Rwanda and the IMF
Press Release: IMF Completes Second and Third Reviews Under Rwanda's PRGF Arrangement, Approves US$1.68 Million Disbursement, and Grants Additional Interim Assistance of US$6.6 Million Under the Enhanced HIPC Initiative
June 10, 2004
Country's Policy Intentions Documents
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|Rwanda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Kigali, May 20, 2004
Mrs. Anne O. Krueger
Ten years after genocide, Rwanda has established strong democratic institutions with the adoption of a new constitution approved by referendum and the conduct of presidential and legislative elections. Government therefore believes that with these firm democratic institutions in place, Rwanda has created a strong foundation for a new future for full implementation of its poverty reduction strategy.
Our economic strategy in the medium-term is therefore in line with our policies and priorities set out in Vision 2020. These have been articulated in the participatory PRSP and subsequent sectoral strategies and also reflect the aspirations of the nation. In line with our economic strategy, we intend to implement strong policies that will raise agricultural productivity and export base to achieve external sustainability. We believe these are essential for wide ranging and sustainable poverty reduction.
In support of our political, economic and social programs, Government reaffirms its commitment to strengthen the foundation for regional peace and security in the Great Lakes area.
The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the 2003 program and sets out the objectives and policies that the government intends to pursue in 2004.
In light of the progress achieved in the implementation of the program for 2003, and given the supporting details provided in the MEFP, the Government of Rwanda requests a waiver for the missed observance of the performance criteria for end-June 2003 on the domestic fiscal balance, the net accumulation of domestic arrears, and the contracting of nonconcessional external loans; for end-December 2003 on the net foreign assets of the National Bank of Rwanda, reserve money, net banking system credit to government, the domestic fiscal balance, the net accumulation of domestic arrears, and the contracting of nonconcessional external loans; and for the structural performance criteria on the submission of a revised investment code, the issuance of financial instructions, and the incorporation of tax incentives into the structure of the income tax. The Government also requests a third disbursement under its PRGF arrangement with the Fund in an amount equivalent to SDR 1.142 million, following completion of the second and third reviews by the Fund's Executive Board. In view of the delay of the completion point under the enhanced HIPC Initiative compared to the original schedule of December 2002, the government requests additional interim HIPC Initiative assistance in an amount of SDR 4.482 million for the period from June 9, 2004 to June 8, 2005.
The Government of Rwanda will continue to provide the IMF with such information as the Fund requires to assess Rwanda's progress in implementing the policies described in this letter and the accompanying MEFP. In addition, the Government will continue to consult with the Fund on its economic and financial policies, in accord with the Fund's policies and practices on such consultations.
I. Performance Under the 2003 Program
1. Macroeconomic performance during 2003, under the second annual PRGF arrangement, was greatly affected by poor weather and by unprogrammed spending related to the challenge of assuring a smooth political transition. Nonetheless, with strengthened economic institutions and financial management and oversight, and solid achievements in the implementation of poverty programs, including the achievement of a substantially higher primary school enrollment rate and a reduced incidence of communicable diseases, the foundation has been set for rapid progress in 2004, under the poverty reduction and growth strategy.
2. The rate of real GDP growth fell below the targeted range in 2003, as poor rains led to a fall in agricultural output. In turn, as a result of sharp increases in food prices, along with rising import prices, inflation edged up to 7.7 percent at end-2003, compared with the program target of 3 percent. As grant financing for the political transition and health programs did not materialize and, with other external assistance disbursements delayed to January 2004, international reserves fell by US$29 million, to the equivalent of 5.0 months of import cover.
3. The nonobservance of quantitative performance criteria for end-December 2003 resulted from overspending elections, the financing of a hotel project, and delayed donor disbursements of external program assistance. Action is being taken to correct these slippages in 2004. These include a substantial reduction in net credit to government from the banking system, slower reserve money growth, and a fiscal program that incorporates contingent cuts to assure that the domestic fiscal balance remains consistent with macroeconomic objectives. The missed performance criteria on new non-concessional external debt resulted from an energy rehabilitation loan with a grant element marginally below the 50 percent floor set in the program. The financing for this project will be brought to the required concessionality level by end-June 2004.
4. On the structural side, the structural performance criteria for submission of a revised investment code, issuance of financial instructions for more effective expenditure management, and incorporation of tax incentives into the structure of the income tax were not observed as a result of human capacity constraints. Firm dates have been set for the completion of the missed criteria and action is being taken to assure their realization. Three prior actions, now being implemented, further underscore the strength of resolve on the advancement of the structural agenda.
5. Some progress was achieved toward the fiscal objectives under the 2003 program. Domestic revenue collections, equivalent to 13.5 percent of GDP modestly exceeded the projected level, as weaker-than-expected excise taxes were offset by improved direct tax performance, largely due to changes in the tax on professional remuneration. Nontax revenue was 0.1 percentage points of GDP above the projected level, as improved collection efficiency resulting from the transfer of administrative fees collection to the Rwanda Revenue Authority (RRA) offset disappointing dividend income from public enterprises.
6. Domestic spending exceeded the program target by 1.2 percent of GDP, largely as a result of spending on elections and, late in the year, on unanticipated goods and service outlays. Nonetheless, the performance criteria for recurrent priority spending were met and recurrent defense spending was held to 2.7 percent of GDP, compared with 2.9 percent in 2002, and down from 3.3 percent in 2001. Expenditure on the constitutional referendum in May, and on presidential and legislative elections during August-September 2003, equivalent to 1.6 percent of GDP was roughly twice the budgeted amount. Overall, exceptional spending exceeded the (adjusted) indicative program target by 0.5 percent of GDP. Partly offsetting the impact of this higher spending, savings equivalent to 0.1 percent of GDP were realized on domestically financed capital spending, and outlays for the strategic petroleum reserve were more than halved. Finally, despite progress towards regional peace, voluntary participation in the demobilization program fell short of projections and 0.6 percent of GDP in related outlays were deferred to 2004. Largely as a result of startup delays for grant-financed road works, preliminary data indicate that foreign-financed development expenditures for 2003 were equivalent to about 4.2 percent of GDP—2 percentage points below the programmed level.
7. Given this, the domestic fiscal deficit amounted to RF 50 billion (5.5 percent of GDP) in 2003, exceeding the (adjusted) ceiling set as a performance criterion by RF 26.7 billion. The overall deficit on central government operations amounted to 10.5 percent of GDP before grants, and 2.5 percent of GDP after grants. While the settlement of pre-2003 domestic arrears exceeded the programmed value for end-December 2003 only marginally (by 0.1 percentage points of GDP), the performance criterion on the net reduction of domestic arrears was missed by 1.7 percent of GDP, as the stock of bills payable for 2003 increased substantially because government payments were slowed in light of expansionary monetary conditions.
8. The implementation of monetary policy during 2003 was complicated by the reliance on central bank credit to cover the cost of higher-than-programmed election spending that emerged beginning in July 2003. Additional factors adding to the liquidity expansion were the unprogrammed domestic financing of a hotel project, the relaxation of the limit on the net foreign exchange positions of commercial banks, and lending to the economy by nonbank financial institutions, following the recapitalization of the UBPR credit union under a World Bank loan.
9. As the annual growth rate of broad money (at current exchange rates) rose from 15.8 percent in June 2003 to a peak of 19.0 percent in September (the September reserve money benchmark was missed by 8.2 percent), the National Bank of Rwanda (NBR) took corrective measures. It raised the discount rate from 13.5 percent to 14.5 percent in August and withdrew liquidity from the system through open market operations and higher foreign exchange sales to the market. Consequently, the interest rates on treasury bills and the central bank intervention rate rose from about 11 percent in mid-September to about 13 percent in mid-November. However, the central bank was unable to fully sterilize the fiscal impulse, and reserve money exceeded the performance criterion that had been set for end-2003 by 9.6 percent.
10. Largely as a result of shortfalls and delays in external assistance inflows, the net foreign assets of the NBR declined to RF 57.8 billion at end-2003, from RF 72.6 billion at end-2002, falling short of the (adjusted) floor set under the program by RF 27.8 billion.1 Net credit to government from the banking system increased to RF 17½ billion during 2003, exceeding the (adjusted) program ceiling by RF 32.6 billion. In addition, banking system credit to the economy grew by 14.8 percent—7 percentage points above the targeted level. As a result, broad money grew by 12.2 percent (on an annual basis) during 2003—4.2 percentage points above the targeted rate (evaluated at the program exchange rate).
11. The higher-than-programmed expansion in monetary aggregates, along with weak export performance (see below) contributed to growing pressure on the foreign exchange market during the second half of 2003. The Rwanda franc/U.S. dollar exchange rate, which had depreciated by 4.8 percent during the first half of 2003, weakened by 8.2 percent during the second half of the year, despite an increase in the amount of foreign exchange offered by the NBR in its weekly auctions from US$1.3 million to US$1.8 million on average.
12. External sector performance deteriorated in 2003, reflecting the collapse of the international coltan market, weak international markets for coffee and tea, and slow progress towards improving productivity and establishing niche markets. While merchandise exports fell from US$67 million in 2002 to US$63 million in 2003, imports of goods and services increased moderately, causing a further weakening of the current account balance by 3.2 percentage points to 19.8 percent of GDP. External budgetary assistance inflows fell short of the projected value by US$73 million (4.4 percent of GDP), as projected World Bank and African Development Bank loans, and European Union grant disbursements were delayed, and additional grant financing to cover election costs and one-off health expenditures, which had been projected at US$18 million, amounted to only US$6 million. Given this lower-than-anticipated external budgetary assistance, the NBR reduced its net foreign assets to US$113 million at end-December 2003, a decline of US$30 million relative to end-2002.
13. In February 2003, a loan agreement was signed with the OPEC Fund and Arab Bank for African Development (BADEA) as part of a financing package for an energy sector project. While the grant element of this loan was substantial (47 percent), it did not meet the concessionality test set under the PRGF arrangement and, as a result, the performance criteria for new nonconcessional external debt for end-June and end-December 2003 and the corresponding benchmark for end-September 2003 were not observed. Agreements have been reached that will increase the grant element of the loan and bring the terms within the required concessionality threshold. In this regard, ratification by BADEA's Board of Directors is scheduled for June 9, 2004. Government guarantees issued in August 2003 for an external US$10 million loan on commercial terms, as part of the financing package for a major hotel project will be repaid in full by end-May, 2004. As no new nonreschedulable arrears have been accumulated in 2003, the performance criterion for external arrears was met. To strengthen external debt service management, an action plan is currently being implemented. Furthermore, the second phase of a capacity building program with Debt Relief International, was started in January 2003. Activities so far undertaken have included three country missions to deal with institutional reforms as well as the organization of a workshop on Rwanda's longer-term debt sustainability.
14. Rwanda's external debt amounted to US$1.4 billion (85 percent of GDP) at end-2003. Given the heavy debt service burden associated with this stock, Rwanda continues to depend on interim debt relief from its creditors. In this regard, Paris Club creditors, in June 2003, decided to extend the consolidation period from June 20, 2003 to June 30, 2004 on the basis of Cologne terms. Paris Club creditors have been requested to further extend the consolidation to end-June 2005. During 2003, Rwanda reached agreements on debt cancellation or rescheduling with some of its Paris Club creditors; remaining negotiations are expected to be concluded prior to the June 30, 2004 deadline for reaching bilateral agreements. Rwanda is also making efforts to reach rescheduling agreements with its non-Paris Club creditors. An agreement with the Kuwait Fund was signed on February 5, 2003, rescheduling the stock of debt including arrears.
15. The agenda for structural reform in 2003 included steps to improve the efficiency and productivity of the private sector, and to strengthen the effectiveness, comprehensiveness and accountability of public finances and the financial sector. Substantial progress was achieved in each of these areas. In a step to strengthen Rwanda's public utilities, a five-year management contract for the electricity and gas parastatal, Electrogaz, was agreed in March 2003 and entered into operation in October, 2003. In telecommunications, the offer for sale of the public telecommunications company, Rwandatel, will be issued in May 2004. As a critical component of the export promotion strategy set out in the PRSP, the government sold 13.4 percent of its shares in Sorwathe (a tea processing factory) to a private investor and a further 10 percent to a farmer's association. In addition, two state-owned tea estates were offered for sale at end-August 2003, following the adoption of enabling legislation by the National Assembly. One of the bids received in early-February 2004 remains under review, with a decision expected shortly, while the other bid has been accepted. The privatization of three rice processors, and mining, printing, hotel, and livestock enterprises will constitute the next steps in this area.
16. Similarly, important steps were taken towards addressing structural issues in the financial sector. The framework for the supervision of microfinance institutions was strengthened, with on-site inspections slated to begin in 2004. In addition, during 2003, loan recovery improved, access to mortgage finance was widened, and information sharing was initiated between banks on creditor risk. With this, the share of gross nonperforming loans in total loans stabilized at 37.4 percent at end-December 2003. A World-Bank-sponsored financial sector study was completed in April 2004. In addition, the restructuring of the Caisse Hypothécaire du Rwanda (CHR) is planned.
17. While the tender for sale of the Banque Commerciale du Rwanda (BCR, a structural benchmark for end-June 2003) was delayed, substantial progress was made towards the sale of the bank. An action plan was implemented for improving BCR's profitability ahead of privatization. The bank was advertised for sale in major publications in June 2003, and prospective investors subsequently undertook due diligence inspections. Under a revised timetable, the offer for sale of the bank is expected to take place by end-July 2004.
18. The strengthening of public financial management constituted the most ambitious component of the reform agenda. While the achievement of specific objectives has proven to be a greater challenge than had been anticipated, overall progress can only be rated as a major success. The adoption of a new constitution at end-May 2003 established a new and clear framework for the institutions of public finance. The Auditor General (AG) was vested with sole accounting authority, reporting directly to parliament. During 2003, the AG's office audited the 2002 accounts of 41 public entities, including nine ministries (including the Ministries of Defense and Finance), with a report issued to Parliament in March 2004. The framework for government financial operations was clearly set out. With this, and with technical assistance from the Fund staff, a new Organic Budget Law (OBL) was drafted and readied for submission to parliament, planned for June 2004. (The submission of the OBL to parliament has been delayed from the September 2003 program benchmark to end-June 2004. As a result of the delayed submission of the OBL, the issuance of financial instructions, which will provide complementary operational details and which had been set a structural performance criterion for end-January 2004, is now set for end-May 2004.)
19. Following a joint World Bank/United Kingdom financial accountability review and assessment plan (FARAP) diagnostic mission in February 2003, a draft action plan was issued in June 2003. This action plan, which incorporates inputs from the Fund, builds on existing commitments and previous advances, covering the legal and institutional framework and budget and expenditure management. At the same time, a number of the structural actions envisaged under the 2003 program were realized, including a comprehensive review of tax exonerations, exemptions and incentives. (The respective structural performance criterion was completed by end-June 2003.) Progress was also made on structural benchmarks set under the program: a draft report on the implementation of the 2002 development budget was issued in July 2003, and finalized the following September; a list of overdue obligations scheduled for clearance during 2003 was issued in September 2003; and, with Fund staff support, drafting of a new investment code and tax laws was initiated.
20. Despite the substantial achievements noted above, the calendar set for reforms in the area of public financial management proved overly ambitious. In addition to the previously noted delays on the OBL and supporting financial instructions, the preparation of legislation for submission of a revised investment code to parliament, incorporating tax incentives into the tax law (a structural performance criterion), could not be achieved under the timetable fixed under the 2003 program. These actions, as noted in paragraph 18, will be realized over the coming months. Substantial progress was made in implementing other structural benchmarks including, setting the Ministry of Finance and Economic Planning's (MOF) internal audit department fully in place (a structural benchmark); the development of a monthly reporting mechanism for district governments, and the closure of government dormant accounts.
21. The National Bank of Rwanda (NBR) made substantial progress towards meeting the structural benchmarks set in the reform agenda for the financial system. In an effort to improve regulatory compliance, the NBR issued new instructions on solvency ratios, risk exposure and provisioning at end-December 2003. Actions taken in response to the recommendations of the April 2003 Fund safeguards mission are detailed in paragraphs 49-50. In addition, the central bank continued its consultations on the drafting of new anti-money laundering legislation. Related to this, Fund and World Bank staff will provide technical assistance in drawing up required legislation, and an enforcement unit will be established at the NBR during 2004.
II. The Medium-Term Strategy
22. Rwanda's medium term strategy for poverty reduction and economic growth continues to be guided by the policies set out in its Poverty Reduction Strategy Paper (PRSP), which was issued in June 2002. The PRSP progress report issued in July 2003 sets out the substantial advances made in human resource development as well as the contributions made by improved governance and regional peace to development objectives. Looking forward, the immediate challenge will be the full elaboration of policy frameworks in the nonsocial sectors and their implementation. In particular, in the period ahead, an increased focus will be placed on improving the supply response of the economy, reducing its vulnerability to exogenous shocks, and strengthening the performance of the external sector. This approach will include programs to improve access to fertilizers and improved seeds, and rural infrastructure development, with a view to increasing employment and incomes in rural areas. The export promotion strategy, currently under review, aims at the diversification of the export base through the privatization of the tea sector, a shift in coffee production to the specialty market, and the development of tourism activities.
23. The medium term strategy recognizes the critical importance of macroeconomic stability in supporting the attainment of poverty reduction objectives and envisages, over the medium to long term, the gradual reduction of macroeconomic imbalances and dependence on external grants and borrowing. The phasing out of transitional programs and targeted improvements in domestic resource mobilization, and the impact of the export promotion strategy, combined with prudent macroeconomic policies, will contribute to the realization of this objective. Furthermore, at least in the short run, a strong effort to mobilize more grants from development partners, to supplement current medium and long term grant commitments, will help to assure that external sustainability is achieved and maintained. Under a policy cooperation agreement that was reached with cooperating partners in November 2003, communications on external budgetary assistance will be moved forward in the planning cycle, donors will aim towards multi-year commitments, and policies will be drawn from a commonly supported framework with joint progress reviews.
III. The Economic Program for 2004
24. The program for 2004 will provide resources to assure that substantial progress is made towards achieving poverty reduction objectives and for placing Rwanda on a trajectory towards achievement of the millennium development goals by 2015. This agenda will include, beginning in 2004, a 10 percent rise in the number of educators, with fees eliminated for primary education. Funding for health programs has been substantially increased. At the same time, substantial focus will be placed on strengthening export performance, moving forward with the privatization agenda, making the legislative and regulatory climate more conducive to investment, and improving economic infrastructure and productivity. This will continue to be supported by steps to strengthen management, transparency and accountability in the financial sector and in public finances.
25. Based on the PRSP, the medium-term macroeconomic objectives are to (i) achieve annual real GDP growth of at least 6 percent; (ii) limit end-period inflation at 5 percent in 2004 and 3 to 4 percent thereafter; and (iii) reconstitute and maintain gross international reserves equivalent to at least 6 months of imports. As Rwanda's population growth rate is about 3 percent, these objectives should yield significant increases in per capita real income over the medium term.
A. Macroeconomic Policies
26. The fiscal program for 2004 aims to consolidate gains made in revenue policy and administration over the preceding two years, while drawing on substantial increases in pledged external grant assistance to finance an ambitious, yet well-focused, government expenditure program. While no major tax policy changes are planned for 2004, past reforms will come fully into play. Custom duties on a reciprocal basis with other FTA members were eliminated as a result of Rwanda's entrance into the COMESA free trade area (FTA) on January 1, 2004. Direct tax income will reflect on a full year basis the impact of revisions in marginal rates and in the taxation of professional remuneration. In addition, further action to strengthen revenue administration, building on technical assistance from the IMF and United Kingdom, including the formation of a large taxpayer unit at the Rwanda Revenue Authority, will support strong revenue performance. All told, government domestic revenue is projected to steady at 13.5 percent of GDP in 2004.
27. Government domestic spending is budgeted to increase to the equivalent of 21.3 percent of GDP in 2004, which reflects a substantial increase from the 14¾ percent that had been envisaged under the initial PRGF arrangement. As previously noted, given increased availability of external financing, implementation will begin in earnest on a full range of programs, including new constitutionally mandated institutions, free basic education, government counterpart contributions for a comprehensive HIV/AIDS treatment program, supplementary pay for health sector workers, human resource development in tertiary education, labor intensive rural works, and export promotion, all of which are drawn from the PRSP. The 2004 budget also reflects 0.5 percentage points of GDP in demobilization outlays that have been carried over from 2003. As a result, government priority spending is budgeted to rise to 45 percent of domestic expenditure, as targeted. Beyond this, net lending will increase by the equivalent of 1.5 percentage points of GDP to cover guarantees issued to finance hotel construction in 2003 and to finance completion of the hotel project in 2004, and to the electricity parastatal (Electrogaz) to finance the procurement of emergency generating equipment and related fuel oil.
28. As a result, the domestic fiscal deficit under the 2004 budget is set to rise to the equivalent of 7.8 percent of GDP. The budget also provides for the settlement of 0.9 percent of GDP in unpaid government bills (on a net basis) that were outstanding at end-2003 and outlays equivalent to 0.7 percent of GDP on government domestic arrears accumulated prior to 2002. Taken together with payments to nonbank public entities, the total budgeted government borrowing requirement for domestic operations (net of taxes) amounts to about 10.3 percent of GDP.
29. Currently identified external budgetary grants (equivalent to 8 percent of GDP) fall short of fully meeting financing requirements, As additional external borrowing to meet the financing gap would raise Rwanda's net present value of external debt-to-export ratio further above established norms, and as rapid spending could add to the substantial monetary overhang at the beginning of 2004, budgetary operations equivalent to 1.4 percent of GDP were rephased from the first to the second half of 2004. These operations will be authorized only to the extent that additional external grant financing is secured and if monetary policy remains on track.
30. Monetary policy has been set with the objective of bringing inflation down to 5 percent at end-2004. Accordingly, and taking into account the GDP growth objective for the monetized economy, broad money is targeted to increase by 11 percent (at the program exchange rate) by year-end. Targets for the expansion of the monetary base have been set accordingly. The NBR will closely coordinate with the Ministry of Finance through the recently established Treasury Committee, in order to ensure that fiscal and monetary policy implementation operate effectively. The development of a secondary market for government securities, which is now underway, is expected to strengthen the effectiveness of the NBR's policy implementation in the period ahead. In order to improve the information base for monetary control, the NBR will start to publish a new consumer price index for Kigali during the first half of 2004.
31. Despite the projected increase in external assistance inflows of grants and loans, given increased foreign exchange sales and government external payments, the NBR's international reserves will fall by US$6 million and, with this, gross official reserves will fall to the equivalent of 4.6 months of import cover. Net credit to government by the banking system is targeted to increase by RF 5.5 billion, while credit to the economy is programmed to grow by 10.6 percent.
32. Regarding the NBR's foreign exchange transactions, the operation of the auction will be further strengthened. The NBR will review, with assistance from the IMF staff, the current auction system, in order to limit collusion among auction participants and ensure that auction exchange rates are market determined.
33. The deficit on the external current account, excluding current official transfers, is expected to rise to 21.4 percent of GDP in 2004, from 19.8 percent in 2003. Underlying this projection, merchandise exports appear set to increase modestly to US$68 million, mainly as a result of an increase in the volume of tea and nontraditional exports. Gains in coffee exports, while benefiting from a modest increase in international prices, are likely to be constrained by poor rains, shortages of inputs, and limited infrastructure. The international sale of fully washed coffee is likely to remain relatively flat, while coltan export volumes are projected to continue their secular decline in 2004. Merchandise imports, driven by increased outlays for the development budget and intermediate goods, including fertilizers, along with the previously noted purchase of electricity generating equipment and fuel oil, are projected to rise by 16 percent.
34. As part of efforts to address the structural issues underlying Rwanda's disappointing export performance, an export promotion commission, established in December 2003, submitted a preliminary short-term action plan for cabinet consideration in February 2004. That plan incorporates a working capital facility for the coffee sector, funds for producer and grower-targeted programs, and an export finance facility. To ensure the compatibility of these priority actions with the government's broad development objectives as well as their swift implementation, external partners have been asked to provide support in the articulation of necessary policies and institutions. Beyond this, work continues on a strategy for the diversification of the export base, which will be facilitated by the return to stability in the Great Lakes region, and a growing outreach to COMESA markets.
35. The decline in Rwanda's exports of goods and services in 2003 further weakened the already fragile debt sustainability indicators. Given this, and taking into account the importance of reaching the Completion Point (CP) under the HIPC Initiative as soon as possible, action is continuing in order to meet the remaining floating CP triggers, while maintaining a prudent debt management policy. New debt will only be contracted on highly concessional terms, and will be limited to levels consistent with assumptions made at the time of the Decision Point. In this context, the government reserves the option to rephase the execution of its development budget in case the programmed external grant financing were only partially forthcoming. Efforts to reach bilateral debt rescheduling agreements with Paris Club creditors on Cologne terms, and to regularize relations with all external creditors through the signing of rescheduling agreements on terms comparable to those provided by the Paris Club, are currently underway. We will also strengthen efforts to ensure the participation of all creditors in the HIPC Initiative.
B. Structural Policies
Steps to improve economic productivity and external sustainability
36. Government activities to strengthen Rwanda's economic productivity and external sustainability will be significantly intensified in 2004. The privatization of the telecommunications parastatal (Rwandatel), along with the finalization of the sale of tea factories at Mulindi and Pfunda, and the preparation for the offering of the seven remaining estates, will contribute to this effort. In addition, a comprehensive policy framework for Rwanda's water sector and energy regulation is slated for development, with World Bank assistance. The government will continue efforts to sell a majority share in Prime Holdings, which developed two hotel projects during 2003, to private investors. The government is also continuing discussions with private investors on the development of a methane gas project at Lake Kivu.
37. At the same time, additional steps will be taken to further strengthen the legal framework, in order to create an attractive environment for investment. In particular, a new investment code has been drafted and will be submitted to parliament by end-September 2004. Moreover, a new mining code is being drafted and will be submitted for parliamentary consideration by end-2004.
38. Given the disappointing economic performance of 2003, the implementation of the development strategy set out in the PRSP will be accelerated. A labor intensive public works project, developed with donor assistance, will initiate operations, including land terracing, reforestation, wetlands reclamation, road rehabilitation and extension, and the construction of district markets. Alongside this, the Ministry of Agriculture, in consultation with supporting partners, is reassessing its policy framework and reviewing modalities for improving access to agricultural credit, and the distribution of fertilizer and improved seeds.
39. In the external sector, the government export promotion taskforce that was constituted in December 2003 will submit a detailed export promotion action plan for cabinet consideration by end-June 2004. The plan will include recommendations for the establishment of an effective management structure and will set out a specific and time-bound agenda for strengthening export performance.
Extending reforms in the legal framework and institutions
40. The important achievements realized during 2002-03 in establishing modern, efficient and transparent laws and institutions for Rwanda's public finances will be extended in 2004. The new organic budget law, which is now pending cabinet review, will be submitted to parliament by end-June 2004. Supporting this, critical financial instructions have been readied and will be issued in tandem with the budget law. A draft income tax law, prepared with technical assistance from the IMF, eliminating ad hoc exemptions and exonerations in line with the recommendations of an IMF technical assistance report, was finalized and presented for cabinet consideration at end-March 2004. The submission of the new tax law to parliament is targeted to take place by June 30, 2004, and will be accompanied by a new procedures manual. The new procurement code, drafted in 2003, is slated for cabinet approval by end-May 2004. Finally, a draft customs law was finalized and sent for cabinet consideration at end-June 2004. It is expected that, with parliamentary approval, the law will take effect beginning with the 2005 budget.
Strengthening the administration of public finances
41. Building on earlier achievements and on a broad range of technical assistance from various development partners, including the IMF, a draft action plan, reflecting the findings of a financial accountability review and assessment, conducted by a United Kingdom-led team in cooperation with the World Bank, was issued in June 2003. In February 2004, a treasury management team was appointed to manage the plan's implementation, building on the findings of a European Union-sponsored team that visited Rwanda in March 2004 to assess associated costs. In tandem, the World Bank will conduct, in conjunction with the development of a new poverty reduction strategy credit, a country financial accountability assessment, and the Fund and the World Bank will jointly update their earlier HIPC assessment and action plan, providing a supporting review of government financial administration.
42. While the above noted reviews are in process, the implementation of the current agenda for the strengthening of public financial management will continue. For 2004, programmed actions will focus on budgeting, internal accounting, and decentralization. In particular, a new chart of government accounts for all units of government, developed in 2003 and tested, early in 2004, will be applied beginning with the 2005 budget. At the same time, with assistance from the IMF staff, the government's computerized fiscal operations reporting system will be extended to cover the provincial level, and the reporting mechanism extended to cover district government operations by end-December 2004, supporting enhanced monitoring, including monthly reporting.
43. Efforts to streamline the management of government bank accounts will continue. The task force established to implement this agenda will issue a progress report by end-September 2004. In addition, following the publication of required notifications, in 2004 the NBR will proceed with the closure of accounts which are either dormant or operating outside of controlling regulations, and will issue a progress report by end-December 2004. At the same time, the Ministry of Finance and Economic Planning intends to intensify efforts to reconcile on a monthly basis the balances on government budgetary operations with the movements in its financing balances. IMF staff will also provide assistance on treasury reforms, including the progressive phase out of nontreasury bank accounts, and the adoption of a treasury single account system, beginning in 2005. In this regard, monthly reconciliation statements, clearly showing the unreconciled differences between fiscal and monetary data, will be published on the Ministry's website on a quarterly basis, with no more than a one month lag, beginning in July 2004.
44. In order to strengthen the budgeting process, an inventory of the physical assets of the central government line ministries, provinces, public enterprises and joint development projects is now scheduled for completion by end-December 2004 and will be annexed to the 2005 budget. In addition, reflecting a delay from last year, the 2005 budget will include a statement of tax expenditures associated with both existing and new policies included in the budget, a statement of assets and liabilities of all levels of government, financial statements of public enterprises, a statement of consolidated government equity holdings, a consolidated budget of the districts, a fiscal risk assessment, and a list of all contingent liabilities.
45. Substantial progress has been made in making government finances more transparent. The Auditor General's report on government 2002 operations will be made public at end-June 2004. In addition, in accordance with the law, consolidated central government accounts for 2003 were transmitted to the Auditor General at end-March 2004, and his audit based on those accounts will be submitted to parliament by end-June 2004. In 2004, as in 2003, the Auditor General will conduct audits of the 2003 operations of every central government ministry. As in 2003, a detailed list of pre-2002 domestic obligations scheduled for clearance during 2004 will be issued by end-June 2004.2
46. Efforts will continue to strengthen the Rwanda Revenue Authority (RRA). The reform agenda at the RRA in 2004 includes the establishment of a large taxpayer office and an operations policy department, along with the appointment of a single commissioner for tax operations. The system of tax identification numbers will be improved, accommodating the prompt elimination of separate value added tax registration numbers. Late filing penalties for tax returns will be reviewed and tax legislation will be updated to include penalties for tax fraud. The computerization of the tax (and customs) administration will continue during 2004.
Continuing financial sector reforms
47. The NBR will further increase its efforts to reestablish the observation of prudential regulations on a regular basis. In order to achieve this objective, it will work with commercial banks to agree on action plans, including specific steps, and deadlines and sanctions, for bringing them into compliance with banking regulations by end-December 2004. Agreement on the plans is targeted for end-June 2004. With regard to the regulation on the net open foreign exchange position, by May 31, 2004 the central bank will restore the governing regulation to the text in force one year earlier. In 2004, the central bank supervision department plans to conduct full annual audits of four commercial banks and the Rwandan Development Bank. The NBR plans to audit all commercial banks annually, beginning in 2005.
48. The sale of Banque Commerciale du Rwanda (BCR), delayed from 2003 in order to accommodate due diligence requests from interested investors, is now planned to be completed by end-July 2004. The rehabilitation of CHR will be completed in 2004. Following the completion of the World Bank-sponsored financial sector study, a joint Fund-World Bank financial sector action plan (FSAP) mission has been scheduled for the fourth quarter of 2004. The FSAP will provide a comprehensive program for the reform and development of Rwanda's financial sector.
49. Key recommendations of an IMF safeguards assessment for the improvements of the NBR's control, accounting, reporting and auditing systems have been implemented. The recommendations of the safeguards assessment that have been implemented include conduct of external audits of the NBR for 2001 and 2002; the establishment of a formal policy for the conduct of annual external audits; the adoption of resolution to publish the audited financial statements within six months of the financial year; and the limitation of 2004 distributable profit to realized gains, net of unrealized losses.
50. Several recommendations by the IMF and external auditors are still in the process of implementation. IMF recommendations not yet (fully) implemented include the establishment of written procedures to ensure that monetary data used for program monitoring follow agreed definitions and are consistent with accounting records; an audit of program data as of September 30, 2003; the recruitment of additional accounting and internal audit staff; amendments to the central bank law with respect to internal accounting and audit procedures and the legal protection of senior staff in conducting their duties; and the tender for a study on potential improvements in the risk management of NBR.
IV. Program Coordination and Monitoring
51. The monitoring and program coordination is expected to be strengthened
by the recently established treasury committee, which comprises members from
the Ministry of Finance, the Rwanda Revenue Authority, and the NBR and is
headed by the Secretary General of MOF. The program for 2004 will be monitored
on a continuous basis with quantitative and structural performance criteria,
benchmarks, and indicative targets. The fourth review will reflect performance
on quantitative performance criteria for June 2004 and structural benchmarks
and performance criteria through September 2004 and will be completed by
mid-November 2004. The fifth review will reflect performance on quantitative
performance criteria for end-December 2004, and structural benchmarks and
performance criteria through end-March 2005, and will be completed by end-May
2005. A complete list of quantitative and structural performance criteria,
as well as structural benchmarks, is included in Tables 1 and 2, respectively.
The attached technical memorandum of understanding lays out the details of
program design and terminology.
1 Evaluated at the program exchange rate of RF 511.9=US$1.
2 The list will set out amounts to be settled for salaries, goods and services (with details on payments to public utility companies, other public enterprises and the social security fund), and overdue payments including cumulating penalties for late payment (e.g., to road contractors). The list will indicate which
Technical Memorandum of Understanding
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 National Bank of Rwanda (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||Opening and closing balances as well as debits and credits for OTR accounts, the demobilization commission, Rwanda Revenue Authority (RRA), Victims of Genocide Fund (FARG), the Road Fund, and Gacaca in the central bank and 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 with a break down between of loans by creditor and grants by donors.||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||Four weeks||Yes|
|D. Public enterprises|
|Table||Public enterprises financial statements||Semiannual||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, 20031
(In millions of Rwanda francs)
|National police services||4,103|
|Soil conservation and water systems management||92|
|Agricultural extension and marketing||172|
|Promotion of trade and commerce||34|
|Industrial development and artisanal promotion||522|
|Pre-primary and primary education||1,849|
|Scientific and technological research||605|
|Youth and Sports||420|
|Research, acquisition, and conservation of the national heritage||196|
|Primary health care||1,431|
|Specialist care for major health problems||2,359|
|Development of health structures||392|
|Improvement in health management services||419|
|Transport and communication, energy and water resources||3,313|
|Development and modernization of communication infrastructures||340|
|Improvement in transport services||208|
|Rationalization and management of urban land||113|
|Development of transport infrastructure 2||2,275|
|Water and sanitation||150|
|Mining and other geological programs||80|
|Methane gas unit||103|
|Support programs for promotion and development of women||178|
|Promotion of gender in development||52|
|Promotion of socio-economic equity||57|
|Civil service reform||374|
|Employment and social security promotion||127|
|Lands and resettlement||684|
|Land planning and management||377|
|Planning and supervision of housing amenities||193|
|Conservation and protection of the environment||113|
|Local government (excluding exceptional expenditure)||6,448|
|Promotion of children's rights||18|
|Decentralization (district transfers in recurrent budget)||1,526|
|Common development fund (district transfers in development budget)3||4,000|
Source: Rwandese authorities.
1All programs are classified as recurrent expenditures, except where marked.
2Includes Road Fund.
3As part of capital expenditure.
3. Rwanda: Composition of
Exceptional Expenditure, 2003
(In millions of Rwanda francs)
|Supplies for prisoners||1,352|
|Gacaca Sensibilization, Ministry of Justice||306|
|Health insurance Gacaca members||479|
|Victims of Genocide Fund (FARG)||5,895|
|Assistance to vulnerable groups||374|
|Reinsertion of vulnerable groups||6|
|Support to local initiatives (education)||61|
|Support to orphanages and ENA||87|
|Reinsertion of displaced groups from Gishwati||180|
|Reinsertion of street children||48|
|Good governance commissions|
|Human Rights National Commission||730|
|Commission for Unity and Reconciliation||569|
|Office of the Ombudsman||168|
|National Commission for the Fight Against AIDS||215|
|KIST (Kigali Institute for Science and Technology)||1,952|
|KHI (Kigali Health Institute)||556|
|KIE (Kigali Institute of Education)||1,335|
|Special exceptional road works||1,000|
|Special exceptional health expenditure||3,015|
Source: Rwandese authorities.
1Gacaca: Community justice initiative.