## RWANDA: Eighth Review under the Policy Support Instrument and Third Review under the Standby Credit Facility ## Source details **Canonical URL:** [RWANDA: Eighth Review under the Policy Support Instrument and Third Review under the Standby Credit Facility](https://www.imf.org/-/media/files/publications/cr/2018/cr1813.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1813.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1813.pdf.json) --- ### IMF decisions and financing - Executive Board approved an 18-month SCF arrangement with access of about US$204 million (SDR 144.18 million) or 90 percent of Rwanda’s quota; extension of the PSI-supported program through end-2017 was approved on June 8, 2016. - Both the SCF arrangement and the PSI extension were again extended on November 29, 2017 to January 31, 2018. - Latest disbursement under the arrangement: SDR 18.0225 million, bringing total disbursements under the arrangement to SDR 144.18 million, about US$206.6 million. - SCF scheduled/completed disbursements (SDR and percent of quota): - June 8, 2016: 72.0900 million SDR; 45.00 percent of quota. - January 6, 2017: 36.0450 million SDR; 22.50 percent of quota. - July 12, 2017: 18.0225 million SDR; 11.25 percent of quota. - November 15, 2017: 18.0225 million SDR; 11.25 percent of quota. - Total: 144.1800 million SDR; 90.00 percent of quota. Note: Rwanda's quota is SDR 160.2 million. ### Recent economic developments and outlook - Growth - 2016 and early 2017 growth below historical standards but robust regionally; 2017 growth estimated at 5.2 percent (revised entries: 2017 Act. 6.2 in some tables; staff notes recovery beginning Q2 2017 and strengthening in Q3). - Growth recovery began in Q2 2017 and strengthened in Q3; projected to revert to historical averages of 7–7.5 percent over the next two years (medium-term). - Updated indicators: 2017 Q3 y/y growth reported at 8.0 percent; services growth 10 percent in Q3; sectoral Q3 drivers included information and communication 28 percent, mining and quarrying 25 percent, textiles 23 percent, transport 21 percent. - Inflation - Headline inflation spiked in early 2017, then declined; year-on-year inflation at 2.3 percent in November 2017 (also reported 2.2 percent in other updates). - Headline inflation projection for 2017 revised to 4.0 percent y/y; expected to return to the authorities’ medium-term target of 5 percent by end-2018. - Core inflation averaged 4.3 percent in the first ten months of 2017; core inflation stood at 4.2 percent in November. - External sector - Trade deficit narrowed as export volumes outpaced imports; current account deficit expected to improve from 14.9 percent of GDP in 2016 to 8.8 percent in 2017. - Rapid external adjustment: November 2016–October 2017 trade deficit in US$ terms was 24 percent lower than pre-SCF period; export volumes increased 43 percent (30 percent excluding re-exports); import volumes increased marginally by 1.5 percent versus pre-SCF period. - Current account, selected projections: 2016 Act. -14.4 percent of GDP; 2017 Act. -14.9 percent; 2018 Prov. -10.2 percent (table entries vary by presentation). - Reserves - Gross international reserves (selected table entries, US$ millions): 1001, 1001, 1037, 1083, 1046, 1128, 1275 (as listed across tables and figure contexts). - Reserves rebuilt to above 4 months of imports from 3.6 months in 2015; projected gross official reserves with prospective financing: 2016 Act. 1,001; 2017 Act. 1,001; 2018 Prov. 1,037; 2019 Proj. 1,046; later Proj. 1,128; 2020 Proj. 1,153; later Proj. 1,275. - Outlook revisions and projections (selected) - Real GDP growth entries: 2016 Act. 5.9; 2017 Act. 6.2; 2018 Prov. 5.2; 7th PSI Review Proj. 6.8; 2019 Proj. 6.5; 2020 Proj. 7.5. - CPI (end period) entries: 2016 Act. 7.3; 2017 Act. 7.0; 2018 Prov. 4.0; 7th PSI Review Proj. 5.0; 2019 Proj. 5.0; 2020 Proj. 5.0. ### Fiscal policy, performance, and risks - FY2016/17 fiscal outturn - Overall fiscal deficit stood at 4.6 percent of GDP, meeting the adjusted nominal program ceiling (6th review) and maintained at the 7th review. - Revenue collection aligned with 7th review projections. - Total domestic revenue collections were 0.6 percent of GDP higher than projected (noting UN Peace Keeping Operations disbursements effect). - Overall deficit on cash basis recorded at 4.9 percent of GDP. - FY2017/18 stance and revisions - FY17/18 fiscal stance slightly relaxed: revised projections imply a net effect of 0.5 percent of GDP increase in the overall fiscal deficit (commitment basis) compared to original budget/7th review projection. - Original FY2017/18 budget: fiscal deficit projected at 3.7 percent of GDP; revenue and grants 22.1 percent of GDP; tax revenue 15.3 percent of GDP; total expenditure and net lending 25.8 percent of GDP. - Revised FY2017/18 budget to finance new ministries and tourism expansion: cost about 0.5 percent of GDP; revised fiscal deficit 4.2 percent of GDP financed by domestic credit about 0.3 percent of GDP. - FY2018/19 prelim. total revenue RwF 1,615.8; 7th PSI Review Proj. FY2018/19 total revenue RwF 1,771.3. - FY2018/19 prelim. overall deficit (including grants) RwF -327.1; 7th PSI Review Proj. FY2018/19 overall deficit RwF -298.0. - Medium-term public debt and risk - Total public debt (percent of GDP): 2016 Act. 44.5; 2017 Act. 45.7; 2018 Prov. 47.6; 7th PSI Review Proj. 47.1; 2019 Proj. 49.2; 2020 Proj. 49.8. - Debt sustainability assessment: Rwanda assessed at low risk of debt distress; external debt portfolio 72 percent concessional as of end-June 2017. - Government provided RWF 80 billion in guarantees and 1.1 percent of GDP in domestic debt guarantees to the insurance and hotel sectors; structural benchmark for H1 2018 added to study fiscal risks in the hotel and insurance sectors. ### Monetary policy and financial sector - Monetary policy stance and transition - Policy rate cuts: cumulative 100 basis points since November 2016 noted in summary; specific cuts recorded from 6.5 percent to 6.25 percent in December 2016 and to 6.0 percent in June 2017; MPC later reduced policy rate by 50 basis points on December 28, 2017 to 5.5 percent. - Reserve money targets kept unchanged from the 7th review to provide space for a gradual transition to an interest rate-based operational framework. - Central bank actions to align policy and market rates, establish interbank rate as operational target, remove structural excess liquidity, and extend maturity structure of government securities; timeline for framework move noted as end-2018 but authorities prefer to take needed time. - Monetary aggregates and credit - Broad money (M3) annual growth: 2016 Act. 7.6; 2017 Act. 13.0; 2018 Prov. 14.7. - Reserve money annual growth: 2016 Act. 5.5; 2017 Act. 10.9; 2018 Prov. 12.6. - Credit to non-government sector annual growth: 2016 Act. 7.8; 2017 Act. 17.9; 2018 Prov. 11.0. - Monetary outcomes by end November 2017: M3 increased by 9.5 percent (vs. 8.8 percent in November 2016); outstanding credit to private sector increased by 12.3 percent (vs. 8.8 percent). - Financial sector soundness (selected indicators) - NPLs/gross loans: Mar 2015 6.3; Jun 2015 5.9; Mar 2016 6.2; Jun 2016 7.0; Sep 2016 7.5; Dec 2016 7.6; Mar 2017 8.1; Jun 2017 8.2; Sep 2017 8.3 (staff report) with a later revision to 7.7 percent for end-September 2017 after write-offs/provisions. - Banking sector capital: regulatory capital to risk-weighted assets — Mar 2017 19.6; Jun 2017 20.4; banking sector CAR at end-September 2017 reported at 22.2 percent. - Return on average assets: Sep 2017 1.6 percent. - Insurance sector solvency ratio: 160 percent; liquidity ratio: 121 percent (end-September 2017). - Microfinance institutions: NPLs decreased from 8.2 percent in Sep 2016 to 8.0 percent in Sep 2017; capital adequacy ratio 36 percent (minimum 15 percent). ### Structural policies, reforms and "Made in Rwanda" initiative - Made in Rwanda (MIR) - Targeted policies and tax incentives for cement, textiles, sugar, rice; cement production increased three-fold between 2014 and mid-2017 and could increase up to nine-fold with planned upgrades; sugar and rice production increased by around 40 percent since end-2014; textile imports fell sharply after higher tariffs on second-hand clothing introduced mid-2016. - Fiscal impact: recent tax incentives and implementation of EAC tariffs on used clothing caused a slight decline in revenues in 2016/17. - Development strategies - Vision 2050 aims for upper middle income status by 2035, operationalized via seven-year National Transformation Strategies replacing EDPRS. - Compact with Africa participation; FDI below 3 percent of GDP noted; measures include investor-friendly tax regime and better access to finance (examples: coordination between Rwanda Development Board and RRA; quarterly investor roundtables; bilateral/multilateral support for Affordable Housing Fund and Export Growth Facility). - Structural benchmarks and reforms (implementation status) - Structural benchmarks met include methodology for policy interest rate, quarterly revenue/expenditure reporting, fiscal risk strategy for PPPs, transition steps to GFS14, tax expenditure report on Investment Tax Policy and Made in Rwanda campaign, revised fixed asset tax legislation, risk management plan for FY17/18, and tax registry clean-up report. - Not met: rollout pilot of Electronic Billing Machines (EBM for all) aiming for 10,000 taxpayers; reformulated benchmark focusing on software-based EBM proposed and rescheduled. ### Program performance, conditionality and monitoring - Program performance - Most quantitative targets and structural benchmarks met; missed targets include net domestic arrears (missed by 0.3 percentage points of GDP) and EBM pilot (delayed). - All continuous and end-June program quantitative assessment/performance criteria targets were met per staff report; indicative target on domestic arrears missed due to seasonal spending pressures. - Proposed next steps - Staff supports completion of the 3rd and 8th Reviews under the SCF arrangement and PSI program, approval of the fourth SCF disbursement, and authorities’ request to extend the PSI-supported program through December 1, 2018 (after the short extension to January 31, 2018). - Proposed additional PSI reviews with quantitative assessment criteria, indicative targets, and structural benchmarks with test dates end-December 2017 and end-June 2018 (and proposed structural benchmarks for PSI 9th and 10th Reviews). - Data and reporting requirements - Enhanced reporting frequencies specified: weekly, monthly, quarterly and annual data with precise timing; detailed reporting on NDF, domestic revenues, priority expenditure, domestic arrears, NBR foreign assets/liabilities, and reserve money. - Authorities to inform IMF staff in writing prior to making any policy changes affecting program outcomes. ### Key risks and policy recommendations - Risks - Economy vulnerable to external shocks, fiscal risks, pests affecting harvests, weather variability, and regional political conditions. - Breadth of recovery uncertain given recent industrial activity and underlying demand conditions. - Rollover risk from large share of short-term treasury bills. - Policy recommendations and priorities - Maintain exchange rate flexibility as central adjustment tool while accumulating foreign exchange reserve buffers. - Continue fiscal consolidation with focus on identifying and mitigating fiscal risks, increasing transparency, and regaining momentum in domestic revenue mobilization to finance development and aim for middle income status by 2035. - Transition gradually to an interest rate-based monetary policy framework while deepening money and government securities markets and improving liquidity management. - Implement structural reforms to support private-sector led growth, enhance access to credit, deepen financial markets, and modernize fiscal reporting (move to GFSM 2014 and accrual accounting). - Complete fiscal transparency evaluation (FAD) in H2 2018 and conduct fiscal risk analyses (hotel and insurance sectors). *Source: IMF staff report (Eighth Review under the PSI and Third Review under the SCF), December 21, 2017.* ### 18.0225 million), bringing total disbursements under the arrangement to SDR 144.18 million, ### RWANDA: Eighth Review under the Policy Support Instrument and Third Review under the Standby Credit Facility ### IMF Decisions and Arrangements - Requests for an 18-month SCF arrangement with access of about US$204 million (SDR 144.18 million) or 90 percent of Rwanda’s quota, and to extend Rwanda’s PSI-supported program through end-2017, were approved by the Executive Board on June 8, 2016. - Both the SCF arrangement and the PSI extension were again extended on November 29, 2017 to January 31, 2018. - Latest disbursement under the arrangement: SDR 18.0225 million, bringing total disbursements under the arrangement to SDR 144.18 million, about US$206.6 million. ### Statement by Deputy Managing Director (Mr. Zhang) - Progress and policy mix: - Notable progress in reducing external imbalances, safeguarding macroeconomic stability, and improving prospects for long term growth. - Exchange rate adjustment as the central tool, supported by public spending restraint and prudent monetary policy. - Targeted policies to promote domestic production contributed to reduced current account deficit. - Growth and inflation outlook: - After a slowdown in 2016 and early 2017, growth started to recover; expected to return to historical average of 7–7.5 percent over the next two years, supported by public infrastructure investment and interventions promoting structural transformation and diversified exports. - Headline inflation spiked in early 2017, then declined rapidly as food supplies recovered; expected to remain low in the near term but could pick up gradually over 2018 as growth accelerates. - Risks and recommendations: - Economy remains vulnerable to external shocks and fiscal risks. - Important to continue building foreign exchange reserve buffers and identify and mitigate potential fiscal risks. - Regaining momentum in mobilizing domestic revenue is important for financing development and achieving middle income status by 2035. ### Recent Economic Developments - Growth: - Rwanda’s growth in 2016 and early 2017 was below historical standards but robust relative to the region, with 2017 growth estimated at 5.2 percent. - A growth recovery began in Q2 2017 and strengthened in Q3; growth expected to revert to historical averages (7–7.5 percent) over the next two years. - External sector and current account: - Trade deficit continued to narrow as export volumes outpaced imports, partly reflecting exchange rate adjustment and structural policies. - Current account deficit expected to improve from 14.9 percent of GDP in 2016 to 8.8 percent in 2017. - Inflation and monetary policy: - Consumer price inflation declined since February 2017, with year-on-year inflation at 2.3 percent in November, 2017. - Inflation expected to close the year below the central bank’s medium-term target of 5 percent, but to pick up toward the target as growth accelerates. - Monetary policy relaxed with the policy rate adjusted downwards by a cumulative 100 basis points since November 2016. - Fiscal policy: - Fiscal stance for FY2018/19 slightly relaxed while maintaining the medium-term path of adjustment. - Program performance: - Most quantitative targets and structural reform benchmarks were met, except for a target on domestic arrears at end-June 2017 and a planned measure to roll out a pilot for electronic billing machines (delayed in favor of newer and less costly software). ### Program Summary and Objectives - The PSI and SCF arrangement supported efforts to address external imbalances, support strong growth, and reduce poverty. - The SCF arrangement added concessional financing to the PSI program. - Program aims: - Promote private-sector led growth. - Safeguard macroeconomic stability via external sustainability and fiscal sustainability through improved domestic resource collection. - Maintain low and stable inflation. - Enhance access to credit and deepen the financial sector. ### Key Findings on Sectoral and Financial Developments - Real sector: - Growth dipped to 1.7 percent in Q1 (year-on-year) before modest recovery in Q2, led by agriculture and services; industrial growth remained subdued. - Fiscal outturn FY16/17: - Overall fiscal deficit stood at 4.6 percent of GDP, meeting the (adjusted) nominal program ceiling set at the 6th review and maintained at the 7th review. - Revenue collection was in line with 7th review projections. - Monetary operations and transmission: - Policy rate cut twice (December 2016 and June 2017) by a cumulative 50 basis points (later noted cumulative 100 basis points since November 2016 in another section). - Transmission to lending rates weak; private sector credit growth decelerated. - Reserve money remained well below program ceilings; larger and less stable money multiplier noted. - Central bank gradually transitioning to an interest rate-based operational monetary framework. - Banking and nonbank financial sector: - NPLs rose to 8.3 percent through September 2017. - Banking sector remains broadly profitable and well capitalized, with capital above 20 percent of total assets at end-September. - Insurance sector indicators improved in 2017 with solvency and liquidity ratios at 160 and 121 percent, respectively, as of end-September 2017. - Microfinance institutions: declining NPLs and a capital adequacy ratio of 36 percent (minimum 15 percent). ### External Adjustment and Reserves - Rapid external adjustment: - In November 2016–October 2017, the trade deficit in US$ terms was 24 percent lower than the pre-SCF period (July 2015–June 2016). - Import volumes increased marginally by 1.5 percent compared to pre-SCF period. - Export volumes increased 43 percent (30 percent excluding re-exports), reflecting a more competitive exchange rate and policies promoting non-traditional exports. - Gross international reserves (selected figures from Table 1): - In millions of US$: 100, 110, 371, 083, 1046, 1128, 1275 (as listed in Table 1). - In months of next year's imports: 4.2, 3.9, 4.1, 3.7, 4.0, 4.3 (as listed in Table 1). ### Policy Discussions and Recommendations - Fiscal policy: - Agreed a more gradual path for fiscal adjustment in FY2017/18 to balance supporting growth recovery and medium-term external and debt sustainability. - Fiscal reforms to focus on identifying fiscal risks, increasing transparency, and maintaining momentum for domestic revenue mobilization to ensure fiscal resilience and support development. - Monetary policy: - Transition to an interest rate-based monetary policy framework should be gradual as the monetary transmission mechanism develops. - Maintain a flexible exchange rate regime and pursue measures to deepen financial markets to support the transition. - External sustainability and structural policies: - Maintain flexible exchange rate and support domestic production to strengthen external balances. - Development strategy: - Authorities are crafting a revised medium-term development strategy aiming for middle income status by 2035. - Regaining momentum in domestic revenue mobilization emphasized as key to financing development. ### Program Monitoring and Next Steps - Staff supports completion of the 3rd and 8th Reviews under the SCF arrangement and PSI-supported program, and the authorities’ request to extend the PSI-supported program through December 1, 2018. - Proposed supporting program conditionality and structural benchmarks to continue monitoring progress. *Source: IMF staff report (Eighth Review under the PSI and Third Review under the SCF), December 21, 2017.* ### 6. Reserve buffers are higher and RWF depreciation is tapering. After rapid and steady ### 6. Reserve buffers are higher and RWF depreciation is tapering. After rapid and steady ### Reserve buffers and exchange rate developments - After rapid and steady depreciation since mid-2015, the pace of depreciation moderated in 2017 (3 percent y/y by end-October). - Forex reserves have been accumulating rapidly. - The end-June NFA floor was exceeded by a large margin (some RWF 92 billion or US$76 million), due to large inflows late in the FY and lower-than-expected outflows (including lower forex sales to banks). - Reserve stocks continued to accumulate more rapidly than projected through end-October. - Exchange rate/Economic indicators from figures: - International reserves (millions of US$) series shown: 600, 700, 800, 900, 1000, 1100 (Figure context). - Exchange rate (RWF per U.S.$) and depreciation (annualized) series show RWF depreciation has slowed in 2017 (Oct-17). - Real Effective Exchange Rates (March 2013= 100) plotted for Rwanda and peers (Oct-17). ### Program performance - All continuous and end-June program quantitative assessment/performance criteria targets were met, as were most indicative targets. - The indicative target on accumulation of net domestic arrears was missed by 0.3 percentage points of GDP, due to seasonal spending pressures. - Measures to improve treasury cash management are being implemented, including more frequent tracking of cash flows outside the government’s accounts at the central bank. - Structural benchmarks: all but one were met; piloting the use of electronic billing machines was not met and the initiative was delayed into 2018. The authorities’ proposal for a redrafted structural benchmark and rescheduled test date has been included in Table 2 of the MEFP. ### Economic outlook and risks - Growth and inflation revisions: - Growth projections revised to 5.2 percent in 2017 and 6.5 percent in 2018. - Medium-term growth projected at 7–7.5 percent (noted: historical average 7.5 percent over the past decade). - Headline inflation projection for 2017 revised to 4.0 percent y/y. - Inflation expected to return to the authorities’ medium-term desired inflation target of 5 percent by end-2018. - Rwanda: Revised Macroeconomic Framework (selected entries) - Real GDP growth (y/y change): 2016 = 5.9; 2017 = 5.9; 2018 = 6.2 (7th Rev.Act./Proj. columns show multiple cells — preserve numbers as presented). - CPI inflation, eop (y/y change): 2016 = 7.3; 2017 = 7.3; 2018 = 7.0 (and revised entries 2017 = 4.0; 2018 = 5.0 in later columns). - CA balance, excl. airport (% GDP): -14.4, -14.9, -9.7, -9.6, -9.7, -9.5 (as table shows). - Overall fiscal balance (% GDP): -3.8, -3.8, -4.1, -5.3, -3.9, -4.5 (as table shows). - Gross international reserves (in millions of US$): 1001, 1001, 1037, 1083, 1046, 1128 (as table shows). - Total public debt (% GDP): 44.5, 44.5, 45.7, 45.7, 47.1, 47.6 (as table shows). - Memorandum items: Overall fiscal balance (FY, % GDP) entries: -3.4, -3.4, -3.6, -4.6, -3.7, -4.2. - Downside risks identified: - Breadth of recovery remains in question given recent industrial activity and underlying demand conditions. - Additional downside risks: regional political conditions, pests affecting harvests, and perennial unpredictable weather. ### Policy discussions and recommendations - Overall focus: support nascent growth recovery while safeguarding external and debt sustainability; structural reforms to identify fiscal risks, improve fiscal transparency, maintain momentum for domestic revenue collection, and transition to an interest-rate based monetary framework. - Program timing: - SCF arrangement and PSI-supported program scheduled to expire at end-January 2018. - Authorities requesting extension of the PSI through December 1, 2018 to enable transition to a successor program; MEFP proposes quantitative assessment criteria, indicative targets, and structural benchmarks for two successive reviews with test dates of end-December 2017 and end-June 2018. A. Fiscal policy — maintaining the course of adjustment - FY 17/18 fiscal stance is slightly eased to smooth the adjustment path: revised projections imply a net effect of 0.5 percent of GDP increase in the overall fiscal deficit (commitment basis) compared to the original budget/7th review projection. - The revised stance remains contractionary in terms of overall balance and primary balance excluding grants, while aiming to avoid expenditure recomposition and provide a medium-term path consistent with attaining the EAC goal of an overall deficit target of 3 percent of GDP by 2021. - Comparison of Overall Balance and Primary Balance Excluding Grants (in percent of GDP) — selected rows: - Overall balance (comm. basis): FY15/16 = -3.4; FY16/17 = -4.6; FY17/18 (7th Rev.) = -3.7; Proj. = -4.2; Proj. = -4.4; Proj. = -4.2. - Primary balance excluding grants: FY15/16 = -8.4; FY16/17 = -8.2; FY17/18 = -7.0; Proj. = -7.5; Proj. = -7.5; Proj. = -7.3. - GDP (RWF, billions): FY15/16 = 6,321; FY16/17 = 7,125; FY17/18 = 8,026; Proj. = 7,813; Proj. = 8,750; Proj. = 9,879. - Fiscal risk and transparency actions: - Government provided 1.1 percent of GDP in domestic debt guarantees to the insurance and hotel sectors. - Structural benchmark for H1 2018 added to study fiscal risks in the hotel and insurance sectors. - An FAD Fiscal Transparency Evaluation expected in H2 2018. - World Bank exploring potential fiscal risks in the energy sector related to ambitious PPP plans. - Transition to GFSM 2014 and accrual accounting planned; authorities intend to transition fully starting with FY2018/19. Interim compilation of transactions in existing and new reporting formats will be done. Follow up IMF technical assistance envisaged. B. Monetary policy — transitioning to interest rate-based framework - The central bank is assessing scope for monetary easing; monetary policy committee has left interest rates unchanged for now but is committed to signal further monetary easing if inflation expectations remain below the 5 percent medium-term target. - Reserve money targets kept unchanged from the 7th review to provide space for monetary operations consistent with a gradual transition to an interest rate-based framework. - Progress and preconditions for transition: - Authorities conducting operations to align policy rate and market rates, establishing the interbank rate as an operational target, and working to remove structural excess liquidity. - Since August 2016, interbank and repo rates have moved and remained closer to the policy rate, though evidence that longer-term lending rates have been affected is nascent. - Timeline for moving to a new monetary policy framework remains end-2018, but authorities favor taking the time needed to establish minimum supporting environment and thus keep monetary targets for the time being. - Roadmap includes extending maturity structure of government securities and establishing an electronic interbank trading platform to improve price transparency; key steps added as structural benchmarks in the PSI-supported program. C. External sustainability — maintaining a flexible exchange rate and supporting domestic production - External imbalances are correcting faster than expected; policy discussions emphasized maintaining a flexible exchange rate and supporting measures to boost domestic production to underpin external and debt sustainability. *Source: Rwandan authorities, and IMF staff estimates and projections (as presented in the provided content).* ### 16. The authorities are committed to maintaining ### 16. The authorities are committed to maintaining ### Exchange rate flexibility and reserves - The real exchange rate has depreciated to within its equilibrium range (IMF Country Report No. 17/217). - The forecast reflects nominal depreciation consistent with maintaining its real value constant. - The central bank takes a conservative stance toward reserve accumulation targets; reserve accumulation at end-2017 and end-2018 is still likely to be higher than programmed. - Policy rate and repo rate spreads (in percent) shown across Jan-15 to Jul-17 indicate movements in spread, Repo Rate, and Policy Rate (figure labels preserved). ### "Made in Rwanda" (MIR) initiative — targeted production support and effects - MIR is a broad policy framework incentivizing deepening of domestic supply chains and raising domestic product quality. - Targeted interventions (mainly tax incentives) made in several product markets: cement, textiles, sugar and rice; exports benefit from a more competitive exchange rate. - Fiscal impact: recent tax incentives and implementation of the EAC tariffs on used clothing caused a slight decline in revenues in 2016/17. - Initiatives are nascent; overall impact assessment is difficult. Initial effects include: - Cement production increased three-fold between 2014 and mid-2017, and could increase as much as nine-fold upon full use of planned upgrades. Increased domestic cement production coincided with a sharp decline in import volumes, and slight increase in exports. - Sugar and rice production has increased by around 40 percent since end-2014; production should continue to increase under existing investment plans to increase processing capacity and agricultural efficiency. - Investment in the textile industry buoyed domestic production since 2014. Textile imports have fallen sharply since higher import tariffs on second-hand clothing and shoes were introduced in mid-2016; production and job-creation has expanded rapidly. This coincided with lower textile exports, consistent with re-orientation of production to domestic markets. Creation of jobs in the informal sector may have muted the full impact of higher tariffs on used clothing imports on domestic activity; the 2016 slowdown in wholesale and retail trade growth could be partly related. Higher tariffs on used clothing and footwear likely contributed to inflation in this area, increasing to over 8 percent by mid-2017 but since declining. ### Vision 2050, EDPRS III, Compact with Africa, and gender equality - EDPRS II mid-term evaluation (July 2017) identified emphasis areas: improving export performance; increasing domestic savings; attracting foreign and local private investment; using PPPs; accelerating urbanization through developing secondary cities; modernizing agriculture and increasing climate resilience; creating organized rural settlements (30 model villages constructed in each district since October 2016). - Vision 2050 aims to achieve upper middle income status by 2035; operationalized via seven-year “National Transformation Strategies” (NTS) replacing EDPRS. An early NTS concept note specifies five priorities: high living standards; modern infrastructure and livelihoods; economic structural transformation; progress on common social values; international cooperation. Staff raised issue of ambitiousness of past growth targets and recommended setting realistic growth targets going forward. - Compact with Africa: Rwanda is among the first five countries to establish a compact to ignite private investment. FDI is below 3 percent of GDP; greater private sector involvement is needed to maintain growth momentum and public debt sustainability. - Capacity development strategy will focus on: domestic revenue mobilization; transition to the interest rate based operational monetary policy framework; improving coverage, timeliness and transparency of fiscal reporting; improving fiscal risk statements; harmonizing BOP and national account price statistics; strengthening financial sector supervision (Annex I). - Gender work: 2017 Article IV gender pilot estimated a potential growth dividend from more inclusion of women in higher value-added activities. Rwanda was recently ranked 4th in the world in terms of gender equality by the World Economic Forum. A regional peer-learning conference in November in Kigali emphasized: women’s access to education and labor force participation; the role of gender budgeting; importance of gathering gender-disaggregated data. Rwanda has been a leader on gender budgeting and gender-disaggregated data. ### Compact with Africa — selected measures (Box 3) - Rwanda’s Compact focuses on: (i) ensuring an investor-friendly tax regime without eroding the tax base; (ii) more responsiveness to private sector concerns; (iii) better access to finance for investors in specific sectors. - Examples of measures: - Monthly coordination between the Rwanda Development Board and the Rwanda Revenue Authority to reach common interpretations of tax incentives. - Quarterly investor roundtable and response mechanism; the first roundtable held, next scheduled for January 2018. - Bilateral and multilateral financial support for the Affordable Housing Fund and Export Growth Facility (from DFID, KFW and World Bank Group) and technical support for setting up an Agriculture Risk Sharing Facility (from AFDB, Netherlands, USAID, and World Bank Group). ### Program modalities and policy intentions for 2018 - Program extension request: authorities request to extend Rwanda’s existing PSI-supported program for a fifth and final year, through December 1, 2018, after a short extension through January 31, 2018. - Rationale: allow time to consider successor engagement modes (PSI vs. Policy Coordination Instrument); staff and authorities do not foresee balance of payments needs or vulnerabilities that would justify use of Fund resources arrangement. Authorities drafted a Letter of Intent and a Memorandum of Economic and Financial Policies containing policy intentions throughout 2018. Staff will engage stakeholders in 2018 on successor program priorities. - Quantitative targets and structural benchmarks for 2018: End-December 2017 and end-June 2018 quantitative targets are proposed, consistent with the medium term macroeconomic framework (Table 7). New forward-looking structural benchmarks are proposed (Table 8), aligned with priorities: benchmarks to move to an interest-rate based monetary framework from the authorities’ transition “roadmap,” and benchmarks for a move to GFS 2014 based on TA recommendations and discussions with authorities. - Debt sustainability: No changes in the external debt profile since the 7th review (presented in July, 2017); minor near-term macro changes do not change the debt sustainability profile; risk rating remains low. IMF and Bank staffs agreed no DSA update is needed for this review. ### Staff appraisal — assessment and recommendations - Adjustment policies: Rwanda’s adjustment policies continue to be successful; external situation continues to improve and reserve buffers continue to accrue. Central tenet: exchange rate adjustment supported by public spending restraint and prudent monetary policy. - Growth outlook: Growth is projected to pick up, yet there are downside risks. Medium-term growth potential remains in line with historical averages, supported by returns from public investment. Industrial activity and underlying demand conditions pose downside risk to short-term projections. Fiscal and monetary stances must be balanced to support recovery while safeguarding external and debt sustainability. - Fiscal risks and revenue mobilization: Identifying and mitigating potential fiscal risks and maintaining momentum for domestic revenue mobilization are important for safeguarding public investment and debt sustainability. Staff welcomes authorities’ commitment to identify risks systematically, including through a Fiscal Transparency Evaluation, and intentions to compile and report financial balance sheet data. The move to GFS 2014 reporting and accrual accounting, with eventual expansion to general government, should improve fiscal reporting and forecasting. Recent legislative reforms should help domestic revenue mobilization; careful examination of costs and benefits of recent tax incentives is recommended. - Monetary policy transition: Transition to an interest rate based monetary policy operational framework should be gradual as the monetary policy transmission mechanism strengthens. Staff welcomes central bank’s actions and commitments to align money market rates with the policy rate. Increased communication with market players, deepening the interbank money market, and maintaining reserve money program targets during the transition should support establishment of the interbank rate as the operational target. Staff agrees to assess options for moving to an inflation consultation clause in the context of a possible successor program. - Development strategy: Authorities’ ambition in crafting a forward-looking development program is exemplary, but should be calibrated on realistic assumptions and careful choices. Rwanda’s recent achievements (poverty reduction, structural transformation, competitiveness, gender equality) demonstrate capacity to deliver on objectives. *International Monetary Fund — Country Report excerpt* ### 31. Staff recommends completion of the third and eighth reviews of the SCF arrangement ### 31. Staff recommends completion of the third and eighth reviews of the SCF arrangement and PSI-supported program, respectively, as well as approval of the authorities’ request for an extension of the PSI-supported program and proposed supporting program conditionality. ### Macroeconomic outlook and key indicators - Real GDP: 2016 Act. 5.9; 2017 Act. 6.2; 2018 Prov. 5.2; 7th PSI Review Proj. 6.8; 2019 Proj. 6.5; 2020 Proj. 7.5. - GDP deflator (annual change): 2016 Act. 4.9; 2017 Act. 7.4; 2018 Prov. 6.4; 7th PSI Review Proj. 5.5; 2019 Proj. 4.2; 2020 Proj. 5.0. - CPI (period average): 2016 Act. 5.7; 2017 Act. 7.1; 2018 Prov. 5.3; 7th PSI Review Proj. 6.0; 2019 Proj. 4.5; 2020 Proj. 5.0. - CPI (end period): 2016 Act. 7.3; 2017 Act. 7.0; 2018 Prov. 4.0; 7th PSI Review Proj. 5.0; 2019 Proj. 5.0; 2020 Proj. 5.0. - Terms of trade (deterioration = -): 2016 Act. 6.3; 2017 Act. 6.1; 2018 Prov. 4.6; 7th PSI Review Proj. -4.1; 2019 Proj. -4.7; 2020 Proj. 1.2. - Broad money (M3) annual growth: 2016 Act. 7.6; 2017 Act. 13.0; 2018 Prov. 14.7; 7th PSI Review Proj. 13.2; 2019 Proj. 14.4. - Reserve money annual growth: 2016 Act. 5.5; 2017 Act. 10.9; 2018 Prov. 12.6; 7th PSI Review Proj. 11.1; 2019 Proj. 11.7. - Credit to non-government sector annual growth: 2016 Act. 7.8; 2017 Act. 17.9; 2018 Prov. 11.0; 7th PSI Review Proj. 14.2; 2019 Proj. 12.9. - Nonperforming loans (NPLs percent of total gross loans): 2016 Act. 7.6; 2017 NPLs to total gross loans for 2017 is as at June 2017. ### Fiscal outlook (selected aggregates) - Total revenue and grants (percent of GDP): 2016 Act. 23.7; 2017 Act. 22.1; 2018 Prov. 22.7; 7th PSI Review Proj. 21.9; 2019 Proj. 22.6; 2020 Proj. 22.1. - Tax revenue (percent of GDP): 2016 Act. 15.8; 2017 Act. 15.4; 2018 Prov. 15.7; 7th PSI Review Proj. 15.2; 2019 Proj. 15.7; 2020 Proj. 15.9. - Grants (percent of GDP): 2016 Act. 5.1; 2017 Act. 4.5; 2018 Prov. 4.5; 7th PSI Review Proj. 4.3; 2019 Proj. 4.4; 2020 Proj. 4.3. - Total expenditure (percent of GDP): 2016 Act. 27.4; 2017 Act. 26.2; 2018 Prov. 28.0; 7th PSI Review Proj. 25.8; 2019 Proj. 27.1; 2020 Proj. 26.6. - Current expenditure (percent of GDP): 2016 Act. 15.4; 2017 Act. 14.6; 2018 Prov. 15.0; 7th PSI Review Proj. 14.1; 2019 Proj. 14.6; 2020 Proj. 14.7. - Capital expenditure (percent of GDP): 2016 Act. 10.6; 2017 Act. 9.4; 2018 Prov. 10.7; 7th PSI Review Proj. 9.9; 2019 Proj. 10.4; 2020 Proj. 9.8. - Primary balance (percent of GDP): 2016 Act. -2.8; 2017 Act. -2.9; 2018 Prov. -4.2; 7th PSI Review Proj. -2.7; 2019 Proj. -3.3; 2020 Proj. -3.3. - Overall balance (including grants, percent of GDP): 2016 Act. -3.8; 2017 Act. -4.1; 2018 Prov. -5.3; 7th PSI Review Proj. -3.9; 2019 Proj. -4.5; 2020 Proj. -4.4. - Overall balance excluding grants (percent of GDP): 2016 Act. -8.9; 2017 Act. -8.6; 2018 Prov. -9.8; 7th PSI Review Proj. -8.2; 2019 Proj. -8.9; 2020 Proj. -8.7. - Total public debt incl. guarantees (percent of GDP): 2016 Act. 44.5; 2017 Act. 45.7; 2018 Prov. 47.6; 7th PSI Review Proj. 47.1; 2019 Proj. 49.2; 2020 Proj. 49.8. - External public debt (percent of GDP): 2016 Act. 35.8; 2017 Act. 38.1; 2018 Prov. 37.6; 7th PSI Review Proj. 40.2; 2019 Proj. 39.4; 2020 Proj. 40.2. ### Public finances — budgetary central government flows (selected levels, RwF billions and percent of GDP) - FY2018/19 Prelim. total revenue RwF 1,615.8; 7th PSI Review Proj. FY2018/19 total revenue RwF 1,771.3. - FY2019/20 Proj. total revenue RwF 1,929.2; total expenditure and net lending FY2019/20 Proj. RwF 2,609.4. - FY2018/19 Prelim. overall deficit (including grants) RwF -327.1; 7th PSI Review Proj. FY2018/19 overall deficit RwF -298.0. - FY2019/20 Proj. overall deficit (including grants) RwF -412.7. - Financing (FY2019/20 Proj.): foreign financing (net) RwF 352.7; net domestic financing RwF 90.5. - FY2019/20 Proj. drawings RwF 392.1; amortization RwF -40.4. ### Monetary and financial sector - Monetary survey broad money (M3) levels: 2016 Act. RwF 1,595; 2017 Act. RwF 1,772; 2018 Prov. RwF 1,801; 7th PSI Review Proj. RwF 1,829; 2019 Proj. RwF 1,920; 2020 Proj. RwF 2,092; later Proj. RwF 2,461. - Reserve money levels (selected): Dec. 2016 Act. RwF 303; Dec. 2017 Act. RwF 307; Jun. 2018 Prov. RwF 336; Jun. 2018 7th PSI Review Proj. RwF 341; 2019 Proj. RwF 351; 2020 Proj. RwF 357; later Proj. RwF 373; 2020 Dec. Proj. RwF 443. - Financial soundness indicators (selected, percent): Regulatory capital to risk-weighted assets — Mar 2015 23.3; Jun 2015 21.6; Mar 2016 22.3; Jun 2016 20.7; Mar 2017 19.6; Jun 2017 20.4. - NPLs/gross loans: Mar 2015 6.3; Jun 2015 5.9; Mar 2016 6.2; Jun 2016 7.0; Sep 2016 7.5; Dec 2016 7.6; Mar 2017 8.1; Jun 2017 8.2; Sep 2017 8.3. - Return on average assets: Mar 2015 2.7; Jun 2015 2.4; Mar 2016 1.9; Jun 2016 1.7; Sep 2016 1.9; Dec 2016 1.7; Mar 2017 1.8; Jun 2017 1.7; Sep 2017 1.6. ### External sector and balance of payments (US$ millions, selected) - Current account balance (incl. official transfers): 2016 Act. -1,211.0; 2017 Act. -1,249.0; 2018 Prov. -907.2; 7th PSI Review Proj. -783.3; 2019 Proj. -1,060.2; later Proj. -951.4; 2020 Proj. -981.3; later Proj. -912.9. - Exports (f.o.b.): 2016 Act. 745.0; 2017 Act. 745.0; 2018 Prov. 905.5; 7th PSI Review Proj. 994.6; 2019 Proj. 971.1; later Proj. 1,128.8; 2020 Proj. 1,093.9; later Proj. 1,326.8. - Imports (f.o.b.): 2016 Act. 2,045.1; 2017 Act. 2,045.1; 2018 Prov. 1,983.1; 7th PSI Review Proj. 1,923.0; 2019 Proj. 2,184.2; later Proj. 2,144.3; 2020 Proj. 2,280.3; later Proj. 2,286.6. - Gross official reserves (with prospective financing): 2016 Act. 1,001; 2017 Act. 1,001; 2018 Prov. 1,037; 7th PSI Review Proj. 1,083; 2019 Proj. 1,046; later Proj. 1,128; 2020 Proj. 1,153; later Proj. 1,275. - Current account deficit (percent of GDP): 2016 Act. -14.4; 2017 Act. -14.9; 2018 Prov. -10.2; 7th PSI Review Proj. -8.8; 2019 Proj. -11.3; later Proj. -10.0; 2020 Proj. -9.9; later Proj. -8.9. ### Program targets and quantitative performance (as of end-June 2017) - Ceiling on the overall fiscal deficit, including grants (cumulative from 6/30/2017): Program 324; Adjusted 359; Actual 328 — Status: Met. Proposed Program (Dec 2017) 241; Proposed Program (June 2018) 365. - Net foreign assets of the NBR at program exchange rate (floor on stock): Program 474; Adjusted 474; Actual 613 — Status: Met. Proposed Program (Dec 2017) 657; Proposed Program (June 2018) 575. - Reserve money (ceiling on stock, upper bound): Program 330; Adjusted 330; Actual 348; Proposed Program (Dec 2017) 365. - Reserve money (ceiling on stock): Program 323; Adjusted 323; Actual 303 — Status: Met. Proposed Program (Dec 2017) 341; Proposed Program (June 2018) 357. - External payment arrears (US$ millions) (ceiling on stock): Program 0; Proposed Program 0. - Indicative targets: Net domestic financing (ceiling on flow) Program 0; Adjusted 35; Actual 22 — Status: Met. Proposed Program (Dec 2017) -35; Proposed Program (June 2018) 27. - Domestic revenue collection (floor on flow): Program 1,145; Adjusted 1,157; Actual — Status: Met. ### Structural benchmarks and reforms (implementation status) - Structural benchmarks completed for 3rd SCF/8th PSI Review (status: Met unless noted): - Monetary: Develop methodology to identify policy interest rate consistent with identified range of excess reserves — Met. - Public Financial Management: Provide quarterly revenues, expenditures, and financing estimates within 60 days of the end of each quarter — Met. - Public Financial Management: Design strategy to incorporate fiscal risks and foreign exchange needs into project planning assessments, starting with PPPs — Met. - Public Financial Management: Start transition of fiscal reporting into the GFS14 framework to allow recording of donor project implementation — Met. - Fiscal Revenues: Produce tax expenditure report on Investment Tax Policy and Made in Rwanda campaign — Met. - Fiscal Revenues: Submit revised legislation on fixed asset tax to Parliament — Met. - Fiscal Revenues: Approve new risk management plan for FY17/18 to improve tax compliance — Met. - Fiscal Revenues: Issue report on "clean up" of tax registry — Met. - Fiscal Revenues: Initiate rollout of "EBM for all" pilot aiming for 10,000 taxpayers within one year — Not met. - Proposed structural benchmarks for PSI 9th and 10th Reviews (target dates indicated in table): - Monetary: Establish an optimal level of headline or core inflation target range for monetary policy — 10th PSI Review. - Monetary: Develop and adopt a communication strategy on objectives and operations of monetary policy framework — 9th PSI Review. - Financial markets: Introduce real horizontal REPOs including transfer of collateral across banks — 10th PSI Review. - Financial markets: Introduce Government bond reopening mechanisms to develop benchmark bonds — 10th PSI Review. - Financial markets: Establish an electronic interbank trading platform — 10th PSI Review. - Public Financial Management: Begin publishing in GFS 2014 format for quarter ending September 2018 — End-March 2017 / 9th PSI Review. - Public Financial Management: Initiate fiscal risk analysis of hotel and insurance sectors — 10th PSI Review. - Fiscal Revenues: Initiate rollout of “EBM version 2” pilot to reach 1,000 new EBM users — 10th PSI Review. ### SCF disbursements and schedule (SDR and percent of quota) - SCF arrangement total scheduled disbursements (completed reviews listed): - June 8, 2016: 72.0900 million SDR; percent of quota 45.00; Board approval of the SCF arrangement. - January 6, 2017: 36.0450 million SDR; percent of quota 22.50; Board completion of the first SCF review based on end-June 2016 conditionality. - July 12, 2017: 18.0225 million SDR; percent of quota 11.25; Board completion of the second SCF review based on end-December 2016 conditionality. - November 15, 2017: 18.0225 million SDR; percent of quota 11.25; Board completion of the third SCF review based on end-June 2017 conditionality. - Total: 144.1800 million SDR; percent of quota 90.00. - Note: Rwanda's quota is SDR 160.2 million. For completed reviews, the date refers to the date of completion of the review and not the availability date. The Board approval and subsequent reviews of the SCF are expected to be done concurrently with the fifth, sixth, seventh and eighth reviews of the PSI, respectively. *Sources: Rwandan authorities and IMF staff estimates and projections.* ### Annex 1. Capacity Development for FY 2018 ### Annex 1. Capacity Development for FY 2018 ### Forward-looking policy priorities - Focus areas: domestic revenue collection; interest rate-based monetary policy framework; improving fiscal transparency; improving and harmonizing statistical reporting; and promoting private investment. ### Assessment of capacity development and recent TA provided - Rwanda is a high-intensity technical assistance (TA) recipient with a good track record for use of IMF technical assistance. - Authorities’ commitment/ownership mitigates risks; continued close coordination between the authorities, TA providers, and the AFR team is required for future success. - In the final quarter of FY16/17, TA was provided for: - Financial sector supervision and regulation: The central bank received training on risk-based supervision and internal capital adequacy assessment for banks. - Macro fiscal analysis: Officials from the Ministry of Finance, the Revenue Authority, and BNR were trained in financial programming and policies. - Public Financial Management: The existing chart of accounts was reviewed and updated to support the move to accrual accounting in the medium term. - Real sector statistics: NISR was supported to develop national accounts statistics that conform to the East African Community (EAC) requirements. ### Authorities’ views on capacity development - Broad agreement with the capacity development strategy. - Requests: - Technical assistance to be carefully sequenced and phased to allow maximum absorption of recommendations and ensure staff can devote time fully to activities. - Emphasis on peer learning opportunities where TA is provided by regional ministry and central bank staff. ### Priorities and objectives (forward-looking TA agenda) - Revenue policy and administration reforms: - Domestic tax expenditure analysis; updating and improving the revenue forecasting tool; improving the integrity of the tax payer register. - Objective: Increase tax revenue to GDP ratio. - GFSM 2014 adoption for fiscal reporting: - Objective: Improve the coverage, timeliness, and transparency of fiscal reporting. - Development of the interbank money market: - Objective: Strengthen the monetary transmission mechanism for an interest rate targeting operational framework. - Data quality and statistics: - Harmonization of trade statistics between National Accounts and the Balance of Payments. - Fiscal Transparency Evaluation: - Determine fiscal transparency strengths and reform priorities to mitigate fiscal risks. - Strengthening risk-based supervision: - Implement the work plan on Basel II. ### Letter of Intent — key program points (selected) - The attached update of the Memorandum of Economic and Financial Policies (MEFP) outlines progress and policies toward meeting objectives of the economic program supported by the SCF arrangement and the PSI for Rwanda. - External shocks experienced in 2015 have receded; coverage of reserves increased to above 4 months of imports, from 3.6 percent in 2015. - Fiscal situation: in line with the program; debt kept at sustainable level. - Growth revised: 2017 growth revised down by 1 percentage points of GDP to a projection of 5.2 percent. - Program requests to the IMF: - Complete the eighth review under the PSI and third review under the SCF program. - Approve the fourth disbursement under the SCF arrangement. - Extend the PSI program until December 1, 2018, with proposed supporting program conditionality. - Commitment to continue fiscal consolidation, raise fiscal revenues, broaden the tax base, conduct tax expenditure analysis, and press forward with public financial management reforms. - Monetary policy commitment: maintain inflation close to medium-term target level of 5 percent and continue transition to interest rate-based operational framework within a flexible exchange rate regime. ### Macroeconomic developments and program performance through Q2 2017 - Growth and inflation: - GDP growth during the first half of the year averaged 2.9 percent. - Industry growth: 0.0percent (first half of year). - Construction: deceleration of -5.5 percent during the first half of 2017. - Services sector: growth at 5.5 percent. - Sub-sector performance: hotels and restaurants grew 13 percent; real estate grew 7.5 percent. - Agriculture: overall agricultural growth 4.5 percent; export crops shrunk relative to first half of last year. - 2017 GDP growth projection: revised down to 5.2 percent from 6.2 percent. - Headline inflation: rose to 5.6percent during the first ten months of 2017 (from 5.5 percent during the same period of 2016). - 2017Q1 headline inflation: 7.7 percent; October 2017 headline inflation: 3.6 percent. - Core inflation: averaged 4.3percent in the first ten months of 2017 (compared to 3.9 percent same period in 2016). - Headline inflation expected to be around 4.0 percent by end December 2017. - External position: - Trade balance in merchandise improved by 24.9 percent during the first eight months of 2017. - Formal exports grew by 44.9 percent; formal imports declined by 7.9 percent. - Reserves rebuilt to above 4 months of imports, from 3.6 months of imports in 2015. - Fiscal performance and financing: - Total domestic revenue collections were 0.6 percent of GDP higher than projected (mainly reflecting faster disbursements related to UN Peace Keeping Operations). - Tax revenue collections exceeded the target by 0.1 percent of GDP. - Overall deficit (on cash basis): 4.9 percent of GDP. - Net domestic financing: 0.4 percent of GDP (slightly higher than the -0.1 projected), not counted against the program indicative target for net domestic financing. - External disbursements: current grants registered a small excess (mainly due to exchange rate differentials); delays in removal of bottlenecks for new project loan draw-downs led to lower disbursements and lower implementation of foreign-financed projects than projected. - Expenditures: total expenditure and net lending in FY2016/17 about 0.5 percent of GDP higher than projected. - Recurrent spending excess: 0.4 percent of GDP (mainly due to wage overruns from new recruitments). - Capital spending excess: draw-down of project deposits for implementation of on-going projects. - Debt management: - Rwanda assessed at low risk of debt distress in the most recent debt sustainability analysis, despite a temporary breach under the liquidity indicator associated to the 10-year Eurobond maturing in 2023. - External debt portfolio: 72 percent concessional loans as end June 2017. - Share of domestic debt stock out of total debt stock: increased to 23 percent at end FY 2016/2017 (against 21 percent in December 2016). - Increase attributed to debt securities issued for cash flow purposes and issued guarantees (RwF 80 billion) denominated in Rwandan franc, which will be redeemed, if needed, within the next five years. - Concern: large share of shorter-term treasury bills could constitute a rollover risk; government will continue efforts to extend domestic debt maturity profile through issuance of longer-term bonds. - Monetary policy and exchange rate developments: - BNR policy rate (KRR) reductions: from 6.5 percent to 6.25 percent in December 2016 and to 6.0 percent in June 2017. - As of end September 2017: - Broad money M3 increased Y-o-Y by 16.4 percent. - Reserve money increased Y-o-Y by 9 percent. - Projections from 7th PSI/2nd SCF review discussions in May 2017 for end December 2017 were 13.0 percent (M3) and 10.9 percent (reserve money). - Private sector credit growth: 9.6 percent in September 2017 (compared to 9.1 percent for whole year 2016). - Monetary aggregates growth still below historical trends due to weak credit demand and overall slowdown in economic activities. - Money market interest rates declined in line with policy stance; interbank rates remained close to the policy rate and center of BNR’s interest rate corridor (200 basis points). - Transmission to longer-term interest rates remains to fully materialize. - 2017Q3 lending and deposit interest rates: lending 17.4 percent and deposit 7.7 percent (from 17.5 percent and 8.0 percent in 2016Q3). - Rwandan Franc (RwF) depreciation: RwF depreciated by 2.2 percent against the USD from end-December 2016 through end-September 2017. *Source: Annex 1. Capacity Development for FY 2018 (cr1813).* ### 2017. This more modest pace of depreciation, compared to 8.4 percent observed in the same period ### cr1813 - 2017. This more modest pace of depreciation, compared to 8.4 percent observed in the same period ### Exchange rate and central bank actions - The exchange rate depreciation in 2017 was more modest compared to "8.4 percent observed in the same period of 2016", reflecting closer alignment with equilibrium and an improved external position. - The NBR will ensure the exchange rate remains market driven, intervening only to smooth excessive volatility. ### Financial sector developments - Banking system indicators (as at end-September 2017): - Capital adequacy ratio (CAR): 22.2 percent (regulatory minimum: 15 percent). - Nonperforming loans (NPLs): 8.3 percent (September 2016: 7.5 percent). - Return on assets (ROA): 1.6 percent (September 2016: 1.9 percent). - Drivers of NPL increase: - Slowdown in economic activity. - Impairment of a few large loans due to weak credit underwriting and project monitoring. - Banks are improving loan recovery processes and working with debtors to improve leverage ratios, including opening up for capital injections and income-earning assets. - Non-bank financial institutions: - Microfinance institutions (MFIs) NPLs: decreased from 8.2 percent in September 2016 to 8.0 percent in September 2017. - MFI capital adequacy ratio: increased from 33.2 percent to 36.0 percent (prudential minimum: 15 percent). - Private insurance companies: - Solvency ratio: 160 percent (September 2016: -37 percent; prudential minimum: 100 percent). - Liquidity ratio: 121 percent. - Improvements partly reflect capital injections and better revenue and cost management as part of BNR-required reforms. ### Program performance (PSI-supported program) - All quantitative assessment criteria were met in the review period, except: - Indicative target (IT) on domestic arrears was not met by a small margin owing to difficulties separating out those less/greater than 90 days. - Remedy: monthly tracking of cash tax and non-tax flows for better forecasting and prompt payment of due bills. - Structural benchmarks: - Most were met. - One not met: piloting of new Electronic Billing Machines (EBM). RRA opted for alternative EBM solutions (software installable on phones and computers). - Benchmark reformulated to focus on the new approach and proposed for final PSI review in the second half of 2018. ### Macroeconomic outlook: growth and inflation - Real GDP growth projections: - 2018: 6.5 percent. - From 2019 onward: above 7 percent. - Growth drivers: - Agriculture: increased production of food crops from progress in irrigation, better fertilizer use, and improved seeds. - Industry: construction (Bugesera Airport, roads), real estate, industrial parks. - Private sector credit growth and higher agriculture growth impacting trade and services. - Inflation: - Projected to remain contained at 5 percent by end-2018. - Risks: adverse weather conditions could put pressure on food prices and threaten the inflation target. ### External position and reserves - Current account: - 2017: expected to narrow to 8.8 percent of GDP. - 2018: headline current account deficit expected to widen temporarily to 10 percent of GDP due to Bugesera Airport–related imports. - Excluding Bugesera, continued narrowing expected to around 7.6 percent of GDP by 2019. - Reserves: - Gross official reserves projected to reach 4.3 months of prospective imports by 2019. ### Fiscal policy stance FY2017/18 (original and revised) - Original FY2017/18 budget (approved by Parliament): - Fiscal deficit projected: 3.7 percent of GDP. - Revenue and grants: 22.1 percent of GDP. - Tax revenue: 15.3 percent of GDP. - Total expenditure and net lending: 25.8 percent of GDP. - Fiscal performance Q1 FY2017/18: - Total tax revenue: marginally lower than projected (consumption taxes account for shortfall). - Total expenditure and net lending: marginally higher, with higher net domestic finance plugging resource gap. - Revised FY2017/18 budget (to finance creation of new Ministries and expand net lending to tourism): - Cost: about 0.5 percent of GDP. - Revised fiscal deficit: 4.2 percent of GDP. - Increase financed by domestic credit at about 0.3 percent of GDP (original budget had a government deposit drawdown of 0.2 percent of GDP). ### Fiscal policy FY2018/19 and medium term - 2018/19 fiscal stance: - Continued fiscal consolidation and prudent borrowing to sustain debt and external balances. - Tax revenue (estimated at 15.7 percent of GDP in revised 2017/18): projected to remain at 15.7 percent of GDP in 2018/19. - Total expenditure and net lending: - Revised 2017/18: 26.7 percent of GDP. - Projected 2018/19: 26.4 percent of GDP. - Overall deficit projected at 4.2 percent of GDP in revised 2017/18 expected to remain broadly similar in 2018/19 and 2019/20. - Measures to boost revenue and contain expenditure: - Revision of property tax law. - Expansion of electronic billing machines (EBM) beyond VAT to track total sales and boost tax collections. - EBM expansion to improve data collection and reduce fraud and leakages. - Expenditure prioritization measures to contain recurrent spending. ### Medium-term tax policy and administration measures - RRA strategy: improve overall tax compliance. - TADAT assessment (August 2015) led to Compliance Risk Analysis Model and Tool with IMF TA support. - Compliance improvement plans: - FY2016/2017: targeted Construction and Hotels sectors; improved indirect tax revenues from targeted sectors. - FY2017/18: focus on Real Estate activities, bars and restaurants, professionals’ activities, Importers and Customs brokers; strengthen oversight on Construction and Hotel sectors. - EBMs: - Introduced in 2013; helped boost VAT collection. - RRA developing "EBM version 2" software compatible with devices used by businessmen, removing need for new hardware. - By late 2018, rollout of EBM version 2 pilot to 1,000 taxpayers to raise registration beyond usual annual increase of VAT-registered taxpayers using hardware EBMs. - Tax expenditure analysis: - IMF TA requested to document current preferential tax legislation (Investment Code 2015; "Made In Rwanda" incentives) and provide cost estimates to inform balance between economic impact and revenue loss. ### Public financial management measures - Fiscal risk management: - Plan to conduct fiscal risk analysis of strategic sectors (hotels and insurance) to assess potential contingent liabilities and safeguard fiscal/financial sustainability. - Fiscal reporting improvements: - Budget execution report published quarterly. - Steps to report in GFS-2014 framework starting FY2018/19. - Quarterly budget execution reports for budgetary central government to be published in GFS-2014 format starting FY2018/19. - Supporting work: develop accrual-based chart of accounts, roadmap and blueprint for migration to accrual accounting. - IMF Fiscal Transparency Evaluation requested for the second half of 2018 to assess public reporting comprehensiveness, clarity, reliability, timeliness, and relevance. ### Monetary policy stance and operational framework transition - Monetary policy stance: - Prudent, supported by exchange rate flexibility. - On 27th September, BNR MPC kept the Key Repo Rate (KRR) at 6percent, citing ease in inflationary pressures, stable FRW exchange rate, and weak aggregate demand. - Next ordinary MPC meeting scheduled for December 2017; stance to depend on prevailing macro fundamentals. - BNR projections show no sign of inflationary pressures, indicating stance may remain accommodative. - Transition to interest-rate based operational framework: - Preconditions and steps taken to move to forward-looking framework, including liquidity management and policymaking process enhancements. - "Financial Market Operations Committee" established for daily market analysis, liquidity management and forecasting. - Regular discussions initiated with commercial banks’ treasurers. - Interbank market has grown in depth and width; interbank rate kept close to KRR for over a year. - FPAS (forecasting and policy analysis system) increasingly used for MPC processes. - Measures planned for 2017–18 to implement interbank-targeted framework: - Interbank market development: - Introduce electronic interbank trading platform to enhance information sharing and price discovery. - Deepen government securities market and enhance yield curve by establishing a re-opening mechanism for long-term bonds to build benchmark bonds. - Communication: - Develop a communication strategy to enhance BNR transparency and accountability; strengthen inflation report content to anchor price expectations. - Capacity development: - Build in-house capacity and IT scheme blocks in parallel stages. - FPAS operationalization: - Set up a formal unified forecasting team with defined roles. - Redesign forecast process to increase interactions with decision makers. - Determine optimal inflation target range: - BNR conducting a study to recommend an optimal band for headline or core inflation. - Reduce excess reserves: - Address persistent and volatile bank excess reserves that undermine monetary transmission and financial stability; excess liquidity leads to disintermediation, reduced bank profitability, discouraged deposit taking, excessive risk taking, lower credit quality, and potential FX market destabilization. ### Financial sector stability and development (structural reforms) - Banking sector reforms: - New Banking Law gazetted in October 2017 to align with Basel Core Principles and EAC framework; introduces risk management framework and clarifies loan classification. - New capital and liquidity regulations compliant with Basel II/III approved and gazetted in May 2017; parallel reporting ongoing; full implementation expected early 2018. - Additional regulations: business continuity management, cyber security regulation, outsourcing regulation, revised corporate governance regulations for banks and insurance companies. - Non-bank sector reforms: - Licensing of new voluntary pension schemes and service providers after pension law (2015) and implementing regulation (2016). - New Microfinance and Insurance laws approved and undergoing parliamentary review before enactment and implementing regulations. - Work with Access to Finance Rwanda (AFR) to establish micro-insurance regulatory frameworks to boost insurance penetration. - Payment systems and innovation: - Revised regulation on Payment System Providers (PSPs) to include activity- and risk-based supervision and Regulatory Sandboxes. - New regulations for Remittance Services and Payment Initiation and Aggregation Services. - Enforcement of e-money regulations for user safeguards. - Assessment of ACH and RIPPS gaps relative to standard principles for financial market infrastructure. - Approved regulations to strengthen the payments system: Payment Service Providers; Payment Initiation Service; Remittance Service. - Consumer protection and disclosure: - Draft law on Financial Consumer Protection and regulation on Key Facts Statements for Credit, Accounts and Insurance. - Single portal (price comparator) created for consumers to compare bank charges. - Disclosure regulations implementation (Key Facts Statement) ongoing and monitored through on-site inspections. - Financial integrity: - National risk assessment of ML/FT being conducted in collaboration with other Government institutions to inform AML/CFT framework improvements. ### Program requests and sequencing - Government requests: - Completion of the eighth review under the PSI and third review under the SCF arrangement. - Extension of current PSI program through December 1, 2018. - Addition of two semi-annual reviews (9th and 10th) under the PSI, expected by end-June 2018 and December 1, 2018, respectively. *Source: IMF staff report (cr1813) as provided in the source content.* ### 38.6 billion incurred as a result the overdraft to the pre-war government and the 1995 ### cr1813 - 38.6 billion incurred as a result the overdraft to the pre-war government and the 1995 devaluation, as well as the current overdraft with the NBR ### Definitions and coverage of government debt and net domestic financing (NDF) - Credit to the government will exclude treasury bills issued by the NBR for monetary policy purposes, the proceeds of which are sterilized in deposits held as other NBR liabilities. - Government deposits excluded from the NDF definition: deposits over which the budgetary central government does not have direct control (i.e., project accounts, Global Fund money meant for the private sector, counterpart funds, and fonds publics affectés). - Government deposits included in the deduction from NDF (as recorded in the monetary survey) include: the main treasury account; accounts of line ministries; the fund for assistance to genocide survivors; the Rwanda Revenue Authority; the electoral commission; the demobilization commission; fonds routier; the privatization account; and accounts of any other autonomous public enterprises and public agencies over which the government has direct control. - Non-bank holdings of government domestically issued debt consist of non-bank holdings of treasury bills, bonds (domestic and non-resident), old development bonds (pre-1994 debt), new development bonds (including those used for recapitalization of banks), and other accounts receivable. - Bank holdings of government domestically issued debt 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), and other accounts receivable. ### Adjusters to the NDF ceiling - 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 78 billion. 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 RWF78 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 RWF78 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. ### Overall fiscal deficit including grants (QAC) - A ceiling applies to the overall fiscal deficit including grants. The ceilings for December 31, 2017, and June 30, 2018, are cumulatively measured from June 30, 2017. - Definition: overall fiscal deficit including grants is valued on a commitment basis; it is the difference between total revenue and grants and total expenditure and net lending (costs and acquisition net of nonfinancial assets). Government expenditure is defined on the basis of payment orders accepted by the Treasury, as well as those executed with external resources. This assessment criterion is set as a floor on the overall fiscal deficit as of the beginning of the year. - Adjusters to the overall fiscal deficit including grants: - Adjusted upward by shortfall between actual and programmed budgetary grants, up to a maximum of RWF 78billion. - Adjusted upward, up to a maximum of RWF78 billion, for foreign financed capital expenditure financed with draw-down of accumulated government deposits as specified in the definition of NDF. - Adjusted upward by unexpected public expenditures on food imports in the case of a food emergency. - Adjusted upward (downward), up to a maximum of RWF78 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. ### Floors and ceilings on fiscal aggregates and arrears - Floor on Flow of Domestic Revenues (IT): - The floors for December 31, 2017, and June 30, 2018, are cumulatively measured from June 30, 2017. - Definition: total government revenue (tax and non-tax), per the budgetary central government statement of operations table, but including (a) local government taxes (business licenses, property tax, rental income tax) and (b) local government fees; excluding receipts from Peace Keeping Operations. - Floor on priority expenditure: - The floors for December 31, 2017, and June 30, 2018, are cumulatively measured from June 30, 2017. - Definition: priority expenditure is the sum of recurrent expenditures, domestically-financed capital expenditures, and net lending identified as priority in line with the EDPRS2/NTS, monitored through the Integrated Financial Management System (IFMS) at the program level. - Ceiling on Net Accumulation of Domestic Expenditure Arrears of the Government (IT): - A ceiling applies to net accumulation of domestic expenditure arrears; ceilings for December 31, 2017, and June 30, 2018, are cumulatively measured from June 30, 2017. - Definition: domestic expenditure arrears are unpaid claims overdue by more than 90 days, including payments for tax refunds, employee expenses (wages and salaries, staff claims for travel, and other non-salary allowances), utilities, rents, recurrent goods and services, and construction works. - Accumulation is calculated as a cumulative change in the stock of arrears >90 days at each test date from the stock at the end of the previous fiscal year (June 30). Arrears related to claims preceding 1994 will not be counted. - Note: A negative target thus represents a floor on net repayment. ### Limits on debt and external arrears - Limit on New External Debt of Nonfinancial Public Enterprises (IT): - Ceiling applies to contracting and guaranteeing by nonfinancial public enterprises of new external borrowing with non-residents. Excludes external borrowing by Bank of Kigali and Rwanda Development Bank (BRD). - Ceiling also applies to private debt for which official guarantees have been extended, including future swaps involving foreign currency loans guaranteed by the public sector, and excludes external borrowing solely for refinancing existing public sector debt that improves debt profile, and on-lending agreements between Government of Rwanda and public sector enterprises. - Public sector definition: government, entities part of the budgetary process, and nonfinancial public enterprises with government controlling stake (owning more than 50 percent), but excludes BRD. - Guarantee arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (payments in cash or in kind). - Definition of "debt" (paragraph 8(a) of Guidelines on Public Debt Conditionality): - Debt means a current liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring future payments of assets (including currency) or services to discharge principal and/or interest. - Forms include: (i) loans (including deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, official swap arrangements); (ii) suppliers' credits; (iii) leases (debt equals present value at inception of all lease payments expected, excluding operation/repair/maintenance payments). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligation that constitutes debt are included. - Limit on the Stock of External Payment Arrears: - Continuous performance/assessment criterion: non-accumulation of payment arrears on external debt contracted or guaranteed by the government and entities that form part of the budgetary process. - External payment arrears consist of external debt service obligations (principal and interest) not paid when due, excluding arrears on obligations subject to rescheduling. - For monitoring, external arrears are obligations not paid on the due date (taking into account contractual grace periods). External payment arrears on external debt service obligations by nonfinancial public enterprises with government controlling stake but not part of the budgetary process, and public private partnership projects, are not included unless overdue by more than 30 days under contract terms (including any grace periods). ### Targets for monetary aggregates and adjusters - Net Foreign Assets (NFA) of the National Bank of Rwanda (QAC): - A floor applies to NFA of the NBR for December 31, 2017 and June 30, 2017. - Definition: NFA of the NBR in Rwandan francs is defined consistent with the SDDS template as external assets readily available to, or controlled by, the NBR net of its external liabilities. Pledged or otherwise encumbered reserve assets (including swaps) are excluded. Reserves assets corresponding to undisbursed project accounts are considered encumbered and excluded. - Conversion rules: foreign assets and foreign liabilities in U.S. dollars are converted to Rwandan francs by using the U.S. dollar/Rwanda franc program exchange rate. Foreign assets and liabilities in other currencies are converted to U.S. dollars using the actual end-of-period U.S. dollar/currency exchange rate. Foreign liabilities include use of IMF resources. - Adjusters to the floor on NFA: - 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 78 billion. - Adjusted downward (upward) by the surplus (shortfall) of cash external debt service payments compared to originally-scheduled payments. - Adjusted downward by the amount of unexpected public expenditures on food imports in the case of a food emergency. - Reserve money (QAC): - A ceiling applies to the stock of reserve money for June 30, 2017, and December 31, 2017 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. - Calculation: the stock of reserve money for a given quarter is the arithmetic average of the stock of reserve money at the end of each calendar month in the quarter. Daily average of all three months in the quarter constitutes 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: ceiling on 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) multiplied by actual amount of liabilities (Rwanda Franc plus foreign-currency denominated) in commercial banks. ### Data reporting requirements and monitoring - Timing standards (unless specified otherwise): 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 reporting requirements: - Data on NDF (showing separately treasury bills and government bonds outstanding, other government debt, and budgetary central government deposits), each type of debt by debt holder, transmitted monthly. Deposits of the government with the NBR and with commercial banks will be separated from deposits of public enterprises and autonomous public agencies and agencies that the government does not have direct control over. - Detailed data on domestic revenues transmitted monthly. - Data on priority expenditure transmitted quarterly. - Data on accumulation and repayment of domestic arrears and the remaining previous year’s stock of arrears transmitted quarterly. - Data on foreign assets and foreign liabilities of the NBR transmitted weekly, including breakdown of assets that are pledged or encumbered, and daily and weekly data on the NBR’s foreign exchange liabilities to commercial banks (including required reserves with the NBR) with the exchange rate used for conversion into Rwanda francs shown separately. - Data on reserve money transmitted weekly, including a daily and weekly balance sheet of the NBR showing all items listed in the reserve money definition. - Reporting protocols and communications: - The authorities will inform IMF staff in writing prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Policies include, but are not limited to, customs and tax laws, wage policy, and financial support to public and private enterprises. - The authorities will inform IMF staff of changes affecting respect of continuous QACs and ITs. - The authorities 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 frequency and time lags per TMU Table 1; information should be mailed electronically to the Fund (email: afrrwa@imf.org). *International Monetary Fund — Eighth Review under the Policy Support Instrument and Request for Extension, and Third Review under the Standby Credit Facility — Supplementary Information* ### 1. The following information became available after the staff report was issued, and ### 1. The following information became available after the staff report was issued, and ### Updated Economic Indicators - 2017 Q3 y/y growth was 8.0 percent, based on services growth of 10 percent, and a recovery of growth in agriculture and industry to 8 and 6 percent, respectively. - Specific areas of strong growth in 2017 Q3: - information and communication: 28 percent - mining and quarrying: 25 percent - textiles: 23 percent - transport: 21 percent - Non-performing loan (NPL) ratio for the banking sector for 2017 Q3 was revised to 7.7 percent, versus the 8.3 percent figure shown in the staff report. - Revision reflects recalculation after commercial banks wrote off or fully provisioned loans more than one year overdue per external auditors’ recommendations. - On December 28, the Monetary Policy Committee (MPC) of the National Bank of Rwanda announced a 50-basis point reduction in the policy rate, bringing it to 5.5 percent. - MPC cited tapering off of exchange rate depreciation, low inflationary pressures, and continuing support for private credit growth. ### Recent Economic Developments and Program Performance - Real GDP growth: - 2.9 percent during the first half of 2017 - 8 percent in Q3 2017 - Country is likely to end the year a little higher than the revised projections of 5.2 percent. - Main Q3 drivers: mining and quarrying sectors, air transport, and food crops. - Inflation and prices: - Inflation was about 2.2 percent last November, the sixth consecutive month below the target after reaching a peak of 8.1 percent in February. - Food inflation fell from 13.3 percent in 2017Q2 to 2.2 percent in November 2017. - Overall, inflation averaged 5.4 percent from January to November. - Core inflation stood at 4.2 percent in November, down from 4.4 percent recorded in October of 2017. - Trade and reserves: - Rwanda’s trade deficit improved by 21.1 percent by the end of November 2017 over the same period in 2016. - Reserves buffers were rebuilt to above 4 months of imports, from 3.6 months of imports in 2015. - Program performance under PSI and SCF: - All end-June 2017 and continuous quantitative assessment performance criteria were met. - Most structural benchmarks were implemented or are in progress. - Indicative target on domestic arrears was not observed by a small margin. - Remedial actions: improvements in treasury cash management forecasts to match seasonal spending. ### Outlook and Medium-Term Policies - Authorities’ outlook: - Economy expected to return to historical growth rates of above 7 percent over the next three years. - Inflation will be kept under the central bank’s 5 percent headline target. - Policy priorities: - Sustaining improvement in environment for private sector development. - Increasing productivity through strategic infrastructure investments for structural transformation. - Enhancing domestic revenue mobilization, fostering financial deepening, and maintaining prudent monetary policy. ### Fiscal Policy - Fiscal performance in FY2016/17 described as largely satisfactory. - Commitment to fiscal consolidation and a prudent borrowing policy to keep debt sustainable, reflected in 2017/18 budget. - Steps to improve domestic resource mobilization: - Revising the property tax law. - Expanding the use of electronic billing machines to better track total sales. - Conducting a tax expenditure analysis with IMF technical assistance. - Public financial management improvements underway: - Improve timeliness, frequency and coverage of fiscal reporting. - Efforts to carry out fiscal risk analysis of selected sectors to mitigate risks. ### Debt Management - Debt sustainability assessment: - Rwanda assessed to be at low risk of debt distress, despite a temporary breach under the liquidity indicator associated with the 10-year Eurobond maturing in 2023. - External debt portfolio mostly concessional loans: 72 percent as end June 2017. - Issuance of treasury bills and bonds for cash flow purposes and capital market development to establish a longer yield curve and stronger secondary markets. - Strategy objective: - Ensure government financing needs and payment obligations met at the lowest cost and risk while increasing concessional loans and developing the domestic capital market. - Lengthen maturity of short term domestic instruments consistent with MTDS objectives. ### Monetary Policy and Financial Sector Issues - Monetary policy stance: - Continue to remain prudent to maintain inflation close to the authorities’ medium-term target level of 5 percent. - Central bank reduced the central bank rate (KRR) to 5.5 percent from 6 percent on December 28, 2017 to support private sector financing. - Monetary outcomes by end November 2017: - Broad monetary aggregate (M3) increased by 9.5 percent compared to 8.8 percent in November 2016. - Outstanding credit to the private sector increased by 12.3 percent compared to 8.8 percent in the same period of 2016 and against PSI target of 11.4 percent by end December 2017. - New authorized loans increased by 7.7 percent compared to 4.5 percent in the period under review. - Transition plans: - Plans to transition to interest rate based monetary policy framework. - BNR taking steps to meet preconditions for implementing a forward-looking monetary policy framework in liquidity management and policymaking processes. - Banking sector asset quality: - Banks remain well capitalized though asset quality deteriorated slightly. - Following BNR review and external audit in October-November 2017, NPLs at end September 2017 were estimated at 7.7 percent, not 8.3 percent as initially projected. ### External Sustainability - Current account: - Current account deficit improved in 2016 and is expected to improve over the medium term partly due to exchange rate adjustment which has led to increase in exports and reduced imports. - Projected improvement also reflects import substitution and export promotion policies. - “Made in Rwanda” policy: - Implemented to encourage domestic production of certain imported goods and promote export diversification to strengthen external stability and foster growth. ### Conclusion and Requests - Assessment: - Rwanda’s adjustment policies continue to be successful with sustained improvement in external situation and reserve buffers, centered on exchange rate adjustment, fiscal discipline, and prudent monetary policy. - Performance under the IMF-supported program expected to remain good given authorities’ strong commitment. - Requests to Directors: - Support for completion of the third and eight reviews under the SCF and PSI-supported program, respectively. - Support the authorities’ request to extend the PSI-supported program through December 1, 2018. *January 8, 2018; Statement by the Executive Director, Mr. Daouda Sembene, and by the Executive Director Advisor, Ms. Loy Nankunda, on Rwanda — January 12, 2018.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1813.pdf_