRs) published by the OECD should be used as the discount rate for assessing the level of concessionality, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and the 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more.

23.   Reporting requirement: Details of all new external debt, including government guarantees, will be provided after the approval by parliament and the constitutional court on a monthly basis within three weeks of the end of each month.

E. Ceiling on Change in Outstanding Stock of External Debt, Owed or Guaranteed by the Central Government, Local Governments, and the NBR with Original Maturity of Up To and Including One Year

24.   Definition: The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000. Excluded from this performance criterion are normal import-related credits.

25.   Reporting requirement: Data on debt and guarantees by central government, local governments, and NBR will be transmitted, with detailed explanations, on a monthly basis within three weeks of the end of each month.

F. Primary Fiscal Balance

26.   Definition: The primary fiscal balance is defined as domestic revenue (excluding grants and privatization proceeds) minus noninterest current expenditure (on a payment order basis (ordonnancement); including exceptional social expenditures) and minus domestically financed capital expenditure.

27.   Adjustments: The primary fiscal balance target will be reduced by the amount of the FFESSA.

G. Social Expenditure (Annex A and Table 3)

28.   Definition: Central government spending on social services under the program is defined as outlays on social services (on a payment order basis, including transfers) by the Ministry of Education (including University of Rwanda, transfers to KIE (food), ISAE, IRST, and scholarships); the Ministry of Health; the Ministry of Youth and Sports; the Ministry of Gender; the Ministry of Agriculture, Livestock and Fisheries; the Ministry of Lands and Resettlement; the Ministry of Energy and Water Resources; the Ministry of Local Government; the Ministry of Internal Affairs; the Ministry of Commerce; the Ministry of Social Affairs; the Ministry of Transport and Communications; the Ministry of Public Service; the Ministry of Justice; and the Supreme Court. Social expenditure does not include any exceptional social expenditure.

29.   Reporting requirement: Data on expenditure on social sectors according to Table 3 will be transmitted to the African Department of the Fund on a monthly basis within three weeks of the end of each month.

H. Net Repayment of Domestic Arrears

30.   Definitions: The repayment of domestic arrears is defined as the repayment of the stock of arrears on goods and services outstanding at end-1999, arrears to public enterprises (including the Caisse sociale du Rwanda and the National Post Office) and arrears (counterpart funds) to World Bank projects. The accumulation of new domestic arrears is defined as the difference between cumulative (since January 1) payment orders and actual payments (debited to the government treasurer's account at the NBR) minus a "normal float" of RF 2.0 billion. The net repayment of domestic arrears is defined as the repayment of domestic arrears (as defined above) minus the accumulation of new domestic arrears (as defined above).

31.   Reporting requirement: Detailed data on repayment of domestic arrears and the remaining previous-year stock of arrears will be transmitted on a monthly basis within three weeks of the end of each month.

I. Stock of Outstanding Nonreschedulable External Arrears

32.   Definition: The stock of nonreschedulable external arrears is defined as the sum of arrears to multilateral creditors and, if any, nonreschedulable arrears, to bilateral official and commercial creditors.

33.   Reporting requirement: Detailed information on repayment and/or refinancing (including the terms of refinancing) of arrears will be transmitted on a quarterly basis within three weeks of the end of each quarter.

III. Quantitative Indicators

A. Reserve Money

34.   Definition: Reserve money is defined as currency in circulation, reserves of deposit money banks (including NBR borrowing from deposit money banks on the money market and cash in vault held by commercial banks), and deposits of public enterprises (including CSR and other autonomous public agencies), and nonbank financial institutions. (Autres sommes due aux clients, including cautions à l'importation, are excluded from reserve money.)

35.   Reporting requirement: Data on reserve money will be transmitted on a weekly basis within seven days of the end of each week.

B. Adjustment for Changes in the Required Reserve Ratio of the NBR

36.   If the required reserve ratio of the NBR changes, The NBR will be expected to absorb the excess liquidity that this change creates. Therefore the reserve money, and hence net domestic assets, target of the NBR will be adjusted by the absolute change in the ratio times the deposit base of the commercial banks.

C. Budget Revenue

37.   Definition: Budget revenue is defined as the sum of domestic tax and nontax revenue (excluding privatization proceeds; including debt service payments by public enterprises on government (guaranteed) debt retroceded by the government to these enterprises).

38.   Reporting requirement: Data on budgetary revenue will be transmitted on a monthly basis within three weeks of the end of each month.

D. Government Wage Bill

39.   Definition: The government wage bill is defined as the total wage and salary payments (including all monetized fringe benefits) for civil servants and military, including food allowances for the military, employer social security contributions, and health insurance premiums. It includes the imputed rent for civil servants living in government houses; this rent is deducted from salary payments and is included under nontax revenue.

40.   Reporting requirement: Data on the government wage bill will be transmitted on a monthly basis within three weeks of the end of each month.

IV. Structural Indicators (Table 2)

A. Size of Civil Service

41.   Definition: The size of the core civil service is defined as the number of persons on the payroll of the central government, excluding teachers and the National Army of Rwanda, but including the national police. The number is monitored on the basis of the average size of the civil service during each quarter (based on end-of-month data).

42.   Reporting requirement: The number of civil servants on the central government payroll, as well as the numbers for new recruitment and removal from the payroll during the period, will be transmitted on a monthly basis by ministry within three weeks of the end of each quarter.

B. The Number of Teachers

43.   Definition: The number of teachers is defined as the number of teachers in primary and secondary schools on the payroll of the central government. The ceiling is monitored on the basis of the average number of teachers during each quarter (based on end-of-month data).

44.   Reporting requirement: The number of teachers on the central government payroll, as well as the numbers for new recruitment and removal from the payroll during the period, will be transmitted on a monthly basis (by primary and secondary schools) within three weeks of the end of each quarter. In addition, the number of occasionnels (teachers and noncivil servants not on the payroll, but paid from other budget lines will be reported on a monthly basis by primary and secondary schools) within three weeks at the end of the quarter.

V. Other Data Requirements for Program Monitoring

A. Public Finance

45.   Reporting requirement: Monthly data on external budgetary support with a breakdown of loans by creditor and grants by donor and domestic nonbank financing of the budget (including treasury bills and government bonds held by the nonbank public) will be transmitted on a monthly basis within three weeks of the end of each month; quarterly data on the implementation of the development budget with detailed information on the sources of financing will be transmitted on a quarterly basis within three weeks of the end of each quarter; public sector external and domestic scheduled debt service and payments will be transmitted on a monthly basis within three weeks of the end of each month. The Rwanda Revenue Authority will transmit any updated census results of small and medium enterprises (including the economic characteristics of these enterprises and their estimated annual sales).

B. Monetary Sector

46.   Reporting requirement: the following data will be transmitted on a monthly basis within four weeks of the end of the month: the individual balance sheet and consolidated balance sheets of deposit money banks (situation monétaire des banques); the monetary survey (situation monétaire intégrée); disaggregated data on "other items net" of the NBR and deposit money banks; required reserves and excess reserves of individual commercial banks, showing separately foreign exchange held as required reserves with the NBR; nonperforming loans of individual commercial banks; required and actual provisioning of impaired assets for individual banks; capital adequacy ratio for individual commercial banks and a weighted average for all commercial banks.5

C. Public Enterprises

47.   Definition: The financial statements and bank deposits of the key public enterprises (including Rwandatel, Electrogaz, Ocircafé, Ocirthé, and ONP) will be monitored under the program.

48.   Reporting requirement: The financial accounts (including profit and loss accounts, balance sheets, and annual reports when published) of key public enterprises (including Rwandatel, Electrogaz, Ocircafé, Ocirthé, and ONP) will be transmitted to the African Department of the Fund within four weeks on a semi-annual basis or as the accounts become available. The statement of these enterprises' bank deposits (bank by bank) will be transmitted to the African Department of the Fund on a quarterly basis within four weeks of the end of each month.

D. External Sector

49.   Reporting requirement: The following buying, selling, and average exchange rates will be transmitted on a weekly basis within seven days of the end of each week: (i) intervention exchange rates used in NBR's operations with the commercial banks; (ii) the exchange rates used in interbank transactions among the commercial banks; (iii) the average of (i) and (ii); (iv) the exchange rates for transaction in banknotes at the commercial banks; (v) the same for foreign exchange bureaus; and (vi) the parallel (black) market exchange rates. All these exchange rates will be calculated on the basis of daily buying and selling rates; the average exchange rates will be calculated on the basis of a simple average of the daily buying and selling rates. The NBR will report weekly on the difference between the parallel market rate (buying and selling) and the weighted weekly average rates of NBR intervention in the interbank market for purchases and sales, respectively.

50.   The following data will be provided on a monthly basis within four weeks of the end of each month:

  • The amount of foreign exchange held by commercial banks with the NBR as required reserves
  • net open foreign exchange position of each commercial bank and foreign exchange bureau, and the calculation method;
  • foreign exchange intervention by the NBR on interbank market;
  • imports, sales, and purchases of foreign exchange banknotes by commercial banks;
  • sales and purchases of foreign exchange banknotes by foreign exchange bureaus.

51.   Export and import data, including volumes and prices, will be transmitted on a monthly basis within four weeks of the end of each month; other balance of payments data including the data on services, official and private transfers, capital account transactions, and the repatriation of export receipts will be transmitted on a quarterly basis within four weeks of the end of each quarter.

E. Real Sector

52.   Reporting requirement: Monthly disaggregated consumer price indices for Kigali (NBR), urban areas (Ministry of Finance), and rural areas (Ministry of Finance) will be transmitted on a monthly basis within four weeks of the end of each month; any revisions to gross domestic product by sector estimates will be transmitted within three weeks of the date of revision.

VI. Electronic Data Reporting

53.   Reporting requirement: The following data will, where feasible, be made available through electronic format and e-mailed to the African Department of the Fund: (i) monetary data (monthly balance sheet of the NBR, summary balance sheet of the commercial banks, individual balance sheets of the commercial banks, details of public sector deposits with commercial banks, details of commercial banks' loan provisioning and capital adequacy, monthly data on foreign exchange operations of commercial banks and the NBR, and net open foreign exchange positions); (ii) fiscal "flash" report (aggregate and by ministry); (iii) exchange rates; (iv) detailed export and import data; and (v) detailed CPI data. Files that are in LOTUS123 version 4 should be converted to LOTUS123 version 3 or to Excel.

VII. Program Monitoring Committee

54.   Definition: The program monitoring committee is the Interministerial Committee composed of the Ministers of Finance and Economic Planning, Civil Service and Labor; Education; Health; Commerce, Industry, and Tourism; and Agriculture, Animal Husbandry and Forests; and the Governor of the National Bank of Rwanda. The Interministerial Committee is assisted by the Interministerial Technical Committee, composed of senior officials of the same ministries, and the National Bank of Rwanda. The Interministerial Technical Committee shall meet once a month and be responsible for monitoring the performance under the program, informing the IMF staff regularly about progress on program implementation, and transmitting supporting information necessary for program monitoring.

55.   Reporting requirement: the names of the Interministerial Technical Committee shall be communicated to the IMF no later than the date of submission of the authorities request for the three-year ESAF arrangement to the Executive Board of the IMF or the start of a new annual arrangement. The Interministerial Technical Committee shall provide to the IMF staff a progress report on the program implementation on a monthly basis within two weeks of the end of each month. 

/s/
François Mutemberezi
Governor
Banque Nationale du Rwanda
  /s/
Donald Kaberuka
Minister of Finance
and Economic Planning

 

ANNEX B. Reclassifications

The following reclassifications of data have been made to the monetary survey (see Table 1):

1.   Currency overdraft to the prewar government: In tables presented by the IMF before August 1, 1999, a currency overdraft to the prewar government of RF 2 billion of currency was subtracted from the NBR figures for reserve money, net credit to the government from the banking system, and net domestic assets. As of August 1, 1999 this adjustment will no longer be made by the IMF to any data, past or present, and figures for reserve money, net credit to the government from the banking system, and net domestic assets will be RF 2 billion higher than comparable figures from before August 1, 1999.

2.   Foreign exchange losses incurred by the NBR as a result of the 1995 devaluation: In tables presented by the IMF before August 1, 1999, foreign exchange losses of approximately RF 9 billion that were incurred by the NBR because of a devaluation that resulted from a change in exchange regime ordered by the government in 1995 were subtracted from net credit to government, under the assumption that the government would not reimburse the NBR for these losses. As of August 1, 1999 this adjustment will no longer be made by the IMF to any data, past or present, and figures for net credit to the government from the banking system will be RF 9 billion higher than comparable figures from before August 1, 1999. A corresponding adjustment will be made to other items net to maintain consistency of the monetary survey.

3.   Reclassification of deposits of the central government with commercial banks: In tables presented by the IMF prior to May 1, 1999 deposits of the central government were underestimated by subtracting out a residual that was required to reconcile individual commercial banks' data on deposits of the public sector with the corresponding data from the NBR.6 As of May 1, 1999, more reliable figures have been identified, this residual has been eliminated, and figures for net credit to the government from the banking system will be lower than comparable figures from before May 1, 1999 by the past values of this residual, with a counterpart adjustment in broad money.

4.   Reclassification of deposits of the nongovernment public sector with commercial banks: In tables presented by the IMF prior to January 1, 1999 deposits of the government included deposits of the nongovernment public sector with commercial banks.7 As of January 1, 1999, the definition of government has been narrowed to "central government". Non-central-government public sector deposits will be categorized as private sector deposits, and figures for net credit to the government from the banking system will be higher than comparable figures from before January 1, 1999 by the amounts of these deposits. A corresponding adjustment will be made to broad money to maintain consistency of the monetary survey.

5.   Reclassification of deposits with the NBR of the CSR and other autonomous public agencies: In tables presented by the IMF prior to January 1, 1999 deposits of the central government with the NBR included deposits of the CSR and other autonomous public agencies. As of January 1, 1999, these deposits will be categorized in other nonbank deposits, and figures for net credit to the government from the banking system will be higher than comparable figures from before January 1, 1999 by the amounts of these deposits. A corresponding adjustment will be made to reserve money to maintain consistency of the monetary survey.

6.   Reclassification of the deposits of 15 additional autonomous public agencies: In tables presented by the IMF prior to November 5, 2000, deposits of the central government with the NBR included deposits of 15 autonomous agencies not identified in the original reclassification of January 1, 1999. As of November 6, 2000 these deposits will be itemized separately in a category called "public nongovernment deposits," but will still be included in the domestic credit of the NBR.

 


1A summary of reporting requirements is provided in Table 4.
2The definitions of social and antipoverty spending are in Annex A.
3This cap is necessary in order to limit the possible deterioration of Rwanda's international reserve position.
4All figures are evaluated in U.S. dollars and are cumulative from the start of the year. Amounts denominated in Rwanda francs are converted to U.S. dollars using the program exchange rate. The program exchange rate used in the calculation of performance criteria is US$1=RF411 in end-December 2000, and US$1=RF415.5 in 2001. Amounts denominated in other currencies are converted to dollars at the exchange rate prevailing at the time of the disbursement.
5Detailed data account by account on central government (including ministries), other public agencies, and public enterprises accounts with the NBR and each commercial bank will be transmitted on a quarterly basis within for 4 weeks of the end of the quarter.
6 This residual was shown in detailed tables as "adjustment".
7 These include public enterprises (including CSR), autonomous public agencies, and OCIR-Thé.



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