IMF Executive Board Completes the Sixth Review of Rwanda's PRGF Arrangement and Approves a New Three-Year PRGF Arrangement

Press Release No. 06/121
June 8, 2006

The Executive Board of the International Monetary Fund (IMF) has completed the sixth and final review of Rwanda's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement, which enables the release of SDR 571,000 (about US$850,000) under the arrangement. This will bring total disbursements under the arrangement approved on August 12, 2002 (see Press Release No. 02/36) to SDR 4 million (about US$6 million).

In completing the review, the Board granted waivers for the non-observance of the end-June 2005 quantitative performance criterion on priority spending, and the end-September 2005 structural performance criterion on publishing a financial audit and a business plan of Prime Holdings.

The Executive Board also approved Rwanda's request for a new three-year PRGF arrangement amounting to SDR 8.01 million (about US$12 million). The new PRGF arrangement will become effective on June 12, 2006, after which Rwanda may request an initial drawing of SDR 1.14 million (about US$1.7 million).

The principal objective of the new PRGF-supported program is to advance Rwanda's medium-term economic agenda, while preserving macroeconomic stability. The program envisages a real annual growth rate of 3 percent to 5 percent, annual inflation of 5 percent, and a level of international reserves of at least four months of imports. Macroeconomic and structural policies will aim to lay the foundation for moving Rwanda onto a higher growth trajectory.

Following the conclusion of the Executive Board's discussion of Rwanda's current and upcoming economic program on June 5, 2006, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"Rwanda's economic performance strengthened in 2005. Driven by a recovery in agriculture, growth rebounded to 6 percent and inflation fell. Macroeconomic policy implementation was broadly on track. On the structural side, progress was mixed, partly due to capacity constraints. In particular, reforms in public expenditure management remain pending.

"Looking ahead, steadfast commitment to reform will be critical. The authorities' medium-term framework aims at addressing the impediments to growth and making further progress in poverty reduction. Most importantly, this will require improving the business climate to foster private sector growth. In addition, the authorities will implement productivity-enhancing strategies, particularly in the agricultural and export sectors, which are also expected to make the economy more resilient to shocks.

"Managing aid inflows lies at the heart of Rwanda's medium-term strategy. Policies will be geared toward marshalling aid flows to their most efficient use while preserving macroeconomic and debt sustainability. To finance the development effort, the authorities' intention to seek external financing mostly in the form of grants is appropriate and should be complemented by measures to strengthen the domestic revenue base.

"The 2006 fiscal program takes a step in the right direction by improving the quality and efficiency of fiscal spending. The increase in priority spending, particularly in education, is encouraging. In this context, the use of resources freed-up by the MDRI relief for food imports (related to a possible food crisis due to drought) and the Lake Kivu methane gas project to generate electricity is welcome. To better target spending to alleviating poverty, efforts should also be made to strengthen the link between fiscal spending and poverty reduction. Of particular importance is the authorities' intention to reinvigorate reforms in public expenditure management as it will provide assurances to development partners that resources are leveraged to their most productive use.

"The authorities' structural reform agenda appropriately aims at tackling obstacles to growth. In general, a continued focus on building capacity of both the civil service and the private sector is needed. More specifically, reducing the cost of doing business will be key to stimulating private sector development. To this end, the authorities should be commended for their fast pace in strengthening banking supervision and headway should now be made in designing medium-term financial sector reforms," Mr. Carstens said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies that are adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

ANNEX

Background

Macroeconomic performance strengthened in Rwanda in 2005. A recovery in agriculture helped real growth to accelerate to 6 percent and inflation to moderate to below 6 percent. Macroeconomic policy implementation was broadly satisfactory when temporary slippages in the third quarter of 2005 were reversed in the last quarter of the year. However, structural reforms lagged, partly due to capacity constraints. In particular, reforms in expenditure management remain pending.

The main challenge for the country is to achieve sustained high growth rates to advance toward the Millennium Development Goals (MDGs) while maintaining debt sustainability. To this end, policies will aim at fostering private sector development, including through productivity-enhancing strategies and trade facilitation. Moreover, polices will have to be geared to marshalling aid flows to their most efficient use while preserving macroeconomic stability. In this regard, more emphasis will have to be placed on public expenditure management and capacity building.

Program Summary

Poor weather conditions are clouding prospects for economic activity in 2006. To prepare for a possible food crisis due to drought, the program sets aside ½ percent of GDP for food imports and includes an adjuster allowing a reserve drawdown if needed.

The principal objective of the program is to advance the medium-term agenda while preserving macroeconomic stability. The program envisages a real growth rate of 3 percent to 5 percent, inflation of 5 percent, and a level of international reserves of at least 4 months of imports. Macroeconomic and structural policies will aim at laying the foundations for moving Rwanda onto a higher growth trajectory.

Under the new IMF-supported economic program, policies will aim at preserving macroeconomic stability. Pressures for a real appreciation of the exchange rate are expected to continue, with a further widening of the fiscal deficit (mostly reflecting one-off revenue in 2005) and the likely drawdown of project account balances. Policy discussions thus focused on managing the domestic demand impact of fiscal policies and preventing a crowding-out of private investment.

The structural agenda will seek to remove constraints to growth. In addition to reforms in the financial sector and the business environment, as well as productivity-enhancing strategies in the agriculture and export sectors, structural policies will focus on expenditure and debt management, and civil service reform.




Rwanda: Selected Economic and Financial Indicators, 2002-2008


  2002 2003 2004 2005 2006 2007 2008
    IMF Country Report No. 05/3339 Est. IMF Country Report No. 05/3339 Proj. Proj. Proj.

  (Annual percentage changes, unless otherwise indicated)
 

Output and prices

 

Real GDP growth

9.4 0.9 4.0 4.0 6.0 4.3 3.0 4.3 4.5

GDP deflator

0.0 8.7 12.0 6.4 7.1 4.0 5.5 5.0 5.0

Consumer prices (period average)

2.0 7.4 12.0 7.0 9.2 4.0 5.5 5.0 5.0

Consumer prices (end of period)

6.2 7.7 10.2 6.0 5.6 4.0 5.0 5.0 5.0
 

External sector

 

Export, f.o.b (in U.S. dollars)

-28.1 -6.3 55.4 2.1 27.6 3.6 5.5 3.8 5.8

Imports, f.o.b (in U.S. dollars)

-1.3 4.0 13.1 33.3 35.6 6.4 26.6 -1.1 2.4

Export volume

-10.0 -12.5 26.8 -6.8 3.8 6.3 10.4 3.4 5.1

Import volume

-6.5 0.5 10.2 24.8 24.2 5.7 24.1 -5.2 3.3

Terms of trade (deterioration -)

-24.3 3.5 19.5 2.6 12.6 -3.1 -6.3 -3.7 1.5
 

Government finance

 

Revenue

16.9 21.4 20.2 15.7 22.6 5.2 1.8 11.3 11.3

Total expenditure and net lending

10.5 23.7 27.2 14.4 24.0 11.3 7.1 7.3 10.0

Current expenditure

14.0 31.4 4.4 21.1 27.9 5.3 13.6 4.6 9.1
 

Money and credit 1/

 

Net domestic assets 2/

-6.1 14.8 -28.9 17.5 -12.1 5.9 14.6 ... ...

Domestic credit 2/

-4.0 19.7 -22.7 12.8 -5.3 5.9 14.0 ... ...

Government 2/

-12.4 10.7 -28.9 6.7 -16.4 -0.5 4.6 ... ...

Economy 2/

8.5 9.0 6.2 6.1 11.2 6.4 9.4 ... ...

Broad money (M2)

11.4 15.2 12.1 5.3 17.2 10.4 10.7 ... ...

Reserve money

11.9 12.2 13.4 12.2 12.3 10.4 12.8 ... ...

Velocity (GDP/M2; end of period)

5.7 5.4 5.6 5.9 5.5 5.8 5.4 ... ...
 
  (In percent of GDP)

National income accounts

 

National savings (excluding official transfers)

0.3 -0.8 2.3 -0.9 2.9 1.5 0.6 1.9 3.4

Of which: private (including public enterprises)

4.3 3.9 5.9 2.4 6.2 4.9 6.0 4.9 6.0

Gross investment

16.9 18.4 20.5 21.1 22.3 22.3 21.9 21.9 22.4

Of which: private (including public enterprises)

12.0 12.8 12.0 12.1 12.2 12.2 13.4 13.1 13.2
 

Government finance

 

Total revenue (excluding grants)

12.2 13.5 13.9 14.6 15.1 14.1 14.1 14.3 14.5

Total expenditure and net lending

21.2 23.9 26.1 27.0 28.5 27.7 28.1 27.5 27.5

Capital expenditure

4.9 5.6 8.5 9.0 10.1 10.2 8.6 8.8 9.0

Current expenditure

14.8 17.8 15.9 17.5 17.9 17.0 18.8 17.9 17.8

Primary fiscal balance 3/

-1.6 -0.3 -1.7 -1.7 -2.0 -3.6 -3.5 -3.9 -4.0

Domestic fiscal balance 4/

-4.2 -5.5 -5.5 -5.0 -5.6 -6.3 -7.4 -6.9 -6.6

Overall balance (payment order)

 

After grants

-1.7 -2.3 -0.2 -0.5 0.7 -1.4 -0.7 -3.6 -4.1

Before grants

-8.9 -10.3 -12.1 -12.4 -13.4 -13.5 -13.9 -13.3 -13.0
 

External sector

 

External current account balance

 

Including official transfers

-6.7 -7.8 -3.0 -9.0 -3.1 -7.4 -10.8 -10.0 -10.5

Excluding official transfers

-16.6 -19.2 -18.2 -22.0 -19.4 -20.8 -21.4 -19.2 -18.2

External debt (end of period) 5/

85.3 93.4 91.9 73.7 70.7 70.8 15.0 18.7 22.1

Net present value of external debt

 

(in percent of exports of goods and services) 6/

... 285.6 239.4 317.3 149.8 304.1 65.6 82.9 97.7

Scheduled debt-service ratio after HIPC Initiative debt relief

 

(in percent of exports of goods and services)

12.0 11.1 9.6 7.4 7.2 8.2 5.0 5.0 4.8

Gross reserves (in months of imports of goods and services)

6.3 5.0 5.7 4.9 6.2 4.6 4.9 4.8 4.7
  (In millions of U.S. dollars)
External debt (end of period) 5/ 1,476.8 1,572.4 1,685.3 1,523.1 1,510.0 1,564.1 354.0 478.4 600.7

Gross official reserves

243.6 217.6 314.5 398.4 405.8 276.9 317.3 323.9 327.3

Memorandum item:

 

Nominal GDP (in billions of Rwanda francs)

825.0 905.3 1,054.3 1,184.7 1,197.2 1,264.8 1,300.8 1,425.3 1,564.2

Sources: Rwandese authorities; and IMF staff estimates and projections.

1/ Data up to 2005 based on current exchange rates, for 2006 based on program exchange rate of RF 553.7/US$.

2/ As a percent of the beginning-of-period stock of broad money.

3/ Revenue excluding grants; minus current expenditure except interest due and exceptional expenditure; minus domestically financed capital expenditure.

4/ Revenue excluding grants; minus current expenditure (excluding external interest), minus domestically financed capital expenditure and net lending.

5/ After rescheduling, including arrears and new debt (the latter includes assumed project and budgetary disbursements for the period 2006-08).

6/ Based on assumptions about expected new borrowing.



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