Public Information Notice: IMF Concludes Article IV Consultation with Rwanda; Approves Second ESAF Loan
December 6, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On November 19, 1999, the Executive Board concluded the Article IV consultation with Rwanda.1 The Board also approved the second loan for Rwanda under the Enhanced Structural Adjustment Facility (ESAF), in an amount equivalent to SDR 23.80 million (about US$32 million), with SDR 9.5 million (about US$13 million) available immediately.
Since the end of the war and genocide in 1994, Rwanda has made significant progress in rebuilding the country's economic and social infrastructure, despite institutional capacity constraints. Real GDP growth in Rwanda has been robust since 1994; it reached 10 percent in 1998 as a result of the improved security situation in the northwest, the resettlement of displaced persons, and good weather conditions. In 1999, mainly reflecting problems in the transport and manufacturing sectors, growth slowed down and is now projected at 5 percent. After a sharp increase in 1997, food prices have gradually returned to their previous levels, contributing to a drop in the consumer price index (CPI) of 5 percent over the 12-month period ended July 1999. The period average inflation rate is now projected at -2 percent for the year 1999. Rwanda's gross official reserves position remained comfortable at over six months of imports.
Under the 1999 budget, the government reduced import tariffs, removed the export tax on coffee, significantly increased social spending, reduced defense spending, and improved the pay and incentive structure for the civil service. Budget execution during the first half of 1999 was largely as envisaged except for significant revenue shortfalls, partly outside the control of the government and partly reflecting persistent problems in tax and customs administration. In response to the revenue shortfalls, the government took measures on both the revenue and expenditure side and the primary fiscal deficit for 1999 is targeted at just over ½ percent of GDP, somewhat higher than originally foreseen. Recurrent social spending is expected to increase to 3.7 percent of GDP (from 2.8 percent in 1998) and defense spending to decline to 4.0 percent of GDP (from 4.3 percent in 1998).
Broad money demand remained sluggish in the first half of 1999, after a 3 percent drop in 1998 (reflecting the rapid drop in inflation and the relatively slower growth of the monetized sector), and the 12-month growth rate reached 2 percent at end-June. Both deposit and lending interest rates fell somewhat, but remained strongly positive in real terms.
During 1998/99, Rwanda implemented several structural reforms. Based on the end-1998 civil service census, a large number of "ghost" workers were removed; the regularization of staff, previously not on the payroll, was completed; and a new organizational structure for all ministries was adopted. A new regulatory framework for the banking sector, with emphasis on strengthened supervision of all financial institutions, was introduced, and all banks were audited. The exchange system was further liberalized and the government accepted the obligations of Article VIII of the IMF's Articles of Agreement. There was also good progress in improving expenditure management, including the monitoring of social spending, the elimination of domestic arrears, the establishment of the National Tender Board, and the establishment of the Auditor General's office. The divestiture program is largely on track with about half of the almost 70 enterprises in the program sold, under liquidation, or offered for sale. Finally, a new Investment Code became effective in early 1999.
While output, which had dropped 50 percent in 1994, has recovered to its prewar level, the majority of the population is still worse off today and the poverty incidence--estimated at 70 percent--is higher than in the prewar period. The government is committed to a poverty reduction strategy consisting of the following main elements: (i) enhance the quality and accessibility of health and education services through significant increases in public spending, as to ensure the services of qualified health workers and teachers and the provision of essential supplies, including books and medicines; (ii) improve agricultural productivity through better functioning markets for inputs and outputs, the provision of extension services, the rehabilitation of feeder roads and water supply, the promotion of rural credit schemes, and the introduction of a legal framework providing security of land tenure; (iii) encourage the expansion of the coffee and tea sectors through liberalization and privatization, while ensuring adequate participation of farmers; and (iv) implement targeted poverty alleviation programs, with special emphasis on vulnerable groups, such as women and minor-headed households. The government plans to achieve universal primary education by 2005 (from just over 85 percent gross enrollment today) and improve the transition rate from primary to secondary schools to 40 percent by the same date (from just over 20 percent today). To facilitate the development of small- and medium-size enterprises in both rural and urban areas, the regulatory framework for small-scale credit (through savings and loans cooperatives), the commercial code governing the establishment of enterprises, and the labor code are being revised. Special programs are in place to assist victims of the genocide through direct income support, provision of medical treatment and shelter, and programs to reintegrate them into the schooling system.
Rwanda's debt burden--with an NPV of debt-to-exports ratio estimated at about 500 percent--is likely to be unsustainable.
Executive Board AssessmentWhile noting that there had been some policy slippages, overall, Executive Directors commended the authorities for maintaining macroeconomic stability, improving fiscal management, and making progress with structural reforms under the 1998/99 program. This performance, which had been achieved despite a difficult political and security environment as well as serious institutional constraints, had resulted in solid economic growth and low inflation. Noting that the recovery of the economy from the war that ended in 1994 may be almost complete, Directors strongly emphasized that the authorities would need to show determination in tackling the difficult challenges that remain, if economic progress was to be maintained. They therefore welcomed the authorities' commitment to deepen the reform effort in order to achieve robust and sustained growth through rising productivity and investment. This would be essential to reducing Rwanda's still pervasive poverty.
Regarding the fiscal situation, Directors were concerned about the persistent weaknesses in revenue collection in recent years, despite the authorities' demonstrated willingness to take prompt actions in the face of fiscal slippages. Against this background, they welcomed the progress in firmly establishing the Rwanda Revenue Authority as an important step in strengthening overall revenue performance, while-in the interest of opening the economy-reducing Rwanda's reliance on trade taxes. Directors stressed the importance of improving tax and customs administration and of accelerating the preparation of the VAT, drawing on the technical assistance provided by the Fund and others in these areas.
Directors underscored that, in addition to strengthening revenue performance, containment of nonpriority spending would also be crucial to create room for the needed further increases in budgetary spending in the social sector and other priority programs. In this connection, Directors welcomed the recent efforts to contain defense spending, and attached particular importance to achieving the targeted reductions in these outlays in 1999 and 2000. They stressed the importance of effective monitoring of the level and impact of social spending, which would be essential for sustained improvement in Rwanda's social indicators. Directors also considered it essential to improve the implementation of capital spending, given Rwanda's large physical infrastructure needs.
Directors stressed the importance of enhancing governance and, in this regard, welcomed the steps taken to improve budgetary transparency, accountability, and expenditure control. They encouraged the authorities, with technical assistance from donors, to develop promptly a system of public accounts, and to begin operations of the Auditor-General's office, including the audit of military expenditures. This would facilitate the authorities' efforts to redeploy resources from defense spending to the social areas.
Directors commended the authorities for their continued tight monetary policies. However, they noted frequent slippages in meeting the net foreign asset targets of the National Bank of Rwanda (NBR), and urged the authorities to allow the exchange rate to be market determined, while relying on tight macroeconomic policies to address exchange market pressures.
Directors welcomed progress in structural reforms, which they considered vital to achieving sustained and robust growth. In this connection, they stressed the importance of effective and timely capacity building, including through external technical assistance, and through reform of the civil service. In the financial sector, noting the high level of nonperforming bank loans, Directors underscored the need for adopting and implementing without delay the revised restructuring plans of the commercial banks, and for strengthening the supervisory capacity of the NBR. Regarding other structural areas, they encouraged the authorities to accelerate the privatization of the tea sector with a potentially large impact on poverty reduction and the public utilities. Directors noted Rwanda's significant progress in trade liberalization in recent years. They regretted that revenue considerations had led the authorities to introduce temporary import surcharges in 1999, but welcomed their commitment to phase out the surcharges in the course of 2000.
Directors noted the need for promptly addressing weaknesses in statistics, in particular in external sector data, national accounts, prices, and social indicators.
Directors noted Rwanda's heavy debt burden, as reflected in the net present value of the debt-to-exports ratio estimated at about 500 percent during 1999 to 2002. They looked forward to considering Rwanda's request for debt relief under the enhanced Heavily Indebted Poor Countries Initiative in the course of 2000, following satisfactory performance under the second-year ESAF arrangement.