## RWANDA — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION, SEVENTH REVIEW UNDER THE POLICY SUPPORT INSTRUMENT, AND SECOND REVIEW UNDER THE STANDBY CREDIT FACILITY ## Source details **Canonical URL:** [RWANDA — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION, SEVENTH REVIEW UNDER THE POLICY SUPPORT INSTRUMENT, AND SECOND REVIEW UNDER THE STANDBY CREDIT FACILITY](https://www.imf.org/-/media/files/publications/cr/2017/cr17217.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17217.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17217.pdf.json) --- ### Key issues and context - Rwanda implemented Vision 2020 over two decades, achieving high and inclusive growth, poverty reduction, improved living standards, and sharpened competitiveness. - Government drafting “Vision 2050” aimed at reaching upper middle-income status by 2035 and high income by 2050; EDPRS III under development to align to a 7-year presidential term. - Priority reform areas highlighted: - Reorient economy toward higher value-added activities. - Bolster gender equality through greater economic inclusion. - Increase access to affordable financial services and technology. - Foster development of domestic securities markets. - Main risks to growth: weather shocks affecting agriculture, regional security issues, and unexpected shifts in external development assistance. ### Program context and performance - Adjustment program centered on exchange rate flexibility; program performance described as strong. - All quantitative performance and assessment criteria and most indicative targets met for end-December 2016; most structural benchmarks observed through end-March 2017. - Staff supports conclusion of second review under the SCF and seventh review under the PSI. - Executive Board emphasized: - Endorsement of exchange rate flexibility as main adjustment tool. - Need to rebuild reserve buffers to enhance resilience. - Support for interest-rate based monetary policy framework preconditions: deepening interbank and domestic debt markets, clear policy signals to anchor inflation expectations. - Importance of boosting private sector role, improving business environment, and investing in education and vocational training. ### Economic developments and outlook - Growth: - 2016 growth: 5.9 percent (down from 2015). - Recovery expected in 2017–18 owing to good rains and expanding domestic production; projections include 2017: 6.2; 2018: 6.8; 2019: 7.3 (Selected quantitative indicators). - Inflation: - Food price inflation peaked at 17.6 percent y/y in February 2017; headline inflation peaked at 8.1 percent. - May food inflation: 14.3 percent; headline inflation: 6.5 percent; core inflation in May: 4.9 percent. - CPI (period average): 2015: 2.5; 2016: 5.7; 2017: 7.1; 2018: 6.0; 2019: 5.0 (Selected quantitative indicators). - External trade and current account: - External trade deficit lower than anticipated in 2016 due to strong pick up in goods and services exports and reduced import demand. - Preliminary current account deficit 2016: -14.4 percent of GDP (compared with -16.9 percent projected). - Current account balance (incl. grants) projections: 2017: -10.2; 2018: -11.2; 2019: -9.9 (Selected quantitative indicators). - Vulnerabilities and outlook: - Economy vulnerable to external shocks; priority to rebuild foreign exchange reserve buffers. - Growth expected to pick up in latter half of 2017; inflation trending down but higher average rates expected in 2017. - Large public investment in business tourism (Bugesera) expected to boost service exports medium-term and diversify exports. ### Fiscal performance, outlook, and policy recommendations - FY2016/17 Q1–Q3 (percent of 2016/17Q1-Q3 GDP) projected vs. provisional (Proj.; Prov.; Diff.): - Revenue and grants: 31.3; 32.2; 0.8. - Total revenue: 24.9; 25.9; 1.0. - Tax revenue: 21.7; 21.8; 0.1. - Total Grants: 6.4; 6.3; -0.1. - Total expenditure and net lending: 36.9; 37.8; 0.9. - Current expenditure: 20.3; 22.1; 1.8. - Capital expenditure: 14.4; 13.5; -0.9. - Overall Deficit (cash basis, incl. grants): -6.0; -5.2; 0.7. - Foreign financing (net): 7.6; 6.8; -0.8. - Domestic financing: -1.6; -1.0; 0.6. - Selected program/fiscal targets and outcomes: - Ceiling on overall fiscal deficit including grants (Billions RwF): Adjusted 139.5; Actual 138.3; Status: Met (Table 6). - Domestic revenue collection (floor on flow) (Billions RwF): Adjusted 539.0; Actual 532.1; Status: Not met. - Medium-term fiscal framework: - Overall deficit target maintained at 3.7 percent of GDP for FY2017/18 and through 2019/20, to help meet EAC convergence objective of 3 percent of GDP by 2022. - Net domestic financing projected close to zero over 2017/18–2019/20. - Total public debt incl. guarantees (Selected quantitative indicators): 2015: 36.4; 2016: 44.5; 2017: 45.7; 2018: 47.1; 2019: 48.7. - External public debt (Selected quantitative indicators): 2015: 27.9; 2016: 35.8; 2017: 38.1; 2018: 40.2; 2019: 42.1. - Policy recommendations: - Maintain exchange rate flexibility and rebuild official foreign exchange reserve buffers. - Build on revenue collection progress to provide space for strategic public investment and reduce aid dependence; ensure tax incentives are well-targeted and consistent with fiscal objectives. - Maintain agreed fiscal and monetary stance; reconsider monetary stance in second half of 2017 based on inflation and growth developments. - Assess revenue loss associated with Made in Rwanda tax incentives and follow-up analysis by next review. ### Revenue mobilization and “Made in Rwanda” - Domestic revenue collection increased by some 6 percentage points of GDP from 2010 to 2016. - Revenue administration improvements: central collection of local taxes, auditing improvements, scrutiny of large taxpayers. - Tax policy changes included VAT on mobile airtime, royalty taxes on mining, taxes for special petroleum and infrastructure funds, and VAT exemptions narrowed to strategic sectors (exports, manufacturing, energy, ICT, financial services, construction, agriculture). - Made in Rwanda (MIR) Campaign: - Objectives: reduce structural trade deficits and stimulate growth via import substitution in cement, light manufacturing (garments), and agriculture (sugar, rice); expanded to deepen domestic supply chains and product quality. - Measures: investment in publicly-owned cement company; public procurement preference for domestically-produced goods; VAT exemptions on inputs for strategic sectors; sector-specific action plans. - Short-term outcomes: From July 2016–March 2017, imports of used clothes/shoes declined by 86 percent and domestic production picked up sharply; inflation related to clothing/shoes remained lower than other categories. - Assessment: too early to assess broader impact on production, external balances, and consumer welfare. - Planned revenue measures (not fully included in projections): - Revision in property taxes to Parliament in summer 2017. - Expansion of electronic billing machines beyond VAT. - Forthcoming increases in some excise duties. - Introduction of big data and analytics to improve tax compliance. ### Monetary policy, banking sector, and financial markets - Monetary stance and operations: - BNR mopped up liquidity to strengthen the short-term interbank market; despite this, many banks held large precautionary balances. - Key policy rate reduced by 25 basis points in late December (concern over weak demand and deceleration of private sector credit). - Policy priorities in transition to interest-rate based framework: flexible exchange rate; functioning money market tools; clear policy signals to guide inflation expectations. - BNR building forecasting capacity using FPAS and preparing action plan to incorporate into monetary policy formulation. - Credit and monetary aggregates (Selected quantitative indicators): - Credit to non-government sector: 2015: 30.1; 2016: 7.8; 2017: 17.9; 2018: 14.2. - Broad money: 2015: 21.1; 2016: 7.6; 2017: 13.0; 2018: 13.2. - Reserve money: 2015: 16.2; 2016: 5.5; 2017: 10.9; 2018: 11.1. - Financial inclusion and resilience: - Total assets of financial sector increased from 31 to 54 percent of GDP over 8 years. - Financial access rose from 48 to 89 percent of adult population over 8 years. - NPLs rose but remained below 10 percent of credit: NPLs (percent of total gross loans): 2015: 6.2; 2016: 7.5; Mar-17: 8.1 (Table 5). - Banking sector well capitalized: regulatory capital to risk-weighted assets around 19.6–23.3 percent across Mar-13–Mar-17. - Financial sector reforms: - New Banking Law approved by Cabinet; BNR approved regulations on capital and liquidity; regulation on credit classification reviewed; regulations on related-party transactions and external auditors adopted. - Deposit Guarantee Fund operational since November 2016. - Roadmap to move from base money targeting to inflation targeting by end-2018; FPAS supported by IMF TA. ### External sector, reserves, and Bugesera Airport - Exchange rate and reserves: - Rwandan franc depreciated by 9.7 percent against the US$ (end-December 2016 vs. December 2015); 14.5 percent since mid-2015; depreciation in 2017 as of end-May was 1 percent. - Gross international reserves (billions US$): 2015: 0.9; 2016: 1.0; 2017: 1.0; 2018: 1.0; 2019: 1.2 (Selected quantitative indicators). - Reserves in months of next year’s imports: 2015: 3.6; 2016: 4.1; 2017: 3.9; 2018: 3.7; 2019: 3.9. - ARA-CC model: with flexible exchange rate classification, current reserve levels would only just be “optimal” if annual opportunity cost of holding reserves is around 4 percent; without IMF-supported program, reserve needs closer to 5 months at same opportunity cost. - Bugesera Airport (PPP) — key facts and macro treatment: - First phase estimated at US$ 400 million; financing 40 percent equity and 60 percent debt. - Government minority equity stake just under 16 percent; authorities’ equity stake US$25 million financed over two years within existing budget envelopes. - Debt share US$37 million contracted over three years and repayable over 15 years; government’s share of external debt servicing will peak in 2020 at less than 0.1 percent of GDP. - Construction assumed to increase imports of goods and services by around US$316 million over 3 years, most import-intensive phases in 2018–2019. - Projected current account deficit (percent of GDP): 2017 w/airport 10.2; w/o airport 9.7. 2018 w/airport 11.2; w/o airport 9.7. 2019 w/airport 9.9; w/o airport 8.6. - Reserves in months of prospective imports under airport scenario: 2017 w/airport 3.9; w/o airport 4.0. 2018 w/airport 3.7; w/o airport 3.8. 2019 w/airport 3.9; w/o airport 3.8. - IMF staff: airport increases headline current account deficit and import base for reserve coverage but not projected to affect overall BOP or actual level of foreign exchange reserves. ### Debt sustainability and DSA findings - DSA overall assessment: debt sustainable with low risk of debt distress. - Public debt levels and composition: - External public debt (percent of GDP, Selected quantitative indicators): 2015: 27.9; 2016: 35.8; 2017: 38.1; 2018: 40.2; 2019: 42.1. - Total public debt incl. guarantees (Selected quantitative indicators): 2015: 36.4; 2016: 44.5; 2017: 45.7; 2018: 47.1; 2019: 48.7. - External public debt (table excerpt): Total (including guarantees) 2016: 2.9 Billions US$, 100.0 percent, 35.8 % GDP. - Domestic public debt (2016): Total 571 Billions RWF, 100 percent, 8.6 % GDP; T-bonds 168 Billions RWF. - Key DSA projections and risks: - Baseline projections show most debt burden indicators below policy-dependent thresholds; single temporary breach in 2023 tied to maturity of 2013 Eurobond. - PV of PPG external debt (percent of GDP) examples: 2017: 26.0; 2018: 26.8; 2019: 27.7; 2020: 28.6; 2021: 27.6; 2022: 26.3. - Debt-service-to-exports and debt-service-to-revenue ratios rise in certain years (e.g., PPG debt service-to-revenue ratio 2017: 9.1 percent). - Main structural risk: narrow export base; DSA assumes export expansion and diversification will mitigate this risk. - Policy implications from DSA: - Use debt space judiciously; maximize external concessional funding; develop domestic capital markets; prioritize high-return investments. - Strengthen treasury management and broaden domestic revenue mobilization to secure assumed fiscal gains. ### Structural transformation, labor, and inclusion - Structural transformation: - Rapid move out of agriculture mainly into services; faster pace than most SSA peers. - Bottlenecks: proper use of agriculture investments (seed, fertilizer distribution, irrigation), quality of service-sector labor skills, cost of transporting goods, high electricity costs, low staple yields relative to SSA peers. - Investment surge led by public sector; need larger private sector role as public debt rises. - Gender inclusion: - World Economic Forum’s 2016 Gender Gap Index: Rwanda ranked number 1 among all low-and-middle-income countries in closing the gender gap and number 5 worldwide. - Potential growth payoff: further reducing gender inequality could boost per capita GDP growth by ½ percentage points (Selected Issues Paper No. II). - Human capital and labor market: - Emphasis on aligning education and TVET with labor market needs; proposals to develop universities focused on science, ICT and statistics; allow free flow of labor from EAC as interim labor market relief. ### Food security and agricultural resilience - Drought in 2016: - Agriculture output growth slowed to 3.9 percent in 2016 from a 2011–15 average of 5.2 percent; drought accounted for one-third to one-half of growth deceleration in 2016. - Approximately 59,000 households affected; government used strategic food stocks and is replenishing them. - Authorities allocating additional 0.3 percent of GDP to replenish food security stocks and expand irrigation by 20 percent per year. - Fall Army Worms (FAW) 2017: - FAW invaded starting February 2017; within 6 weeks, 95 percent treated with 60–80 percent recovery rates. - Contingency and refugee-related vulnerabilities: - 54,000 Burundian refugees in Rwanda dependent on WFP could face food insecurity due to insufficient financing of WFP program. - Contingency planning discussed for multilateral financing to address potential risks to off-budget support from one donor in health sector. ### Risks, contingency planning, and policy responses - Risk matrix highlights (selected): - Domestic shocks: - Accelerated slowdown in private credit growth — Likelihood/Impact: High. Policy responses: consider monetary accommodation by improving liquidity while maintaining fiscal discipline; contingency planning for financial soundness deterioration. - Persistence of adverse weather conditions — Likelihood/Impact: Medium. Policy responses: replenish food security stocks; expand irrigation; invest in agricultural productivity. - Low growth pay-off of public investment — Likelihood/Impact: Medium. Policy responses: invest in higher-quality education; prioritize project selection/implementation. - External shocks: - Regional geopolitical/security risks — Likelihood/Impact: Medium. Policy responses: reprioritize fiscal spending, allow higher exchange rate flexibility, accelerate reforms to improve resilience. - Stronger US dollar/higher global rates or weaker global growth — Likelihood/Impact: Medium. Policy responses: maintain flexible exchange rate, reduce donor dependence, accelerate competitiveness reforms. - Reserve adequacy: - ARA-CC suggests optimal reserve range depends on opportunity cost; with flexible exchange rate classification and opportunity cost ~4 percent, current reserve levels only just “optimal”; if opportunity cost 3 percent, range would be 4.4–5.9 months of imports. - IMF staff recommend maintaining exchange rate flexibility and consider higher reserve buffers than ARA-CC suggests to insure against commodity price volatility and market exposure. ### Program modalities and institutional details - Discussions held in Kigali during May 2–16, 2017. Mission: L. Redifer (head), E. Alper, S. Kwalingana, M. Newiak, C. Ntumwa (all AFR), N. Meads (SPR), assisted by A. Thomas (Resident Representative). F. Nyankiye and J. Ogaja (AFR) contributed. - Report approved by Roger Nord (AFR) and Yan Sun (SPR). - SCF disbursement schedule (Table 8 highlights): - Total: 144.18 percent of quota, 1,800 million SDR; 232.98 million US$ total available; 90.00 million US$ total disbursed as of dates shown. - Disbursements: June 16, 2016; January 17, 2017; planned further disbursements contingent on reviews (e.g., June 9, 2017; November 15, 2017). ### Concluding priorities - Maintain exchange rate flexibility and rebuild reserves to enhance resilience. - Continue fiscal consolidation while protecting priority spending and accelerating domestic revenue mobilization. - Advance monetary framework reforms toward inflation targeting with supporting market development (interbank market, domestic debt markets). - Prioritize reforms to boost private sector investment, export diversification, and human capital to sustain inclusive growth and mitigate vulnerabilities. *International Monetary Fund staff report for the 2017 Article IV consultation, seventh review under the Policy Support Instrument, and second review under the Standby Credit Facility (June 27, 2017).* ### 144.18 million) or 90 percent of Rwanda’s quota and to extend Rwanda’s PSI-supported ### RWANDA — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION, SEVENTH REVIEW UNDER THE POLICY SUPPORT INSTRUMENT, AND SECOND REVIEW UNDER THE STANDBY CREDIT FACILITY ### Key issues and context - Rwanda has implemented an ambitious development strategy over two decades (Vision 2020), achieving high and inclusive growth, poverty reduction, improved living standards, and sharpened competitiveness. - Government drafting a new “Vision 2050” development strategy aimed at reaching upper middle-income status by 2035. - Reforms should build on progress, including: reorienting the economy toward higher value-added activities; bolstering gender equality through greater economic inclusion; increasing access to affordable financial services and technology; and fostering development of domestic securities markets. - Main risks to growth: weather shocks affecting agriculture, regional security issues, and unexpected shifts in external development assistance. ### Program context and performance - Adjustment program centered on exchange rate flexibility; program performance remains strong. - All quantitative performance and assessment criteria and most indicative targets met for end-December 2016; most structural benchmarks observed through end-March 2017. - Staff supports conclusions of: second review under the SCF and seventh review under the PSI. ### Executive Board assessment — summarized views - Commended achievements: structural transformation, high and inclusive growth, reduced poverty and gender inequality, and an attractive business environment. - Endorsed exchange rate flexibility as the main adjustment tool; welcomed reforms to bolster domestic production to place external balances on a more sustainable path. - Emphasized importance of rebuilding reserve buffers to enhance resilience to external shocks. - Welcomed improved domestic revenue mobilization; urged careful balancing of tax incentives with domestic revenue objectives and supported planned tax expenditure analysis. - Supported move to an interest-rate based monetary policy framework; encouraged preconditions for indirect instruments, including deepening interbank and domestic debt markets and providing clear policy signals to anchor inflation expectations. - Underscored importance of boosting private sector’s role, continued improvements to the business environment, and investment in education and vocational training targeted at evolving labor needs. ### Economic developments and outlook - Growth: 2016 growth was 5.9 percent, down from 2015; recovery expected in 2017–18 owing to good rains and expanding domestic production. - Inflation: A spike in consumer price inflation in early 2017 was driven by food prices; inflation has decelerated as food supply constraints receded. - External trade: External trade deficit was lower than anticipated in 2016 due to a strong pick up in goods and services exports and reduced demand for imports. - Vulnerabilities: economy remains vulnerable to external shocks; need to rebuild foreign exchange reserve buffers. ### Key policy recommendations - Maintain exchange rate flexibility and rebuild official foreign exchange reserve buffers for a sustainable and resilient external position. - Build on progress in boosting revenue collection to provide space for strategic public investment and reduce aid dependence, while ensuring tax incentives to promote domestic production are well-targeted and consistent with overall fiscal objectives. - Maintain the already-agreed fiscal and monetary stance, while reconsidering monetary stance in the second half of 2017 based on developments in inflation and growth projections. - In transition to an interest-based monetary policy framework, prioritize: a flexible exchange rate regime; functioning money market tools; and clear signals about policy stance to guide inflation expectations. ### Selected quantitative indicators (2015–2019) - Real GDP: 2015: 8.9; 2016: 5.9; 2017: 6.2; 2018: 6.8; 2019: 7.3 - GDP deflator: 2015: 0.1; 2016: 4.9; 2017: 7.4; 2018: 5.5; 2019: 4.6 - CPI (period average): 2015: 2.5; 2016: 5.7; 2017: 7.1; 2018: 6.0; 2019: 5.0 - CPI (end of period): 2015: 4.5; 2016: 7.3; 2017: 7.0; 2018: 5.0; 2019: 5.0 - Core inflation (period average) (defined as excluding fresh products and energy): 2015: 2.1; 2016: 4.1 - Terms of trade (deterioration, -): 2015: 5.3; 2016: 6.3; 2017: 6.1; 2018: -4.1; 2019: 3.6 - Broad money: 2015: 21.1; 2016: 7.6; 2017: 13.0; 2018: 13.2 - Reserve money: 2015: 16.2; 2016: 5.5; 2017: 10.9; 2018: 11.1 - Credit to non-government sector: 2015: 30.1; 2016: 7.8; 2017: 17.9; 2018: 14.2 - M3/GDP (percent): 2015: 24.9; 2016: 24.1; 2017: 23.9; 2018: 24.0 - NPLs (percent of total gross loans): 2015: 6.2; 2016: 7.5 - Total revenue and grants (general government): 2015: 24.7; 2016: 23.7; 2017: 22.1; 2018: 21.9; 2019: 21.7 - Expenditure (general government): 2015: 29.3; 2016: 27.4; 2017: 26.2; 2018: 25.8; 2019: 25.6 - Primary balance: 2015: -0.3; 2016: -2.8; 2017: -2.9; 2018: -2.7; 2019: -2.7 - Overall balance: 2015: -4.6; 2016: -3.8; 2017: -4.1; 2018: -3.9; 2019: -3.9 - Net domestic borrowing: 2015: 1.1; 2016: 0.8; 2017: 0.0; 2018: 0.2; 2019: 0.5 - Total public debt incl. guarantees: 2015: 36.4; 2016: 44.5; 2017: 45.7; 2018: 47.1; 2019: 48.7 - Of which: external public debt: 2015: 27.9; 2016: 35.8; 2017: 38.1; 2018: 40.2; 2019: 42.1 - Investment: 2015: 25.9; 2016: 25.6; 2017: 24.0; 2018: 24.6; 2019: 22.6 - Government investment: 2015: 12.6; 2016: 10.6; 2017: 9.4; 2018: 9.9; 2019: 9.5 - Nongovernment investment: 2015: 13.3; 2016: 15.0; 2017: 14.6; 2018: 14.7; 2019: 13.1 - Savings: 2015: 8.0; 2016: 7.1; 2017: 10.2; 2018: 9.9; 2019: 9.3 - Government savings: 2015: 3.5; 2016: 3.1; 2017: 3.0; 2018: 3.5; 2019: 3.2 - Nongovernment savings: 2015: 4.5; 2016: 3.9; 2017: 7.3; 2018: 6.4; 2019: 6.1 - External sector: - Exports (goods and services): 2015: 18.4; 2016: 19.0; 2017: 20.3; 2018: 20.6; 2019: 21.9 - Imports (goods and services) (imports for 2016 reflect purchases of two aircrafts): 2015: 35.6; 2016: 37.0; 2017: 33.1; 2018: 34.3; 2019: 34.2 - Current account balance (incl. grants): 2015: -13.4; 2016: -14.4; 2017: -10.2; 2018: -11.2; 2019: -9.9 - Current account balance (excl. grants): 2015: -17.8; 2016: -18.5; 2017: -13.8; 2018: -14.6; 2019: -13.3 - Current account balance (excl. large projects): 2015: -9.9; 2016: -9.9; 2017: -10.2; 2018: -10.5; 2019: -10.3 - Gross international reserves: - in billions of U.S.$: 2015: 0.9; 2016: 1.0; 2017: 1.0; 2018: 1.0; 2019: 1.2 - in months of next year’s imports: 2015: 3.6; 2016: 4.1; 2017: 3.9; 2018: 3.7; 2019: 3.9 - Memorandum items: - GDP at current market prices, Rwanda francs (billion): 2015: 5,956; 2016: 6,618; 2017: 7,548; 2018: 8,505; 2019: 9,544 - GDP at current market prices, US$ (billion): 2015: 8.3; 2016: 8.4 - GDP per capita (US$): 2016: 732; 2015: 729 (table lists these two values in the GDP per capita row) - Population (million): 2015: 11.3; 2016: 11.5; 2017: 11.8; 2018: 12.1; 2019: 12.8 ### Program modalities and institutional details - Discussions held in Kigali during May 2–16, 2017. Mission comprised L. Redifer (head), E. Alper, S. Kwalingana, M. Newiak, and C. Ntumwa (all AFR) and N. Meads (SPR), assisted by A. Thomas (Resident Representative). F. Nyankiye and J. Ogaja (AFR) contributed to the report. - Report approved by Roger Nord (AFR) and Yan Sun (SPR). Staff supports second review under the SCF and seventh review under the PSI. *International Monetary Fund staff report for the 2017 Article IV consultation, seventh review under the Policy Support Instrument, and second review under the Standby Credit Facility (June 27, 2017).* ### 4. Rwanda has boosted domestic revenues to reduce donor reliance. Rwanda’s past ### 4. Rwanda has boosted domestic revenues to reduce donor reliance. Rwanda’s past ### Domestic revenue mobilization - Domestic revenue collection increased by some 6 percentage points of GDP from 2010 to 2016 (Box 2). - Revenue administration improvements: collection of local taxes at the central level, improvements in auditing procedures, closer scrutiny of large taxpayers. - Tax policy measures: VAT on mobile airtime, royalty taxes on mining, and taxes for special petroleum and infrastructure funds. - RRA (Rwandan Revenue Authority) 2015 TADAT-led work program: strengthen taxpayer registries, electronic filing, and reduce outstanding stock of arrears more efficiently. - IMF technical assistance focused on mining and property taxation and analyzing the VAT gap; outcomes include royalty taxes and revised Fixed Asset Tax legislation with new rates and a property valuation system based on market prices. - VAT amendments narrowed various incentive schemes to strategic sectors: exports, manufacturing, energy, ICT, financial services, construction, and agriculture. - Charted composition of revenues (fiscal years, in percent of GDP) showed components: Direct taxes; Taxes on goods and services; Taxes on international trade; Non-tax revenue (data series for 2011/12–2018/19 present in source). ### Development strategies and achievements (Box 1) - Vision 2020 objectives: transform Rwanda to middle-income status (per capita income US$1240) by the year 2020 (from US$229 in 2000); reduce poverty below 20 percent (around 60 percent in 2005); increase life expectancy to 66 years (from 49 years in 2000). - Vision based on 6 pillars: good governance; improved labor skills; private sector-led growth; infrastructure development; improved agricultural productivity; regional integration. Inter-woven: gender equality, environmental protection, use of science and technology. - EDPRS II (through 2018) thematic areas: (1) Economic Transformation; (2) Rural Development; (3) Productivity and Youth Employment—to create 200,000 jobs per annum; (4) Accountable Governance. - Community-based programs: “Umurenge” social protection, national program to provide cows, school feeding, free laptops, Crop Intensification Program. - Recent achievements: per capita income nearly doubled to US$729 (2016); poverty reduced to 39 percent (2014); life expectancy increased to 64 years (2014). - Follow up: Vision 2050 and EDPRS III under development aiming for upper middle income by 2035 and high income by 2050; EDPRS III aligned to new 7-year presidential term. Priorities include export diversification; energy distribution and supply; consolidated land use and irrigation; education and vocational training aligned to labor needs; national schemes to boost private savings; improved public project planning and monitoring. - GDP per Capita objectives timeline in source: 2000 US$229; 2016 US$729; 2020 US$1,240; 2035 US$4,035; 2050 US$12,476 (as reported in source). ### Recent economic developments and outlook - Growth: - Growth decelerated sharply in 2016: cumulative quarterly y/y growth slowed from 8.9 to 5.9 percent over the course of 2016. - Causes: extensive drought on agricultural production; completion of large public investment projects for tourism; adjustment policies tempering import demand. - Real GDP growth figures reported in macro framework table: Act. 2015 8.9; Prog. 6.0; Act. 2016 5.9; Prog. 2017 6.2; Proj. 2018 6.2; Proj. 2019 6.6; Proj. 2020 6.8 (table shows Act./Prog./Proj. context). - Inflation: - Food price inflation peaked at 17.6 percent y/y in February 2017; headline inflation peaked at 8.1 percent. - May food inflation dropped to 14.3 percent; headline inflation 6.5 percent. - Core inflation stood at 4.9 percent in May (first-round effects of exchange rate pass-through). - CPI inflation, average (percent) series in macro framework: Act. 2015 2.5; Prog. 2016 5.6; Act. 2016 5.7; Prog. 2017 5.5; Proj. 2018 7.1; Proj. 2019 5.0; Proj. 2020 6.0. - Sectoral impacts: - Rebasing national accounts from 2011 to 2014 put more emphasis on industry vs. agriculture (new national accounts figures released March 2017). - 2015 GDP growth and contribution by sector shown in source (services, industry, agriculture breakdown). ### Fiscal performance and policies - FY2016/17 Q1–Q3 outcomes (in percent of 2016/17Q1-Q3 GDP), projected vs. provisional: - Revenue and grants: Proj. 31.3; Prov. 32.2; Diff. 0.8. - Total revenue: Proj. 24.9; Prov. 25.9; Diff. 1.0. - Tax revenue: Proj. 21.7; Prov. 21.8; Diff. 0.1. - Non-tax revenue: Proj. 3.2; Prov. 4.1; Diff. 0.8. - Total Grants: Proj. 6.4; Prov. 6.3; Diff. -0.1. - Total expenditure and net lending: Proj. 36.9; Prov. 37.8; Diff. 0.9. - Current expenditure: Proj. 20.3; Prov. 22.1; Diff. 1.8. - Wages and salaries: Proj. 5.6; Prov. 5.9; Diff. 0.4. - Purchases of goods and services: Proj. 4.1; Prov. 4.1; Diff. 0.0. - Interest payments: Proj. 1.5; Prov. 1.4; Diff. -0.1. - Transfers: Proj. 5.8; Prov. 6.9; Diff. 1.1. - Exceptional social expenditure: Proj. 3.3; Prov. 3.8; Diff. 0.5. - Capital expenditure: Proj. 14.4; Prov. 13.5; Diff. -0.9. - Domestic capital: Proj. 7.8; Prov. 7.6; Diff. -0.1. - Foreign capital: Proj. 6.7; Prov. 5.9; Diff. -0.8. - Net lending: Proj. 2.2; Prov. 2.2; Diff. 0.0. - Overall Deficit (cash basis, incl. grants): Proj. -6.0; Prov. -5.2; Diff. 0.7. - Financing: Proj. 6.0; Prov. 5.8; Diff. -0.2. - Foreign financing (net): Proj. 7.6; Prov. 6.8; Diff. -0.8. - Project loans: Proj. 3.7; Prov. 2.9; Diff. -0.8. - Domestic financing: Proj. -1.6; Prov. -1.0; Diff. 0.6. - Banking system (Net): Proj. -2.6; Prov. -1.9; Diff. 0.7. - Non-banks (Net): Proj. 1.1; Prov. 0.9; Diff. -0.2. - Errors and omissions: Proj. 0.0; Prov. 0.5; Diff. 0.5. - Fiscal notes: - Revenue and grants on target overall, with slight shortfalls in taxes on goods and services and international taxes (lower imports of used clothes and cement), offset by overperformance in direct taxes. - Higher current expenditures in Q1–Q3 due to programming of whole-year spending: peacekeeping in CAR and South Sudan, court-mandated teacher salary increases, higher transfers to districts. - Lower investment spending in Q1–Q3 due to delays in externally-financed project disbursements and procurement/invoicing delays. ### Monetary stance and banking liquidity - BNR mopped up liquidity to strengthen the short term interbank market; liquidity withdrawals increased interbank market activity among a few banks while majority held large precautionary balances. - Despite tight stance, key policy rate was reduced by 25 basis points in late December due to concerns over weak demand and rapid deceleration of private sector credit growth (actual private sector credit growth 7.8 percent vs. 15.7 percent envisaged for end-2016). - Reserve money series presented in source (billions of Rwandan francs) with upper band and projections. ### External sector, reserves, and trade - Exchange rate: - Rwandan franc depreciated by 9.7 percent against the US$, higher than projected under the program. - Depreciated by 14.5 percent in the 11 months since mid-2015. - Depreciation in 2017 as of end-May was 1 percent. - Current account: - Preliminary current account deficit was 14.4 percent of GDP, compared to 16.9 percent projected. - Projection path in macro framework: Current account balance (percent of GDP) Act. 2015 -13.4; Prog. 2016 -16.9; Act. 2016 -14.4; Prog. 2017 -11.7; Proj. 2018 -10.1; Proj. 2019 -10.5; Proj. 2020 -11.3. - Import volumes contracted by 2 percent (July 2016–April 2017 vs. same period previous year), with declines in clothing imports (86 percent) and construction materials (25 percent). - Export volumes grew 27 percent, driven by strong non-traditional export performance including horticulture despite weakness in tea, coffee and minerals. - Gross central bank reserves: - End-2016 gross central bank reserves were roughly US$75 million higher than programmed. - By end-April 2017, foreign exchange reserve levels were only modestly higher than programmed. - Trade balance and program adjustment indicators (July 2016–April 2017): reported percent changes in import/export volume/value in source. ### Program performance - Program remains well on track: all end-December structural benchmarks and quantitative assessment/performance criteria were met; most indicative targets met. - Adjusted indicative targets on NDF and domestic revenues narrowly missed by some 0.1 percent of GDP each: - NDF miss due to higher non-bank financing offsetting shortfall in project loans. - Domestic revenue miss due to larger-than-expected impact on revenues of tariff increase for used clothes. - Structural benchmarks: - Revised National Investment Policy went to Cabinet in April (slight delay from end-March). - Two end-March structural benchmarks not yet met: fixed asset tax legislation still under discussion in Cabinet (expected to be submitted to Parliament for summer session, rephased to next review); framework for recording donor project support in one sector not met—now subsumed by accelerated GFSM 2014 incorporation and reformulated to require GFSM 2014 in Q1 FY17/18 quarterly budget execution report (rephased to next review). ### Bugesera Airport (Box 3) - Project rationale: support business tourism and increase cargo trade; new international airport outside Kigali (Bugesera) for more/larger aircraft. - Financing structure: public-private partnership with government minority stake just under 16 percent; a large private investor 16 percent; consortium (including MDBs) about 70 percent. - First phase estimated at US$ 400 million, financed 40 percent through equity and 60 percent through debt. - Authorities’ equity stake US$25 million, financed over two years within existing budget envelopes, aided by privatization receipts. - Debt share US$37 million contracted over three years and repayable over 15 years. - Government’s share of external debt servicing associated with the project will peak in 2020 at less than 0.1 percent of GDP. - Investor interest: non-disclosure agreements signed; investors offered three times more financing than needed; final contracts expected to be signed in summer with construction commencing later in 2017. - Macroeconomic treatment: project included in macroeconomic framework and DSA. - Construction assumed to increase imports of goods and services by around US$316 million over 3 years, most import-intensive phases in 2018–2019. - With airport, current account deficit (% GDP) in source projections: - 2017 w/airport 10.2; w/o airport 9.7. - 2018 w/airport 11.2; w/o airport 9.7. - 2019 w/airport 9.9; w/o airport 8.6. - Reserves in months of prospective imports: - 2017 w/airport 3.9; w/o airport 4.0. - 2018 w/airport 3.7; w/o airport 3.8. - 2019 w/airport 3.9; w/o airport 3.8. - While increasing the headline current account deficit and the import base for reserve coverage, airport construction is not projected to affect the overall BOP or the actual level of foreign exchange reserves. ### Outlook and risks - Growth outlook: - Growth expected to pick up in latter half of 2017 with good Q1 2017 rains promising better mid-year harvests. - Growth in 2018–2019 projected to come closer to historical averages. - Large public investment in business tourism expected to boost service exports medium-term and diversify exports. - Inflation trending down but higher average rates expected in 2017. - External adjustment: - Current account deficit expected to narrow further in 2017 to 10.1 percent of GDP as trade balance improves. - Framework reflects authorities’ plan to begin Bugesera airport construction in H2 2017 via PPP; authorities’ engagement intended to avoid adverse debt sustainability or overall BOP impact. - Risks (Annex II): - Upside: good Q1 2017 rains; airport construction; expanded and diverse exports. - Downside: deteriorating political conditions in Burundi and Democratic Republic of Congo; increasingly unpredictable weather patterns; difficult global economic conditions. - Contingency planning: authorities discussed contingency planning for multilateral financing to address potential risks to off-budget support from one donor in the health sector. *Source: IMF staff report text provided in the content unit.* ### 18. Discussions focused on key areas for sustaining high and inclusive growth, while ### 18. Discussions focused on key areas for sustaining high and inclusive growth, while ### Structural transformation (Box 4) - Rwanda’s pace of structural transformation has been faster than most SSA peers, due to high levels of efficient investment. - Rapid move out of agriculture mainly into services. - World Economic Forum Global Competitiveness index ranks Rwanda’s quality of infrastructure among the best in SSA, linked to available funding and quality public investment management. - Persisting bottlenecks: - Proper use of agriculture investments (seed availability, distribution of fertilizers, irrigation use). - Quality of service sector labor skills. - Cost of transporting goods. - High costs of electricity. - Yields remain below SSA peers for most staples (maize, sorghum, and cassava). - Investment composition and constraints: - Surge in investment led by the public sector; private sector needs to play a larger role as public debt rises. - Small scale and landlocked status are inherent barriers to boosting private investment. - Education levels remain low; urgent need to better match education with labor market demands given demographic trends. - Government measures include eliminating non-tariff barriers in transportation, developing universities specializing in science, ICT and statistics, and enhancing Technical and Vocational Education and Training (TVET) programs. - Interim labor market relief through allowing free flow of labor from the EAC. ### Gender inclusion (Box 5) - Improvements in gender-related outcomes over the past decade built on strong political will and leadership and supporting institutions (Ministry of Gender and Family Promotion; Gender Monitoring Office; National Women Council; Forum for Women Parliamentarians). - Gender equality operationalized as integral to development since the mid-1990s; women assumed new roles including heads of households. - Indicators and rankings: - World Economic Forum’s 2016 Gender Gap Index ranks Rwanda number 1 among all low-and-middle-income countries in closing the gender gap, and number 5 worldwide. - Significant progress in socio-economic outcomes, including gender parity in school attendance and reduced risk of maternal mortality. - Potential growth payoff: - Further reducing gender inequality could boost per capita GDP growth by ½ percentage points (see Selected Issues Paper No. II). - Specific measures: increasing access to quality health and education services, and higher financial inclusion to boost female labor force participation beyond agriculture. ### Macro-financial developments (Box 6) - Rapid financial inclusion driven partly by technology advances. - Total assets of the financial sector grew from 31 to 54 percent of GDP in the past 8 years. - Financial access increased from 48 to 89 percent of the adult population over the past 8 years. - From 2011 to 2014, the share of adults with financial accounts increased by 10 percentage points (World Bank Findex). - Financial system resilience: - Despite substantial credit growth, private sector credit gaps have stayed below risk thresholds for credit booms. - During 2013–15, the credit gap remained below the 2 percent threshold commonly associated with bubble concerns, and has since returned to long-term structural trends. - Banking sector vulnerabilities assessed as medium, mainly because of a recent rise in NPLs, which nonetheless have remained below 10 percent of credit, lower than regional peers. - Financial development and policy implications: - Improvement driven by financial institutions; securities markets remain largely undeveloped. - Deeper securities markets important for access to larger-scale finance at lower costs. - Growing financial sector importance affects monetary transmission, financial stability, and consumer welfare. - Central bank adapting legal, regulatory and supervisory frameworks to manage risks from rapid financial innovation. ### Fiscal policy—balancing incentives and domestic revenue collection - FY outcomes and projections: - End-June FY16/17 fiscal deficit will likely be lower than previously projected due to continued under execution of investment spending; deficit could be almost 1 percent of GDP lower than the agreed targeted ceiling. - Modest revenue shortfalls in the first half expected to be offset by acceleration of large taxpayer audits and expiration of financial sector tax exemptions. - FY 17/18 draft budget: - Deficit target maintained at 3.7 percent of GDP (4 percent on a cash basis). - Rebasing resulted in a higher GDP base; following modest shortfalls associated with the new investment code and Made in Rwanda campaign, revenue projections were not increased fully in line with revised GDP, leading to a 0.6 percent of GDP reduction in revenues compared with earlier projections. - Spending adjustments in real terms offset revenue reduction; some re-composition toward current spending reflecting lower projections for externally-financed investment spending. - Rwanda’s level of investment spending remains high compared to peers; wage bill low. - Election expenditures are less than 0.1 percent of GDP and fully financed. - Medium-term framework: - EAC deficit objective is 3 percent of GDP; medium-term projections show the deficit trending toward that objective. - Authorities’ effective fiscal anchor is maintaining a low risk of debt distress under the DSA, which encompasses central government deficit and contingent liabilities (e.g., KCC, Rwandair, Bugesera). - Projected gradual tapering of budget support and shift away from grants implies maintaining debt sustainability will require renewed focus on domestic revenue collection. - Structural fiscal measures and transparency: - Recent tax incentive: elimination of VAT on inputs to stimulate domestic production of imported goods (textiles and leather products, cement, computers and other office accessories) under the “Made in Rwanda” campaign. - Staff noted adverse impact of such incentives on domestic revenue mobilization and underscored the importance of continued revenue mobilization. - Program benchmark reformulated to assess revenue loss associated with these measures by the next review, with follow-up analysis of associated benefits. - Authorities exploring new tax policy measures on excise taxes and expect revenue gains from the new property tax law with higher rates, assessed against market-based valuations. These latter policies are not included in the current macroeconomic forecast and present upside potential to the revenue forecast. - Improvements in fiscal transparency: quarterly budget execution reports published; transition to GFSM 2014 format underway; backward-looking annual tables made available (Tables 2c-d); projected publication of quarterly fiscal execution tables will begin in the fall to better monitor project grant flows and produce fiscal projections per the new methodology. - Structural benchmark: develop a strategy to assess foreign exchange needs of companies investing in Rwanda under PPP arrangements through continuous monitoring and by building them into future project appraisals. ### Food security (Box 7) - Drought in 2016: - Agriculture output grew by an annual average 5.2 percent between 2011 and 2015; growth slowed to 3.9 percent in 2016 due to drought from September 2015 through December 2016, accounting for one-third to one-half the growth deceleration in 2016. - Approximately 59,000 Rwandan households affected; government used strategic food stocks and is replenishing them. - USAID estimates near-normal harvests following relatively normal rainfall; food price inflation began declining since February; trend expected to continue. - 54,000 Burundian refugees in Rwanda dependent on WFP could face food insecurity due to insufficient financing of the WFP’s program. - Fall Army Worms (FAW) in 2017: - FAW invaded starting in February 2017, affecting large swathes of grain fields. - Government response: deployed pesticides, training, and the military; within 6 weeks, 95 percent had been treated with 60–80 percent recovery rates. - Public investment to improve agricultural resilience: - Authorities allocating an additional 0.3 percent of GDP to replenish food security stocks and expand irrigation by 20 percent per year, among other measures. - Government assembled a task force to identify and manage new outbreaks, develop less labor-intensive methods for treatment, and research more resistant grain varieties. ### Monetary policy—strengthening the operational framework - Credit dynamics: - Private sector credit growth declined from 30 percent in 2015 to 7.8 percent in 2016, and appears to have troughed in February 2017. - Authorities attribute sharp deceleration mainly to weak demand stemming from growth deceleration; similar patterns across the EAC raise questions about regional linkages, including drought impacts. - Policy stance for second half of 2017: - NBR and staff agreed monetary policy stance would consider developments in inflation and growth projections. - Authorities and staff concurred that 2016 and early 2017 inflationary impulses stemmed almost exclusively from supply-side factors and first-round effects of exchange rate pass-through, with little second-round effect on inflation. - If inflation expectations remain consistent with the medium-term objective (5 percent) and growth indicators suggest continued deceleration, policy tightening agreed a year ago could be partially reversed through slowing liquidity withdrawals. - Move toward inflation targeting: - Authorities taking steps to move toward inflation targeting; greater exchange rate flexibility allowed as centerpiece of adjustment. - Consistent with EAC objectives, authorities aim to move toward a forward-looking interest rate-based monetary framework by end-2018. - Interim priorities: deepen interbank and domestic debt markets; reduce structural excess liquidity; create a functioning role for the policy rate. - Staff emphasized importance of exchange rate flexibility for establishing an effective policy framework. - BNR developing forecasting capacity using the Forecasting and Policy Analysis System (FPAS) and has prepared an action plan to incorporate this into monetary policy formulation. - Financial soundness: - Despite some recent weakening, indicators remain within comfortable limits; banking system remains well capitalized. - Non-performing loan ratios have risen through March 2017 owing to lower credit growth and tighter provisioning requirements. - Authorities strengthening regulatory and supervisory frameworks to manage stability risks from rapid financial innovation without hindering financial sector development. ### External sector—rebuilding reserve buffers - External imbalances: - Deterioration of the current account deficit and reserve buffers since 2012 reflected temporary factors (commodity price shock, large investment projects) and structural reduction in official development assistance. - Adjustment policies undertaken since have begun to reverse external imbalances and stem the loss of official reserves. - Pace of Rwandan franc depreciation slowed in 2017, suggesting the external position is more in line with fundamentals as indicated by various external analysis metrics (Annex IIII). - Accumulation of official reserves through end-2017 expected to be slightly less than earlier projected, based on authorities’ revised projections for foreign direct investment which reflect recent information on 2015 outcomes. - Staff view: authorities’ projections for FDI may be conservative; FDI outturns in 2015 may have been depressed by temporary factors including commodity price decline; initiatives underway to stimulate private investment. - Policy measures beyond macroeconomic adjustment: - “Made in Rwanda” campaign (launched in 2016) originally focused on import substitution; expanded to promote domestic production more generally. - Staff emphasized continued exchange rate flexibility will be important for sustainable external balances and for the transition to inflation-targeting. *International Monetary Fund staff report excerpt.* ### Box 8. “Made in Rwanda” Campaign ### Box 8. “Made in Rwanda” Campaign ### Objectives and scope - Formulated over the course of 2016 to reduce structural trade deficits and stimulate growth. - Initially intended to identify promising sectors for import substitution: cement, light manufacturing (garments), agriculture (sugar, rice). - Policy expanded to provide incentives to deepen domestic supply chains and product quality. ### Targeted interventions and measures - Investment in the publicly-owned cement company to expand production potential. - A communication campaign to encourage purchase of domestically-produced goods. - Public procurement laws which give preference to domestically-produced goods. - Certification changes to increase quality of domestically-produced goods. - New VAT exemptions on inputs for strategic sectors to reduce the cost of production. - Sector-specific action plans for strategic sectors to strengthen domestic supply chains to boost the domestic content of products, including meat, sugar, steel, detergents, and pharmaceuticals. ### Trade policy action and short-term outcomes - As of July 1, 2016, the government implemented an EAC policy to hike import tariffs on used clothing/shoes, primarily to stimulate domestic clothing production. - From July 2016-March 2017, imports of used clothes/shoes declined by 86 percent, and domestic production has picked up sharply. - Over the same period, inflation related to clothing/shoes has remained lower than other categories, suggesting there has not been an adverse welfare effect. ### Assessment - With the larger MIR initiative in its nascent stages, it is too early to assess its broader impact on domestic production, external balances, and consumer welfare. *Box 8 text from cr17217 - Box 8. “Made in Rwanda” Campaign* ### 40. Staff supports the completion of the second review under the SCF and the seventh ### 40. Staff supports the completion of the second review under the SCF and the seventh review under the PSI ### Program status and conditionality - Staff supports completion of the second review under the SCF and the seventh review under the PSI. - Program performance: all end-December, 2016 quantitative assessment/performance criteria and most indicative targets met, as well as most structural benchmarks through end-March 2017. - Next Article IV consultation with Rwanda expected to be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements. ### Growth and real sector developments - Real GDP growth (Table 1, annual percent change): 2015: 6.9; 2016: 8.9; 2017 (Prel.): 6.0; 2018 (Proj.): 5.9; 2019 (Proj.): 6.2; later projections listed through 2019 including 6.2, 6.6, 6.8, 7.3 in extended columns. - Growth slowed sharply in 2016 due to drought, completion of large projects, and adjustment policies (Figure 2). - Sector contributions (Figure 2): Services, Industry, Agriculture contributions to GDP growth shown graphically (percent contributions across Mar-13 to Dec-16). ### Fiscal developments and budgetary outcomes - Overall fiscal deficit (percent of GDP, Table 1): 2015: -5.1; 2016: -4.6; 2017 (Prel.): -3.9; 2018 (Proj.): -3.8; 2019 (Proj.): -4.1; continued projections to 2019 range around -3.9 to -4.1. - Total revenue and grants (percent of GDP, Table 1): 2015: 25.2; 2016: 24.7; 2017 (Prel.): 24.1; 2018 (Proj.): 23.7; 2019 (Proj.): 23.0; later projections: 21.9. - Tax revenue (percent of GDP, Table 1): 2015: 15.9; 2016: 15.6; 2017 (Prel.): 16.2; 2018 (Proj.): 15.8; 2019 (Proj.): 16.3; later projection 15.4. - Expenditure (percent of GDP, Table 1): 2015: 30.3; 2016: 29.3; 2017 (Prel.): 28.0; 2018 (Proj.): 27.4; 2019 (Proj.): 27.2. - Public debt (percent of GDP, Table 1): Total public debt incl. guarantees: 2015: 35.4; 2016: 36.4; 2017 (Prel.): 45.0; 2018 (Proj.): 44.5; 2019 (Proj.): 50.8; further projections: 47.1, 48.7. - Notes from Figure 3: Lower FY15/16 deficit reflected an increase in revenues and lower capital spending; public debt continues to rise reflecting large public infrastructure investment. ### Central government flows (Tables 2a–2d, selected figures) - Total revenue (Billions of RwF, Table 2a): FY2015/16 Act.: 1,167.9; 2016/17 Rev. Budget: 1,240.5; 2017/18 6th PSI Review Proj.: 1,265.4; 2018/19 Proj.: 1,401.7; 2019/20 Proj.: 1,796.6 (later years included). - Total expenditure and net lending (Billions of RwF, Table 2a): FY2015/16 Act.: 1,757.7; 2016/17 Rev. Budget: 1,891.3; 2017/18 6th PSI Review Proj.: 1,854.7; 2018/19 Proj.: 2,026.8; 2019/20 Proj.: 2,601.7. - Overall deficit including grants (Billions of RwF, Table 2a): FY2015/16 Act.: -216.0; 2016/17 Rev. Budget: -324.3; 2017/18 6th PSI Review Proj.: -256.1; 2018/19 Proj.: -284.8; 2019/20 Proj.: -373.8. - Financing (Billions of RwF, Table 2a): Foreign financing (net): FY2015/16 Act.: 227.4; 2016/17 Rev. Budget: 350.4; 2017/18 6th PSI Review Proj.: 292.2; 2018/19 Proj.: 333.3; 2019/20 Proj.: 383.6. - Budget support (Table 2a): Total budget support (Billions of RwF): FY2015/16 Act.: included under Grants; disaggregated budget grants and project grants shown for multiple years (e.g., Budget grants FY2015/16 Act.: 204.8; Project grants FY2015/16 Act.: 168.9). ### Monetary sector and inflation - CPI (period average) (Table 1): 2015: 2.5; 2016: 2.5; 2017 (Prel.): 5.6; 2018 (Proj.): 5.7; 2019 (Proj.): 5.3; later projections include 7.4, 4.8, 5.5, 4.6. - CPI (end period) (Table 1): 2015: 4.5; 2016: 4.5; 2017 (Prel.): 6.0; 2018 (Proj.): 7.3; 2019 (Proj.): 5.0. - Reserve money (Table 3, year-on-year growth): 2015 Dec.: 16.2; 2016 Dec.: 8.9; 2017 June: 5.5; other projections through 2019 included. - Broad money (M3) growth (Table 1 and Table 3, year-on-year): 2015: 21.1; 2016: 21.1; 2017 (Prel.): 10.7; 2018 (Proj.): 7.6; 2019 (Proj.): 11.5; later projections include 13.0, 17.8, 13.2. - Credit to non-government sector (Table 3, year-on-year / Table 1 values): 2015: 30.1; 2016: 30.1; 2017 (Prel.): 15.7; 2018 (Proj.): 7.8; 2019 (Proj.): 15.1; subsequent projections show 11.7, 16.3, 17.8, 15.2, 17.3, 9.0. - Figure 4: Extended drought in 2016 drove up food prices; private sector credit growth continued to decline; liquidity conditions tightened; interbank and T-bill rates increased. ### External sector and reserves - Current account balance (percent of GDP, Table 4 memorandum): 2015: -13.4; 2016: -16.9; 2017 (Prel.): -14.4; 2018 (Proj.): -11.7; 2019 (Proj.): -10.2; later projections show -11.2 and -9.9. - Gross international reserves (billions of US$, Table 1 and Table 4): 2015: 0.9; 2016: 0.9; 2017 (Prel.): 1.0; projections: 0.9, 1.0, 1.1, 1.0, 1.2 in subsequent years. - Months of next year's imports (Table 1): 2015: 3.4; 2016: 3.6; 2017 (Prel.): 3.7; projections around 4.1, 3.9, 3.9, 4.0, 3.7, 3.9. - Trade and current account details (Table 4): Exports (f.o.b.) 2015: 683.7; 2016: 728.0; 2017 (Prel.): 745.0; 2018 (Proj.): 831.5; 2019 (Proj.): 907.3; Imports (f.o.b.) 2015: 1,918.7; 2016: 2,173.1; 2017 (Prel.): 2,045.1; 2018 (Proj.): 2,048.6; 2019 (Proj.): 1,983.1. - Figure 5: Current account deficit widened in 2016; official reserves stabilized; Rwandan franc depreciated significantly in nominal terms, bringing real exchange rate closer to fundamentals. ### Banking system soundness - Capital adequacy (Figure 6 / Table 5): Regulatory capital to risk-weighted assets (percent): Mar-13 through Mar-17 data show values around 19.6 to 23.3, with Dec-16 at 19.9 and Mar-17 at 19.6. - Nonperforming loans (NPLs/gross loans, Table 5): Mar-15 6.3; Jun-15 5.9; Sep-15 6.3; Dec-15 6.2; Mar-16 6.2; Jun-16 7.0; Sep-16 7.4; Dec-16 7.6; Mar-17 8.1. - Provisions/NPLs (Table 5): ranged from 52.3 down to 42.7 and back to 44.5 by Mar-17. - Profitability (Table 5): Return on average assets: down to 1.8 by Mar-17; Return on average equity: 10.0 by Mar-17. - Regional comparison (Figure 6): Rwanda's banking system compares favorably in the region in terms of capital adequacy and has the lowest NPLs in the region as of 2016Q4 versus Burundi, Kenya, Tanzania, Uganda. ### Quantitative program targets and outcomes (end-December 2016) - Assessment/performance criteria outcomes (Table 6, December 2016): - Ceiling on the overall fiscal deficit, including grants (Billions RwF): Adjusted 139.5; Actual 138.3; Status: Met. - Net foreign assets of the NBR at program exchange rate (floor on stock) (Billions RwF): 555.0 target; Actual 650.2; Status: Met. - Reserve money (ceiling on stock) (upper bound) (Billions RwF): 320.8 adjusted; Actual n.a. - Reserve money (ceiling on stock) (Billions RwF): 313.9 target; Actual 282.5; Status: Met. - External payment arrears (US$ millions) (ceiling on stock): target 0.0; Status: Met. - Indicative targets: - Net domestic financing (ceiling on flow) (Billions RwF): Adjusted -101.4; Actual -72.7; Status: Not met. - Domestic revenue collection (floor on flow) (Billions RwF): Adjusted 539.0; Actual 532.1; Status: Not met. - Net accumulation of domestic arrears (ceiling on flow) (Billions RwF): Adjusted -10.0; Actual -12.2; Status: Met. - Total priority spending (floor on flow) (Billions RwF): Adjusted 338.8; Actual 340.3; Status: Met. - New external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions) (ceiling on stock): Adjusted 500.0; Actual 418.0; Status: Met. - Memorandum items (Table 6): Total budget support (US$ millions) Adjusted 302.8; Actual 279; Budget support grants Adjusted 105.5; Actual 127; Budget support loans Adjusted 197.3; Actual 152; RWF/US$ program exchange rate target 807.2; actual 807. ### Structural benchmarks through end-March 2017 (Table 7 highlights) - Monetary: - Define and target a range of excess reserves conducive to developing the interbank market. Target: End-December 2016. Status: Met. - Introduce the real horizontal REPOs including transfer of collateral across banks to facilitate transactions and boost trading of debt securities. Target: End-March 2017. Status: Met. - Public Financial Management: - Provide quarterly revenues, expenditures, and financing estimates within 60 days of quarter end. Target: Each quarter. Status: Met. - Submit revised National Investment Policy to Cabinet. Target: End-March 2017. Status: Not met. Completed in April 2017. - Operationalize IFMIS and E-procurement interface protocols. Target: End-December 2016. Status: Met. - Set up framework for recording donor project support in one sector. Target: End-March 2017. Status: Not met. - Produce an inventory of project accounts at the central bank. Target: End-March 2017. Status: Met. - Fiscal Revenues: - Produce detailed report on tax expenditures for FY15/16. Target: End-December 2016. Status: Met. - Submit to Parliament revised legislation on fixed asset tax. Target: End-March 2017. Status: Not met. ### SCF disbursements and IMF financing (Table 8 and Table 9) - SCF disbursement schedule and status (Table 8): - June 8, 2016: 72.0 percent of quota, 900 million SDR available; 109.23 million US$ disbursed 45.00 million US$; Disbursed on June 16, 2016. - December 1, 2016: 36.0 percent of quota, 450 million SDR available; 61.88 million US$ disbursed 22.50 million US$; Disbursed on January 17, 2017. - June 9, 2017: 18.0 percent of quota, 225 million SDR available; 30.94 million US$; Board completion of the second SCF review based on compliance with end-December 2016 conditionality. - November 15, 2017: 18.0 percent of quota, 225 million SDR available; 30.94 million US$; Board completion of the third SCF review based on compliance with end-June 2017 conditionality. - Total: 144.18 percent of quota, 1,800 million SDR; 232.98 million US$ total available; 90.00 million US$ total disbursed as of dates shown. - Indicators of Fund credit and prospective obligations (Table 9, selected figures): - Fund obligations based on existing credit (millions of SDRs): 2016 Est.: 1.4; 2017: 1.2; 2018: 0.9; 2019: 0.5; 2020 onward include prospective SCF access showing increases (e.g., 2020: 16.1 under prospective scenarios). - Obligations to the Fund from existing and prospective credit (millions of U.S. dollars): 2016 Est.: 1.9; 2017: 1.6; 2018: 1.1; 2019: 0.5; 2020: 22.2; later years show larger amounts with projected peaks. - Outstanding Fund credit based on existing drawings (end-of-period, SDRs): 2016: 74.4; 2017: 109.3; 2018: 108.5; 2019: 108.1; projections extend with prospective drawings. *Source: Rwandan authorities and IMF staff estimates and projections (content unit: cr17217 - 40).* ### Annex I. Implementation of Key policy recommendations from ### Annex I. Implementation of Key policy recommendations from the 2014 Article IV consultation ### Growth and trade: investments, energy, and trade diversification - Recommendation: Prioritize investments to reduce the infrastructure deficit, increase energy generation, and diversify trade to facilitate private sector engagement and growth. - Status: - Government focus on niche tourism and business conferences via MICE (meetings, incentives, conferences, events) strategy. - Finalized The Kigali Convention Center. - Several new international hotels completed in 2016. - Rwandair scaled up operations by purchasing three small and two large planes. - A new airport in Bugesera is planned to handle growing business tourism and cargo trade. - Special Economic Zones used to diversify exports and reduce imports; low cost energy identified as a key component. ### Fiscal policy: deficit reduction and priority spending - Recommendation: Reduce the overall budget over time considering reduced grant financing and protect priority spending. - Status: - Overall deficit: 5.1 percent deficit in 2014 down to 4.6 percent in 2016 notwithstanding airport. - Rwanda has consistently met the indicative targets on minimum priority spending on energy, roads, agriculture, health and education, as defined by the EDPRS2. - Service gaps remain because of the low education base. ### Revenue mobilization: broaden tax base and strengthen administration - Recommendation: Continue to broaden the tax base and strengthen revenue administration. - Status: - Tax revenue to GDP ratio: almost 16 percent of GDP in 16/17. - Improvements due to tax administration measures including expanded utilization of electronic billing machines, E-Tax enhancements, roll out of the single customs territory, one-stop-border posts and electronic cargo tracking systems. - Pending tax policy measures include revisions to property taxes. ### Debt sustainability: use debt space judiciously and explore financing options - Recommendation: Make judicious use of available debt space and recourse to non-concessional financing, while fully exploring concessional financing options and private sector participation. - Status: - Considerable progress in improving public investment oversight; regarded as a peer leader. - Identified private sector and concessional financing for the new airport, allowing maintenance of low-risk assessment for debt distress. ### Monetary and financial access policy: strengthen frameworks and access - Recommendation: Continue efforts aimed at strengthening the monetary and supervisory frameworks and improve access to finance. - Status: - BNR is laying the groundwork for implementing a more forward-looking monetary policy framework by 2018. - Longer tenured bonds were issued to deepen financial markets. - BNR developed a five-year road map to: - Give prominence to its policy rate by promoting a secondary market for public securities. - Lengthen the yield curve. - Reduce excess reserves in the banking system. - Introduce an electronic platform for retail investors. - Financial access: development of mobile platforms has helped raise access to finance by 15 ppt between 2012 and 2016. *Annex II. Risk Assessment Matrix (selected items)* ### Potential domestic shocks - Accelerated slowdown in private credit growth - Time Horizon: Short - Medium Term - Likelihood/Expected Impact: High. Accelerated slowdown in the private credit growth could adversely affect economic growth and banks’ asset quality. - Policy response: - Consider monetary accommodation through improving liquidity conditions while maintaining fiscal discipline. - Develop contingency planning if financial soundness deteriorates. - Persistence of adverse weather conditions - Time Horizon: Medium-Long Term - Likelihood/Expected Impact: Medium. Agricultural production could decline, pressuring prices, food supplies, and exports. - Policy response: - Replenish food security stocks. - Invest in expanded irrigation. - Invest in boosting agricultural productivity and diversity. - Low growth pay-off of public investment - Time Horizon: Long term - Likelihood/Expected Impact: Medium. Could limit prospects to boost growth and living standards, and affect debt sustainability. - Policy response: - Invest in higher quality education that teaches problem-solving and matches labor demand. - Continue to allow free movement of skilled labor from the region. ### Potential external shocks - Policy and geopolitical uncertainties; intensification of security risks in the region - Time Horizon: Medium-long term - Likelihood/Expected Impact: Medium. Increased refugees from Burundi and Dem. Rep. of Congo would increase spending needs for food and adversely impact the current account by reducing tourism and exports. - Policy response: - Reprioritize fiscal spending to accommodate food security outlays. - Allow for higher exchange rate flexibility. - Accelerate reforms to improve resilience to external shocks. - Financial conditions: significant further strengthening of the US dollar and/or higher rates; weaker European banks - Time Horizon: Short-medium term / Medium-long term - Likelihood/Expected Impact: Medium. Adverse effects on the BOP and reserves. - Policy response: - Maintain flexible exchange rate regime. - Continue efforts to reduce donor dependence. - Weaker-than-expected global growth (including significant China slowdown) - Time Horizon: Short to Medium Term - Likelihood/Expected Impact: Medium. Will adversely impact current account by reducing tourism and exports and financial account by reducing FDI and portfolio inflows. - Policy response: - Maintain exchange rate flexibility. - Accelerate reforms to address structural weaknesses affecting competitiveness. - Lower energy prices - Time Horizon: Short to Medium Term - Likelihood/Expected Impact: Low. Low energy prices are a positive shock for Rwanda in the near term. *Annex III. External Stability Assessment* ### Summary assessment - Overall: External position broadly in line with fundamentals and desirable policy settings. - Short-term adjustment policies helped reduce external imbalances; Rwandan Franc (RwF) continued to depreciate in 2016. - Reserve coverage trends have been gradually reversed; analysis suggests buffers should be slightly increased further. - Non-price competitiveness indicators show a relatively strong business environment, but gaps remain, including workforce education. ### Context and recent developments - ODA historically high; after 2012 retraction of ODA, priority to become less donor dependent. - Current account deficit deterioration in recent years: - Current account deficit reached 14.4 percent of GDP in 2016. - Commodity price shocks suppressed export receipts for minerals, which nearly halved in 2015 after accounting for about one-third of exports in 2014. - Several large public and private investment projects increased import demand, causing a large jump in the current account deficit in 2015-2016. - Estimating a “structural” current account deficit: removing large projects and tied financing results in a current account deficit of 7 percent of GDP, assuming a 75% import content for project financing. - Reserves: - Reserves dropped from US$ 1050 million at end-2011 to US$ 738 million by mid-2015. - Months of prospective import coverage dropped from 5.1 to 2.9 months over the same period. - Adjustment measures since mid-2015: - More flexible exchange rate; RwF depreciated by 5.5 percent in real terms since mid-2015. - Depreciation supported by prudent fiscal and monetary policy and incentives for exports and import substitution via “Made in Rwanda.” - Import volumes contracting; significant decline in consumer goods and construction-related imports. - Export volumes growing robustly, aided by strong non-traditional exports supplementing tea and coffee. - Current account deficit in 2016 was lower than projected; improvements continued into Q1 2017. ### Exchange rate assessment - Methodologies used: EBA-lite current account model (CA) and real exchange rate model (REER). - REER approach: - Suggests RWF is moderately undervalued—by around 8 percent. - Current account approach: - Estimates a fitted 2016 current account deficit of 5.2 percent of GDP. - Adjusted “structural” current account deficit range: 6.6–7.6 percent of GDP based on differing assumptions for import content. - Difference between structural CA deficit and estimated 2016 value: range of 1.4 and 2.4 percentage points. - With estimated trade balance elasticity to REER of -0.19, RwF would have to adjust by between 8 and 13 percent to eliminate the gap. - BNR research suggests trade elasticity may be -0.25, indicating RwF adjustment of 6-10 percent would be needed to close the gap. - Staff assessment: - Real effective exchange rate broadly in line with fundamentals. - Given differing approach outcomes, exchange rate flexibility remains an important adjustment tool. ### Competitiveness and survey-based indicators - World Economic Forum’s Global Competitiveness Index (CGI) 2016–17: - Rwanda’s overall rank: 52 out of 138 economies. - Third best for a Sub-Saharan African country (after Mauritius and South Africa). - Improvement of 18 places over the past 5 years. - Improvements in institutions, health and primary education, and innovation. - World Bank Doing Business Report 2017: - Rwanda ranks 56 out of 190 countries. - Second-best overall ranking for a Sub-Saharan African country. - Rwanda is one of only 10 economies implementing reforms in all Doing Business indicators every year since 2006. - Recent improvements: registering property, enforcing contracts, and reinforcing export promotion programs and access to financial services. - Structural strengths and weaknesses: - Rwanda compares favorably on most Doing Business indicators relative to EAC and Sub-Saharan Africa. - Dealing with construction permits is inferior to regional peers. - Key impediments identified: access to financing and workforce education levels. ### Adequacy of international reserves - End-2017 Q1 reserves: 3.6 months of prospective imports. - Projected end-2017 reserves: 3.9 months of prospective imports. - Simple rules of thumb: - Reserves above standard threshold of 3-months of imports coverage. - Reserves above 20 percent of broad money threshold. - Historical IMF recommendation for Rwanda: optimal reserve levels of 4–5 months of imports. - Central bank minimum target: 4 months of prospective goods and services imports. - Medium-to-long-term need: reach and maintain reserve coverage ratios of at least 4.5 months of imports to meet the EAC convergence criteria. *International Monetary Fund — Rwanda staff report annexes (selected sections from Annex I–III).* ### 14. Assessing reserve adequacy using a cost-benefit approach suggests a range of ### 14. Assessing reserve adequacy using a cost-benefit approach suggests a range of ### ARA-CC model findings on reserve adequacy for Rwanda - The Fund’s Assessing Reserve Adequacy in Credit Constrained Economies (ARA-CC) approach indicates a range of “optimal” reserves that depends on the cost of holding reserves and access to an IMF-supported program. - Rwanda’s classification as having a flexible rather than fixed exchange rate lowers the model’s optimal reserve range; maintaining new exchange rate flexibility is therefore crucial. - With a flexible exchange rate classification: - Current reserve levels would only just be “optimal” if the annual opportunity cost of holding reserves is around 4 percent per year. - Without access to an IMF-supported program, reserve needs at the same opportunity cost would be closer to 5 months of imports. - If the opportunity cost of holding reserves were lower at 3 percent, the range would increase to between 4.4 and 5.9 months of imports. ### Limitations of the ARA-CC assessment and additional risks - The ARA-CC approach may not fully capture all developments and risks affecting Rwanda: - Rwanda remains vulnerable to external shocks given its narrow export base and significant dependence on external financing by international partners. - Volatility in commodity prices could suggest that reserve buffers should be higher than suggested by the ARA-CC approach. - Increasing recourse to international capital markets, in the context of declining aid trends, will increase exposure to shifts in market sentiment and require a higher level of reserves. - Example quantified risk: if donor support for healthcare were to be lost and replaced with higher domestic spending (without adjustments in other fiscal parameters), a balance of payments loss equivalent to around ½ months of imports would result. ### Macroeconomic performance and outlook (select findings) - Growth and inflation - 2016 growth: 5.9 percent (below five-year growth average of 7.6 percent). - GDP rebasing to 2014 raised nominal GDP by 2.1 percent. - Inflation: above the medium-term target of 5 percent since June 2016; underlying inflation at 5 percent year on year. - Projected growth: 6.2 percent in 2017, 6.8 percent in 2018, 7.3 percent in 2019. - Industry growth expected to average 9.2 percent over the medium-term projection period. - External position and trade - Official reserves rose to 4.1 months of prospective imports of goods and services in 2016, compared to 3.6 months in 2015. - Formal exports grew by 35.3 percent year on year in 2017Q1 while imports declined by 11.9 percent, leading to a 24.4 percent improvement in the trade balance. - Current account deficit projected: 10.1 percent of GDP in 2017; expected to deteriorate slightly in 2018 due to Bugesera airport construction imports (fully financed); expected to improve to 9.9 percent of GDP by 2019. - Monetary and exchange rate developments - 2016: credit to private sector growth 7.8 percent; reserve money growth 7.6 percent. - 2017Q1: credit to private sector growth 9 percent (y-o-y); broad money growth 10 percent (y-o-y) through end March. - FRW depreciation: 9.7 percent end December 2016 relative to December 2015; in 2017 slowed to 0.99 percent at end May 2017. - BNR actions: set up “Financial Market Operations Committee”; initiated regular discussions with commercial banks’ treasurers; steps toward preconditions to move to IT, especially liquidity management. - Fiscal performance and projections - First three quarters of FY2016/17: tax revenue slightly exceeded target by 0.1 percent of GDP. - Nine-month fiscal outturn: overall fiscal deficit (cash basis) of 2.7 percent of GDP (slightly smaller than expected). - FY2017/18 budget projections: - Fiscal deficit projected at 3.7 percent of GDP. - Total tax revenue projected at 15.3 percent of GDP (decline of 0.3 percentage points from prior year projection). - Total tax revenue in FY2016/17 forecasted at 15.6 percent of GDP. - Total expenditure and net lending budgeted at 25.8 percent of GDP in FY17/18 (0.4 percentage point lower than FY16/17). - Nine-month implementation: total expenditure and net lending about 0.5 percent of GDP higher than projected; recurrent spending slightly higher, offset by lower capital expenditure. - Planned measures: RRA and MINECOFIN to produce an updated tax expenditure report to measure MIR tax incentives by end-November 2017; a follow-up report on growth-enhancing aspects by June 2018. - Program performance and financial sector reforms - All end-December and continuous quantitative assessment/performance criteria were met; most structural benchmarks were met. - Banking sector reforms and regulatory actions highlighted: - New Banking Law approved by Cabinet. - BNR approved two regulations on Banks’ capital and liquidity requirements. - Regulation on credit classification reviewed and general provisions requirement introduced. - Regulation on transactions of related parties and management of concentration risk adopted. - Regulation on accreditation of external auditors adopted. - Regulation on inactive and dormant accounts gazetted December 2016. - Regulation on FOREX business approved to better monitor forex bureaus. ### Risks to the outlook and policy implications - Key risks: - Continued unpredictability of agricultural performance and climate-related shocks. - Sensitivity to changes in mineral prices. - Increasing cost of servicing Rwanda’s debt in both local and foreign currency terms. - Potential deterioration from loss of donor support or delays in external financing and project implementation. - Policy implications: - Maintain newly adopted exchange rate flexibility to keep reserve needs lower per the ARA-CC framework. - Consider higher reserve buffers than ARA-CC suggests to insulate against commodity price volatility and increased market exposure from international capital market issuance. - Strengthen treasury management to ensure resources are available for rising debt service needs. - Continue fiscal consolidation, broaden the tax base, enhance tax collection, and use big data and data analytics to improve tax compliance. - Prioritize completion of ongoing capital projects while containing recurrent spending and improving execution of foreign-financed projects (including e-procurement to address bottlenecks). *IMF staff report and attachments as contained in the Rwanda country document (June 26, 2017).* ### 23. The overall deficit of 3.7 percent of GDP in 2017/18 will be maintained through 2019/20 ### 23. The overall deficit of 3.7 percent of GDP in 2017/18 will be maintained through 2019/20 ### Fiscal outlook and public debt - The overall deficit of 3.7 percent of GDP in 2017/18 will be maintained through 2019/20, which should allow meeting the EAC convergence criterion calling for an overall deficit of 3 percent of GDP by 2022. - Over the 2017/182019/20 period, net domestic financing is projected to be close to zero, thus allowing maximum room for private sector credit and investment. - Total domestic public debt is expected to remain at around 10 percent of GDP. - External public debt is projected to grow from 29.8 percent of GDP at end-2016 to 38 percent of GDP at end-2020. - With most external borrowing highly concessional, the NPV of total public debt is projected to grow from 24 percent to 26.9 percent of GDP between 2016 and 2020, well within the EAC convergence criterion of 50 percent. ### Revenue measures and fiscal policy actions (measures not yet included in projections) - Revision in property taxes to be sent to parliament in summer 2017. - Expansion of electronic billing machines beyond VAT to track total sales and inform income tax collection. - Forthcoming increases in some excise duties. - Introduction of big data and data analytics to improve tax compliance, identify tax fraud, improve risk scoring, and increase tax revenues. - Automation of core Rwanda Revenue Authority (RRA) functions to reduce manual data operations, avoid costly reconciliation discrepancies, reduce cumbersome audits, and allow RRA to focus on strategic forecasting and better tax planning. ### Public financial management and statistics - MINECOFIN is replacing GFSM 1986 with GFSM 2014 reporting framework; preliminary compilation for FY 2013/14 and 2015/16 using GFSM2014 methodology has been done. - A roadmap has been developed to migrate fully by 2018/19. - FY2017/18 will be a transition year with central government fiscal projections and reporting presented using both GFSM 1986 and GFSM 2014 classifications. - Migration will improve recording of donor project implementation and projections (SB by end-November 2017). ### Debt management strategy - Rwanda’s public and publicly guaranteed debt remains rated at a low risk of debt distress. - Concessional loans constitute 58.1 percent of total debt. - Guarantees and non-concessional debt of public enterprises constitute 20.8 per cent of total debt. - Domestic debt is mainly government securities, especially treasury bills (21 per cent of total debt). - Strategy going forward: maximize external concessional funding to avoid unsustainable debt levels, while developing the domestic capital market. - Domestic financing mix to be reoriented toward issuance of more treasury bonds vs. bills to increase portfolio maturity. ### Monetary policy, inflation, and FPAS transition - BNR will maintain a prudent monetary policy stance in 2017 to ensure inflation remains low and stable. - BNR targets a medium-term inflation objective of 5 percent. - BNR stands ready to ease monetary policy should inflation pressures ease further and credit demand conditions remain weak. - BNR plans to shift from base money targeting to inflation targeting, a move planned for 2018. - Measures planned for 2017-18 to support the transition: - Elimination of excess reserves and improvement of monetary transmission mechanism. - Interbank market development to facilitate liquidity management and influence interest rate determination. - Communication improvements so interest rates communicate market information to the central bank. - Capacity development, including building IT schemes in parallel stages. - BNR has put in place a forecasting and policy analysis system (FPAS) with IMF technical assistance. - To operationalize FPAS, BNR will: (i) set up a formal unified forecasting team with well-defined individual roles; (ii) redesign the forecast process to increase interactions with decision makers; and (iii) restructure publications to become more forward looking, including creating a more forward looking inflation report. ### Financial sector reforms and inclusion - For banks: implementation of Basel II and III capital requirements and review of the Banking law and bank supervisory regulations are ongoing. - A financial consumer protection law (FCPL) has been adopted by the BNR Board of Directors, with accompanying disclosure requirements. - A Deposit Guarantee Fund (DGF) has been operational since November 2016, with first premiums collected in April 2017. - For non-bank financial institutions: revised draft microfinance law approved by the BNR Board of directors on 30th March 2017 and should be adopted shortly. - Planned regulatory reforms include new regulations on micro-insurance, licensing of re-insurance and health insurance companies, and a review of the pension law. - Supervisory plans include a parallel run for the risk-based capital solvency regime for insurance companies and corporate governance regulations to accommodate the risk-based capital approach. - A national financial inclusion strategy is at final stages of approval; the strategy envisages financial inclusion for the entire population (11 percent remain excluded) and to deepen usage of financial services for those already included. Expected adoption and launch is in the second half of 2017. - A financial literacy program aimed at improving knowledge of the financial sector and markets as well as rights and obligations should be finalized by December 2017. - Rwanda Social Security Board (RSSB) pension scheme currently covers only 10% of Rwanda’s workforce. A long-term savings policy proposal to expand coverage to the other 90% has been developed and approved by Cabinet. ### Medium-term policy objectives and initiatives - Rwanda joined the G20 “Compact with Africa (CWA)” initiative in March 2017 to stimulate private investment in Africa through coordination between government and development partners. - Vision 2050 is under preparation to set goals including upper middle income status by 2035 and high-income status by 2050; EDPRS III will articulate nearer-term objectives. - Vision 2050 and EDPRS III emphasize six main areas: Quality of life; Transformation for prosperity (high values jobs); Modern infrastructure and livelihoods; Values for Vision 2050; International cooperation and positioning; Social Protection. - Initiatives under development include a proposal for a Kigali International Business and Financial Services Centre (KIB/FSC). - The Government developed a 10-year plan to develop capital markets; the master plan was finalized and adopted by stakeholders and is awaiting cabinet approval. ### Selected program and technical numbers reported - Program exchange rate reported in MEFP Table 1: RWF/US$ program exchange rate 807.28. - Text Table 1. Program Exchange Rates from December 30, 2016: Rwanda Franc (per US$) 819.79. - MEFP Table indicators and selected figures (as presented): - Ceiling on the overall fiscal deficit, including grants: 139.5 164.1 138.3 324 324 (table entries as reported). - Net foreign assets of the NBR at program exchange rate (floor on stock): 555.0 555.0 650.2 474 474 (table entries as reported). - Reserve money (ceiling on stock) (upper bound): 320.8 320.8 303 330 (table entries as reported). - Domestic revenue collection (floor on flow): 539.0 532.1 571 145 (table entries as reported). - RWF/US$ program exchange rate (memorandum item): 807.28 807.28 807 820 (table entries as reported). *Source: IMF staff report as presented in the supplied content.* ### 10. Non-bank holdings of government domestically issued debt consist of non-bank holdings of ### 10. Non-bank holdings of government domestically issued debt consist of non-bank holdings of ### Composition of non-bank and bank holdings - Non-bank holdings consist of: - treasury bills - bonds (domestic and non-resident) - old development bonds (pre-1994 debt) - new development bonds (including those used for recapitalization of banks) - other accounts receivable - Bank holdings (for comparison/definition) consist of: - bank holdings of treasury bills - bonds (domestic) - old development bonds (pre-1994 debt) - new development bonds (including those used for recapitalization of banks) - other accounts receivable ### Adjusters to Net Domestic Financing (NDF) - The ceiling on NDF will be adjusted upward by the amount of any shortfall between actual and programmed budgetary grants and loans (as defined in Table 1 of the MEFP), up to a maximum of RWF 69billion. In the event that actual budgetary grants exceed programmed levels, the ceiling on NDF will not be adjusted. In the event that actual budgetary loans exceed programmed levels, the ceiling on NDF will be adjusted downward. - The ceiling on NDF will be adjusted upward up to a maximum of RWF69 billion representing the amount of foreign financed capital expenditure financed with draw-down of accumulated government deposits as specified in the definition of NDF. - The ceiling on NDF will be adjusted upward by the amount of unexpected public expenditures on food imports in the case of a food emergency. - The ceiling on NDF will be adjusted upward (downward)up to a maximum of RWF69 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. ### Overall Fiscal Deficit Including Grants (QAC/PC) - A ceiling applies to the overall fiscal deficit including grants. The ceilings for December 31, 2016, and June 30, 2017, are cumulatively measured from June 30, 2016. - Definition: The overall deficit including grants is valued on a commitment basis and equals government total revenue and grants minus total expenditure and net lending. Definitions follow the 2001 Government Financial Statistics Manual (GFSM). Government expenditure is defined on the basis of payment orders accepted by the Treasury, and those executed with external resources. - Adjusters to the overall fiscal deficit including grants: - The ceiling on the overall deficit will be adjusted upward by the amount of any shortfall between actual and programmed budgetary grants (as defined in Table 1 of the MEFP), up to a maximum of RWF 69billion. - The ceiling on the overall deficit will be adjusted upward, up to a maximum of RWF69 billion, representing the amount of foreign financed capital expenditure financed with draw-down of accumulated government deposits as specified in the definition of NDF. - The ceiling on the overall deficit will be adjusted upward by the amount of unexpected public expenditures on food imports in the case of a food emergency. - The ceiling on the overall deficit will be adjusted upward (downward), up to a maximum of RWF69 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. ### Floors on revenue and priority spending - Floor on flow of domestic revenues (IT): - The floors for December 31, 2016, and June 30, 2017, are cumulatively measured from June 30, 2016. - Definition: Floor on domestic government revenue is total government revenue (tax and non-tax), per the central government fiscal operation table, excluding external grants, peace keeping operations, and privatization receipts. - Floor on priority expenditure: - The floors for December 31, 2016, and June 30, 2017, are cumulatively measured from June 30, 2016. - Definition: Priority expenditure is the sum of recurrent expenditures, domestically-financed capital expenditures, and net lending identified as priority in line with the EDPRS2. Priority expenditure is monitored through IFMIS at the program level. ### Net accumulation of domestic expenditure arrears (IT) - A ceiling applies to net accumulation of domestic expenditure arrears of the government. The ceilings for December 31, 2016, and June 30, 2017, are cumulatively measured from June 30, 2016. - Definition: Domestic expenditure arrears are unpaid claims overdue by more than 90 days, including tax refunds, employee expenses, utilities, rents, recurrent goods and services, and construction works. Accumulation is calculated as the cumulative change in the stock of arrears >90 days from the stock at end-June. Arrears related to claims preceding 1994 will not be counted. - Note: A negative target thus represents a floor on net repayment. ### Limits on debt (selected provisions) - Limit on new external debt of nonfinancial public enterprises (IT): - A ceiling applies to contracting and guaranteeing new external borrowing with non-residents by nonfinancial public enterprises. Exclusions: external borrowing by Bank of Kigali and Rwanda Development Bank (BRD), external borrowing solely for refinancing existing public sector debt that improves the debt profile, and on-lending agreements between Government of Rwanda and public sector enterprises. - Public sector definition includes government, entities part of the budgetary process, and nonfinancial public enterprises with government controlling stake (>50 percent), excluding BRD. - For program purposes, a guarantee arises from any explicit legal obligation of the public sector to service a debt in event of nonpayment. - Definition of debt (per Guidelines on Public Debt Conditionality, Executive Board Decision No. 15688-(14/107), adopted December 5, 2014): - (a) Debt is a current liability created under a contractual arrangement requiring future payments in assets or services; primary forms include: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers' credits), temporary exchanges equivalent to fully collateralized loans (repurchase agreements, official swap arrangements); - (ii) suppliers' credits; - (iii) leases (debt equals present value at inception of all lease payments, excluding operation/repair/maintenance payments). - (b) Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are included. - Limit on the stock of external payment arrears: - Continuous PC applies to non-accumulation of payment arrears on external debt contracted or guaranteed by the government and entities part of the budgetary process. - External payment arrears are debt service obligations (principal and interest) not paid when due, excluding arrears subject to rescheduling. For monitoring, arrears are obligations not paid on the due date (accounting for contractual grace periods). External payment arrears by nonfinancial public enterprises (>50% government stake) not part of the budgetary process, and PPP projects, are excluded unless overdue by more than 30 days under contract terms. ### Monetary aggregates and related adjusters - Net foreign assets (NFA) of the National Bank of Rwanda (QAC/PC): - A floor applies to NFA for December 31, 2016 and June 30, 2016. - Definition: NFA in Rwandan francs equals external assets readily available to or controlled by NBR net of external liabilities, consistent with SDDS template. Pledged or encumbered reserve assets (including swaps) are excluded. Reserve assets corresponding to undisbursed project accounts are considered encumbered and excluded. Foreign assets and liabilities in U.S. dollars are converted using the U.S. dollar/Rwanda franc program exchange rate; other currencies converted to U.S. dollars using actual end-of-period U.S. dollar/currency exchange rate. Foreign liabilities include use of IMF resources. - Adjusters: - The floor on NFA will be adjusted downward by the amount of any shortfall between actual and programmed budgetary loans and grants per Table 1 of the MEFP, capped at RWF 69 billion. - The floor on NFA will be adjusted downward (upward) by the surplus (shortfall) of cash external debt service payments compared to originally-scheduled payments. - The floor on NFA will be adjusted downward by the amount of unexpected public expenditures on food imports in the case of a food emergency. - Reserve money (QAC, PC): - A ceiling applies to the stock of reserve money for June 30, 2016, and December 31, 2016 as indicated in Table 1. The ceiling is the upper bound of a reserve money band (set at+/- 2.2 percent) around a central reserve money target. - The stock of reserve money for a quarter is calculated as the arithmetic average of end-of-month stocks for the three months in the quarter; daily averages constitute the actual reserve money to be compared with the target. - Definition: Reserve money = currency in circulation + commercial banks’ reserves + other nonbank deposits at the NBR. - Adjuster: - The ceiling on the stock of reserve money will be adjusted symmetrically for a change in the required reserve ratio of commercial banks. The adjustor = (new reserve ratio minus program baseline reserve ratio) × actual amount of liabilities (Rwanda Franc plus foreign-currency denominated) in commercial banks. ### Data reporting requirements and timetable highlights - Reporting frequencies and lags: - Weekly data: within seven days of the end of each week. - Monthly data: within five weeks of the end of each month. - Quarterly data: within eight weeks of the end of each quarter. - Annual data: as available. - Specific data transmissions: - Monthly: Data on NDF (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits), each type of debt by debt holder. Deposits of the government with NBR and commercial banks will be separated from deposits of public enterprises and autonomous agencies not under direct government control. - Monthly: Detailed data on domestic revenues. - Quarterly: Data on priority expenditure; data on accumulation and repayment of domestic arrears and remaining previous year’s stock of arrears. - Weekly: Data on foreign assets and foreign liabilities of the NBR, including breakdown of pledged/encumbered assets; daily and weekly data on NBR’s foreign exchange liabilities to commercial banks and the exchange rate used for conversion into Rwanda francs. - Weekly: Data on reserve money, including a daily and weekly balance sheet of the NBR showing all items in the reserve money definition. - Communication and policy change notifications: - Authorities will inform IMF staff in writing prior to making any changes in economic and financial policies that could affect the financial program outcome (including customs and tax laws, wage policy, financial support to public and private enterprises). - Authorities will inform IMF staff of changes affecting respect of continuous QACs and ITs and will furnish a description of program performance according to QACs and ITs as well as structural benchmarks within 8 weeks of a test date. - Submission channel: information should be mailed electronically to the Fund (email: afrrwa@imf.org). ### Reporting matrix (TMU Table 1) — selected items and frequencies - Exchange Rates: Daily reporting; Weekly reporting; Daily publication. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Weekly reporting; Weekly publication; Monthly publication. - Reserve/Base Money: Weekly reporting; Weekly publication; Monthly publication. - Broad Money: Monthly reporting; Monthly publication. - Central Bank Balance Sheet: Weekly reporting; Weekly publication; Monthly publication. - Consolidated Balance Sheet of the Banking System: Monthly reporting; Monthly publication. - Consumer Price Index: Monthly reporting; Monthly publication. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Quarterly reporting; Quarterly publication. - Comprehensive list of domestic arrears of the government: Semi-annually reporting; Semi-annually publication. - Stocks of public sector and public-guaranteed debt as compiled by MINECOFIN and NBR: Quarterly reporting; Quarterly publication. ### Debt Sustainability Analysis (DSA) summary - Risk of external debt distress: Low - Augmented by significant risks stemming from domestic public and/or private external debt? No - Bank/Fund assessment: continuation of low risk of debt distress. External debt burden indicators remain below “risk” thresholds, except: - a small and temporary breach in the baseline of the debt service-to-revenue ratio - the stress test for debt service-to-exports in 2023 when the Eurobond issued in 2013 matures - Policy focus: Authorities prioritize choosing highest return projects financed under favorable terms, encouraging private investment via guarantee schemes from multilateral and bilateral development partners, and minimizing government exposure to additional liabilities. - DSA notes: - This DSA updates IMF Country Report No. 16/153 (June 2016). - Fiscal year runs July–June; DSA prepared on a calendar year basis. - Results discussed with authorities who are in broad agreement. - Rwanda’s CPIA average score in 2013-15: 3.99; relevant indicative thresholds for “strong” classification are: 50 percent for NPV of debt-to-GDP, 200 percent for NPV of debt-to-exports, 300 percent for NPV of debt-to-revenue, 25 percent for debt service-to-exports, and 22 percent for debt service-to-revenue. *Source: cr17217 - 10. Non-bank holdings of government domestically issued debt consist of non-bank holdings of (IMF staff report PDF).* ### 1. Growth in the Rwandan economy decelerated in 2016. Real GDP grew by 5.9 percent in 2016, ### 1. Growth in the Rwandan economy decelerated in 2016. Real GDP grew by 5.9 percent in 2016, ### Growth and external account developments - Real GDP growth: 5.9 percent in 2016, compared to 8.9 percent in 2015. - Main drivers of the 2016 slowdown: - Impact of drought on agricultural production. - Completion of large investment projects in the second half of the year. - Adjustment policies intended to address external imbalances. - Lower commodity prices reducing mining exports. - Imports and current account: - Imports increased in the first half of 2016 due to large public and private investment projects, causing an increase in the current account deficit. - Adjustment policies, notably sizeable exchange rate adjustment, lowered demand for imports and boosted export competitiveness in the second half of the year, reducing the deterioration of the current account balance relative to forecasts. - Projections: - Current account deficit projected to decline from 14.4 percent of GDP in 2016 to 10.2 percent in 2017. - Real GDP growth projected to recover gradually, reaching 6.8 percent by 2018. ### Key statistics on external balances and trade (from the DSA framework) - Current account (% of GDP), Current DSA: -14.4 (2016), -10.2 (2017), -11.2 (2018), -9.9 (2019), -8.7 (2020). - FDI (% of GDP), Current DSA: 2.9 (2016), 3.3 (2017), 4.2 (2018), 4.4 (2019), 4.4 (2020). ### Notable policy measures - Implementation of measures to encourage import substitution and promote export diversification. - Example: “Made in Rwanda” policy aiming for forex savings of roughly US$450 million per year by supporting domestic production in key sectors (construction materials, light manufacturing, agro-processing). --- ### Public sector debt levels and composition - External public sector debt at end-2016: 35.8 percent of GDP. - Increase since 2013: external debt ratio rose by 14 percentage points, reflecting sustained public investment. - Composition shifts: - Official development assistance shifting from grants toward concessional borrowing. - Notable project-related borrowings: - Kigali Convention Center (KCC) new debt in 2016: US$160 million (80 percent external). - RwandAir expansion: US$171 million in loans for two new aircraft plus leases for two other aircraft; associated debt servicing included within the public sector analysis. - New international airport project: government expected to take on around US$37 million in external debt over 2017–19 (included in the DSA). - Domestic bridge financing by the government included in the DSA: US$75 million. - Domestic public debt at end-2016: 8.6 percent of GDP (about 2 percent higher than in 2013). - Drivers: increase in short-term debt and issuance of medium-term treasury bonds for capital market development. ### Table excerpts (exact figures as presented) - External public debt composition (2016): - Total (including guarantees): 2.9 Billions US$, 100.0 percent, 35.8 % GDP. - Total (excluding guarantees): 2.5 Billions US$, 84.8 percent, 30.4 % GDP. - Multilateral creditors (2016): 21.6 % GDP. - Bilateral creditors (2016): 3.8 % GDP. - Commercial creditors (2016): 5.0 % GDP. - Publicly guaranteed debt (2016): 5.5 % GDP. - Domestic public debt (2016, RWF): - Total: 571 Billions RWF, 100 percent, 8.6 % GDP. - Short-term borrowing (2016): 236 Billions RWF, 43 percent, 4.7 % GDP. - Medium and long-term borrowing (2016): 328 Billions RWF, 57 percent, 3.9 % GDP. - Of which T-bonds (2016): 168 Billions RWF. --- ### Macroeconomic framework and key assumptions (Box 1 and Table 3) - Long-run growth projected at 7.5 percent. - Inflation and reserves: - Inflation had risen to 7.3 percent by end-2016. - Inflation expected to decline to and be maintained at the authorities’ medium-term target of 5 percent. - Reserve buffers expected to gradually increase toward 4.5 months of prospective imports. - Fiscal and financing assumptions: - Gradual rise in domestic revenues assumed. - Grants assumed to taper in real terms over the projection period. - External borrowing assumed to decline from close to 5 percent of GDP on average over the last 5 years to under 2 percent of GDP (2016–2021). - From 2022 onward, increased share of commercial debt, including international capital market issuance. - Net domestic borrowing assumed to increase gradually from 1.4 percent of GDP (average last 5 years) to 2.6 percent by 2037. - New domestic borrowing assumed at a nominal interest rate of 8 per cent. - Selected macro indicators (Current vs. Previous DSA) — Current DSA figures by year: - Real GDP growth (percent), Current DSA: 5.9 (2016), 6.2 (2017), 6.8 (2018), 7.3 (2019), 7.5 (2020). - Inflation (average), Current DSA: 4.9 (2016), 7.4 (2017), 5.5 (2018), 4.6 (2019), 5.0 (2020). - Primary balance (% of GDP), Current DSA: -2.8 (2016), -2.8 (2017), -2.7 (2018), -2.7 (2019), -1.8 (2020). --- ### Debt sustainability analysis (DSA) findings - Overall assessment: Rwanda’s debt is assessed to be sustainable with low risk of debt distress. - Country classification: Rwanda classified as a “strong” performer based on the 3-year average of CPIA ratings. - Baseline scenario outcomes: - All but one debt burden indicator remain below policy-dependent thresholds. - Single temporary breach: in 2023 the PV of debt service-to-revenue ratio just exceeds its threshold (temporary, one year), related to maturity of the 2013 Eurobond. - PV of debt service-to-exports ratio peaks in 2023; small breach of the indicative threshold under the largest stress scenario (shock to export growth). - Other indicators remain well below thresholds even under extreme stress scenarios. - Probability approach: All baseline indicators remain well below thresholds when using country-specific CPIA and historical growth information. - Risks and sensitivities: - Some potential liquidity pressures when the 2013 Eurobond matures in 2023. - Increased risks in recent years due to large public investment projects and tapering budget support/shift away from grants. - The debt-service breach is temporary and manageable given low external debt levels, expected improvements in export base and tax revenues, and assumed refinancing of the maturing Eurobond. - Public DSA (including domestic debt): - Adding domestic public debt does not alter the analysis; total public debt indicators broadly follow external debt under the baseline, peaking in 2019 before receding. - In PV terms, total public debt remains significantly below the LIC DSA public debt benchmark of 74 percent for countries with strong policies and institutions. - Under a standard scenario keeping the primary balance unchanged from 2016, the PV of debt-to-revenue drifts upward, underscoring importance of securing revenue gains assumed under the baseline. --- ### Authorities’ views and recommended policy implications - Authorities’ stance: - Broad agreement with DSA results and the conclusion of low risk of external debt distress. - Commitment to maximize external concessional funding to avoid unsustainable debt levels while developing the domestic capital market. - Reorientation of domestic financing mix toward issuance of more treasury bonds vs. bills to increase portfolio maturity. - Emphasis on investments and measures to expand and diversify traditional and non-traditional exports and tourism to improve resilience. - Recognition of potential liquidity pressures when the 2013 Eurobond matures and agreement on need for prudent medium-term debt management. - Policy implications and priorities identified in the DSA: - Maintain sound macroeconomic and fiscal policies to mitigate temporary debt-service breaches. - Focus on domestic revenue mobilization given tapering of budget support and reduced grants. - Carefully prioritize future projects and their financing to contain public debt vulnerabilities. - Develop a medium-term debt management strategy and deepen domestic capital markets (shift toward medium/long-term instruments). --- *Source: Rwandan authorities and IMF staff (content unit: cr17217).* ### 12. The main risk to Rwanda’s debt sustainability remains the narrow export base. While it is ### cr17217 - 12. The main risk to Rwanda’s debt sustainability remains the narrow export base. While it is ### Main risk and vulnerability - The main risk to Rwanda’s debt sustainability remains the narrow export base. - The assessment assumes the risk will be mitigated by export expansion and diversification over the assessment period, but: - Recent weakness in exports such as minerals highlights vulnerability from a narrow export base heavily affected by fluctuating commodity prices and output. - Should the anticipated medium-to longer-term expansion in exports fail to materialize, resulting in lower than expected export receipts, the risks to debt sustainability over the longer term would rise. - While high growth rates are expected to be sustained, policy vigilance is warranted should growth disappoint. ### Debt sustainability indicators and baseline projections (selected figures from tables and figures) - External debt (nominal): - 2014: 27.1 - 2015: 31.1 - 2016: 39.0 - 2017: 41.3 - 2022: 43.3 - 2017-22 Average: 39.2 - 2023-37 Average: 29.4 - Public and publicly guaranteed (PPG) external debt (in percent of GDP): - 2014: 23.2 - 2015: 27.9 - 2016: 35.8 - 2017: 38.1 - 2022: 39.9 - 2017-22 Average: 34.9 - 2023-37 Average: 22.6 - Change in external debt (selected years): - 2014: 1.1 - 2015: 4.0 - 2016: 7.9 - 2017: 2.2 - 2022: -0.4 - 2017-22 Average: -1.0 - 2023-37 Average: -1.5 - Identified net debt-creating flows (selected years): - 2014: 6.6 - 2015: 9.8 - 2016: 11.0 - 2017: 4.7 - 2022: 0.6 - 2017-22 Average: -0.2 - 2023-37 Average: -0.4 - Non-interest current account deficit (selected years and averages): - 2014: 11.1 - 2015: 12.7 - 2016: 13.7 - 2017: 8.2 - 2018: 3.8 - 2019: 9.2 - 2020: 10.3 - 2021: 9.0 - 2022: 7.8 - 2017-22 Average: 7.5 - 2023-37 Average: 7.2 - Exports and imports (percent of GDP, selected): - Exports: 2014: 16.4; 2015: 18.4; 2016: 19.0; 2017: 20.3; 2022: 22.7; 2017-22 Average: 26.4; 2023-37 Average: 30.8 - Imports: 2014: 33.2; 2015: 35.6; 2016: 37.0; 2017: 33.1; 2022: 33.2; 2017-22 Average: 35.1; 2023-37 Average: 37.7 - Net current transfers (negative = inflow): - 2014: -7.2; 2015: -6.5; 2016: -6.2; 2017: -10.0; 2018: 2.6; 2019: -5.6; 2020: -5.4; 2021: -5.4; 2022: -5.2; 2017-22 Average: -4.9; 2023-37 Average: -4.6; later averages shown: -3.5, -2.0, -3.1 - of which: official: 2014: -9.5; 2015: -8.4; 2016: -6.6; 2017: -6.0; 2018: -5.8; 2019: -5.7; 2020: -5.4; 2021: -5.0; 2022: -4.5; 2017-22 Average: -2.9; 2023-37 Average: -1.0 - Net FDI (negative = inflow): - 2014: -3.9; 2015: -2.7; 2016: -2.9; 2017: -2.5; 2018: 0.9; 2019: -3.3; 2020: -4.2; 2021: -4.4; 2022: -4.4; 2017-22 Average: -4.4; 2023-37 Average: -4.4; later: -4.6, -4.5 - Endogenous debt dynamics (contribution, selected): - 2014: -0.6; 2015: -0.2; 2016: 0.2; 2017: -1.3; 2018: -1.7; 2019: -2.0; 2020: -2.2; 2021: -2.2; 2022: -2.2; 2017-22 Average: -2.0; 2023-37 Average: -1.4 - Contribution from nominal interest rate (selected): 2014: 0.7; 2015: 0.7; 2016: 0.7; 2017: 1.0; 2018: 1.0; 2019: 1.0; 2020: 0.9; 2021: 0.8; 2022: 0.8; 2017-22 Average: 0.7; 2023-37 Average: 0.7 - Contribution from real GDP growth (selected): 2014: -1.9; 2015: -2.3; 2016: -1.8; 2017: -2.3; 2018: -2.7; 2019: -3.0; 2020: -3.2; 2021: -3.0; 2022: -3.0; 2017-22 Average: -2.7; 2023-37 Average: -2.1 - Residual (3-4) (selected): - 2014: -5.5; 2015: -5.9; 2016: -3.1; 2017: -2.4; 2018: -2.4; 2019: -0.6; 2020: -1.8; 2021: -1.7; 2022: -0.9; 2017-22 Average: -0.8; 2023-37 Average: -1.2; later: -0.7 - PV of external debt (selected): - 2017: 29.2; 2018: 29.9; 2019: 30.8; 2020: 31.8; 2021: 30.8; 2022: 29.7; 2027: 27.1; 2037: 22.5 - In percent of exports: 2017: 153.8; 2018: 147.6; 2019: 149.6; 2020: 145.1; 2021: 141.8; 2022: 133.5; 2027: 128.5; 2037: 102.7; later: 73.2 - PV of PPG external debt (selected): - 2017: 26.0; 2018: 26.8; 2019: 27.7; 2020: 28.6; 2021: 27.6; 2022: 26.3; 2027: 25.7; 2037: 22.8; later: 15.7 - In percent of exports: 2017: 136.9; 2018: 132.2; 2019: 134.7; 2020: 130.7; 2021: 126.9; 2022: 118.5; 2027: 113.2; 2037: 86.6; later: 51.0 - In percent of government revenues: 2017: 140.3; 2018: 152.1; 2019: 157.1; 2020: 164.3; 2021: 152.8; 2022: 140.6; 2027: 132.7; 2037: 117.2; later: 77.0 - Debt service-to-exports ratio (in percent): - 2014: 7.8; 2015: 6.8; 2016: 7.0; 2017: 10.3; 2018: 10.2; 2019: 9.4; 2020: 11.8; 2021: 13.3; 2022: 9.9; 2017-22 Average: 6.0; 2023-37 Average: 5.2 - PPG debt service-to-exports ratio (in percent): - 2014: 4.5; 2015: 4.0; 2016: 4.5; 2017: 7.9; 2018: 7.7; 2019: 6.9; 2020: 9.7; 2021: 11.4; 2022: 8.1; 2017-22 Average: 4.8; 2023-37 Average: 4.2 - PPG debt service-to-revenue ratio (in percent): - 2014: 4.5; 2015: 4.0; 2016: 4.6; 2017: 9.1; 2018: 9.0; 2019: 8.7; 2020: 11.7; 2021: 13.5; 2022: 9.5; 2017-22 Average: 6.5; 2023-37 Average: 6.3 - Total gross financing need (Billions of U.S. dollars): - 2014: 0.7; 2015: 1.0; 2016: 1.1; 2017: 0.8; 2018: 0.8; 2019: 0.7; 2020: 0.7; 2021: 0.8; 2022: 0.7; 2017-22 Average: 0.8; 2023-37 Average: 1.8 - Non-interest current account deficit that stabilizes debt ratio (selected): - 2014: 10.0; 2015: 8.8; 2016: 5.8; 2017: 7.0; 2018: 8.3; 2019: 7.0; 2020: 8.5; 2021: 8.4; 2022: 7.6; 2017-22 Average: 7.2; 2023-37 Average: 7.2 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent) (historical and projections): - 2014: 7.6; 2015: 8.9; 2016: 5.9; 2017: 7.6; 2018: 1.8; 2019: 6.2; 2020: 6.8; 2021: 7.3; 2022: 7.5; 2017-22 Average: 7.5; 2023-37 Average: 7.1; later columns: 7.5, 7.5, 7.5 - GDP deflator in US dollar terms (change in percent) (selected): - 2014: -2.4; 2015: -5.1; 2016: -4.1; 2017: 2.7; 2018: 6.6; 2019: -0.1; 2020: -1.2; 2021: -2.2; 2022: 0.1; 2017-22 Average: 2.0; 2023-37 Average: 2.0; later: 0.1, 2.0, 2.0, 2.0 - Effective interest rate (percent) 5/ (selected): - 2014: 2.7; 2015: 2.5; 2016: 2.2; 2017: 1.6; 2018: 0.9; 2019: 2.7; 2020: 2.5; 2021: 2.4; 2022: 2.2; 2017-22 Average: 2.1; 2023-37 Average: 2.0; later: 2.3, 2.0, 2.4, 2.2 - Growth of exports of G&S (US dollar terms, in percent) (selected): - 2014: 12.4; 2015: 15.7; 2016: 4.9; 2017: 18.1; 2018: 21.6; 2019: 13.3; 2020: 7.1; 2021: 11.7; 2022: 6.7; 2017-22 Average: 12.0; 2023-37 Average: 12.2; later: 10.5, 12.9, 9.6, 11.8 - Growth of imports of G&S (US dollar terms, in percent) (selected): - 2014: 8.9; 2015: 10.9; 2016: 5.3; 2017: 15.6; 2018: 14.8; 2019: -5.0; 2020: 9.3; 2021: 4.6; 2022: 4.7; 2017-22 Average: 9.2; 2023-37 Average: 9.6; later: 5.4, 11.0, 9.6, 10.5 - Grant element of new public sector borrowing (in percent) (selected): - 2019: 46.6; 2020: 46.1; 2021: 45.0; 2022: 47.4; 2023: 45.5; 2024: 44.0; 2025: 45.8; 2026: 40.5; 2027: 25.2; 2037: 33.8 - Government revenues (excluding grants, in percent of GDP) (selected): - 2014: 16.5; 2015: 18.4; 2016: 18.5; 2017: 17.6; 2018: 17.6; 2019: 17.4; 2020: 18.0; 2021: 18.7; 2022: 19.4; 2017-22 Average: 19.5; 2023-37 Average: 20.4; later: 19.9 - Aid flows (in Billions of US dollars) (selected): - 2014: 0.9; 2015: 0.9; 2016: 0.8; 2017: 0.7; 2018: 0.7; 2019: 0.7; 2020: 0.7; 2021: 0.7; 2022: 0.7; 2017-22 Average: 0.8; 2023-37 Average: 0.6 - of which: Grants: 2014: 0.6; 2015: 0.5; 2016: 0.4; 2017: 0.4; 2018: 0.4; 2019: 0.4; 2020: 0.4; 2021: 0.4; 2022: 0.5; 2017-22 Average: 0.5 - of which: Concessional loans: 2014: 0.3; 2015: 0.4; 2016: 0.3; 2017: 0.3; 2018: 0.2; 2019: 0.2; 2020: 0.3; 2021: 0.3; 2022: 0.3; 2017-22 Average: 0.3; 2023-37 Average: 0.1 - Grant-equivalent financing (in percent of GDP) (selected): - 2019: 7.0; 2020: 6.4; 2021: 6.2; 2022: 6.1; 2023: 5.8; 2024: 5.4; 2025: 3.5; 2026: 1.2; 2027: 2.8 - Memorandum items (selected): - Nominal GDP (Billions of US dollars): 2014: 8.0; 2015: 8.3; 2016: 8.4; 2017: 8.9; 2018: 9.4; 2019: 9.9; 2020: 10.6; 2021: 11.6; 2022: 12.8; 2027: 20.2; 2037: 50.4 - PV of PPG external debt (in Billions of US dollars): 2014: 2.1; 2015: 2.3; 2016: 2.5; 2017: 2.7; 2018: 2.9; 2019: 3.0; 2020: 3.2; 2021: 4.5; 2022: 7.8 - Gross workers' remittances (Billions of US dollars): 2014: 0.2; 2015: 0.2; 2016: 0.2; 2017: 0.2; 2018: 0.2; 2019: 0.2; 2020: 0.2; 2021: 0.2; 2022: 0.2; 2027: 0.5; 2037: 1.5 ### Sensitivity analysis and stress tests (selected outcomes) - Table 5 and Figures present alternative scenarios and bound tests for key indicators of PPG external debt (2017–2037). - PV of debt-to-GDP ratio (baseline and scenarios) (selected rows show yearly values; examples): - Baseline (2017–2027 etc.): 27, 28, 29, 28, 26, 26, 25, 24, 23, 23, 16 (table matrix format). - PV of debt-to-exports ratio and PV of debt-to-revenue ratio also reported under multiple scenarios and bound tests (matrix values provided in Table 5). - Bound test example: - B6. One-time 30 percent nominal depreciation relative to the baseline in 2018: produces notably higher ratios (table entries indicate sharp increases across indicators; e.g., PV of debt-to-exports and PV of debt-to-revenue rise under this shock). - Table 7 provides sensitivity analysis for public debt indicators (2017–2037), including alternative scenarios A1–A3 and bound tests B1–B5: - B4. One-time 30 percent real depreciation in 2018 results in elevated public debt indicators (examples: PV of Debt-to-GDP Ratio row shows spikes such as 34, 46, 46, 43, 39, 37, 31, 29). ### Policy findings and recommendations (as reflected in the report text) - Maintain policy vigilance given the narrow export base and export volatility risk. - Export expansion and diversification are assumed to mitigate the export-base risk; policies should support these outcomes. - Fiscal policy: - Authorities committed to programmed fiscal deficit of 3.7 percent of GDP. - Strategy includes increasing fiscal revenue through broadening the tax base and enhancing tax collection. - Specific measures: large taxpayer audits, phasing out of financial sector tax exemptions, expanding electronic domestic tax filing and billing, building a taxpayer database, integrating e-payment with mobile money, using visa card service operators, new property tax law, increases on excise taxes, expansion of electronic billing machines, introduction of big data and analytics for tax compliance. - Move towards the EAC medium-term deficit objective of 3 percent of GDP to preserve fiscal and debt sustainability. - Monetary policy and financial sector: - Maintain prudent monetary policy to keep inflation low and stable and support growth. - BNR lowered its policy rate by 25 basis points to 6.0 percent in June 2017 to support private sector credit growth and economic growth. - Monitor private sector credit growth, inflation, economic activity; be ready to adjust policy. - Continue improving monetary policy transmission and prepare for transition to inflation targeting. - Strengthen regulatory and supervisory frameworks; address NPLs; develop interbank market; deepen financial inclusion while safeguarding stability. - External sustainability: - Rely on exchange rate flexibility, stimulate foreign investment, implement export promotion strategies, and promote import substitution (including the Made in Rwanda Initiative) to strengthen external stability. - Debt management: - Commit to prudent debt management, prioritize high-yield public investments, mobilize financing with the most favorable terms, and develop domestic debt markets. *Sources: Country authorities; and staff estimates and projections.* ### Conclusion ### Conclusion ### Macroeconomic achievements and Fund support - The Rwandan authorities have made great strides in maintaining macroeconomic stability, supporting strong and inclusive growth, and reducing poverty. - Fund arrangements over the past years have supported the country’s overall development goals identified in their successive EDPRS and Vision 2020. - The current PSI and SCF have been instrumental in improving the external position and anchoring inflationary pressures, while paving the way for sustaining strong growth. ### Ongoing challenges and reform priorities - The authorities are committed to keeping pace with their reform momentum with a view to enhancing private sector development and economic transformation. - Fund engagement will continue to be valuable, particularly in the context of the formulation and implementation of Vision 2050 and EDPRS III. ### Request to Directors - The staff would appreciate Directors’ support for the conclusion of the second review under the SCF and seventh review under the PSI. *Source: Conclusion (cr17217 - Conclusion).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17217.pdf_