Rwanda and the IMF
Country's Policy Intentions Documents
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Rwanda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler
1. Rwanda has strived over the past eight years to addressing the rent in the social fabric and immense surge in poverty engendered by the genocide of 1994. The challenges faced in this endeavor have no precedence in history. Nonetheless, our eventual success in providing a better future for our nation is ineluctable.
2. Following the genocide in 1994, our immediate priorities were the restoration of peace, the resettlement of the internally displaced and of returned refugees, the promotion of national reconciliation, and the revival of the economy. In the interim, we have largely succeeded in restoring peace and the vast majority of refugees have returned and resettled. By end-1999, over three million internally displaced persons and refugees had been permanently resettled.
3. We have set as our goals: reconstruction, national reconciliation, peace, stability, good governance and poverty reduction. We have made some noteworthy achievements toward those ends, including empowering the Rwandan people through a process of decentralization and democratization. The National Assembly adopted a decentralization law in November 2000 and local elections were held in March 2001. Judges, who will preside over community-based judicial processes (Gacaca) to try those suspected of having committed crimes, were elected in October 2001 and are currently being trained.
4. There is an extraordinary urgency in our actions to reduce poverty. The share of households living below the poverty line, estimated at 53 percent in 1993, rose to 70 percent in 1994 and, as some progress has been made, now stands at 60 percent. But, in addition to the usual considerations in targeting poverty, for Rwanda a significant and rapid decline in poverty will be a key element in securing national reconciliation; while creating new and more productive employment is critical to creating a future for a generation of young that has suffered beyond normal limits. We have finalized and issued a Poverty Reduction Strategy Paper (PRSP), detailing priority objectives and an action plan for their achievement. This PRSP focuses on the areas of rural development and agricultural transformation, human resource development, economic infrastructure, governance, private sector development and institutional capacity building. The PRSP underpins our policy program for the period ahead, including the macroeconomic and financial policies to be supported under a new arrangement from the IMF.
5. During the next years, Rwanda will embark on a sweeping national transformation: democracy will be rooted, including through a referendum on a new constitution and elections at the national level during 2003, reconciliation critical to sustaining a common national interest will be forged, and resources that had been claimed by conflict will be turned to building a better future. The achievement of these goals will depend on steady and efficient implementation of a coordinated action plan, whose key elements are set out in the PRSP.
6. We recognize clearly that the achievement of our objectives will depend critically on the establishment of a sound macroeconomic foundation. The three-year ESAF/PRGF arrangement that was approved by the Fund's Executive Board of Directors in June 1998, and which was extended to end-April 2002, provided a framework for our efforts to that end. Our record under that framework has been successful in broad terms. With successive years of strong economic growth, in 2000 we were able to re-attain the real GDP level of 1990. We plan to improve on that record in the period ahead. We have also made strides in checking inflation and have substantially rebuilt official reserves. Despite our capacity limitations, we have made progress in improving structural efficiency through reforms in the exchange and trade regime, financial administration, tax policy, privatization and the civil service.
7. The Government, in collaboration with DfID, is currently carrying out a poverty and social impact assessment (PSIA). We intend to discuss the findings of the PSIA with the staff of the IMF and the World Bank and with other key stakeholders later this year. The PSIA findings and subsequent discussions will be taken into account in reviewing possibilities for accommodating supplemental grant income that may become available within the fiscal and monetary policies set out in the attached MEFP.
8. The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the 2001 program and lays out the objectives and policies that the government intends to pursue during 2002, and for the medium term. In support of these objectives and policies, the Government of Rwanda requests the approval of a new three-year PRGF arrangement with access in an amount equivalent to SDR 4 million (5 percent of quota) and the extension of additional interim relief from the Fund to cover part of its debt service obligations to the Fund during the period August 1, 2002 to July 31, 2003 under the HIPC Initiative. We would therefore request the disbursement of a first loan in an amount equivalent to SDR 574 thousand upon approval of the new PRGF arrangement. The remaining SDR 3.426 million would be disbursed in six equal amounts equivalent to SDR 571 thousand, each available upon completion a review. The limited access requested reflects the foreign reserve cover already in place and the availability of complementary concessional financing. We understand that consideration by the Executive Board of Rwanda's requests for approval of a follow-up PRGF arrangement will be subject to the fulfillment of a number of prior actions, as indicated in the attached MEFP, Table 6.
9. The Government of Rwanda will continue to provide the Fund with such information as the Fund requires in 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.
I. Performance Under the 2001 Program
1. Rwanda's economic performance during 2001 was broadly in line with the objectives set under the PRGF-supported program. Favorable climatic conditions supported increased agricultural production; income from coltan mining contributed to domestic demand, especially in the first half of 2001 and, along with substantial external transfers, contributed to growth in construction and services output. Overall, real GDP grew by 6.7 percent during 2001, compared with the targeted 6 percent. Falling food prices, associated with increased local supply following a drought in 2000, helped to moderate consumer price increases. Accordingly, inflation fell from 3.9 percent in 2000 to an average of 3.4 percent in 2001—some 0.4 percentage points above the program target. The external current account deficit (excluding official transfers), at 16.4 percent of GDP in 2001, was roughly unchanged from the 2000 level largely as increased private sector saving was offset by an expansion in the public investment. In the first quarter of 2002, preliminary information indicates that mining receipts have contracted following a collapse in prices of coltan in mid-2001, while export earnings from coffee and tea prices continue to limited by historically low international market prices.
2. The fiscal outcome in 2001, as measured by the primary fiscal deficit, was 0.2 percent of GDP better than programmed, as stronger-than-projected revenue collections more than offset expenditure overruns. Consistent with this, the overall fiscal deficit was limited to 9.5 percent of GDP, compared with the 10.4 percent target under the program, as spending delays on foreign-financed capital expenditure added to gains on the current balance. Receipts from income and profit taxes, international trade taxes, and excise taxes were higher than projected reflecting, in part, improved tax administration. However, nontax revenue collections, particularly from public enterprises, fell somewhat short of expectations. Given the strong revenue performance, it was possible to increase public spending beyond the level foreseen under the program while maintaining the agreed fiscal stance. There were some increases in nonpriority spending due to a number of urgent demands including minor overruns in military spending associated with the withdrawal of troops from the Democratic Republic of the Congo (DRC). The performance criterion on social spending was met, with social expenditure marginally higher than the program floor. The strong revenue performance allowed for a modest increase in exceptional expenditure (0.2 percent of GDP), mostly for tertiary education.
3. Payments to clear overdue government obligations during 2001 were equivalent to 2 percent of GDP, and exceeded the program target by 0.7 percent of GDP. Obligations settled included remuneration due to teachers, local government employees, police and soldiers (equivalent to 0.8 percent of GDP), and arrears for energy, petroleum, transport, the tea parastatal and treasury bonds. At the same time, the stock of pre-2000 obligations presented to the Auditor General for verification, rose from RF 27 billion (3.6 percent of GDP) to over RF 40 billion (5.3 percent of GDP), as initial tallies were revised and new claims, reflecting the continued return of refugees and growing confidence in the process, emerged. Following review, the Auditor General established that required documentation had been submitted for RF 31 billion (3.7 percent of GDP) of the claims submitted. For the remaining RF 10 billion, and other subsequent claims, for which some required documentation is not available, the government has charged a committee of senior administrators (the PRGF Committee) with establishing acceptable standards, reflecting dislocations and losses in the period following the genocide. The government remains committed to settle its arrears in an orderly manner and to take any steps necessary to avoid the re-emergence of arrears in future.
4. Although a miscommunication regarding the payment schedule led to minor delays in debt service payments during December 2001, commitments on avoiding new arrears on external debt service have been substantially met. The government is continuing its efforts to strengthen external debt management and intends to observe agreements reached with external creditors.
5. Regarding monetary developments, the net foreign assets (NFA) of the National Bank of Rwanda (NBR) at end-2001 exceeded the floor set under the program by over RF 7 billion (0.5 months of imports). Reflecting both the strong fiscal performance and the impact of grant inflows, net credit to government was substantially reduced, and more than met program targets. With credit to the private sector growing by 9.1 percent, however, the fall in the net domestic assets of the banking system did not fully offset net foreign inflows and broad money grew by 10.0 percent (current exchange rates), exceeding the 6.6 percent growth that had been targeted.
6. In moving to tighten monetary policy in the second half of 2001, an increase in the discount rate by the NBR to tighten monetary conditions led to a substantial compression in activity in the interbank market, reflecting a skewed liquidity position among banks. In response, the NBR temporarily relaxed its policy stance while moving to address the underlying issue. While this revitalized the interbank market, it led to a buildup in bank reserves and thus to an expansion in reserve money, which is currently being addressed.
7. Regarding exchange rate developments, the Rwanda franc depreciated by 3.4 percent in nominal effective terms in the official market in 2001, and by 4.9 percent in real effective terms. The exchange rate premium in the parallel market trading remained below 5 percent during most of 2001, indicating that the introduction in February 2001 of weekly foreign exchange auctions by the NBR has led to improved efficiency and transparency in this market.
8. There has been progress in carrying out the agenda of structural measures adopted under the program (Box 1 and Table 1). The difficulty of the task at hand should not be underestimated. Thus, despite strong commitment and concerted effort, work is still in progress in some areas that were targeted for implementation, including the issuance of financial instructions in accordance with the organic budget law, which is awaiting supporting legislation that will modify the roles of the Auditor General and of the Cours des Comptes.
9. In strengthening public financial administration and its institutions we have made some significant strides forward. A presidential decree issued on January 2, 2002 put the arbitration center on a firm legal basis. A draft decree giving legal status to the National Tender Board (NTB) was submitted to the cabinet for consideration on June 15, 2002 and is expected to be issued by September 2002. This step caps a comprehensive training program for decentralized tender boards in ministries, public institutions, provinces, and districts that was completed in December 2001. The National Tender Board has started to monitor their tendering activities to assure quality control. Financial and commercial courts, as specialized chambers of the Provincial Court, will be put in place, beginning with pilots in Kigali, Butare, and Ruhengeri, by December 2003.
10. We have, similarly, taken some important steps towards improving financial controls, transparency and accountability. An external audit group has submitted the draft of a comprehensive study of government bank accounts to government. Detailed analysis of these accounts has highlighted extrabudgetary and off-budget account movements, and has been followed up by appropriate legal action. Off-budget receipts, including privatization proceeds and revenue from frequency allocations, have been brought on budget, and the activities funded from these sources are now allocated through the Treasury account.1 During 2001, public accountants were established in all line ministries, and will begin filing quarterly reports during March 2003. A beginning has been made in developing a central government internal audit system—some auditors have been put in place within the line ministries, and with the help of the Auditor General's office, a procedural manual has been developed and some auditors have been trained.
11. The office of the Auditor General has continued to expand and broaden the scope of its activities. Audits of the 2000 accounts of 27 public sector entities, including 8 ministries, were completed in December 2001 and submitted to the President, the Speaker of the National Assembly, and the Chief Justice of the Supreme Court. A parliamentary committee is currently reviewing the reports and it is expected that they will be discussed in a meeting of the Budget Committee open to all parliamentarians and the public by end-September 2002. The government will make access to audits of five ministries for 1999 by the Auditor General's Office freely available to the public before year-end.2
12. Substantial headway has also been made in reinforcing revenue administration and in eliminating departures from appropriate application of tax laws. Discretionary exemptions from direct and indirect taxes, mainly to donors and NGOs, have been largely eliminated, and a database has been established for tracking the tax expenditures from customs duties and the VAT associated with the implementation of existing policies. In addition, procedures are being implemented to verify that goods brought into Rwanda on a duty free basis under existing policies are in fact used for the stated purposes.3
13. The Rwanda Revenue Authority (RRA) significantly improved its performance during 2001: targets for voluntary declaration and tax payment compliance rates for profit taxation have improved (largely meeting a program benchmark), declaration rates for small and medium-sized enterprises exceeded the target, and tax declarations of large companies largely were on-track. The rate for profit tax collections within a month of assessment lagged, however, behind the 50 percent target for much of the year due to legally established payment periods, as well as capacity constraints of the public notary, which have now been addressed. The reform of the personal income tax (TPR) has been further delayed, due to a number of technical issues.
14. On the expenditure side, a number of steps have been taken to strengthen budget implementation and monitoring. However, the system is still in its initial stages and more progress needs to be made. A circular is being prepared defining more specifically the scope of work of the auditors and the procedural manual will soon undergo refinement. To improve monitoring capacity, the expenditure recording system has been decentralized to central government ministries allowing ministries to directly follow their own accounts.
15. Civil service reform is advancing with the implementation of the new provincial organigrams. Redeployment within each province has been completed, and redeployment between provinces is expected to be completed with some delay in January 2003. Preparation of organigrams for the districts is in the initial stages, and there will be a need to revisit the central government organigrams to adequately reflect changes due to the decentralization exercise.
16. While slower than had been envisaged, some gains have been registered in the privatization agenda—12 companies were privatized in 2001. In addition, the government has reached agreement with the World Bank on the privatization process for Rwandatel and the recruitment of an advisor is under way. With this, it is estimated that Rwandatel's privatization will be completed in 15 months. An advisor was recruited for the pilot privatization of the two tea factories, in collaboration with the World Bank in October 2001 and a call for bidders is expected shortly. Progress has been made toward putting Electrogaz, the utility company, under private management: the pre-qualification phase for bidders has been completed and five bidders have been short listed; and, as the terms of the management contract have been agreed with the World Bank, it is expected that the bidding and subsequent selection process can be completed by December 2002.
17. A number of significant landmarks were realized in financial sector structural reforms (see Box 1). The Arbitration Center was granted legal person status in January 2002 and began operations. To enable loan recovery from real estate guarantees, the Office of the Public Notary was opened in accordance with the new civil service organigrams (cadres organiques). At the same time, the accelerated loan recovery procedure (voie parée), which had been suspended in 1997, was reinstated in November 2001. In microfinance, strategic audits were completed for the UBP—the major microfinance agency—by March 2001 and a restructuring plan was been agreed with the World Bank. While the government has decided, in principle, to restart the CHR (Caisse Hypothecaire du Rwanda), further action will reflect the findings of a financial sector study that is being undertaken in collaboration with the World Bank.
18. In the banking system, central bank supervisors found that about 40 percent of outstanding loans from commercial banks at end-September 2001 were nonperforming and, as a consequence, a number commercial banks will need to add to their capital. A substantial share of the nonperforming loans, largely extended after 1994, are related to real estate investments hurt by the scaling down of activities in Rwanda by NGOs and international aid organizations, and transportation projects hit by the imposition of axle weight restrictions on trucks transiting Tanzania and Kenya. However, the incidence of nonperforming loans in other sectors suggests that additional factors may have contributed to the buildup in problems, including a post-1994 decline in the effectiveness of the legal system in commercial and banking matters that has undermined loan compliance and enforcement. In light of this, efforts to address these problems will be sustained in the period ahead.
19. The first full Poverty Reduction Strategy Paper (PRSP) was issued on June 21, 2002, building on wide consultations that were successfully held at the grass-roots level and on a host of comments received after having widely circulated a full draft of the paper.
20. Although some delays have been experienced, progress has been made in regularizing relations and implementing agreements reached with external creditors. Outstanding arrears (US$5.5 million) to the OPEC Fund were cleared during the last quarter of 2001. Regarding the Paris Club agreement signed in May 2001, which provided for a topping up of debt relief to Cologne terms, due to an administrative delay, payments have continued on the basis of the Naples agreement signed in 1998 (with the exception of Austria, which informed the authorities that any amounts paid would be deposited into a suspense account). Following the resolution of these difficulties in mid-April 2002, a further extension of the deadline for the conclusion of bilateral agreements has been requested. The Paris Club agreed to extend the deadline for the conclusion of bilateral agreements to September 30, 2002 and we are committed to concluding these negotiations by the revised deadline. We have also requested an extension of the consolidation period from the Paris Club to enable the provision of debt relief under Cologne terms. A decision by the Paris Club is pending, subject to approval of the new PRGF arrangement by the Executive Board. As regards non-Paris Club creditors, an agreement was reached with the People's Republic of China in November 2001 providing for the cancellation of its outstanding arrears, as well as for part of its remaining stock of debt, amounting to US$16.3 million. We remain committed to reaching rescheduling agreements with the remaining non-Paris Club creditors on terms that are at least as favorable as those provided by the Paris Club creditors.
II. Medium-Term Policy Framework
21. Strong economic growth and stable macroeconomic conditions are keystones in the effort to transform the Rwandan economy. Increased productivity, the creation of an educated, healthy, and fully employed workforce, and the progressive eradication of poverty are our goals. In achieving these, the elements critical to supporting a dynamic, market-oriented economy will be set firmly in place: (i) enabling public institutions, including a commercial chamber in the court system, regulatory agencies, and strengthened government financial administration; (ii) a well-focused public expenditure program supported by sustainable revenue and financial policies (iii) an energized private sector that will include public enterprises slated for privatization; (iv) a sound and competitive banking system; (iv) reliable and efficient utilities; and (v) rehabilitated economic infrastructure. This national effort will be further strengthened by a progressive deepening of the regional economy, including through our participation in COMESA and through other bilateral and multilateral initiatives.
22. In line with this approach and given our population growth rate of 3 percent, Rwanda's macroeconomic policies will need to assure that real GDP grows by at least 6 percent a year, while keeping inflation in check (with an annual average of about 3 percent), the external current account improves steadily to a sustainable position, and appropriate steps are taken to reduce vulnerability to shocks, including by maintaining an adequate level of gross official reserves. In this regard, the government aims to bring its debt to a sustainable level by targeting a net present value (NPV) of debt-to-exports ratio of below 150 percent over the medium and long term.
23. Over the medium term, government saving will be strengthened substantially with the overall fiscal deficit limited to 9.9 percent of GDP in 2002, and falling to 9.4 percent in 2003, and 8.0 percent in 2004. Targeted improvements in public institutions, in the health and competitiveness of the financial system, and in regional integration will progressively improve the benefit accrued from moving from the informal to the formal sector and thus extend the tax base and contribute to improved revenue collections. Added to this, revenue measures and continued improvements in tax administration will contribute to strengthening the government's revenue base. Tax policy will be designed to be pro-poor and to facilitate private sector development for growth and poverty reduction. Furthermore, following the completion of transitional programs including Gacaca, demobilization, and decentralization, associated spending will no longer be required and deficits will fall substantially. The government, in collaboration with DfID, is currently carrying out a poverty and social impact assessment (PSIA). We intend to discuss the findings of the PSIA with the staff of the IMF and the World Bank and with other key stakeholders later this year. The PSIA findings and subsequent discussions will be taken into account in reviewing possibilities for accommodating supplemental grant income that may become available within the fiscal and monetary policies set out in the following paragraphs.
24. Improvements in the revenue base will be accompanied by increased efficiency and refined prioritization in the expenditure program. Budget design, implementation, monitoring, and reporting will be strengthened. In particular, budgeting will reflect the priorities identified in the PRSP, encompass public expenditure management at the central, province, and district level, and provide for necessary accountability.
25. A sound monetary program will accompany the fiscal program. While maintaining a firm ceiling on the growth of broad money, monetary programs will also be consistent with an ample expansion of credit to the private sector, and the maintenance of a comfortable foreign reserve cover of six months of imports.
III. The Economic Program for 2002
26. In line with the medium-term objectives outlined above, the program for 2002 aims at avoiding a further deterioration in the macroeconomic imbalances and taking further steps toward poverty reduction. The macroeconomic targets are (i) achieving real GDP growth of 7.3 percent; (ii) limiting inflation to about 3 percent; and (iii) maintaining the gross international reserves cover at about 5.9 months of imports.
A. National Transformation and the Economy
27. Key national initiatives toward decentralization, demobilization, and reconciliation will set the context for the economic program for 2002. Under the demobilization initiative, 20,000 soldiers will be demobilized by 2004, 15,000 ex-FAR personnel already in Rwanda will receive a recognition of service allowance, and 25,000 ex-combatants returning from the Democratic Republic of the Congo will be reintegrated into the Rwandese society—5,000 of them into the army. In parallel, the total size of the armed forces will be substantially reduced by 2005. The traditional court system, GACACA, will be re-established on a major scale to promptly resolve, at the community level, the cases of more than 100,000 persons detained following the genocide, and prison conditions will be improved. Also included in the initiatives will be the preparation of a new constitution and for national democratic elections during 2003. Within this framework, and consistent with the policies set out in the PRSP, resources will be refocused to productive activities and on creating a strong economic base at the community level. This effort will build on the achievements noted in section I of this memorandum, and be supported by the macroeconomic and structural policies set out in the following sections.
28. An established social safety net is critical to assuring the equitability and sustainability of economic policies. At present, the safety net is targeted to the needs of orphans and for assistance to the victims of the genocide. Transfers for the latter will be funded through the Fund for the Victims of the Genocide, which will continue to receive a budgetary allocation equal to 5 percent of domestic revenues. During 2002, the government will conduct a systematic review of the resources required to provide basic support for orphanages and orphans, and those required to meet its commitments to the victims of the genocide. The full assessment will be provided to parliament, along with a report on resources currently available to meet these needs, including from international donors.
B. Macroeconomic Policies
29. The overall fiscal deficit of 9.9 percent of GDP targeted for 2002 balances the resource requirements for implementing national initiatives and supporting core government activities against the need to achieve macroeconomic stability in the near term and in assuring sustainability over the medium and long term. As part of this effort, a limited number of revenue measures will be implemented, following parliamentary ratification on July 1, 2002: (i) in order to promote production, the government will announce that the corporate income tax rate will be reduced from 40 percent to 35 percent; (ii) at the same time, the VAT rate will be increased from 15 percent to 17 percent—moving toward the regional average and strengthening the revenue base; and (iii) in line with the strategy of strong regional economic relations, import tariff rates will be aligned with the preliminary proposal for the COMESA common external tariff, with rates set of 0, 5, 15, and 30 percent.
30. The revenue base will be further strengthened during 2003–04 by the introduction, beginning on January 1, 2003, of a tax on in-kind benefits under the professional income tax, and the introduction of an excise tax on new and used cars. In addition, in the event that increased consumption levels during June–October 2002 do not credibly establish the likelihood that excise tax objectives for 2003, as discussed with the Fund staff, will be achieved, the excise tax rate for beer will be returned to the 2001 level with effect from January 1, 2003. Additional steps required to achieve revenue objectives, including a possible further increase in the VAT rate or equivalent nontariff measures, will be implemented beginning in 2004. These key measures will be supported by the continued strengthening of the Rwanda Revenue Authority and complemented by a comprehensive study of exemptions and incentives granted under the law and through investment agreements. Any required modification to tax concessions, based on the findings of that study, will be implemented as soon as feasible. A summary listing of core targeted policies and administrative improvements can be found in Table 3 of this memorandum.
31. The strengthened income stream will allow government to implement its program of social, priority, and exceptional spending,4 as identified in the PRSP, and progressively strengthen core government administration while meeting its fiscal targets. Reflecting the positions set out in the PRSP, the new Common Development Fund—a fund earmarked for capital projects identified and implemented at the district level, the road fund, and expenditures for employment and social security promotion have been classified as priorities, while central support services have been reduced in importance. Given the limited administrative capacity at the district level, however, the CDF will be phased in more gradually than initially planned. The budget also provides for funding activities key to nation building: demobilization/reintegration, decentralization, and community reconciliation noted in paragraph 27.
32. In the area of 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 2002 and beyond, which is also consistent with the macroeconomic goals under the program. The 2002 fiscal program will increase capital expenditure to 6.8 percent of GDP, compared with an estimated 6.6 percent for 2001. Such outlays are expected to increase to 7.5 percent of GDP by 2004. In order to improve spending efficiency, the government plans to strengthen the development coordination agency (CEPEX) with the assistance of the World Bank.
33. As the settlement of outstanding government obligations incurred prior to 2000 is an important element in the overall strategy for establishing social unity and in restoring financial solvency in key areas of the private sector, additional payments to clear such obligations will continue during 2002–04. As the documentation normally required for establishing the validity of some recognized claims has been lost, it has been necessary in some cases to establish exceptional procedures for payments authorizations. In strengthening those procedures, detailed policy guidelines have been developed that provide the basis for determining the qualification and priority of claims for payment without discretion. Beginning on July 1, 2002, authorizations to settle these domestic obligations will be based solely on these guidelines. Furthermore, it has been decided that, in order to clearly establish and limit the extent of pre-2000 obligations, June 30, 2003 will be set as a deadline for lodging new claims.
34. For 2002, the target for broad money growth has been set in line with nominal GDP growth of 9.4 percent, while taking into account the larger-than-targeted money growth in 2001. Targets for developments in the monetary base have been established in line with this. As reserve money growth exceeded the target trajectory during the first quarter of 2002, the NBR has recently tightened its stance, both through money market interventions and as signaled through an increase in the discount rate, following a formula recently established by the NBR, from 11.5 percent to 13 percent, on June 14, 2002. In this regard, the NBR will quickly absorb excess liquidity in banks in the period ahead in order to limit volatility in the money multiplier and to maintain monetary control.
35. The level of gross international reserves of the NBR attained at the end of 2001 corresponded to an import cover 5.7 months. In light of Rwanda's continuing susceptibility to external shocks and the volatility of aid flows, the NBR will aim to improve its net foreign assets position by some US$16.5 million (0.4 months of import cover). In line with its foreign exchange budget (plan de trésorerie), the NBR will adjust the volume of foreign currency offered at its weekly foreign exchange auctions accordingly, and allow for the necessary exchange rate adjustments to clear the market. Net credit to government provided by the NBR will decline by RF 9 billion, 7 percent of beginning-of-period broad money, as external financing will permit government to eliminate its overdraft and accumulate deposits at the central bank. These policies are consistent with a 13 percent growth of credit to the private sector.
36. Regarding the NBR's foreign exchange transactions between auctions, the current system of exchange rate determination will be reviewed with a view to ensuring that deviations from the market rate are kept at a minimum.
37. The external current account deficit (excluding official transfers) is expected to deteriorate slightly, reaching about 17.0 percent of GDP in 2002. This deterioration is for the most part the result of a sharp reduction in mining receipts and the continued depressed levels of coffee and tea prices in international markets. Over the medium term, the current account deficit is expected to decline to about 13.5 percent of GDP by 2004, as a result of fiscal consolidation, improved domestic productivity, and greater export capacity. Reflecting the changing market incentives that will accompany the likely gradual reduction in aid dependence and support the improvement in the current account balance, real exchange rate adjustments are anticipated. Over the medium term, import growth will moderate, reflecting some domestic substitution, and exports will diversify as a result of the regional trade strategy. Rwanda reduced its import tariffs on COMESA products by 80 percent in January 2002, and will enter the COMESA free trade area by the end of 2004.
38. Trade diversification will be essential for attaining a lasting reduction in external imbalances. Exports are expected to benefit from the gradual recovery of prices but, more importantly, from new policy initiatives. The new strategy on coffee, currently under preparation, envisages the gradual substitution of subsistence production with a market-based system. Coffee quality will be improved through the construction of washing stations, higher yielding varieties will be planted, and fertilizer use expanded, in conjunction with training for farmers. Tea production will benefit from the privatization of tea factories. With coltan exports, largely dependent on world market developments, subdued, the development of horticulture including flowers, bananas, pulses, and tubers will contribute to the expansion. With the return of peace to the region, tourism could also prove an important source of foreign exchange.
39. The authorities are working closely with creditors to assure necessary financing for the macroeconomic program for 2002. In order to limit the deterioration in the NPV of debt-to-exports ratio, grants and highly concessional credits will be substituted for loans (including project loans) to the full extent possible. In any case, the commitment to contract only concessional debt will remain in place. In this regard, the OPEC Fund has been asked to extend the maturity of an already contracted loan in order to meet the agreed concessionality threshold.
40. The financing plan for 2002 assumes that budgetary grants, including HIPC interim assistance, will be disbursed as expected and that rescheduling agreements will be reached with all creditors. A request for additional interim assistance from the Fund is being submitted together with the request for a new PRGF arrangement. The government has regularized all nonreschedulable arrears to creditors. The government will redouble its efforts to reach rescheduling agreements with all non-Paris Club bilateral creditors at terms which are as favorable as those provided by the Paris Club creditors and to ensure the participation of all creditors in the enhanced HIPC Initiative. Upon successful approval of the new PRGF arrangement, the Paris Club will decide on whether to provide additional debt relief on Cologne terms.
C. Enabling Public Institutions
41. Decentralization of government to the provincial and district level will reinforce accountability, refine the focus of government spending, and improve the delivery of public services. The legal framework for fiscal decentralization was largely established during 2000–01.5 Additional legislation adopted in early 2002 established the revenue base and financial management for district governments. As the full implementation of the framework will depend on effective communication between levels of government and an ongoing adaptation of responsibilities and resources, the central government is taking steps to ensure that provincial and district governments report the necessary information. During 2002, the government will seek funding to extend the expenditure recording system to the level of the provinces—where the system will also be available for use by District governments. The central government will also give priority to obtaining financial support for training needed to strengthen the public accounting and internal audit functions for central government ministries, provincial administrations, and district governments.
42. For 2002, districts will provide provincial administrations with information on the resources available to them, and their respective expenditure requirements. Preparation of the budget for 2003 will reflect consultations between the central government and the districts, reconciling the expenditure requirements of the various districts with available resources, including transfers from the central government. Beginning in 2004, representatives of the various levels of government will jointly provide to parliament an assessment of the strengths and weaknesses of the existing legal framework, and an assessment of the measures needed to resolve outstanding problems, particularly as regards ensuring an equitable allocation of resources across district governments.
Strengthening formal sector institutions and governance
43. Strengthening the legal framework and institutions is critical to extending the benefits of formal sector participation and increasing productivity. To this end, the Ministry of Justice is working to set in place a fully operational commercial court by 2003. In the near term, the Ministry of Justice will strengthen the operational capacity of the Arbitration Center in order to facilitate the settlement of commercial disputes. Having granted a status of legal person to the Arbitration Center in 2001, training for judges is now under way.
Civil service reform
44. A well-organized, trained, and motivated civil service is essential for ensuring that public resources are appropriately and efficiently used and that public services are provided promptly and at a good quality. In moving forward in the reform of the civil service, new organigrams are being completed for the provincial level of government, and organigrams for the district level will follow. We are similarly reviewing the organization of central line ministries. Computerization of the complete human resource management process remains a priority and the full integration of the information systems of the line different ministries has been targeted for end-2002. Moreover, improving the quality of the civil service is a government priority.
Administration of public finances
45. Initiatives to strengthen the administration of public finances aim at improving the effectiveness and efficiency in the use of government resources and, by creating a reliable system for monitoring and accountability, assuring that public finances are applied as directed under the budget and the laws. Given this, a wide-ranging program of activities to enhance the transparency of government policies and practices, many of which also meet government commitments under the HIPC Initiative to improve the capacity to track poverty-related expenditures, is being undertaken at all levels of government.
46. As an immediate step in this direction, the government intends to follow up on actions taken during 2001 and early-2002. In this regard, monitoring of government finances, as reported in the monetary survey, will be reviewed and, if necessary, revised based on the final report of the auditor on government bank accounts and off-budget account movements. Any relevant additional off-budget revenue and spending identified under the study will be brought into the 2003 budget. In the meantime, new guidelines for the opening, closing, and monitoring of government bank accounts are being implemented.
47. Strengthening the legal framework that guides the administration of public finances is, thus, a priority. As part of this effort, the government has completed a draft Organic Budget Law; and a draft Law on the Management of the Public Accounts. A legal framework supporting the operations of the National Tender Board, including procurement regulations, has been submitted to the cabinet for consideration. A process to elaborate a new law on the Supreme Court is in preparation and its adoption is expected by December 2002. With the passage of this legislation, it is expected that the National Assembly would approve the Organic Budget Law and the Law on the Management of Public Accounts by June 2003. In the event that the needed legislation is delayed, modified laws containing those elements of the Organic Budget Law and the Law on the Management of Public Accounts consistent with existing legislation would be submitted to the National Assembly no later than June 2003. Additional steps will be taken during 2002–03 to strengthen the legal framework, including the development of draft legislation to create a formal appeals process for taxpayers, and a comprehensive bill of taxpayer's rights. The establishment of both a tax and commercial chambers within the court system will be given priority during the program period and draft legislation establishing the public accounting mechanisms and a public investment regulatory framework will be presented to the Cabinet by June 2003. The latter will facilitate the complete integration of the development and ordinary budgets by 2004.
48. Further strengthening the activities of the Public Accounts and internal audit functions (Inspecteur Géneral des Finances) are also critical for creating the capacity to monitor and control expenditures. To this end, an inventory of assets will be completed for all central government line ministries by end-March 2003, subject to the availability of technical assistance. This inventory will, subsequently, be expanded to capture government assets held by provinces, public enterprises, and acquired as part of project implementation.6 In addition, building on work recently completed by the African Development Bank (AfDB), a fully implemented chart of accounts for all central government agencies is being targeted for completion by end-2003, with similar accounts for provincial and district governments to be ready by end-June 2004.
49. These steps will also allow government to improve both the range and quality of information on government activities available to the parliament and the public. To this end, statistics of government financial operations will be published following the Government Finance Statistics (GFS) format on a quarterly basis, beginning in October 2002, based on September 2002 statistics. In addition, the budget for 2003 will be expanded to include information on budget allocations and (estimated) expenditures for the two previous fiscal years, consistent with established good practice. For 2003, budget materials available to parliament and the public would include: (i) a statement of tax expenditures associated with both existing policies and any new policies included in the budget; (ii) a functional classification for past expenditures and those implied in the proposed budget; (iii) a preliminary statement of assets and liabilities for all levels of government; and (iv) financial statements of public enterprises. For 2004, materials would be expanded to include (v) a consolidated statement of the expenditure obligations, resources, and budgets of the Provincial and District governments; (vi) a fiscal risk assessment; (vii) consolidated district budgets; (viii) a statement of consolidated government equity holdings; (ix) integration of current and capital budgets; and (x) a list of all contingent liabilities, including those arising from the decentralization process. Achieving these objectives will be facilitated by technical assistance from supporting partners, including the IMF.
50. To avoid any accumulation of new arrears, the government is committed to further improvements in the cash budgeting process. The budget for 2002 designates certain expenditures—including those identified as important for poverty reduction as priority areas to be protected from any compression of expenditures in the event of a shortfall in resources, compared with amounts allocated in the budget. During 2002, the government will design and implement a cash budget system consistent with these objectives, including quarterly expenditure ceilings and commitment controls to avoid any accumulation of new arrears. In addition, to assure that contingent liabilities are consistent with government priorities as set out in the PRSP, with immediate effect, new government loan guarantees will be extended only on the basis of loan-specific budget authorizations.
D. Energizing the Economy: Privatization, Utilities, Infrastructure, and Regional Integration
51. In close cooperation with the World Bank, the privatization secretariat will continue to execute its existing privatization strategy. Entities targeted for privatization and/or private management include the electric utility (Electrogaz), telecommunications (Rwandatel), and tea factories and estates. The privatization secretariat will also report on a monthly basis on its privatization receipts and its use of funds.
E. Financial Sector Reforms
52. Strengthening financial sector institutions is another critical element in improving productivity, extending the benefits of participation in the formal economy, and providing the resources needed to finance emerging private sector initiatives at appropriately low cost (a summary of core financial sector reforms is provided in Table 4). In particular, concerted action is currently required to address the problems of Rwanda's banking sector. Given the difficult circumstances of Rwanda's post-genocide recovery, a number of banks have accumulated substantial nonperforming loans. This problem is particularly severe in the case of one especially exposed bank. Recognizing the importance of promptly addressing this bank's problems, the NBR placed it under provisional control in May 2002 and appointed external advisors to develop a plan for its restructuring by year-end. While the details of the restructuring plan remain under development, the NBR-appointed controller has limited new loans extended by that bank to any single borrower to no more than RF 50 million, with effect from May 31, 2002 and external oversight has been strengthened in order to safeguard the bank's capital. The restructuring plan will be developed in consultation with the staffs of the World Bank and the IMF and understandings on the appropriateness of proposed steps would be reached with IMF staff before budgetary resources are committed. When the restructuring plan for this bank has been developed, further policy commitments will be agreed with IMF staff under the program.
53. Addressing the larger problem of nonperforming loans is critical to the establishment of the conditions, including an appropriate legal framework for credit recovery, under which the banking system will be able to provide credit widely and on reasonable terms. In light of this, the NBR is discussing working with the Ministry of Finance, the Ministry of Justice, and the Bankers' Association to identify ways to improve loan recovery. In this regard, an Action Plan detailing specific steps to be taken will be completed by December 2002, with implementation to begin in January 2003.
54. Presently, loan collection will be aided by the reinstatement of the accelerated loan recovery procedure (voie pareé). It is expected that, given recent improvements in the judicial system, past abuses of this procedure will not be repeated. In addition, the NBR is strengthening its Risks and Unpaid Debts Unit, which centralizes the credit information related to delinquent borrowers, in order to improve the quality of credit information. In the period ahead, the NBR will confer with the Bankers' Association on ways in which information on credit quality could be shared with commercial banks. The NBR intends to fully explore possibilities for fostering loan compliance.
55. While the above mentioned measures focus on the strengthening of borrower discipline, a financial sector study commissioned with the help of the World Bank aims at exploring ways to strengthen the overall financial sector and to develop Rwanda's capital market. An important question to be addressed is how to proceed with the high level of nonperforming loans in the banking system. The study will try to evaluate whether the establishment of an asset recovery vehicle in some form would be appropriate. This question will also be investigated within a Financial Sector Assessment Project jointly conducted by the staff of the World Bank and the Fund. In this regard, it should be emphasized that such an asset recovery vehicle should aim to avoid causing moral hazard or burdening the budget. On the basis of the studies noted above, a strategy to improve the management of the high volume of nonperforming loans will be formulated by June 2003 and an Action Plan will be in place by September 2003. Implementation of this plan is to begin in January 2004. Regarding the development of Rwanda's capital market, the financial sector study will investigate—among other options—whether a specialized housing bank can make a contribution toward accumulating long-term capital. Current plans to recapitalize the Caisse Hypothecaire du Rwanda (CHR) and to convert it into a housing bank have been postponed so that the results of this study can be reflected in decisions on moving forward.
56. Substantial progress has been made in the past year to strengthen banking supervision in Rwanda. The NBR will build on this progress and conduct three full-scope examinations in 2002 and another four in 2003. It is expected that at the end of December 2003, the present training program conducted with the assistance of a MAE resident advisor will be completed and that beginning in 2004 each bank will be subject to a full-scope examination each year. During 2002, the off-site supervision process will also be strengthened significantly. The scope of supervision will be extended to micro-finance operations and a Micro-Finance Supervision Unit in the NBR will be established by December 2002. Regarding the ongoing update of the prudential instructions, it is expected that in 2003 two new prudential instructions are going to be issued; one will specify the work required from independent auditors of commercial banks and the other will specify the public disclosure of the commercial banks' financial information. In addition, a new accounting plan for commercial banks is going to be developed, which is going to take effect in January 2004.
57. As existing legislation and institutional structure for preventing money laundering does not currently meet recently established guidelines, the government has requested technical assistance in drafting adequate legislation, and in training and setting up an enforcement unit at the NBR.
IV. Program Coordination and Monitoring
Performance criteria, benchmarks, and reviews
58. The program supported by the new three-year PRGF arrangement 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 benchmarks at end-September 2002, quantitative performance criteria for end-December 2002 and a structural performance criterion and structural benchmarks through January 1, 2003, and will be carried out in conjunction with reaching understandings on a new budget for 2003 and on a restructuring plan of a specified commercial bank. The second review will be based on performance of quantitative benchmarks as of end-March 2003, to be set at the time of the first review, and quantitative and structural performance criteria and benchmarks through end-June 2003, and will be completed by mid-September 2003. Quantitative performance criteria will include floors on net foreign assets of the NBR and on recurrent priority spending as well as ceilings on reserve money, net credit to government by the banking system, the domestic fiscal deficit, new non-concessional external debt, short-term external debt, the accumulation of new external payment arrears except for external arrears that are subject to debt-rescheduling negotiations (to be monitored on a continuous basis), and on the net accumulation of domestic arrears. All external borrowing except for the Fund disbursements will be on concessional terms, defined as loans having a grant element of at least 50 percent. A complete list of quantitative and structural performance criteria and structural benchmarks is included in Tables 5 and 6, respectively. The attached Technical Memorandum of Understanding lays out the details of program design and terminology.
1Exceptions are limited to revenues collected for the road fund, which, although budgetary, are deposited in a separate account at the BNR operated by the Treasury, and fees collected by hospitals and schools.
2Information that might compromise national defense will be obscured in the version of the audit of the Ministry of Defense open to the public. A complete text version of the audit will be made available to key stakeholders.
3Preliminary information indicates that some of the food entering Rwanda on a duty-free basis is ultimately sold in domestic markets.
4 The elements covered under these programs are spelled out in the accompanying Technical Memorandum of Understanding.
5Law No. 43/2000, Organization and Functioning of the Province; Law No. 04/2001, Organization and Functioning of the District; Law No. 05/2001, Organization and Functioning of Urban Authorities; Law No. 07/2001, Organization and Functioning of the Town of Kigali.
6The census of government assets will not cover military assets, or land holdings where the legal status has not been determined. Assets acquired as part of project implementation are to be auctioned off and the revenues credited to the Treasury Account.
Technical Memorandum of Understanding
Annex B. Reclassifications
The following reclassification of data has been made to the monetary
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. 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.
|Table 1. Rwanda: Summary of Reporting Requirements|
|Status||Variable or Table||Reporting Frequency||Reporting delay from end of period covered||Report data electronically|
|A. Monetary and Foreign Exchange|
|PC||Net foreign assets NBR||Weekly||Seven days||Yes|
|PC||Reserve money||Weekly||Seven days||Yes|
|PC||Net credit to central government||Monthly||Three weeks||Yes|
|Table||Monthly balance sheet of the NBR||Monthly||Three weeks||Yes|
|Table||Summary balance sheet of the commercial banks||Monthly||Three weeks||Yes|
|Table||Individual balance sheets of the commercial banks||Monthly||Three weeks||Yes|
|Table||Details of public sector deposits with individual commercial banks||Quarterly||Three weeks||Yes|
|Table||Details of commercial banks' loan provisioning and capital adequacy||Monthly||Three weeks||Yes|
|Table||Monthly data on foreign exchange operations of commercial banks, the NBR, and foreign exchange bureaus||Monthly||Three weeks||Yes|
|Table||Net open foreign exchange positions of commercial banks and foreign exchange bureaus||Monthly||Three weeks||Yes|
|Table||Exchange rates||Weekly||Seven days||Yes|
|PC||New external government borrowing||Monthly||Three weeks|
|PC||Stock of short-term external government debt||Monthly||Three weeks|
|PC||Domestic arrears (repayment of the end-of-year stock of arrears and accumulation of new arrears)||Monthly||Three weeks||Yes|
|PC||External arrears||. . .1||. . .||Yes|
|OV||External budgetary support||Monthly||Three weeks||Yes|
|Table||Fiscal data (revenue, expenditure,2 priority expenditure, exceptional expenditure, wage bill)||Monthly||Three weeks||Yes|
|Table||Development budget implementation||Quarterly||Three weeks||Yes|
|Table||Scheduled debt service and payments||Quarterly||Three weeks||Yes|
|D. Public enterprises|
|Table||Public enterprises financial statements||Semi-annual||Four weeks|
|Table||Public enterprises bank deposits||Quarterly||Four weeks|
|Table||Estimated and actual tax payments of the public enterprises||Quarterly||Four weeks|
|E. Civil service|
|OV||Size of the civil service (core civil service and teachers)||Monthly||Three weeks||Yes|
|F. Balance of payments|
|Table||Export and imports||Monthly||Four weeks||Yes|
|Table||Detailed Balance of Payments||Quarterly||Four weeks|
|OV||CPI Kigali (NBR), urban, and rural (Minecofin)||Monthly||Four weeks||Yes|
1The authorities will notify immediately the Fund in case of incurrence of any nonreschedulable external arrears.
2On commitment basis (engagement) and on payment order basis (ordonnancement); the provision of fiscal data is based on the "flash reporting (aggregate and by ministry).
PC = performance criterion or quantitative benchmark;
QI = quantitative indicator;
OV= other variable.
2. Rwanda: Recurrent and Capital Priority Expenditure, 2002
(In millions of Rwanda francs)
|National police services||3,422|
|Soil conservation and water systems management||73|
|Agricultural extension and marketing||146|
|Promotion of trade and commerce||67|
|Industrial development and artisanal promotion||465|
|Pre-primary and primary education||1,859|
|Scientific and technological research||463|
|Youth and Sports||700|
|Research, acquisition, and conservation of the national heritage||158|
|Primary health care||754|
|Specialist care for major health problems||1,680|
|Development of health structures||101|
|Improvement in health management services||1,155|
|Transport and Communication||2,451|
|Development and modernization of communication infrastructures||145|
|Improvement in transport services||163|
|Rationalization and management of urban land||47|
|Development of transport infrastructure3||2,069|
|Support programs for promotion and development of women||192|
|Promotion of gender in development||47|
|Promotion of socio-economic equity||10|
|Civil service reform||380|
|Employment and social security promotion||68|
|Lands and resettlement||627|
|Land planning and management||328|
|Planning and supervision of housing amenities||183|
|Conservation and protection of the environment||98|
|Local government (excluding exceptional expenditure)||6,133|
|Promotion of children's rights||16|
|Decentralization (district transfers in recurrent budget)||1,370|
|Common development fund (district transfers in development budget)4||2,000|
|Energy and water resources||365|
|Water and sanitation||131|
|Mining and other geological programs||70|
|Methane gas unit||95|
Source: Rwandese authorities.
1/ All programs are classified as recurrent expenditures, except where marked.
2/ Province sub-programs have been allocated to the major Ministry under each program.
3/ Includes Road Fund.
4/ As part of capital expenditure.
3. Rwanda: Composition of Exceptional Expenditure, 2002
(In millions of Rwanda francs)
|Supplies for prisoners||1,300|
|GACACA Sensibilization, Ministry of Justice||50|
|Health insurance GACACA members||652|
|Victims of Genocide Fund (FARG)||5,025|
|Assistance to vulnerable groups||93|
|Reinsertion of vulnerable groups||50|
|Support to local initiatives (education)||54|
|Support to orphanages and ENA||56|
|Reinsertion of displaced groups from Gishwati||50|
|Reinsertion of street children||100|
|Good governance commissions|
|Human Rights National Commission||669|
|Commission for Unity and Reconciliation||565|
|Office of the Ombudsman||174|
|National Commission for the Fight Against AIDS||223|
|KIST (Kigali Institute for Science and Technology)||2,128|
|Printing flags and stamps||30|
|Diffusion of new national hymn||10|
|Public education (educational and technical equipment)||120|
|Family and public education (educational equipment)||4|
|National information system (technical equipment)||21|
|Defense of children's rights (technical equipment)||2|