Rwanda and the IMF
News Brief: IMF Completes Review Under Rwanda's PRGF Arrangement and Approves US$12 Million Disbursement
Free Email Notification
Intent, Memorandum of Economic and Financial Policies, Technical Memorandum
Mr. Horst Köhler
Dear Mr. Köhler:
1. We have held discussions in recent months with the Fund staff on the first review of Rwanda's program for 2000/01, which is supported by the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF), approved by the Executive Board of the Fund on December 22, 2000. The discussions focused on progress made under the program so far and policies to be pursued during the remainder of calendar year 2001.
2. Performance under the 2000/01 program has generally improved over time, albeit with some temporary partial setbacks. In regard to the program benchmarks for end-December 2000, five out of ten quantitative benchmarks were met. The five not met were on the net domestic assets of the banking system, the primary fiscal deficit, the nonaccumulation of new foreign arrears, the stock of nonreschedulable external arrears as of December 31, 2000, and the reduction in domestic arrears. The need to undertake urgent and necessary expenditures in the area of civilian purchases of goods and services toward the end of 2000 explains in large part the nonattainment of these missed program objectives. In contrast, eight out of ten quantitative performance criteria as of end-March 2001 were met as program implementation improved markedly. The missed performance criteria entailed the continuous performance criterion on the nonaccumulation of new arrears to external creditors and the ceiling on the stock of outstanding nonreschedulable external arrears as of March 31, 2001. As at end-June 2001, six out of ten quantitative benchmarks were achieved. Despite better-than-projected revenue performance, significant pressure on, inter alia, military expenditure (reflecting deteriorating security in northwest Rwanda) and domestically financed capital expenditure resulted in the quantitative benchmark on the primary fiscal balance to be missed. Moreover, larger-than-targeted credit expansion to the private sector resulted in the nonobservance of the benchmark on the net domestic assets of the banking system, albeit by a small margin. The benchmarks on external arrears were also missed in June 2001, but all these arrears were regularized by mid-August 2001. Delays in payments were partly caused by the need to clarify the implications of the Heavily Indebted Poor Countries (HIPC) Initiative. The government has consulted with the Fund staff and reached understandings on corrective policies and measures to be undertaken during the rest of the year to ensure monetary stability and fiscal discipline consistent with the program targets. These measures are reflected in quantitative benchmarks for end-August 2001, achievement of which is one of the prior actions for presenting our request for completion of the first review to the IMF Board.
3. As at end-August 2001, the government completed three out of five structural benchmarks, as well as a large number of other structural reforms. However, three out of four structural performance criteria for the first half of 2001 were not met on schedule, essentially for reasons beyond the control of the government. The January 31, 2001 structural performance criterion on conducting weekly foreign exchange auctions was introduced with only a week's delay owing to constraints in scheduling technical assistance from the IMF. Furthermore, legal complications have delayed full parliamentary consideration and approval of the organic budget bill, and thus the issuance of financial instructions by June 30, 2001--a structural performance criterion. The arbitration center, with respect to which the adoption of a law or issuance of a decree that allows for timely enforcement of arbitration awards was a structural performance criterion for June 30, 2001, although already in operation, still requires legal authority. To address delays in these and other areas of structural reform, the government has established a new timetable for their implementation.
4. The attached memorandum of economic and financial policies (MEFP) reviews progress in implementing the program and provides details on the policies to be pursued in the remainder of 2001, including prior actions, needed to ensure that our program's targets for the year as a whole can continue to be within reach. In particular, it reaffirms the government's commitment to implement fully and on a timely basis the set of revenue measures necessary to achieve the fiscal target for 2001, as well as to avoid expenditure overrun. The MEFP also describes the policies of the National Bank of Rwanda (NBR) aimed at safeguarding the inflation target, as well as the government's intended structural reforms, including in governance. In this regard, given the findings and recommendations of the Auditor General in the first four audits of ministries, the government is undertaking important measures to begin addressing identified weaknesses. It will also conduct a review of budget implementation and control with IMF technical assistance.
5. The government has launched and is advancing well in the preparation of the full poverty reduction strategy paper (PRSP), which includes a wide-ranging consultative process. We feel that it is important to ensure that any follow-up PRGF-supported program for 2002 reflect comprehensively the goals of the full PRSP and incorporate a well-thought-out set of policies that would deliver these goals. As a consequence, the timing of the discussions on the new PRGF-supported program could usefully be allowed to take place after the full PRSP is ready in November 2001. In this context, the second review of the third annual PRGF arrangement would be delayed, and the extension of the commitment period of the current arrangement to end-April 2002 would be desirable. This would be accompanied by the conversion of end-December 2001 benchmarks into performance criteria for the third disbursement under the current arrangement, while the end-September 2001 performance criteria would be converted into benchmarks. The end-September structural performance criterion on review of waivers and exemptions from import duties and taxes would be set for October 31, 2001.
6. In view of the overall good progress made in 2001 and the remedial measures adopted to address remaining weaknesses, the government hereby requests a waiver for the nonobservance of the performance criteria on the stock of outstanding nonreschedulable external arrears, the nonaccumulation of external arrears, the introduction of the foreign exchange auction, the adoption of financial instructions in accordance with the organic budget law, and the adoption of a law or issuance of a decree that allows for the efficient and timely enforcement of arbitration awards rendered by the arbitration center. The government also requests the disbursement of SDR 9.52 million, following the completion of the first review by the Fund's Executive Board, and the extension of the commitment period of the current arrangement, as well as of HIPC Initiative interim assistance, to end-April 2002. The government understands that consideration by the Executive Board of Rwanda's request for completion of the first review will be subject to Rwanda's carrying out the prior actions as indicated in the attached MEFP.
7. 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 ensure it consults with the Fund on its economic and financial policies, in accordance with the Fund's policies and practices on such consultations.
I. Performance Under the 2000/01 Program
1. Real GDP growth in 2000 is estimated to have reached 5.6 percent, somewhat higher than projected under the program, reflecting better-than-anticipated performance in the agriculture, construction, and services sectors. Growth could have been even higher if not for a drought that affected certain regions of the country until October 2000. Real GDP growth in the first half of 2001 is estimated to have been robust, especially for agriculture, manufacturing, and construction, and thus the program projection of about 6 percent for the year as a whole continues to be realistic. Annual average inflation rose from -2.4 percent in 1999 to 3.9 percent in 2000, consistent with the program target of 4 percent, owing mainly to higher food and international petroleum prices, and a nominal effective depreciation. Inflation increased further in the first half of 2001--reaching 5.5 percent in May 2001--mainly on account of an outbreak of disease that increased meat and dairy prices.
2. The external current account deficit (excluding official transfers) is estimated at 16.2 percent of GDP in 2000, compared with a revised estimate of about 16.4 percent of GDP in 1999. The improvement was on account of an increase in export receipts, in particular from the mining sector in the second half of 2000 when international prices of colombo-tantalite rose substantially. This more than offset the effects of higher petroleum prices. The stronger exports were partly the cause behind significant increases in the net foreign assets of commercial banks. The net foreign assets of the National Bank of Rwanda (NBR) were also significantly higher than programmed, owing to excess disbursements of external budgetary support at end-December 2000, which could not be spent on social expenditures before the end of the year, as well as lower demand of foreign exchange from the private sector. During 2000, the Rwanda franc depreciated by 12.3 percent in nominal effective terms in the official market. This was accompanied at times by large parallel market premiums. In the first nine months of that year, the NBR followed a policy of intervention that led to shortfalls in the net foreign assets of the NBR relative to target. In the last quarter of 2000, the NBR allowed the rate to float, thus helping it meet its net foreign asset target at end-December. Moreover, the parallel market premium was virtually eliminated in the last quarter of 2000.
3. Preliminary information indicates that in the first half of 2001 strong mining receipts continued, although recently international prices for colombo-tantalite, the principal mining export, have seen a retraction of a large part of their earlier increase. The strong foreign exchange inflows, including from the World Bank, have helped to maintain higher-than-programmed net foreign assets of the banking system and stabilize the value of the currency in the first half of 2001. Moreover, with a view to improving the efficiency and transparency of the allocation of foreign exchange, the first of a series of weekly foreign exchange auctions was held by the NBR on February 7, 2001. The auctions have continued smoothly.
4. Macroeconomic policies through December 2000 were somewhat more expansionary than envisaged under the program. Five out of the ten quantitative benchmarks for end-December were missed. These benchmarks are the primary fiscal deficit, the net domestic assets of the banking system, the stock of external arrears at end-December 2000, the nonaccumulation of new external arrears, and the net reduction of domestic arrears.
5. In 2000, the primary fiscal deficit (excluding exceptional social expenditure but including domestically financed capital expenditure) was RF 3.4 billion (0.5 percent of GDP) higher than the program target, owing mainly to higher-than-programmed nonmilitary nonsocial expenditure. The overrun was primarily on account of expenditures by the presidency, closure of diplomatic missions, road construction, and the decentralization of some government functions to the provinces. Revenue shortfalls amounting to 0.4 percent of GDP were almost fully offset by lower-than-programmed military spending as efforts were made to contain the deviation from the program deficit target. The revenue shortfall was due to lower-than-programmed collection of import duties and dividend transfers from public enterprises. The program benchmark on social spending was met, while exceptional social spending was slightly higher than programmed and financed by excess foreign budgetary support.1 Continued capacity constraints in the central projects management unit (CEPEX) and incomplete information from donor agencies hampered the collection of reliable information regarding capital expenditure; these outlays are estimated at RF 42 billion (6.0 percent of GDP) relative to the program projection of RF 46.3 billion (6.7 percent of GDP). In view of these developments, the overall fiscal deficit on a payment order basis is estimated at RF 63.1 billion (9 percent of GDP), RF 1.1 billion lower than the program target. The net reduction of domestic arrears during 2000 amounted to RF 3.9 billion instead of the RF 4.5 billion envisaged under the program. There were also arrears in the debt service to the European Union (EU)/European Investment Bank (EIB) and the Organization of Petroleum Exporting Countries (OPEC) Fund, which were paid in early 2001.
6. In an effort to achieve the fiscal targets for 2000 and avoid a weakening of the initial conditions for the program for 2001, the government undertook to implement a number of revenue measures in the last two months of 2000. A number of these measures were implemented promptly, although in the case of others there were delays (see Boxes 1 and 2). These delays were inter alia on account of extensive review and debate in Parliament, administrative difficulties, and resistance from the private sector. Among the important achievements was the completion on schedule in late 2000 of 100 1998 tax audits of large enterprises. This exercise has given rise to a sizable amount of additional tax assessments that are potentially collectible in 2001.
7. The fiscal accounts for 2000 initially showed a mismatch between the fiscal deficit measured from above the line and its financing (indicating overfinancing) of about 1 percent of GDP. After concerted efforts, it was found that a substantial part of this mismatch (more than 0.8 percentage point of GDP) was linked to drawdowns of noncentral government deposits, such as line ministry accounts or project accounts. There is evidence that expenditures corresponding to at least some of these drawdowns were committed (and entered above the line) before 2000. Payments of 0.2 percent of GDP, related to the building of the new Ministry of Defense headquarters, fall in this category. Another substantial part of the mismatch is due to the late correction (in 2000) of a 1999 accounting error involving the double counting of EU aid flows (0.2 percent of GDP) in the governmental bank deposits. After these and some other minor corrections, the mismatch can be reduced to -0.1 percent of GDP.
8. To strengthen the monitoring of government expenditures and improve the management and accountability of public funds, the government had committed itself to eliminating all ministerial accounts from November 2000 onward, such that all expenditures would be paid out of the central treasury account and require the signature of the national Treasurer. However, taking into account the legal constraints regarding certain accounts and in order to avoid overburdening expenditure management, the government closed only some of the accounts in the central bank and in commercial banks, and reduced the number of central administration imprest accounts.2 Furthermore, the monitoring and reporting of balances and movements in the remaining accounts have been initiated through improved coordination between the Ministry of Finance and Economic Planning and the central bank. The government recognizes the need for further consolidation of accounts and the appointment of accountants in ministries and other public institutions, with designated counterparts in the public accounts department in the Ministry of Finance and Economic Planning. The government is pursuing its assessment of these reforms and other measures and policies to further improve fiscal transparency (see below).
9. In the 12 months ended December 2000, broad money (at current exchange rates) grew by 14.2 percent, compared with a program target of 6.3 percent. The acceleration in money growth occurred in the last quarter of 2000. A significant increase in the net domestic assets of the banking system, made possible by a decrease of excess reserves by commercial banks, contributed to this development. The increase in the growth of credit to the private sector was absorbed to a large extent by companies involved in construction and services-related activities. Another part of the increase in monetary expansion was due to the buildup in the net foreign assets of the banking system. This was partly due to the above-mentioned good performance of exports in the second half of 2000 and to the larger-than-programmed disbursements of external budgetary support at the end of the year. At the end of 2000, the NBR strengthened its capacity to control monetary developments by eliminating the possibility of using foreign exchange to fulfill the commercial banks' reserve requirement.
10. Macroeconomic policies during the first quarter of 2001 were in line with those envisaged under the program. By end-March 2001, all quantitative performance criteria had been achieved, except for the two performance criteria on external arrears.3 During the second quarter of 2001, six out of ten quantitative benchmarks for June 2001 were met. The four quantitative benchmarks that were missed were on the net domestic assets of the banking system, the primary fiscal deficit, the stock of outstanding nonreschedulable external arrears at end-June 2001, and the nonaccumulation of new arrears to external creditors (by August 17, 2001, all these external arrears had been paid off)4.
11. In the first quarter of 2001, the primary fiscal balance recorded a surplus of RF 3.7 billion, compared with a program target surplus of RF 2.3 billion. The better-than-expected performance reflected higher collection of nontax revenue, owing to the transfer of the previously off-budget national security contributions into the budget in March 2001, and a larger transfer of dividends from the NBR. Overall tax revenue collection was broadly in line with the program target. On the expenditure side, nonsocial recurrent expenditure (including defense) was broadly as programmed, while social and exceptional outlays were RF 3.2 billion higher than programmed. The additional social and exceptional outlays were financed by excess external budgetary support and were in the areas of education, demobilization, and reintegration/reinsertion of ex-FARs and insurgents5. At end-March 2001, domestically financed capital expenditure was higher than programmed. In view of these developments, the overall fiscal deficit on a payment order basis (excluding grants) in the first quarter of 2001 is estimated to have been only marginally larger than programmed. In the same period, the government repaid sufficient amounts of domestic arrears to meet the end-March performance criterion in this area. In this context, net credit to government by the banking system was well within the program target (adjusted for excess foreign budgetary support).
12. Revenue performance continued to be good during the second quarter of the year, with tax revenue collection significantly stronger than programmed. However, overall fiscal performance suffered and the primary fiscal deficit target (which is adjusted for higher social spending) was missed by RF 0.7 billion as government spending in the domestically financed capital budget and military expenditure were higher than programmed. The military expenditure reflected higher outlays associated with the security threats in the northwest of the country. Social and exceptional social expenditures were also significantly higher than programmed but were financed with excess external budgetary support. Additional expenditures were primarily in the areas of goods and services for education (e.g., food for secondary schools), scholarships, food for detainees, orphanages, demobilization, and reintegration/reinsertion of ex-FARs and soldiers. Thus, the overall fiscal deficit in the first half of 2001 was higher than programmed by 0.7 percentage point of annual GDP. The target for the reduction of domestic arrears was achieved and the net credit to government by the banking system was lower than the program target (as nonbank financing was higher than expected).
13. A key element of the 2001 fiscal program was the envisaged increase in revenue of about 0.7 percentage point of GDP through the introduction of a comprehensive set of measures in the areas of customs, income taxation, and excise duties. The government committed itself to implementing these measures and made efforts to do so in the first half of 2001. A number of measures are already in place as targeted under the program, but others still remain to be fully implemented, while still other measures have been modified.6 These shortfalls reflected extensive debate in Parliament and the latter's concern about the impact of higher tax rates on the private sector, as well as administrative difficulties.7 Nevertheless, a critical mass of measures will be implemented to ensure that the fiscal revenue target for 2001 as a whole is achieved. An example of the important steps taken so far is the relatively smooth introduction of the value-added tax (VAT) in January 2001. This has led to revenue collections so far that are in line with program projections. The successful introduction of the VAT (including the reimbursement system) reflected advance preparation by the Rwanda Revenue Authority (RRA), including efforts to educate the public about the workings of the VAT. The RRA also increased to 20 the target number of monthly audits of large enterprises and completed 130 audits between January 1 and July 15, 2001, giving rise to the possibility of significant additional tax assessment and collection.
14. Regarding arrears from before 2000, the internal audit department of the Ministry of Finance completed its investigation of RF 27 billion (about 4 percent of GDP) in claims. Out of these, RF 2.3 billion were incurred between July 1998 and end-1999 and have already been verified as legitimate. The government will retire them in two installments by end-December 2001.8 A significant proportion of the remaining arrears are challenged by the government. The Auditor General has been requested to ensure their validity prior to payment. It is anticipated that the audits of the first RF 5 billion worth of claims to be settled during the course of fiscal 2001 would be completed by September 2001. The audit of all claims of arrears will be completed by mid-December 2001, compared with a target date of end-June 2001 under the program.
15. Broad money growth increased to 18.6 percent in the 12 months to end-March 2001, reflecting by and large increases in net foreign assets. The latter rose on account of private inflows (causing further increases in foreign currency deposits) apparently connected with the continuing strong performance in exports. The effect of inflows of official financing on broad money during this period was fully offset by reductions in the net credit to government by the banking system. In this context, the NBR intervened in the money market in late February and March 2001 and--aided by the prudent domestic borrowing of the government--achieved all its quantitative performance criteria at end-March 2001. However, in the second quarter of 2001, monetary policy proved less effective as sterilization efforts were frustrated by heavy use of the discount window by banks. By June 2001, broad money growth was 18.4 percent, with significant excess reserves held by commercial banks. Since then, the NBR has redoubled its efforts to bring monetary developments under control and render them consistent with the monetary program, including by increasing the rediscount rate and reducing the maturity of such lending.
16. In the area of structural reforms, to date, one out of four structural performance criteria and three out of five structural benchmarks slated for the first semester of 2001 were met. The missed structural performance criteria concerned the introduction of a new foreign exchange auction, which was implemented with only a week's delay arising from the timing requirements of technical assistance from the Fund; the issuing of the new financial instructions in accordance with the organic budget law as the latter's adoption was delayed by Parliament; and the adoption of a law or issuance of a decree that allows for the efficient and timely enforcement of the arbitration awards rendered by the arbitration center. Regarding structural benchmarks, there were delays in the submission of a new income tax bill to Parliament and in the adoption of an improved accelerated loan recovery system (voie parée). Despite these delays, some important steps were taken regarding structural reforms (Boxes 3 and 4).
17. In the area of governance, the Auditor General completed in December 2000 the audit reports of the Ministry of Education, Ministry of Public Works, Ministry of Energy, and Ministry of Defense, and submitted them in March 2001 to the President, Parliament, and the Supreme Court. The lag between the completion of the reports and their submission was due to, inter alia, the need to translate the reports into three official languages as required by the law. They are currently being discussed by a parliamentary committee and are expected to be considered by the plenary session of Parliament by end-September 2001. The work of the Auditor General has proceeded swiftly in 2001: to date, the audit of the Ministry of Health, which was initiated in 2000, as well as the first stage of several of the audits slated for 2001 have been completed. To strengthen his Office, the Auditor General has hired 14 additional staff and has prepared an action plan (including costing and possible areas for donor assistance) for eventually delivering an annual audit of public accounts.
18. The government has taken note of the Auditor General's report on the four audits completed in 2000, including that of the Ministry of Defense. The government has welcomed the recommendations of the report, which serves to further underline its commitment to good governance as reflected in the remedial measures taken to deal with issues raised in the report. The government has committed itself to strengthening mechanisms designed to eliminate any off-budget expenditures and revenues,9 increasing transparency and accountability in the use of budgetary resources, dealing with any nascent corruption, and making sure that proper contract procedures and rules in the use of resources are adhered to in development projects. While the amount of public resources affected by such problems is quite small, the government takes the task of addressing these problems very seriously. In this respect, the prosecution of several officials culpable of malfeasances has been initiated. Steps are also being taken to correct the absence of qualified accounting and internal audit personnel in the line ministries, with a view to, inter alia, addressing the problem of inadequate control over the final use of budgetary resources. The relevant personnel have been identified, and a training program has been arranged jointly by the Office of the Auditor General and the Ministry of Finance. The new corps of accountants and auditors is required to report the financial transactions monthly to the Ministry of Finance. To ensure that these reforms are effectively implemented, the Auditor General will conduct audits/tests on two of the ministries during the fourth quarter of 2001.
19. Comprehensive implementation of the new public tendering procedures has been delayed by the extensive debate in Parliament on the public tendering bill and by the fact that the latter cannot be adopted before the existing procurement law is changed. Most recently, parliament has suspended consideration of the draft public tendering bill until the government modifies a reference made to the establishment of the National Tender Board (NTB) as a semiautonomous agency that is not provided for in the existing organic law on parastatals. Since this amendment may take time, it has been decided that the 1993 prime ministerial decree establishing the NTB will be amended by a presidential decree. Parliament has also initiated an anticorruption bill and solicited the support of the Ministry of Justice for improving its text. It is expected that the draft bill will be put in the agenda for parliamentary debate soon.
20. In addition to the steps described above, and with a view to improving budget implementation and control, a cash-budgeting system has been put in place and stricter commitment procedures have been followed since January 2001. A cash planning division was created within the budget department, with responsibility for creating a realistic cash plan, with quarterly and monthly cash limits on expenditure, against which developments are reviewed weekly. In contrast to the past, effective January 2001 spending agencies must await their allocation of cash limits every month before they can undertake expenditures. The system of commitment control has been further strengthened by ensuring that the budget department does not grant an approval (visa) without taking into account cash availability. Moreover, all suppliers have been informed that no supplies can be effected without the explicit visa from the budget department in the Ministry of Finance. In addition, steps are being taken to ensure that unregistered payments arrears are not incurred by making sure that internal auditors and accountants in line ministries report monthly to the Ministry of Finance for verification of transactions. With a view to improving budget management over time, the government has been preparing a second and improved medium-term expenditure framework (MTEF), covering 2002-04, and has taken stock of all government guarantees, with a view to identifying all contingent liabilities.
21. Although significant progress has been made in budget consolidation, management weaknesses remain in these areas. Some--albeit small--operations remain outside the control of the national Treasurer, leading to inadequate controls over the final usage of some public resources. The exercise of taking stock of such operations currently underway is aiming to identify these operations before eliminating them or incorporating them into the 2002 budget. Despite the recent efforts at improving them, the internal audit procedures need to be reviewed and strengthened. The multitude of government accounts with the banking system has continued to hinder the quick and clear reporting of usable government resources. A related problem is that expenditures are recorded at the time the treasury effects transfers to the noncore governmental accounts (ministerial accounts and project accounts), but not at the time of disbursements from donors into, or final expenditure from, these accounts. Moreover, estimates of the size and nature of capital transfers and expenditure remain very unreliable and are provided with significant lags. The functional budget classification has begun to be utilized in 2001, but it needs further improvement.
22. With regard to civil service reform, the prime ministerial decree of the organigrams (cadres organiques) was signed and the job descriptions for the organigrams for all prefectures were prepared, albeit both with delays. The latter are now awaiting confirmation by the cabinet. The civil servants' code was passed by Parliament in July 2001 after some delays on account of close scrutiny and debate by parliament. Retrenchment of unqualified civil servants within the central administration was completed in the first quarter of 2001 and the number of core civil servants has remained well below the ceiling of 9,500 targeted under the program.10 An effort has been made to control the hiring of teachers by requiring the signature of the Minister of Education on all recruitment; however, a legal procedure is still lacking. In January 2001, all 3,800 contractual teachers (occasionnels) were dismissed or converted into regular appointments. Therefore, as of early 2001, the number of teachers is below the number of 28,500 targeted under the program. Moreover, in the course of 2000, a significant number of unqualified teachers were replaced by qualified ones. These changes have been and continue to be consistent with the budgeted civilian government wage bill.
23. Regarding privatization, the government has established a timetable for the divestiture of all remaining enterprises with government involvement with the assistance of the World Bank. It organized a bidders' conference for the private management of the public utility company, Electrogaz, and has requested proposals from interested bidders. However, the draft management contract is under discussion with the World Bank, and the target date for signing is now projected for December 2001, six months later than in the program. The pilot project of privatizing two tea factories is projected for end-2001, rather than June as programmed, because of delays in the appointment of a privatization consultant. However, there is a risk of further delays, as an agreement has not yet been reached between the World Bank and the government on the modalities of procuring consultancy services for this project. In the case of the telecommunications company, Rwandatel, the terms of reference of the privatization consultant have been approved, and a tender has been placed. It is now expected that the company will be offered for sale by March 2002, rather than the programmed date of November 2001. The longer-than-expected delays were mainly linked to the late passing by Parliament of the telecommunications law and the multisector regulatory law for public utilities (in May 2001) and the continuing discussions between the government and the World Bank on modalities of establishing an independent regulatory board. There are significant risks that the privatization program could be delayed more than noted above, as the effectiveness of a World Bank credit to finance the program hinges on full resolution of all outstanding issues in the privatization program.
24. In the area of financial sector structural reforms (Box 3), the arbitration center has begun operations by handling three cases, and the legal impediments to its operation have been removed as targeted under the program; however, it still has no legal authority. Some progress has been made toward restructuring a number of banks, in accordance with the established plans, although there have been shortfalls in one case, which the NBR is addressing. To enable loan recovery from real estate guarantees, the Office of the Public Notary has been made operational in accordance with the new organigrams (cadres organiques). Regarding the UBP--the major microfinance vehicle in Rwanda--financial and strategic audits were completed by March 2001 and are currently under evaluation before a restructuring plan for UBP can be adopted. In the case of the CHR (Caisse Hypothécaire du Rwanda), in May 2001 the government decided to restart its activities, and a new business plan will be approved by end-December 2001. Finally, with regard to the treatment of government arrears to the CSR (Caisse Sociale du Rwanda), both parties are actively considering partial settlement through a variety of instruments.
II. Policy Measures for the Remainder of 2001
25. For the remainder of 2001, the government of Rwanda is committed to implementing the measures envisaged under the program, including remedial measures, so as to achieve the program targets. In this context, and given the broadly satisfactory performance under the program in the first half of 2001, the program's macroeconomic targets for the year as whole remain achievable: (i) real GDP continues to be projected at about 6 percent, (ii) annual average inflation will be targeted at 4 percent, compared with a previous target of 3 percent, (iii) gross international reserves would continue to be targeted at about six months of imports, and (iv) the external current account deficit is projected at about 16 percent of GDP. These targets reflect the program's aim to consolidate macroeconomic stability while (i) initiating progress toward a sustainable reduction in the underlying macroeconomic imbalances, and (ii) taking clear steps toward poverty reduction.
26. In December 2000, the government successfully completed the interim poverty reduction strategy paper (I-PRSP) after having conducted an extensive first round of consultations at the province (préfecture) level that included a wide range of stakeholders. Progress has continued in recent months toward producing the full PRSP. Preparations for the wide, grassroots consultative process began in February 2001 (including training of facilitators, as well as the translation of documents into Kinyarwanda and their wide distribution). Pilot consultations at the cell level were carried out in one district, and further consultations at the sector level across the country were completed by July 2001. The Poverty Participatory Assessment (PPA) was also completed by July. The full PRSP is now expected to be completed in November 2001 as planned under the program. The public expenditure tracking survey in health and education, as well as the poverty indicators information and monitoring system were completed by April 2001. In addition, the data have been collected for the core welfare indicators questionnaire (CWIQ), but the analysis of the data is still being finalized.
A. Fiscal Policy and Structural Fiscal Reforms
27. Regarding central government finances, the primary fiscal balance in 2001 is projected at a deficit of RF 2.5 billion, compared with a program target of a surplus of RF 1.3 billion. The larger deficit is mostly on account of additional social expenditure, which can be financed from excess external budgetary support.11 To avoid any shortfall from this target, the government will make every effort to implement fully the revenue measures envisaged by the program and adhere strictly to the revised timetable (Box 2) for measures that have experienced delays. The government will also only propose for adoption measures that are consistent with the program. Any proposed revision in tax rates will be subject to consultation with the IMF staff.
28. Among the measures that the government will focus on will be those aimed at collecting profit taxes (including arrears) from large enterprises and improving the collection of customs duties. 12 Regarding the former, the RRA will allocate resources as needed to continue to audit 20 large enterprises per month and collect the revised tax assessments within the now-revised period of 66 days, as well as on outstanding arrears. The effort will rely, inter alia, on the exercise of the right of lien on clients holding assets of enterprises in arrears and the exclusion of the latter from public sector tenders. In the area of customs, the effort will focus on using the preshipment agency's valuation in the valuation of imports whenever possible;13 ensuring that the new unified system of exemptions is strictly applied, including ex-post customs controls for exempted goods that are part of projects; making a priority the improvement in the data management capacity of customs (including computerization); implementing new, more stringent qualifying conditions for customs brokers; specifying clearly customs procedures; and allocating additional resources to customs (e.g., for border posts) from the RRA.14 In early 2001, the government requested financial assistance for capital expenditure from the European Union to support the customs reforms but has been thus far unsuccessful. In the VAT area, the RRA has decided to recruit additional staff to strengthen the audit capacity of the VAT department and help achieve the higher-than-programmed revenue target in this area.
29. If in the course of 2001 there are revenue shortfalls or expenditure overruns that put at risk the achievement of the primary deficit target, the government will undertake spending reductions in certain areas. The government is committed to safeguarding the target for social/antipoverty expenditure (RF 40.0 billion, or 5.2 percent of GDP). Altogether, the identified contingency measures could yield about RF 3 billion (0.4 percent of GDP) on an annual basis.
30. In the area of exceptional social spending (which is not included in the definition of the primary deficit), there will be increases of RF 5.0 billion vis-à-vis the program on account of the implementation of GACACA, the traditional justice system for prisoners accused of participating in the genocide, shortfalls in donor-financed expenditures for prisoners, election expenditures, educational programs (KIST), and the demobilization of 5,067 soldiers, which took place in February, earlier than originally projected. Furthermore, in line with the provisions of the Lusaka peace agreement and the recent developments in Rwanda's northwest, where large numbers of ex-FAR's and militia have been returning, there is an additional expenditure on reintegration/reinsertion of insurgents that will be monitored by the World Bank.15 The increased expenditure is on account of (i) the processing of a projected 6,000 insurgents through camps, in addition to the roughly 20,000 envisaged under the program (RF 0.3 billion), and (ii) the provision of a newly created social safety net and vocational training to insurgents being released from camps, which will come into effect in the last four months of 2001 (RF 1 billion).
31. The total of current expenditure and domestically financed capital expenditure in 2001 is now targeted to be RF 10.6 billion (1.4 percent of GDP) higher than in the original program. This includes RF 1.2 billion in higher defense expenditure. This is needed (i) to address the security threat of stepped-up incursions into Rwanda's territory from returning ex-FARs and Interahamwe militias (RF 0.4 billion), and (ii) to repatriate 15,000 Rwandese soldiers from the Democratic Republic of Congo (DRC) in the context of implementing the Lusaka agreement and furthering the peaceful resolution of the armed conflict in the DRC (RF 0.8 billion). The foreign-financed capital budget is expected to be implemented as envisaged under the program, and total capital expenditure is now programmed at RF 56.8 billion (7.3 percent of GDP). Given these projections and the higher-than-programmed revenue now envisaged, the overall fiscal deficit (on a payment order basis and excluding grants) will be RF 80.4 billion (10.4 percent of GDP), some 0.8 percentage point of GDP higher than the original program target of RF 72.3 billion.
32. The Auditor General is expected to complete the audit of at least RF 5 billion worth of pre-July 1998 arrears by September 2001, which will be paid in two installments, in September and December 2001, through securitization. The government will provide Parliament, the Fund staff, and other interested development partners with information on those arrears before they are paid. The government will also announce by end-December a quarterly schedule for 2002 for the elimination of remaining verified arrears. In addition, as noted above, the government will continue to retire in the third and fourth quarters of 2001 the remaining part of the RF 2.3 billion of arrears incurred between July 1998 and end-1999, as well as RF 2.8 billion in arrears remaining from 2000. (The latter payment will be made fully in cash).
33. The government intends to draw on the priorities that emerge from the PRSP consultative process in revising its medium-term expenditure framework (MTEF). Regarding the latter, the training of ministry staff has been completed, while the training of staff in provinces will be completed in the coming weeks. The crucial step of costing programs is being carried out with the assistance of the UK Department for International Development (DFID) and the World Bank. The government feels that, while such costing will need to be further improved, it will be essential to prioritize expenditure for 2002 and beyond.
B. Monetary Policy and Financial Sector Reforms
34. Regarding monetary policy for the remainder of 2001, the NBR will monitor overall monetary developments, with a view to responding early and consistently to keep the development of broad monetary aggregates in line with a revised program and avoid accommodating the increase in inflation in recent months. The revised monetary program (on the basis of the end-2000 outcome) incorporates a tightening of monetary policy, so as to bring monetary growth in line with a medium-term inflation target of about 3 percent and real GDP growth of about 6.2 percent. The monetary program also assumes a step increase in the demand for money to account for residents bringing into domestic banks foreign currency--previously held abroad or outside the banking system--after the liberalization of foreign currency deposits.
35. In the remainder of 2001, the NBR will aim to contain monetary growth in line with the revised monetary program targets. It will quickly absorb excess liquidity in banks, so as to avoid volatility in the money multiplier and maintain monetary control. In this effort, the NBR will use more aggressively and consistently its sterilization operations, including through appropriate action on interest rates as necessary. In mid-July 2001, the NBR increased the premium of the rediscount rate over the interbank rate to discourage the current dependence of banks on the discount facility on a regular basis, and it began using a new range of shorter maturities for lending from that window. On August 24, 2001, the NBR--as a prior action to the completion of the first review--increased the level of the rediscount rate by an additional 2.25 percentage points to 13 percent in an effort to render monetary developments consistent with program targets for September and December 2001. The NBR committed itself to implementing further increases in interest rates as needed, so as to achieve these targets. The NBR will also initiate the implementation of steps advised by the June MAE technical assistance mission on, inter alia, liquidity forecasting and management, as well as the range and use of monetary policy instruments.
36. The NBR will continue its efforts to improve bank supervision, including through a training program carried out with the help of a resident Fund advisor. Moreover, the NBR will be conducting a full audit of one bank in 2001, which would also be part of the program of training local supervisors. This will be followed by a full audit of three banks in 2002, and efforts will be made to carry out on-site inspection of all six banks in Rwanda by 2004. The NBR is currently conducting a review of all banks' lending procedures and of new loans extended in 2001. It will make recommendations to banks consistent with advice given by the June 2001 MAE technical assistance mission for banks to implement by end-2001. In the meantime, the restructuring of the financial sector as envisaged under the program will continue (see Box 3). In this context, the NBR will continue to strongly encourage banks to implement their restructuring plans and address aggressively any shortfalls. Moreover, the remaining steps will be taken to ensure that the arbitration center acquires the necessary legal authority and an improved form of the voie parée is adopted.
37. An external audit of the NBR has not been conducted since the resumption of operations after the war and genocide in 1994. To address this matter, as well as to conform to the Fund's policy on safeguards assessments, the NBR will have an external audit carried out by the first quarter of 2002. The tendering procedures have already been initiated for this purpose.
C. Other Structural Reforms
38. The government will intensify its efforts to carry out the programmed structural reforms, according to a revised timetable where necessary. The reforms and their schedule are provided in Box 5. In broad terms, the government will redouble its efforts to carry out privatization, including with the assistance of the World Bank. It will also complete the introduction of civil service organigrams, ensure that the civil service employment remains within program limits, and initiate preparation of a second generation of reforms.
39. On account of the findings and recommendations of the Auditor General in the context of the first four audits of ministries in 2000, the government intends to undertake the following measures, in addition to those already initiated (see above, para. 18): (i) completion by October 15, 2001 of a study clarifying the nature of all off-budget operations and accounts, with a view to eliminating them or bringing them into the 2002 budget; (ii) consistent with the recommendations of the Auditor General, consideration by the government of any additional measures necessary to address the issue of off-budget expenditures, revenues, and accounts, including putting in place safeguards to avoid their reemergence; and (iii) the conclusion by the Auditor General of test audits on two of the ministries audited in 2000 during the fourth quarter of 2001, to ensure that the reforms initiated by the government (para. 18) are being effectively implemented. The government is also requesting technical assistance from the Fund on issues of budget implementation and control--including accountability and transparency. A mission from the Fund's Fiscal Affairs Department is envisaged to take place in October 2001.
D. Foreign Financing
40. The macroeconomic framework for Rwanda showed a financing gap for 2001 as a whole (after expected project grants and loans, HIPC Initiative interim relief from multilateral creditors in the form of grants (US$25.1 million), and exceptional financing from Paris Club creditors), of about US$125 million, which can be met with current pledges on account of support expected in the form of loans from IDA (US$30.8 million), in the form of grants, notably from the EU (US$26.2 million) and the United Kingdom (US$27.1 million), and in the form of debt relief by non-Paris Club creditors. A large part of the expected external support has already been received. Regarding rescheduling of its debt obligations, Rwanda has obtained an extension of the Paris Club rescheduling agreement to end-2001 and has been granted a topping up to Cologne terms for payments falling due between December 1, 2000 and December 31, 2001. It has also concluded a rescheduling agreement with the Saudi Fund for Development and is in the process of concluding one with the People's Republic of China. The government has been in contact with other non-Paris Club creditors in an effort to reach rescheduling agreements on terms at least comparable to those provided by the Paris Club.
III. Program Coordination and Monitoring
41. The government is committed to further improving program monitoring and coordination, as well as transparency. Recognizing the need for closer policy coordination, the authorities have established a PRGF committee comprising technical representatives from the NBR, the Ministry of Finance, and the offices of the President and the Prime Minister, who meet on a regular 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 reports its findings to the Minister of Finance and the Governor of the NBR on a regular basis. With a view to improving the monitoring and transparency of the program, the government will also continue to work with the NBR to minimize the mismatch between the fiscal accounts and financing data, including by tracking the movements of all government accounts (including those receiving grants and loans from abroad).
42. The government is aware of the quality deficiencies in Rwanda's macroeconomic data that hinder policy analysis. In line with the recommendations of previous technical assistance missions, efforts will be made to implement remedial measures, including the dedication of adequate resources for the effective functioning of the official statistical agencies, as well as the promotion of enhanced cooperation among statistical agencies so as to maximize the use of available statistical resources.
43. In light of the need to safeguard the good performance in the first quarter of 2001, the government is committed to implementing fully and promptly the measures described above. Of these, eight are prior actions--critical to the continuing success of the 2001 program--to be completed before the government can presents its request for completion of the first review of the third annual PRGF arrangement to the IMF Board (Table 1). The proposed modified quantitative and structural performance criteria and benchmarks for the remainder of the third annual PRGF arrangement, including those at end-December 2001 for the second review, are included in Tables 2 and 3 and are described in the technical memorandum of understanding (the revisions to which are attached). The second review is scheduled to be completed no later than April 30, 2002.
Amendments to the Technical Memorandum of Understanding (TMU)
September 24, 2001
1. This memorandum contains amendments to the definitions of the quantitative performance criteria and benchmarks contained in the original TMU annexed to EBS/00/264 (12/12/00). The new definitions provided below supersede those contained in the original TMU. Except for the amendments described below, the definitions and adjustments of the quantitative performance criteria and benchmarks contained in the original TMU remain unchanged. The reporting requirements of the amended variables remain unchanged from those contained in the original TMU.
IV. Quantitative Performance Criteria and Benchmarks
A. Financed Excess Social/Antipoverty Spending Adjustment
2. The program allows for excess external budgetary support to be used for additional spending in the areas of social/antipoverty expenditure and exceptional social/antipoverty expenditure (as defined in Tables 9 and 10) over and above the specified amounts. Elements included under the outlays that could be financed by excess external budgetary support are exceptional social expenditure associated with the demobilization of soldiers in excess of the amount stated in Table 10. Before the commitment of the above-mentioned outlays, the authorities will consult with both the staffs of the World Bank and the International Monetary Fund.
A. External Budgetary Support
3. Definition. External budgetary support is defined as all official external grants (including all expected or received HIPC Initiative-related grants) and loans, excluding those related to the development budget.
B. Net Repayment of Domestic Arrears
4. Definition. Net accumulation of domestic arrears is now defined as the accumulation of new domestic arrears of the year under consideration (say, 2001) cumulative from January 1 to end-December less the repayment of any arrears outstanding from the preceding year (say, 2000). The accumulation of new domestic arrears is defined as the difference (cumulative from January 1) between payment orders and actual payments.
C. Reserve Money
5. Definition. Reserve money is defined as currency in circulation, reserves of deposit money banks (excluding National Bank of Rwanda (NBR) borrowing from deposit money banks on the money market but including cash in vault held by commercial banks), deposits of public enterprises (including Caisse Sociale de Rwanda (CSR) and other autonomous public agencies), deposits of nonbank financial institutions, and deposits of the private sector (autres sommes dues à la clientèle are included in reserve money).
6. Corollary. Borrowing by the NBR from the commercial banks on the money market will from now on be included under the net domestic assets of the NBR. More specifically, borrowing by the NBR from the commercial banks on the money market will be netted out from commercial bank borrowing from the NBR.
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
7. Definition. This performance criterion is now defined to exclude the use of Fund resources.
V. Other Data requirements for Program Monitoring
A. Monetary Sector
8. Reporting requirement. The following data will now be transmitted on a monthly basis within three weeks of the end of the month: the individual balance sheets 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.
B. Electronic Data Reporting
9. The following additional data will be made available through electronic format and e-mailed to the African Department of the Fund:
1Among the expenditures incurred in this area were the demobilization of 2,567 soldiers and the reintegration into the national army of 2,047 ex-FARs (soldiers of the former army), while 22,357 of the latter and insurgents passed though the camps in 2000.
2All in all, between January 2000 and July 2001, the government reduced the number of ministerial and project accounts held with the central bank by 92 and the number of accounts held with commercial banks by 290.
3There were delays in paying debt service to the European Union (EU), the Arab Bank for Economic Development in Africa (BADEA), the International Fund for Agricultural Development (IFAD), and the Paris Club.
4The external arrears were due to the EU/EIB, BADEA, IFAD, and the African Development Fund (AfDF). Delays in payments were partly due to uncertainties faced by the government about the receipt of interim HIPC Initiative relief.
5Regarding demobilization, 5,000 soldiers were demobilized in February 2001 and received their first of three severance allowances. There were also 7,316 ex-FARs and insurgents in camps as of December 31, 2000.
6A description of the status of the revenue measures of the program is provided in Boxes 1 and 2.
7In February 2001, the government also reduced the excise duty on imported Amstel beer from 57 percent to 22 percent, with a view to decreasing smuggling of this item and generating some customs duty collection on it, which had been hitherto nonexistent. The government believes that this would not adversely affect consumption of beer produced locally and thus lead to pressures for an across-the-board reduction in beer excise rates, which would have an unfavorable effect on excise receipts.
8RF 1.7 billion of these arrears will be paid in cash (RF 0.8 billion by September and RF 0.9 billion by December). The remaining amount will be settled by issuing to the holders of the liabilities government securities with a market interest rate.
9An off-budget transaction is one conducted by a spending agency or line ministry whose transaction should be-according to the law-within the budget but is kept off the budget accounts.
10This number does not include the 3,500 policemen who were put in place in 2000 and who are under the Ministry of Internal Affairs. Police functions were previously carried out mainly by the military and commune-financed police forces.
11Excluding social spending, the increase in the primary deficit vis-à-vis the original program target is about RF 0.4 billion (less than 0.1 percent of GDP).
12There are downside risks to the achievement of the arrears collection target as several enterprises in tax arrears are in financial difficulties, under privatization, or successfully contesting the collection in court. Nevertheless, the effective implementation of the audit program and a host of other measures, inter alia, in the area of customs could lead to higher-than-programmed revenue collection.
13In case the customs department opts for a different valuation, it will ensure that adequate justification (through formal internal procedures) is provided on a case-by-case basis.
14About RF 70 million has been allocated to the RRA for the rehabilitation of six customs border posts.
15The program design explicitly allows for increases in social and exceptional social spending, provided these are financed by additional external support.