## cr18167 ## Source details **Canonical URL:** [cr18167](https://www.imf.org/-/media/files/publications/cr/2018/cr18167.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18167.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18167.pdf.json) --- ### Recent Economic Developments - Growth picked up, with rebound strengthening in the second half of 2017 and rising to 10.5 percent y/y in Q4. - Growth for 2017 was 6.1 percent. - Annual inflation remained low: headline inflation at 1.7 percent (y/y) and core inflation at 2.1 percent (y/y) in April; inflation has remained below the authorities’ medium-term target of 5 percent since May 2017. - Private credit growth stood at 7.7 percent y/y in March 2018. - Composite indicators and sectoral growth: - Agriculture growth: 7 percent (2017), food crops 7 percent. - Industry growth: 4 percent (2017). - Services sector growth: 8 percent (2017). - Mining sector growth: 21 percent (2017). - Manufacturing growth: 6 percent (2017). ### Fiscal Performance (FY2017/18 H1 and FY revisions) - FY2017/18 H1 drivers: - Fiscal deficit in June–December 2017 was about 0.4 percent of GDP lower than projected due to higher revenues and grants, partly offset by larger than expected investment expenditures. - Tax revenue gains driven by a large one-off tax arrears payment and improved compliance measures. - Higher non-tax revenue inflows for UN peacekeeping operations (PKO) and some earlier-than-expected budget grant disbursements. - Earmarked Strategic Fuel Levy funds drawn down to finance a petroleum reserve depot in Kigali. - Government deposits at end-2017 were higher than anticipated because EU grants were disbursed very late in 2017 rather than in 2018 as projected. - Selected fiscal figures (2017/18 H1, billion RwF; differences reported in % 2017 GDP): - Revenue and grants: 832 (Prelim.) 885 (Diff.) 540.7 - Total revenue: 663 691 280.3 - Tax revenue: 569 584 160.2 - Total Grants: 169 195 260.3 - Total expenditure and net lending: 1,034 1,053 190.2 - Current expenditure: 594 596 20.0 - Capital expenditure: 341 364 230.3 - Net lending: 99 93 -6 -0.1 - Overall balance (commitment basis): -202 -167 350.4 - Pending payment (float, net reduction-): -735 420.5 - Overall balance (cash basis, incl. grants): -209 -132 761.0 - Financing: 209 132 -76 -1.0 - Foreign financing (net): 245 209 -37 -0.5 - Domestic financing (net): -37 -109 -72 -0.9 - Errors and omissions: 0 32 320.4 - Budget revisions for FY2017/18: - Total tax revenue projection raised by around RWF 25 billion (0.3 percent of GDP). - Total revenue and grants now projected at 22.8 percent of GDP (vs. 22.6 percent in PSI 8th review). - Total expenditure and net lending revised to 26.6 percent of GDP. - Overall deficit projected to decline to 3.8 percent of GDP (vs. 4.2 percent in revised budget). - The revised budget allows expenditure of 0.2 percent of GDP on selected infrastructure, health insurance, insecticide spraying, irrigation, and PKO pre-financing. ### Monetary Policy and Credit - Monetary Policy Committee lowered the policy rate by 50 basis points in December 2017 to 5.5 percent (cumulative reduction of 100 basis points since Q4 2016). - After December 2017 reduction, the policy interest rate was kept unchanged in Q1 2018; MPC in March noted inflation expectations below target and healthy banking sector liquidity. - Transition plans: - Move from monetary-aggregate targeting to an interest-rate based framework by end-2018 while maintaining monetary targets until pre-conditions met. - Maintain an “accommodative” stance while monitoring conditions; staff encouraged avoiding revisions to pre-announced quarterly fiscal borrowing plans. - Staff underscored importance of maintaining exchange rate flexibility. - Operational history and challenges: - Policy rate (KRR) introduced in 2008; interest rate corridor with symmetric 200 basis points since 2012. - Repurchase rate volatile and consistently below policy rate; transmission to lending rates remains weak due to structural constraints. - Reforms include introducing electronic interbank trading platform, reopening bonds to activate secondary markets, and lengthening maturity structure. - Monetary aggregates and credit (selected): - Broad money (M3) growth: series include 7.6, 14.7, 12.3, 14.4, 16.5, 18.8 (table series). - Credit to non-government sector: 9.1, 11.0, 13.9, 12.9, 15.1, 15.2 (series). - Reserve money growth: 5.5, 12.6, 8.8, 11.7, 12.3, 14.1 (series). ### External Sector and Export Performance - Current account deficit narrowed from 15.8 percent of GDP in 2016 to 6.8 percent in 2017. - Formal goods exports increased sharply by 58 percent in 2017; including informal exports reduces overall export growth to 45 percent. - Import values declined slightly in 2017 but rose in 2018 with increasing international fuel prices. - Gross foreign exchange reserves reached 4.2 months of next year’s projected imports by end-2017. - Trade adjustment (% change over previous period) — selected: - Formal Exports: Vols (kgs) 36.2 (Jan 2017–Dec 2017) and 30.7 (March 2017–Feb 2018); Vals (US$) 57.6 and 65.4 - Formal Imports: Vols (kgs) 6.5 and 11.1; Vals (US$) -1.5 and 2.5 - Formal Trade Def. (US$): -22.9 and -22.7 - Export performance drivers in 2017: - Favorable price movements: coffee, tea, tagged minerals (tin, tungsten, tantalite). - Policies to increase value-added and re-exports (petroleum hub aspirations). - New exports: gemstones, textiles/leather goods, horticulture, processed foods. - Large increase in value of ‘other’ mineral exports driven mainly by Sapphires, Rubies, Tourmaline, Amethyst. ### Program Performance and Debt Limits - Program implementation: - All end-December quantitative assessment criteria and indicative targets were met. - Continuous targets were met except the indicative ceiling on new external debt contracted by public enterprises. - The US$500 million ceiling was exceeded by US$87 million (1 percent of GDP) due to an early Rwandair lease. - Authorities propose raising the indicative ceiling to US$800 million. - All structural benchmarks have been met. - Limits and definitions (highlights): - Net Domestic Financing (NDF) excludes treasury bills issued by the NBR for monetary policy purposes and excludes government deposits not under budgetary central government control. - Adjusters allow upward NDF adjustments up to RWF 78 billion for shortfalls in budgetary grants/loans, draw-downs of government deposits to finance foreign-financed capital expenditure, unexpected food-import public expenditures (food emergency), and PKO financing shortfalls/surpluses (up to RWF 78 billion). - Ceiling on new external debt of nonfinancial public enterprises excludes Bank of Kigali and BRD and on-lending agreements; includes leases as debt per guidelines. ### Economic Outlook and Risks - Growth and inflation projections (selected from revised macro framework and Table 1): - Real GDP growth (percent): Act. 6.0; Prog. 5.2; Proj. 6.1; Proj. 6.5; Proj. 7.2; medium-term 7.8 (2019) and 8.0 (2020). - CPI inflation, average (percent): 5.7 5.3 4.8 4.5 2.8 - CPI inflation, eop (percent): 7.3 4.0 0.7 5.0 5.0 - Current account balance (percent of GDP): -15.8 -8.8 -6.8 -10.0 -8.8 - Overall fiscal balance (commitment basis, percent of GDP): -3.7 -5.3 -4.7 -4.5 -4.1 - Gross international reserves (in millions of US$): 1001.5 1082.8 1163.3 1128.3 1240.2 - Gross international reserves (months of imports): 4.1 4.1 4.2 4.0 4.0 - Revisions and risks: - 2017 outturn 6.1 percent vs. 8th review projection of 5.2 percent. - Growth projection for 2018 revised up to 7.2 percent. - Medium-term risks slightly to the downside; upside drivers include pay-off from public investments and Compact with Africa de-risking facilities; downside risks include small export base, exposure to weather shocks, pests, and adverse regional political developments. - DSA findings: - Risk of debt distress remains low. - Temporary breach of debt-service-to-revenue indicator expected in 2023 due to maturity of the 2013 Eurobond. - Baseline and stress tests generally remain below stock and flow risk thresholds. - Long-term growth assumption: 7.5 percent. ### Fiscal Transparency, Contingent Liabilities, and Reporting - Actions underway to: - Improve fiscal transparency and systematically identify fiscal risks. - Leverage “de-risking” funds to attract private capital without government guarantees. - Conduct an FAD-led Fiscal Transparency Evaluation in latter half of 2018. - Transition to fiscal reporting according to GFSM 2014 — process underway. - Fiscal risk analyses initiated as structural benchmarks: - Initiate fiscal risk analysis of hotel and insurance sectors (sample of 22 hotels representing 92 percent of hotel NPLs). - Insurance sector solvency improved from 78 percent in December 2016 to 193 percent in December 2017; expected to close 2018 above minimum 100 percent. - Staff encouraged greater attention to contingent liabilities from PPPs and public enterprise guarantees. ### Banking Sector and Financial Soundness - Banking sector capitalization and asset quality: - Average capital adequacy ratio 21.4 percent vs. regulatory threshold of 17 percent (after small capital injections for two small banks in 2017). - NPLs, net of provisioning, broadly steady at 6.6 percent (NPLs gross 7.6 percent by end-2017). - Commercial banks’ profitability: return on assets at 1.1 percent (1.6 percent average over past three years). - Financial soundness indicators (selected series): - Regulatory capital to risk-weighted assets: series around 21.3, 19.9, 22.3, 20.7, 20.4... - NPLs/gross loans: series 6.3, 6.2, 6.2, 7.0, 7.5, 7.6, 8.1, 8.2, 7.7, 7.7 - Return on average assets (series): 2.3, 2.1, 1.9, 1.7, 1.9, 1.7, 1.8, 1.7, 1.6, 1.1 - Gross loans/total deposits (series): 87.0, 89.0, 92.2, 90.9, 100.5, 95.5, 110.8, 108.4, 108.7, 108.7 ### Policy Recommendations and Staff Appraisal - Key findings: - Adjustment policies improved external balances and reserve buffers; exchange rate adjustment, public spending restraint, and prudent monetary policy central to adjustment. - Strategic public investment contributed to a strong growth surge, notably diversified exports in H2 2017. - Staff recommendations: - Identify risks to the public purse and establish ex-ante Plan B should risks materialize. - Improve fiscal transparency and accountability, implement GFS-2014, and conduct Fiscal Transparency Evaluation. - Maintain momentum in domestic revenue mobilization to fund middle-income ambitions. - Attract FDI and use Compact with Africa and multilateral/bilateral instruments to alter risk perceptions for private capital. - Continue transition to an interest rate-based monetary policy operational framework, deepen interbank money market, and enhance coordination between government and central bank on financing and liquidity forecasting. - Maintain a flexible exchange rate regime as primary tool for adjustment. - Recommendation on program: - Staff recommends completion of the ninth review of the PSI-supported program. ### Capacity Development and Forward-Looking Priorities (Annex I) - Forward-looking policy priorities: domestic revenue collection; interest rate-based monetary policy framework; improving fiscal transparency; harmonizing statistical reporting; promoting private investment. - IMF technical assistance focus areas: - Financial sector supervision and regulation (risk-based supervision, ICAAP). - Macro fiscal analysis and financial programming training. - Public Financial Management: chart of accounts updated to support accrual accounting. - Real sector statistics: NISR support for national accounts consistent with EAC requirements. - Authorities’ priorities and objectives: - Revenue policy and administration reforms, including tax expenditure analysis and improving taxpayer register. - GFSM 2014 adoption for fiscal reporting. - Development of interbank money market to strengthen transmission. - Harmonization of trade statistics between National Accounts and Balance of Payments. - Fiscal Transparency Evaluation to determine reform priorities. - Strengthening risk-based supervision and implementing Basel II work plan. *International Monetary Fund — Rwanda country report excerpt* ### 1. Rwanda’s ### 1. Rwanda’s ### Recent Economic Developments - Growth picked up, with rebound strengthening in the second half of 2017 and rising to 10.5 percent y/y in Q4. - Growth for 2017 was 6.1 percent. - Annual inflation remained low: headline inflation at 1.7 percent (y/y) and core inflation at 2.1 percent (y/y) in April; inflation has remained below the authorities’ medium-term target of 5 percent since May 2017. - The 2017 growth outturn reflected broad-based pickup in activity, except for construction following a 2016 boom. ### Fiscal Performance (FY2017/18 H1) - The fiscal deficit in June–December 2017 was about 0.4 percent of GDP lower than projected due to: - Higher revenues and grants, partly offset by larger than expected investment expenditures. - Tax revenue gains driven by a large one-off tax arrears payment and improved compliance measures. - Higher non-tax revenue inflows for UN peacekeeping operations (PKO) and some earlier-than-expected budget grant disbursements. - Notable spending items: - Earmarked funds from the Strategic Fuel Levy were drawn down to finance construction of a petroleum reserve depot in Kigali. - Higher spending associated with Global Fund disbursements. - Government deposits at end-2017 were higher than anticipated because EU grants were disbursed very late in 2017 rather than in 2018 as projected. - The “float” (payment commitments not yet settled) increased at end-2017 but were settled in January. Selected fiscal figures (2017/18 H1, billion RwF unless otherwise noted; differences reported in % 2017 GDP): - Revenue and grants: 832 (Prelim.) 885 (Diff.) 540.7 - Total revenue: 663 691 280.3 - Tax revenue: 569 584 160.2 - Total Grants: 169 195 260.3 - Total expenditure and net lending: 1,034 1,053 190.2 - Current expenditure: 594 596 20.0 - Capital expenditure: 341 364 230.3 - Net lending: 99 93 -6 -0.1 - Overall balance (commitment basis): -202 -167 350.4 - Pending payment (float, net reduction-): -735 420.5 - Overall balance (cash basis, incl. grants): -209 -132 761.0 - Financing: 209 132 -76 -1.0 - Foreign financing (net): 245 209 -37 -0.5 - Domestic financing (net): -37 -109 -72 -0.9 - Errors and omissions: 0 32 320.4 ### Monetary Policy and Credit - The Monetary Policy Committee lowered the policy rate by 50 basis points in December 2017 to 5.5 percent (cumulative reduction of 100 basis points since Q4 2016). - After a reduction in December 2017, the policy interest rate was kept unchanged in Q1 2018. - The MPC in March noted stronger growth outlook, external sector performance, sufficient banking sector liquidity, healthy financial sector, inflation expectations below target, and gradual recovery of private credit growth. - Private credit growth stood at 7.7 percent y/y in March 2018. ### External Sector Developments - Current account deficit narrowed from 15.8 percent of GDP in 2016 to 6.8 percent in 2017. - Factors supporting improvement included exchange rate adjustment and other adjustment policies agreed under the recent Stand-by arrangement. - Formal goods exports increased sharply by 58 percent in 2017; the macro framework includes an estimate of informal exports which reduces the overall export growth rate to 45 percent. - Import values declined slightly in 2017 but rose in 2018 with increasing international fuel prices. - Strength of trade adjustment contributed to faster-than-anticipated build-up in gross foreign exchange reserves, reaching 4.2 months of next year’s projected imports by end-2017. Trade adjustment (% change over previous period): - Formal Exports: Vols (kgs) 36.2 (Jan 2017–Dec 2017) and 30.7 (March 2017–Feb 2018); Vals (US$) 57.6 and 65.4 - Formal Imports: Vols (kgs) 6.5 and 11.1; Vals (US$) -1.5 and 2.5 - Formal Trade Def. (US$): -22.9 and -22.7 ### Export Performance in 2017 (Box 1) - Rwanda experienced sharp growth in exports in 2017, attributed to planning and favorable external conditions. - Contributing factors: - Favorable price movements in traditional exports: coffee, tea, and existing (tagged) minerals (tin, tungsten, tantalite). - Policies to increase value-added of existing exports and efforts for Rwanda to become a regional distribution hub for petroleum and related products, causing large increases in re-exports, flour and other areas. - Increasing market share for new exports: gemstones, textiles/leather goods (e.g., high-end purses), horticulture (e.g., roses, haricots verts), and processed foods (e.g., high nutrition infant food). - Strategic policy interventions included land provisioning, IFC support, and promotion for exploration and extraction of gemstones. - Large increase in value of ‘other’ mineral exports driven mainly by Sapphires, Rubies, Tourmaline, Amethyst, which displaced heavy low-value iron ore exports. Increase in non-traditional mineral exports in 2017 (volumes and values): - Gemstones (Sapphires, Rubies, Tourmaline, Amethyst, Garnets and 'Other'): Vol 1/ 1.50 0.2327.2 157.8 157.6 (table formatting preserved from source) - Gold: 2.1 79.5 2.4 90.5 11 - Iron Ore: 6568.8 0.44 13.4 0.4 (diff -0.4) - Total: 6572.48 0.17 43248.3 168.2 (table formatting preserved) 2017 Export Value Growth: % change y/y displayed across categories in source figures. ### Program Performance - All end-December quantitative assessment criteria and indicative targets were met. - Continuous targets were met except for the indicative ceiling on new external debt contracted by public enterprises. - The US$500 million ceiling was exceeded by US$87 million (1 percent of GDP) in early 2018 due to a lease signed by Rwandair earlier than expected to obtain planned aircraft on more favorable terms. - Authorities propose raising the indicative ceiling to US$800 million to accommodate this and potential other leases. - All structural benchmarks have been met. ### Economic Outlook and Risks - Growth revisions: - 2017 outturn 6.1 percent vs. 8th review projection of 5.2 percent. - Growth projection for 2018 revised up to 7.2 percent. - Medium-term projections: 7.8 percent in 2019 and 8 percent in 2020. - Longer-term DSA growth projections remain at 7.5 percent (10-year historical average 7.5 percent). - Risks to 2019–20 forecast are slightly to the downside. - Upside drivers include pay-off from public investments (tourism, export diversification, domestic production, mining, irrigation), private investments in mining, new export markets, and large construction projects; availability of de-risking facilities associated with G-20 Compact with Africa (CWA) could further strengthen growth. - Downside risks: Rwanda’s small export and production base, vulnerability to shocks, adverse regional political developments, pests affecting harvests, unpredictable weather. - Public investment in pest control and irrigation expected to provide more resilience in agriculture. Revised Macroeconomic Framework (selected figures): - Real GDP growth (percent): Act. 6.0; Prog. 5.2; Proj. 6.1; Proj. 6.5; Proj. 7.2 - CPI inflation, average (percent): 5.7 5.3 4.8 4.5 2.8 - CPI inflation, eop (percent): 7.3 4.0 0.7 5.0 5.0 - Current account balance (percent of GDP): -15.8 -8.8 -6.8 -10.0 -8.8 - Overall fiscal balance (commitment basis, percent of GDP): -3.7 -5.3 -4.7 -4.5 -4.1 - Gross international reserves (in millions of US$): 1001.5 1082.8 1163.3 1128.3 1240.2 - Gross international reserves (months of imports): 4.1 4.1 4.2 4.0 4.0 Memorandum items (fiscal): - Overall fiscal balance (commitment basis, percent of GDP, FY): -4.6 -4.2 -3.8 -4.4 -4.6 - Overall fiscal balance (excl. PKO, percent of GDP, FY): -4.2 -4.1 -3.9 -3.9 -4.0 ### Drivers of Medium-Term Growth and Vision 2050 (Box 2) - Near-medium term growth drivers are broad-based with nascent dividends from public investment strategy aimed at increasing productivity in agriculture, tourism, and trade. - Agriculture: - Projected to average about 5–6 percent over the next two years. - Cultivated land under irrigation increased over 20 percent per year over the past four years; agricultural sectoral strategic plan envisages a 110 percent increase in the next 6 years. - Government investing in domestic seed production and mapping input needs; exports from horticulture and agro-processing projected to expand significantly. - Rwandan coffee has found niche markets in the U.S. and Europe, including a large retail chain in the U.S. - Government exploring insurance for agriculture and livestock against weather vagaries. - Industry: - Projected to increase to 13 percent per year as of 2019. - Major drivers: mining (pipeline activity), construction (NST sectoral strategies and airport construction in Bugesera), SEZ expansion, new electric car assembly plant by VW, rapid expansion of textile and leather goods. - Services: - Projected to maintain recent momentum of 8 percent growth with conference bookings at KCC, expanded tourism, and more high-end services. - Government focus on IT services with establishment of “Innovation City” and an innovation fund of US$100 million (30 percent government-financed, 70 percent by international private investors). - Vision 2050 aims to place Rwanda in upper middle-income status by 2035 with first NST (2017–24) around three pillars: economic transformation, social transformation, transformative governance. - Vision targets: Upper-middle income by 2035 (US$4,035 per capita); High-income by 2050 (US$12,476 per capita). - Growth targets cited: GDP growth targeted at an annual average of 9 percent during 2019–24; gross national savings rate expected to double to nearly 23 percent by 2024. - Ambitious growth rates required: Average growth of 9.1% over 1st NST; Average growth of 12% over 2025-2035; Average growth of >9% over 2036-2050. ### Fiscal Policy: Maintaining the Course of Adjustment - Authorities reiterated commitment to maintain a prudent fiscal stance consistent with agreement with the Fund. - Compared to the 8th PSI review, the budget deficit for the remainder of FY17/18 is slightly lower (0.4 percent of GDP), with revenue overperformance offsetting higher capital spending financed by Strategic Fuel Reserve draw-down. - Fiscal stance in FY18/19 remains broadly unchanged, with a small uptick in spending for education, health, and the fuel reserve depot. - The revised fiscal stance continues to deliver a medium-term path consistent with attaining the EAC goal of an overall deficit target of 3 percent of GDP over the medium term (a 3 percent deficit could be reached in 2021 with modest adjustment of 0.4 percentage points of GDP under current growth assumptions). ### Fiscal Transparency, Contingent Liabilities, and Reporting - Actions underway to improve fiscal transparency, contain government balance sheet exposure, and systematically identify fiscal risks. - Government leveraging exposure through “de-risking” funds to attract private sector capital. - Staff encouraged greater attention to taking stock of risks from potential contingent liabilities. - An FAD-led Fiscal Transparency Evaluation is scheduled for the latter half of 2018. - Authorities initiated work to systematically analyze insurance and hotel sectors (structural benchmark). - World Bank working with authorities on contingency planning related to energy supply expansion via PPPs. - Transition to fiscal reporting according to GFSM 2014 is well underway, though taking longer than originally foreseen due to complexity. ### Banking Sector - Banking sector remains well capitalized: average capital adequacy ratio 21.4 percent vs. regulatory threshold of 17 percent (following small capital injections for two small banks in 2017). - Nonperforming loans (NPLs), net of provisioning, remained broadly steady at 6.6 percent. - Commercial banks’ profitability declined to its lowest in 3 years: return on assets at 1.1 percent (1.6 percent average over the past three years), reflecting higher provisioning and loan write-offs. *Source: IMF staff report (text and tables from the Rwanda country report content provided).* ### 12. Efforts are underway to regain momentum for ### 12. Efforts are underway to regain momentum for ### Domestic revenue collection - Authorities are implementing a broad and ambitious reform plan for tax administration with emphasis on: - risk-based auditing, - pre-emptory “advisory visits” in risky sectors, - introducing a “National Invoicing System” via smartphones, - bolstering IT capacity. - Tax policy developments: - New Income Tax Law passed by parliament; addresses some gaps in transfer pricing (caps management fees). - The government’s proposed turnover tax for immoveable property was removed. - A long-delayed Fixed Asset (property) Law moved forward in parliament, but with reduced rates and weakened methodology for determining property values. - Technical assistance: - Authorities are pursuing technical assistance on tax expenditure analysis to ensure current tax incentives are well-targeted. - Forecasting approach and fiscal risks: - Given uncertainty of timing regarding tax policy proposals, authorities preferred a cautious approach and did not include estimates in the macroeconomic framework projections, leaving a strong upside risk to revenue projections. - Policy implication: - Absent meaningful momentum in domestic revenue mobilization, it will be difficult for the country to garner necessary resources to achieve the goal of becoming a middle-income country. ### Monetary policy: Transitioning to an interest rate-based framework - Recent stance and rationale: - The central bank left interest rates unchanged in early 2018. - Although inflation and credit growth remain muted, the pick-up in growth warrants a cautious approach. - Staff analysis indicates current monetary conditions are broadly neutral. - Transition plan and operational details: - The monetary policy framework is transitioning from targeting monetary aggregates to interest rates. - Plan remains to move to an interest-rate based framework by end-2018, but the central bank will maintain monetary targets until key pre-conditions are met to ensure price-based tools are effective. - For now, the BNR will maintain what it terms as an “accommodative” stance, while monitoring conditions closely into the second half of 2018. - Communications and analytical improvements: - Central bank ramping up communications to help the transition. - Recent MPC statement included short-term inflation projections with explicit references to the medium-term desired level of inflation. - BNR has integrated a forward-looking analytical and forecasting framework into monetary policy formulation. - Market transmission and coordination: - Nascent evidence of correlation between short-term market rates; transmission to lending rates not yet evident but expected to improve as framework is implemented. - Staff encouraged authorities to avoid revising pre-announced quarterly fiscal borrowing plans to reduce uncertainty for banks’ cash management and market liquidity. - Staff and authorities agreed to continue setting and monitoring reserve money targets until the new framework is fully in place. - Staff underscored importance of maintaining exchange rate flexibility as a primary tool during the transition. - Box 3 summary — operational history and remaining challenges: - BNR introduced a policy rate (the key repo rate, KRR) in 2008 as a signaling tool, while retaining reserve money as operating target. - In 2012, reserve money averaging and an interest rate operating corridor were introduced; corridor bounded by a symmetric 200 basis points on standing lending and deposit rates from the KRR. - Operations in the interest rate corridor have gradually improved; spread between policy rate and interbank rate declined since mid-2016. - Repurchase rate remains volatile and consistently below the policy rate; transmission to long end of the yield curve remains weak, reflecting structural constraints such as high operational costs. - Other challenges: shallow interbank and capital markets, perceived stigma for use of interbank market and central bank facilities. - Five-year strategy (2017–22) to deepen secondary and capital markets is being implemented. - Reforms underway include introducing an electronic interbank trading platform by the end of the year; developing horizontal repurchasing markets; reopening existing bonds to activate secondary markets; lengthening maturity structure of government securities. - Monetary policy transmission to lending rates is expected to be supported by these reforms to remove structural rigidities. ### Supporting initiatives: Compact with Africa and costing the SDGs - Compact with Africa: - Rwanda’s participation in the G-20 Compact with Africa is ongoing; one of the original signatories. - Government hopes Compact will ignite private investment (FDI and portfolio flows) and lead to more accessible “de-risking” financing vehicles to attract private capital without burdening the government balance sheet with guarantees. - Despite efforts, FDI remains below 3 percent of GDP. - Authorities see need to balance public sector-led growth with greater private sector involvement to maintain growth momentum and public debt sustainability. - Rwanda is a strong proponent of the Continental Free Trade Area to create access to larger markets attractive to private investors. - Costing SDG achievement: - Staff is drawing from Rwanda’s NST sectoral strategies to estimate costs of SDG achievement across countries in health, education and infrastructure. - Authorities developed sectoral strategies aiming to reach SDGs by 2030 or before; costing estimates were developed with development partners but reflect budget constraints and subjectivity in quality metrics. - Specific costing collaborations: - Education: authorities working closely with UNICEF and UK DFID to cost their strategy (developed a common costing template). - Health: authorities hired a consultant to tailor the WHO costing tool “OneHealth” to Rwanda. - Infrastructure: authorities liaised with UNICEF (water) and the World Bank and MIT (electricity) for cost estimates of universal access. - IMF staff will work with authorities and development partners to update estimates under various assumptions and match costing estimates with medium-term financing strategies to determine trade-offs. ### Program modalities, debt outlook, and capacity development - Program modalities: - Existing PSI-supported program will expire on December 1, 2018. - Authorities are considering different modes of successor engagement; staff and authorities do not foresee balance of payments needs or vulnerabilities requiring Fund resources. - Authorities drafted a Letter of Intent and a Memorandum of Economic and Financial Policies containing policy intentions throughout 2018 with structural benchmarks aligned to forward-looking priorities. - End-June quantitative targets for reserve accumulation, domestic revenues, and priority spending are proposed to be more ambitious given performance to date. - Debt sustainability: - An updated DSA suggests the risk of debt distress remains low. - Changes in end-2017 debt stock and the macroeconomic framework do not significantly change the DSA profile. - Framework reflects additional near-term spending for SDG achievement and an improved external outlook; long-term growth assumed in line with historical averages. - Except for temporary breaches of debt service thresholds due to expiration of Rwanda’s one outstanding Eurobond in 2023 (which will be rolled over), all baseline indicators and stress tests remain well below stock and flow risk thresholds. - Authorities reaffirm commitment to maximize external concessional funding when available and to develop domestic capital markets. - Capacity development priorities (Annex I): - Focus on: domestic revenue mobilization; transition to interest rate-based monetary policy operational framework; improving coverage, timeliness and transparency of fiscal reporting; improving fiscal risk statements; harmonizing BOP and national account price statistics; strengthening financial sector supervision. ### Staff appraisal — key findings and recommendations - Key findings: - Rwanda has stayed the course of adjustment policies with good results: external balances improved rapidly and reserve buffers strengthened. - Exchange rate adjustment, supported by public spending restraint and prudent monetary policy, was central to the adjustment program. - Strategic public investment has contributed to a strong growth surge, particularly through diversified exports observed in H2 2017. - Growth projections revised upward, in line with historical averages. - Government’s growth strategy includes public minority stakes to attract private investment and public investments in agriculture to mitigate weather risks and reduce growth volatility. - Recommendations and cautions: - Identify risks to the public purse and establish ex-ante Plan B should risks materialize. - Improve fiscal transparency and accountability, including implementing GFS-2014 and conducting a Fiscal Transparency Evaluation to identify and mitigate fiscal risks. - Maintain momentum in domestic revenue mobilization to fund ambitions to reach middle-income status. - Continue efforts to attract FDI and use instruments under Compact with Africa and multilateral/bilateral vehicles to alter risk perceptions for private capital. - Continue transition to an interest rate-based monetary policy operational framework, deepen interbank money market, and enhance coordination between government and central bank on financing needs and liquidity forecasting. - Maintain a flexible exchange rate regime as a primary tool for adjustment and to support the transition to the new monetary policy operational framework. *International Monetary Fund — Rwanda country report excerpt* ### 26. Based on the government’s performance under the PSI-supported program and its well- ### 26. Based on the government’s performance under the PSI-supported program and its well-articulated forward-looking macroeconomic strategy, staff recommends completion of the ninth review of the PSI-supported program. ### Recommendation - Staff recommends completion of the ninth review of the PSI-supported program. ### Recent economic developments (overview and indicators highlighted in figures) - Quarterly GDP growth (decomposition) and sector contributions shown for Dec-14 to Dec-17 (Services, Industry, Agriculture). - Composite Indicators of Economic Activity (indices, March 2013=100): Headline CIEA, Cement production, Final consumption imports, Electricity, Mining exports (series plotted Dec-14 to Aug-17; Feb-18 noted). - Credit to the Private Sector (percent change, y/y) series from Dec-14 to Mar-18: Private sector credit lags growth recovery; construction activity remains low after the 2016 boom. - Inflation (monthly, y/y) series from Dec-14 to Apr-18: Headline, Core, Food; "Inflation has continued to decelerate sharply as food supplies have increased." - Growth of Exports and Imports Volumes (3-mo rolling avg, y/y) series Dec-14 to Mar-18: Trade deficit (US$ mil.) (RHS), Exports (LHS), Imports (LHS) — "..and the trade deficit has been halved by strong exports and lower demand for imports." - Overall Deficit and Net Foreign Assets (RwF billions) series Dec-14 to Dec-17: "The fiscal deficit evolved consistent with program objectives." ### Key statistics and projections (selected items from Table 1) - Real GDP: 6.0, 5.2, 6.1, 6.5, 7.2, 7.8, 8.0 - GDP deflator: 5.5, 6.4, 7.3, 4.2, 3.0, 4.9, 5.8 - CPI (period average): 5.7, 5.3, 4.8, 4.5, 2.8, 5.0, 5.0 - CPI (end period): 7.3, 4.0, 0.7, 5.0, 5.0, 5.0, 5.0 - Terms of trade (deterioration, -): 6.2, 4.6, 1.8, -4.7, -1.1, 0.3, 0.9 - Broad money (M3) growth: 7.6, 14.7, 12.3, 14.4, 16.5, 18.8 ... - Reserve money growth: 5.5, 12.6, 8.8, 11.7, 12.3, 14.1 ... - Credit to non-government sector: 9.1, 11.0, 13.9, 12.9, 15.1, 15.2 ... - M3/GDP (percent): 23.9, 24.7, 23.6, 25.5, 24.9, 26.1 ... - NPLs (percent of total gross loans): 7.6 .. 7.6 ......... ... - Total revenue and grants (percent of GDP): 23.5, 22.7, 22.9, 22.6, 23.4, 22.0, 22.1 - Tax revenue (percent of GDP): 15.7, 15.7, 15.5, 15.7, 15.8, 15.8, 16.0 - Grants (percent of GDP): 5.1, 4.5, 4.7, 4.4, 4.9, 4.0, 3.9 - Expenditure (percent of GDP): 27.2, 28.0, 27.6, 27.1, 27.5, 26.2, 25.6 - Current: 15.3, 15.0, 14.7, 14.6, 14.9, 14.1, 13.8 - Capital: 10.5, 10.7, 10.7, 10.4, 10.5, 10.0, 9.8 - Primary balance (percent of GDP): -2.7, -4.2, -3.6, -3.3, -3.0, -3.2, -2.5 - Overall balance (percent of GDP): -3.7, -5.3, -4.7, -4.5, -4.1, -4.2, -3.4 - Overall balance excluding grants (percent of GDP): -8.8, -9.8, -9.4, -8.9, -9.0, -8.2, -7.3 - Net domestic borrowing: 0.8, 1.2, 0.2, 0.8, 0.8, 0.6, 0.0 - Total public debt incl. guarantees (percent of GDP): 47.2, 47.6, 48.3, 49.2, 49.0, 49.0, 47.3 - External public debt (percent of GDP): 34.9, 37.6, 37.5, 39.4, 39.2, 39.7, 38.6 - Investment (percent of GDP): 25.9, 25.0, 23.4, 26.0, 25.0, 25.9 - Government: 10.5, 10.7, 10.7, 10.4, 10.5, 10.0, 9.8 - Nongovernment: 15.4, 14.3, 12.7, 15.6, 14.6, 16.0, 16.1 - Savings (percent of GDP): 6.1, 12.5, 12.5, 12.6, 12.4, 13.8, 14.6 - Exports (goods and services, percent of GDP): 18.4, 21.1, 22.4, 21.5, 23.0, 24.1, 24.2 - Imports (goods and services, percent of GDP): 36.9, 31.8, 32.3, 33.1, 34.4, 34.9, 34.2 - Current account balance (incl grants, percent of GDP): -15.8, -8.8, -6.8, -10.0, -8.8, -9.0, -8.3 - Excl grants: -19.8, -12.5, -10.9, -13.4, -12.6, -12.1, -11.4 - Excl large projects: -12.3, -8.1, -6.4, -7.3, -8.6, -7.8, -7.2 - Gross international reserves (in millions of US$): 1001, 1083, 1163, 1128, 1240, 1332, 1460 - In months of next year's imports: 4.1, 4.1, 4.2, 4.0, 4.0, 4.0, 4.1 ### Budgetary central government flows (selected figures from Table 2a, FY basis, Billions of RwF) - Revenue and grants: 1,615.8; 1,766.5; 1,820.6; 1,929.1; 1,997.5; 2,241.6 - Total revenue: 1,285.6; 1,413.7; 1,473.2; 1,554.0; 1,601.2; 1,836.9 - Tax revenue: 1,104.1; 1,229.6; 1,267.2; 1,373.6; 1,395.0; 1,612.9 - Direct taxes: 468.4; 518.4; 534.2; 596.6; 597.5; 691.0 - Taxes on goods and services: 544.6; 602.9; 617.4; 672.7; 680.7; 794.6 - Taxes on international trade: 91.2; 108.4; 115.6; 104.3; 116.7; 127.3 - Non-tax revenue: 181.4; 184.1; 206.0; 180.4; 206.3; 224.1 - Of which: PKO: 128.5; 115.5; 137.4; 104.0; 117.9; 124.9 - Grants: 330.2; 352.9; 347.4; 375.1; 396.3; 404.7 - Total expenditure and net lending: 1,942.9; 2,092.4; 2,125.2; 2,314.7; 2,407.1; 2,687.0 - Current expenditure: 1,069.6; 1,144.8; 1,159.4; 1,274.0; 1,319.9; 1,445.6 - Wages and salaries: 263.7; 302.1; 325.0; 342.4; 365.7; 415.0 - Purchases of goods and services: 207.4; 222.0; 222.0; 243.2; 253.8; 281.5 - Interest payments: 72.2; 94.2; 92.2; 104.1; 94.7; 94.4 - Domestic debt interest: 35.3; 52.7; 50.7; 58.4; 49.8; 43.6 - External debt interest: 36.9; 41.5; 41.5; 45.7; 44.9; 50.8 - Transfers: 366.9; 402.7; 389.2; 438.1; 431.9; 483.3 - PKO and demobilization: 159.4; 123.9; 131.1; 146.3; 173.8; 171.3 - Capital expenditure: 759.5; 769.6; 787.8; 852.0; 897.1; 1,031.7 - Domestic: 418.2; 466.8; 486.6; 483.2; 510.2; 575.6 - Foreign: 341.3; 302.7; 301.1; 368.7; 386.9; 456.1 - Overall balance (incl. grants, commitment basis): -327.1; -325.8; -304.6; -385.5; -409.6; -445.4 - Overall balance (incl. grants, cash basis): -347.2; -350.0; -328.8; -412.8; -436.8; -476.0 - Financing: - Foreign financing (net): 322.7; 324.6; 326.7; 324.3; 372.4; 377.6 - Drawings: 344.6; 349.7; 351.8; 353.0; 400.9; 408.8 - Budgetary loans: 183.8; 217.2; 219.4; 176.5; 247.1; 175.5 - Project loans: 160.7; 132.4; 132.4; 176.5; 153.8; 233.3 - Amortization: -21.9; -25.1; -25.1; -28.7; -28.5; -32.2 - Net domestic financing: 48.9; 25.4; 2.0; 88.5; 64.4; 98.4 - Net credit from banking system: 16.6; 25.4; 2.6; 88.5; 64.4; 98.4 - Nonbank sector: 32.3; 0.0; -0.6; 0.0 ---- ### Budgetary central government flows (percent of GDP, selected from Table 2b) - Revenue and grants: 22.7, 22.6, 22.8, 22.0, 22.4, 22.1 - Total revenue: 18.0, 18.1, 18.4, 17.8, 17.9, 18.1 - Tax revenue: 15.5, 15.7, 15.9, 15.7, 15.6, 15.9 - Grants: 4.6, 4.6, 4.5, 4.3, 4.3, 4.0 - Total expenditure and net lending: 27.3, 26.8, 26.6, 26.5, 26.9, 26.4 - Overall balance (incl. grants, commitment basis): -4.6, -4.2, -3.8, -4.4, -4.6, -4.4 - Financing: 4.9, 4.5, 4.1, 4.7, 4.9, 4.7 - Foreign financing (net): 4.5, 4.2, 4.1, 3.7, 4.2, 3.7 ### Monetary survey (selected figures from Table 4) - Net Foreign Assets (monetary authorities): 660, 749, 629, 642, 734, 820, 939 - Reserve money (average of months in quarter): 303, 329, 357, 344, 381, 370, 422 - Broad money (M3): 1,595, 1,791, 1,961, 1,938, 2,092, 2,086, 2,477 - Year on year growth: - Broad money: 7.6, 12.3, 14.5, 9.4, 14.4, 16.5, 18.8 - Reserve money: 5.5, 8.8, 11.8, 11.8, 11.7, 12.3, 14.1 - Net foreign assets: 15.1, 8.6, 32.2, 30.0, 6.3, 9.0, 13.9 - Credit to the private sector: 9.1, 13.9, 13.7, 18.7, 12.7, 15.1, 15.2 ### Balance of Payments (selected figures from Table 5, US$ millions) - Current account balance (incl. official transfers): -1,335.8; -783.3; -621.7; -951.4; -857.4; -912.9; -951.4; -959.7 - Trade balance: -1,309.6; -928.3; -871.6; -1,015.5; -961.9; -959.8; -1,012.3; -1,035.4 - Exports (f.o.b.): 726.5; 994.6; 1,050.1; 1,128.8; 1,207.2; 1,326.8; 1,396.1; 1,562.0 - Of which: coffee and tea: 121.9; 144.1; 148.4; 156.0; 147.3; 179.3; 167.2; 180.0 - Of which: minerals: 86.4; 102.9; 125.0; 118.0; 166.0; 158.4; 197.3; 244.7 - Imports (f.o.b.): 2,036.2; 1,923.0; 1,922.2; 2,144.3; 2,169.1; 2,286.6; 2,408.5; 2,597.3 - Of which: capital goods: 566.1; 494.3; 495.9; 545.1; 545.3; 598.0; 585.3; 654.0 - Of which: energy goods: 181.0; 198.0; 201.7; 209.3; 255.1; 225.1; 257.1; 265.4 - Services (net): -254.1; -27.4; -29.8; -95.0; -145.8; -92.0; -127.6; -122.4 - Tourism receipts (credit): 389.8; 438.1; 438.1; 496.8; 492.4; 571.4; 566.3; 651.3 - Income: -296.3; -331.8; -316.7; -351.1; -344.8; -389.0; -380.9; -424.7 - Interest on public debt: -43.5; -47.0; -46.6; -50.2; -50.2; -53.5; -53.5; -57.4 - Current transfers (net): 524.2; 504.1; 596.4; 510.1; 595.0; 527.9; 569.4; 622.8 - Private: 180.3; 179.1; 220.8; 186.6; 230.8; 194.8; 247.7; 268.1 - Public: 343.9; 325.0; 375.7; 323.5; 364.2; 333.1; 321.8; 354.7 - Capital and financial account balance: 1,156.5; 783.3; 745.3; 970.1; 909.3; 1,060.0; 1,044.2; 1,111.3 - Capital account: 190.0; 189.9; 189.7; 204.2; 244.4; 211.2; 234.1; 235.2 - Financial account: 966.5; 593.4; 555.6; 765.9; 664.9; 848.8; 810.1; 876.1 - Direct investment: 218.5; 245.1; 245.1; 323.0; 261.6; 343.1; 333.8; 363.9 - Public sector capital: 719.1; 299.0; 298.6; 364.2; 385.9; 429.5; 444.0; 473.4 - Long-term borrowing: 768.0; 369.5; 369.2; 439.7; 461.4; 502.2; 516.7; 567.1 - Gross official reserves (with prospective financing): 1,001; 1,083; 1,163; 1,128; 1,240; 1,275; 1,332; 1,460 - In months of prospective imports of G&S: 4.1; 4.1; 4.2; 4.0; 4.0; 4.3; 4.0; 4.1 - Current account deficit (percent of GDP): -15.8; -8.8; -6.8; -10.0; -8.8; -8.9; -9.0; -8.3 - Excl. Bugesera: -15.7; -8.4; -6.4; -8.5; -8.6; -7.6; -7.8; -7.2 ### Financial soundness indicators (selected, Table 6) - Regulatory capital to risk-weighted assets (series): 21.3, 19.9, 22.3, 20.7, 20.4, 19.9, 19.6, 19.1, 20.4, 20.0 - NPLs/gross loans (series): 6.3, 6.2, 6.2, 7.0, 7.5, 7.6, 8.1, 8.2, 7.7, 7.7 - Provisions/NPLs (series): 48.3, 46.2, 46.0, 42.7, 43.4, 42.7, 44.4, 44.9, 43.9, 46.7 - Return on average assets (series): 2.3, 2.1, 1.9, 1.7, 1.9, 1.7, 1.8, 1.7, 1.6, 1.1 - Return on average equity (series): 12.7, 11.2, 9.8, 9.2, 10.1, 8.8, 10.1, 9.6, 8.9, 6.2 - Net interest margin (series): 8.7, 8.5, 9.3, 9.2, 9.4, 9.3, 10.3, 10.0, 9.6, 10.0 - Liquid assets/total deposits (series): 46.8, 45.4, 43.9, 42.8, 42.3, 41.7, 42.6, 43.0, 42.9, 43.7 - Gross loans/total deposits (series): 87.0, 89.0, 92.2, 90.9, 100.5, 95.5, 110.8, 108.4, 108.7, 108.7 ### Program implementation: Quantitative targets and structural benchmarks - Table 7: Quantitative Program Targets as of End-December 2017 (detailed targets listed in table). - Table 8: Structural Benchmarks through PSI 10th Review — policy measures and status: - 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 the objectives and operations of the monetary policy framework to enhance BNR transparency and accountability. (Ongoing) - Financial Markets: Introduce Government bond reopening mechanisms to develop benchmark bonds and promote depth and liquidity. (10th PSI Review) - Financial Markets: Establish an electronic interbank trading platform to improve banks’ counterparty visibility and price formation. (Ongoing) - Public Financial Management: Provide quarterly revenues, expenditures, and financing estimates for the budgetary central government levels within 60 days of the end of each quarter. (9th PSI Review) - Public Financial Management: Begin publishing in GFS 2014 format for the quarter ending September 2018. (10th PSI Review) - Public Financial Management: Initiate a fiscal risk analysis of hotel and insurance sectors to assess potential contingent liabilities. (10th PSI Review) - Fiscal Revenues: Initiate the rollout of "EBM version 2" pilot, with the intent of reaching 1,000 new EBM users. (Ongoing / Met status indicated for some items) - Status indicators in Table 8 include "10th PSI Review", "Ongoing", "Met", and "9th PSI Review" for specific benchmarks and target dates. *Source: Rwandan authorities and IMF staff estimates and projections (excerpts from the IMF staff report and accompanying tables and figures).* ### Annex I. Capacity Development Strategy for FY 2019 ### Annex I. Capacity Development Strategy for FY 2019 ### 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 IMF technical assistance (TA) engagement - Rwanda is a high-intensity 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. - Final quarter of FY16/17 TA provided for: - Financial sector supervision and regulation: 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. - Requested careful sequencing and phasing of TA to allow maximum absorption of recommendations and ensure staff can devote time fully to activities. - Emphasized peer learning opportunities where TA is provided by regional ministry and central bank staff. ### Priorities and objectives (selected) - Revenue policy and administration reforms: - domestic tax expenditure analysis; - updating and improving the revenue forecasting tool; - improving the integrity of the taxpayer 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: - Objective: Harmonization of trade statistics between National Accounts and the Balance of Payments. - Fiscal Transparency Evaluation: - Objective: Determine fiscal transparency strengths and reform priorities to mitigate fiscal risks. - Strengthening risk-based supervision: - Objective: Implement the work plan on Basel II. --- ### Appendix I. Letter of Intent and MEFP highlights ### Context and program request - Letter dated May 23, 2018, requests Executive Board approval of the ninth review under the PSI-supported program. - Proposed program targets for end-June 2018 adjusted to reflect more ambitious targets for accumulation of reserves, domestic revenues, and priority spending. ### Recent macroeconomic performance (through Q4 2017) - Growth and inflation: - 2017 GDP growth: 6.1 percent (projected 5.2 percent). - Agriculture growth: 7 percent (food crops 7 percent, up from 3 percent in 2016). - Industry growth: 4 percent (2016: 7 percent); construction recorded -3 percent in 2017. - Mining sector growth: 21 percent. - Manufacturing growth: 6 percent. - Services sector growth: 8 percent. - Average annual headline inflation: 4.9 percent in 2017 (2016: 5.7 percent). - Headline inflation eased to 2.8 percent in 2017H2 from 7.0 percent in 2017H1. - Headline inflation year-over-year in March 2018: 0.9 percent. - Fiscal performance and financing: - First half of FY 2017/18 tax revenue collections: marginally exceeded target by 0.2 percent of GDP. - External disbursements of grants: exceeded projected amount by 0.3 percent of GDP. - Total expenditure and net lending in first half FY 2017/18: about 0.2 percent of GDP higher than projected. - Overall deficit (on a commitment basis): 0.4 percent of GDP lower than expected. - Debt management: - Risk of debt distress: remains low. - Debt stock: 47.1 percent of GDP at end-2017. - External debt share of total public debt: 78.6 percent. - Concessional share of external debt: 60 percent. - Domestic debt: 10.2 percent of GDP at end-2017. - Breach of indicative US$500 million ceiling on new external debt by public enterprises: exceeded by US$87 million due to a lease signed by Rwandair; government proposes raising the indicative ceiling to US$800 million. - Government strategy: prioritize projects, apply appropriate financing models, maximize external concessional funding, and promote the domestic capital market. - Monetary policy and exchange rate: - NBR policy rate (KRR) reduced from 6 percent to 5.5 percent on 28th December 2017. - Y/y RWF depreciation against the US$ moderated to 3.1 percent in 2017 (2016: 9.7 percent). - Private sector credit growth: 13.9 percent in 2017 (2016: 9.1 percent). - External position: - 2017 exports growth: 44.5 percent. - 2017 imports decline: 5.6 percent. - Other minerals exports increased from 80 million USD in 2016 to 248 in 2017. - Horticulture exports increased by 61 percent to 18.5 million USD. - Financial sector stability: - Nonperforming loans (NPLs): 7.6 percent by end-2017 (mid-year 2017: 8.2 percent). - Banque Rwandaise de Developement (BRD) noncompliant with minimum capital adequacy ratio of 15 percent at end-December 2017; restructuring and capital injection of RWF 15 billion received from other shareholders expected to restore compliance by year end. - Revised banking law gazetted in October 2017; BNR reviewing banking regulations. - Program performance: - All quantitative assessment criteria met except the indicative ceiling on external borrowing for public enterprises (Rwandair leases). - All structural benchmarks for the ninth review were met on time. ### Macroeconomic outlook (2018–medium term) - Growth projections: - 2018 overall GDP projected at 7.2 percent. - Medium-term average growth projected at 7.7 percent. - Agriculture projected growth in 2018: 6 percent. - Industry projected growth in 2018: 8.3 percent. - Construction projected growth in 2018: 5.2 percent. - Mining projected growth in 2018: 20.1 percent. - Electricity projected growth in 2018: 11.9 percent. - Services projected growth in 2018: 7.6 percent. - Inflation outlook: - Headline inflation expected to remain around the 5.0 percent objective in 2018. - Risks: - Main risk: weather conditions affecting food prices. - External position and reserves: - Current account projected in 2018: USD 867.2 million. - Current account projected in 2019: USD 1,026.9 million. - Reserve build-up projected: 51.8 million in 2018 and 79.0 million in 2019. - Drivers: higher imports related to construction of Bugesera airport; exports expected to improve in medium term; imports excluding Bugesera expected to record a moderate increase as import substitution measures take effect; higher financial flows in FDI and debt flows in 2018 and 2019 expected to boost external position. ### Program policies and long-term strategy - Vision 2050: - Emphasis on high-quality livelihoods, modern living standards, and transition to private sector–led growth. - Priority areas in the first seven-year plan (NST1): creation of decent jobs, accelerating urbanization, establishing Rwanda as a knowledge-based economy, shifting exports toward high value goods and services, increasing domestic savings, developing financial services to promote private investment, and increasing agricultural productivity. - Continued investment in social protection, eradication of malnutrition, quality education and health, capable and accountable institutions, and citizen participation. - Fiscal policy (summary introduction): - Rwanda will continue to safeguard progress to sustain long-term growth by keeping fiscal and external balances sustainable while implementing the National Strategy for Transformation. - Supporting reforms aim to improve domestic revenue mobilization, increase fiscal transparency, and identify and mitigate potential fiscal risks. *Source: Annex I. Capacity Development Strategy for FY 2019; Letter of Intent and Memorandum of Economic and Financial Policies, Kigali, May 23, 2018.* ### 23. The budget for fiscal year 2017/18 has been revised slightly to allow partial spending of ### cr18167 - 23. The budget for fiscal year 2017/18 has been revised slightly to allow partial spending of ### Budget revisions for FY2017/18 - Total tax revenue projection raised by around RWF 25 billion, which represents 0.3 percent of GDP. - Grants are expected to decline by 0.2 percent of GDP due to less RWF depreciation than originally forecast. - Total revenue and grants are now projected at 22.8 percent of GDP (compared to 22.6 percent of GDP in PSI 8th review). - Total expenditure and net lending were revised but fell to 26.6 percent of GDP. - The revised budget allows expenditure of 0.2 percent of GDP to provide for: - Construction of schools and other infrastructure projects of the University of Rwanda. - Provision of health insurance for some citizens. - Insecticide spraying operations to reduce the spread of malaria. - Construction of irrigation systems to improve agricultural production. - Pre-financing of some Peace Keeping Operations of the UN. - Overall deficit projected to decline to 3.8 percent of GDP (compared to 4.2 percent of GDP in the revised budget). - Net domestic finance is expected to decline, reflecting the decline in overall deficit. ### Fiscal policy stance for the medium term (projections and measures) - Overall deficit projected to decline to 4.2 percent of GDP in 2020/21. - Tax revenue collections projected to rise by 0.3 percent of GDP from FY2018/2019 to 16.2 percent in 2020/21. - Increased yields expected from ongoing tax policy and administrative measures. - Expenditure prioritisation measures expected to allow expenditures to decline from 26.9 percent of GDP in 2018/19 to 26.3 percent of GDP in 2020/21. - Recurrent spending projected to decline from 14.8 percent of GDP in 2018/19 to 13.9 percent in 2020/21. ### Public financial management and fiscal-risk assessments - Structural benchmark: fiscal risk analysis initiated for hotel and insurance sectors to assess potential contingent liabilities. - Hotel sector assessment (sample of 22 facilities representing 92 percent of total hotel NPLs): - Most hotel NPLs are in low and middle categories. - Only one facility in the upper risk category; not considered ‘too big to fail’ and therefore does not pose fiscal risks. - Insurance sector assessment: - Expectation of continued performance improvement for private insurers due to: - Recent review of tariffs for the motor business. - Better conduct of business following issuance of the Directive of Conduct of Insurance Business by the BNR. - The directive expected to curb malpractices such as price undercutting, issuing insurance on credit, and fraud in claims settlement. - Solvency of private insurers improved from 78 percent in December 2016 to 193 percent in December 2017 and is expected to close 2018 above the minimum 100 percent. - NBR will continue close monitoring to mitigate potential costs to the budget or debt implications. ### Key policy objectives for 2018/19 and medium term (NST1-guided interventions) - Jobs creation through NEP interventions, focus on youth and women, Hands-on skills development through TVET, and access to start-up toolkits. - Urbanization: implementation of City of Kigali & Secondary City Master Plans and improvement of rural and urban transportation services. - Competitive Knowledge-Based Economy: operationalization of the Rwanda Innovation fund and support to centres of Excellence. - Industrialization and Export Promotion: development of industrial parks, Kigali Logistic Platform, bonded warehouses at borders, and exploration of mineral potentials. - Tourism diversification: continuing construction of Bugesera Airport, support to Rwandair expansion, development of new tourism products. - Increasing Agriculture & Livestock Production and Productivity and establishing agriculture financing and insurance scheme. - Sustainable Management of Natural Resources and Environment. - Domestic Savings Promotion: subscription to Long Term Saving Scheme, implementation of the 10-Year Capital Market Master Plan, operationalization of the World-Class Payment Ecosystem to promote a cashless economy. ### 2018/19 budget projections and tax policy - Fiscal deficit, excluding peacekeeping operations, expected to rise slightly from 2.5 percent of GDP in 2017/18 to 3.1 percent of GDP in 2018/19 and remain at this level in 2019/20 and 2020/21. - Including peacekeeping operations, deficit projected to rise slightly from 3.8 percent of GDP in 2017/18 to 4.6 percent of GDP in 2018/19. - Correcting for one-off arrears collection in FY17/18, tax revenue collections projected to remain flat at 15.6 percent of GDP in 2018/19. - Tax policy changes expected to boost revenue collections in 2018/19 and help achieve FY2019/20 target: - ‘EBM for all’ roll-out to selected non-VAT registered taxpayers. - Enactment of law amending excise duties on beer, wines and liquors as well as mobile data. - Amendments to taxes on income: capping of management fees to 2 percent, excluding liberal professionals from the lump-sum/flat regime. - Implementation of transfer pricing guidelines to help Rwanda Revenue Authority audit multilateral companies (banks, telecoms, insurance and mining companies). ### Expenditure composition and financing (2018/19) - Total expenditure and net lending in 2018/19 projected to rise marginally to 26.8 percent of GDP from 26.6 percent of GDP in 2017/18. - Recurrent spending increased by 0.3 percent of GDP to account for: - On-going restructuring of Government machinery. - Inclusion of expenditures funded with internally generated funds of some public institutions. - Increased spending on Peacekeeping Operations. - Capital spending priority: completion of on-going projects that promote growth. - Foreign investment spending increased by 0.3 percent of GDP due to increased capital grants disbursement, reflecting improved performance partly attributable to uptake of the e-procurement system. - Overall deficit in 2018/19 projected at 4.6 percent of GDP (against 3.8 percent of GDP in 2017/18). - Net domestic finance will amount to 0.6 percent of GDP in 2018/19. ### Monetary policy strategy and operational shifts - Monetary policy to remain supportive in context of subdued inflation and exchange rate pressures to bolster below-potential aggregate demand. - Growing instability of the money multiplier complicates monetary targeting; NBR shifting to a price-based monetary policy framework. - Objectives and preparatory measures: - Interbank market development: - Launch of an electronic interbank trading platform (structural benchmark) to enhance information sharing and price discovery. - Communication: - Develop and adopt a communication strategy to enhance NBR transparency and accountability. - Structural benchmarks include establishing optimal inflation ranges and developing a communications strategy. - Capacity development: - NBR seeking technical assistance to build in-house capacity for the transition. - Forecasting and policy analysis system (FPAS): - FPAS developed with IMF technical assistance; publications restructured to be more forward-looking. - NBR to formalize forecasting team and process and integrate FPAS into monetary policy decision-making. - Determine optimal level of inflation range via ongoing study to recommend an optimal band for headline or core inflation. - Reduce excess reserves: - Progress made; Financial Market Operations Committee strengthened. - Interbank market activity has grown in depth and width; interbank market rate kept close to the Key Repo Rate for almost two consecutive years. ### Government securities market and yield-curve development - Steps to deepen government securities market and enhance the yield curve include establishing a re-opening mechanism for long-term bonds to build benchmark bonds. - Fiscal year 2017-2018 issuances: - 5-year bond issued in August 2017 and February 2018. - 7-year bond issued in November 2017. - Planned 10-year bond at end May 2018. - On 28th March 2018, NBR issued a directive related to regulatory framework for Government Bonds including discussion of the Reopening mechanism (Structural benchmark). - Reopening mechanism to be implemented by end June 2018 with a planned reopening of a 7-year bond issued in 2016. ### Status of structural benchmarks and quantitative targets (selected items) - Structural benchmarks noted as Met at 10th PSI Review for: - Introduce Government bond reopening mechanisms. - Establish an electronic interbank trading platform. - Provide quarterly revenues, expenditures, and financing estimates within 60 days of quarter end. - Begin publishing in GFS 2014 format for quarter ending September 2018. - Initiate fiscal risk analysis of hotel and insurance sectors. - Initiate rollout of “EBM version 2” pilot, intent to reach 1,000 new EBM users. - Quantitative program indicators and outcomes (selected, June 2018 / December 2017 references in tables): - Ceiling on the overall fiscal deficit, including grants: Met (proposed program 241; adjusted 251; actual 168). - Net foreign assets of the NBR at program exchange rate (floor on stock): Met (proposed 657; adjusted 736; actual 628). - Reserve money (ceiling on stock) (upper bound): 348 adjusted, 313 actual, 365 proposed (stocks and bounds noted in table). - External payment arrears (US$ millions) (ceiling on stock): 0 Met 0. - Net domestic financing (ceiling on flow) (indicative targets): proposed -35; adjusted -11; actual -76; Met. - Domestic revenue collection (floor on flow): proposed 556; adjusted 613; actual Met 1300 (table entries). - New external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions) (ceiling on stock): proposed 500; adjusted 634; Not met 800. - Program exchange rates from January 1, 2018 (Text Table 1): - Rwanda Franc (per US$) 845.00 - Euro 1.20 - British Pound 1.35 - Japanese Yen (per US$) 112.90 - SDR 1.42 *Source: cr18167 - 23. The budget for fiscal year 2017/18 has been revised slightly to allow partial spending of* ### 8.6 billion ### 8.6 billion ### Net Domestic Financing (NDF) — definition and adjusters - Definition highlights exclusion of treasury bills issued by the NBR for monetary policy purposes (proceeds sterilized in deposits held as other NBR liabilities). - Less total government deposits with the banking system (as recorded in the monetary survey), including: main treasury account; accounts of line ministries; fund for assistance to genocide survivors; Rwanda Revenue Authority; electoral commission; de-mobilization commission; fonds routier; privatization account; and accounts of any other autonomous public enterprises and public agencies over which the government has direct control. - Excludes government deposits over which the budgetary central government does not have direct control (e.g., project accounts, Global Fund money meant for the private sector, counterpart funds, fonds publics affectés). - 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. Adjusters to 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 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 RWF 78 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 RWF 78 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 government 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: - 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 78 billion. - The ceiling on the overall deficit will be adjusted upward, up to a maximum of RWF 78 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 RWF 78 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. ### Floors on Revenues and Priority Expenditure Floor on Flow of Domestic Revenues (IT): - Floors for December 31, 2017, and June 30, 2018, are cumulatively measured from June 30, 2017. - Definition: total government revenue (tax and non-tax revenues) per the budgetary central government statement of operations, 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: - 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). ### Net Accumulation of Domestic Expenditure Arrears (IT) - A ceiling applies to net accumulation of domestic expenditure arrears of the government. 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 cumulative change in the stock of expenditure arrears of more than 90 days at each test date from the stock at end of previous fiscal year (June 30). - Arrears related to claims preceding 1994 will not be counted in the calculation. - Note: A negative target thus represents a floor on net repayment. ### Limits on Debt 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), assumed not to seek or be granted a government guarantee. - Applies to private debt for which official guarantees have been extended, including future swaps involving foreign currency loans guaranteed by the public sector. - Excludes external borrowing solely for refinancing existing public-sector debt that helps improve the profile of public sector debt. - Excludes on-lending agreements between Government of Rwanda and public-sector enterprises. - Public sector defined to include government, entities part of the budgetary process, and nonfinancial public enterprises in which government holds more than 50 percent of shares, but not consolidated in the budget. - Guarantee arises from any explicit legal obligation of the public sector to service a debt in event of nonpayment by the debtor. Definition of debt (per paragraph 8(a) of Guidelines on Public Debt Conditionality): - (a) Debt understood as a current, i.e., not contingent, liability created under a contractual arrangement through provision of value in form of assets or services, requiring obligor to make future payments in assets or services to discharge principal and/or interest. - (i) Loans: advances of money including deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, official swap arrangements. - (ii) Suppliers' credits: contracts permitting deferred payments after delivery of goods or services. - (iii) Leases: present value at inception of lease payments expected during agreement, excluding payments for operation, repair, or maintenance. - (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 government and entities part of the budgetary process. - External payment arrears: external debt service obligations (principal and interest) not paid at due time as specified in contracts; excludes arrears subject to rescheduling. - For monitoring, external arrears are obligations not paid on due date (taking into account contractual grace periods, if any). - External payment arrears by nonfinancial public enterprises in which government holds more than 50 percent but do not form part of budgetary process, and public private partnership projects, are not included unless overdue by more than 30 days under contract terms. ### Targets for Monetary Aggregates Net Foreign Assets of the National Bank of Rwanda (QAC): - A floor applies to NFA of the NBR for December 31, 2017 and June 30, 2018. - Definition: NFA in Rwandan francs is external assets readily available to, or controlled by, the NBR net of its external liabilities, consistent with SDDS template. - Pledged or otherwise encumbered reserve assets (including swaps) are excluded; includes reserve assets used as collateral or guarantee for third party external liabilities. Reserves corresponding to undisbursed project accounts considered encumbered and excluded. - Foreign assets and 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 by using the actual end-of-period U.S. dollar/currency exchange rate. - Foreign liabilities include, inter alia, use of IMF resources. Adjusters to NFA: - 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 78 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): - A ceiling applies to the stock of reserve money for December 31, 2017 and June 30, 2018 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 given quarter is calculated as the arithmetic average of the stock of reserve money at the end of each calendar month in the quarter. Daily average of all the three months in the quarter constitutes the actual reserve money to be compared with the target. - Reserve money is defined as the sum of currency in circulation, commercial banks’ reserves, and 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 will be calculated as (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 - Government will provide data listed below and in Table 1. Reporting lags unless specified: weekly data within seven days of end of each week; monthly data within five weeks of end of each month; quarterly data within eight weeks of end of each quarter; annual data as available. - 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. Government deposits with NBR and with commercial banks separated from deposits of public enterprises and autonomous public agencies not under direct control. - Detailed data on domestic revenues transmitted monthly. - Data on priority expenditure transmitted quarterly. - Data on accumulation and repayment of domestic arrears and 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; includes daily and weekly data on NBR’s foreign exchange liabilities to commercial banks (including required reserves) and exchange rate used for conversion into Rwanda francs shown separately. - Data on reserve money transmitted weekly; includes a daily and weekly balance sheet of the NBR showing all items listed in definitions of reserve money. - Authorities to inform IMF staff in writing prior to making any changes in economic and financial policies that could affect the outcome of the financial program (including customs and tax laws, wage policy, financial support to public and private enterprises). - Authorities will furnish description of program performance according to QACs and ITs as well as structural benchmarks within 8 weeks of a test date. Information to be submitted electronically to the Fund (email: afrrwa@imf.org). ### Reporting Frequency Summary (TMU Table 1) - Data frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I). - Exchange rates: D W D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: W W M - Reserve/Base Money: W W M - Broad Money: M M M - Central Bank Balance Sheet: W W M - Consolidated Balance Sheet of the Banking System: M M M - Interest Rates: M M M - Volume of transactions in the interbank money market and foreign exchange markets and sales of foreign currencies by NBR to commercial banks: D W W - Consumer Price Index: M M M - Composite Index of Economic Activity (CIEA) and sub-components compiled by the NBR: M M M - Revenue, Expenditure, Balance and Composition of Financing – General Government: A A A - Revenue, Expenditure, Balance and Composition of Financing – Budgetary Central Government: Q Q Q - Financial balance sheet – Budgetary Central Government: A A A - Comprehensive list of tax and other revenues: M M M - Comprehensive list of domestic arrears of the government: SA SA SA - Stocks of public sector and public-Guaranteed Debt as compiled by MINECOFIN and NBR: Q Q Q - External Current Account Balance: A SA A - Exports and Imports of Goods and subcomponents: M M Q - Exports and Imports of Goods and Services and subcomponents: A A A - GDP/GNP: A, Q Q, SA Q ### Debt Sustainability Analysis (Ninth Review under the Policy Support Instrument) - A Bank/Fund assessment indicates continuation of low risk of debt distress. - External debt burden indicators remain below risk thresholds, except for temporary breaches of one debt service indicator in 2023, when the Eurobond issued in 2013 matures. - Authorities focus on choosing highest return projects financed on the most favorable terms, aiming to encourage more private investment, leverage guarantee schemes from multilateral and bilateral development partners, and minimize government’s exposure to additional liabilities. - Prudent monitoring and management of fiscal risks will be important for safeguarding debt sustainability. - Note: This DSA updates the DSA analysis contained in IMF Country Report No. 17/217 (July 2017). The fiscal year for Rwanda is from July–June; however, this DSA is prepared on a calendar year basis. The results were discussed with the authorities and they are in broad agreement with its findings. *Source: cr18167 - 8.6 billion* ### conclusions. ### conclusions. ### Background and recent developments - Public-sector external debt increased to 37.5 percent of GDP in 2017 from 16.4 percent in 2012. - Large planned investment projects driving the increase include: Kigali Convention Center (KCC, completed 2016), Rwandair expansion, and construction of a new airport (Bugesera). - These projects are being completed through a series of PPPs and external guarantees and have contributed to the rise in external public debt. - Public and Publicly Guaranteed (PPG) Debt includes formal guarantees and external debt of SOEs. - Domestic bridge financing by the government in the equivalent of US$75 million has been included in the 2017 numbers. - Domestic public debt increased slightly in 2017 due to modest debt guarantees (1.1 percent of GDP) to provide temporary assistance in the insurance and hotel sectors. ### RwandAir expansion (Box 1) - RwandAir’s fleet increased from 5 to 12 planes in recent years. - Outstanding external loans contribute around 2.5 percent of GDP to PPG external debt stocks. - Operational budgetary transfers have averaged 0.7 percent of GDP over the past 5 years. - Passenger count is estimated to have tripled between FY13/14 and FY 17/18, reaching 1.1 million in 2017/18 and accounting for around 65 percent of incoming passenger traffic through Kigali International Airport. - Leases for aircraft add to the debt servicing burden; two new aircraft leases to be delivered in 2019. ### Growth, external sector, and fiscal context (2017–20) - Real GDP increased by 6.1 percent in 2017. - Quarterly growth reached 10.5 percent y/y in Q4 2017. - Current account deficit declined to 6.8 percent of GDP in 2017. - Higher oil prices and robust real GDP growth expected to contribute to a slight increase in the current account deficit in 2018. - Activity associated with Bugesera airport construction expected to bolster growth further and increase import demand in 2019/20. ### Selected macroeconomic indicators (Current versus Previous DSA) — key values - Real GDP growth (percent): - 2017: Current DSA 6.1; Previous DSA 6.2 - 2018: Current DSA 7.2; Previous DSA 6.8 - 2019: Current DSA 7.8; Previous DSA 7.3 - 2020: Current DSA 8.0; Previous DSA 7.5 - 2021: Current DSA 7.5; Previous DSA 7.5 - Inflation (average): - 2017: Current DSA 7.3; Previous DSA 7.4 - 2018: Current DSA 3.0; Previous DSA 5.5 - 2019: Current DSA 4.9; Previous DSA 4.6 - 2020: Current DSA 5.8; Previous DSA 5.0 - 2021: Current DSA 5.0; Previous DSA 5.0 - Primary balance (% of GDP): - 2017: Current DSA -3.5; Previous DSA -2.8 - 2018: Current DSA -3.0; Previous DSA -2.7 - 2019: Current DSA -3.1; Previous DSA -2.7 - 2020: Current DSA -2.4; Previous DSA -1.8 - 2021: Current DSA -1.8; Previous DSA -1.0 - Current account (% of GDP): - 2017: Current DSA -8.8; Previous DSA -10.2 - 2018: Current DSA -9.0; Previous DSA -11.2 - 2019: Current DSA -8.3; Previous DSA -9.9 - 2020: Current DSA -7.4; Previous DSA -8.7 - 2021: Current DSA -6.9; Previous DSA -8.3 - FDI (% of GDP): - 2017: Current DSA 2.7; Previous DSA 3.3 - 2018: Current DSA 3.2; Previous DSA 4.2 - 2019: Current DSA 3.1; Previous DSA 4.4 - 2020: Current DSA 3.1; Previous DSA 4.4 - 2021: Current DSA 3.1; Previous DSA 4.4 ### Underlying macroeconomic assumptions (Box 2) — highlights - Long-term growth projection: 7.5 percent (unchanged from previous analysis). - Exports of goods and services expected to grow strongly (13 percent on average). - Inflation expected to be maintained at the authorities’ medium-term target of 5 percent. - Reserves projected to reach 4.8 months of prospective imports. - Gradual and consistent rise in domestic revenues assumed. - Tapering of external assistance from development partners in real terms is assumed. - From 2018–2022, central government external borrowing needs assumed met mainly by disbursements of already contracted external multilateral and bilateral debt; from 2022 onward, financing assumed to shift to a progressively increasing share of commercial debt, including bonds issued in the international capital markets. - New domestic borrowing expected to be contracted at an average nominal interest rate of 8 percent. - Framework assumes a gradual increase in FDI. ### External and public DSA findings - Rwanda’s debt is assessed to be sustainable, with a continued low risk of debt distress. - Debt burden indicators remain under their respective thresholds in baseline scenarios. - A servicing spike in debt service in 2023 causes breaches of the debt-service-to-revenue indicator, but is temporary in nature (lasting one year), relating to the maturation of the 2013 Eurobond. - Other indicators remain below their thresholds even under the most extreme stress scenarios. - The low-risk rating is robust even with somewhat lower growth assumptions. - Debt remains significantly below the LIC DSA public debt benchmark of 74 percent (in PV terms) for countries with strong policies and institutions. - The evolution of total public debt indicators broadly follows that of external debt under the baseline—peaking in 2019 before receding as the primary deficit declines. - The upward drift of the PV of debt-to-revenue ratio when the primary balance is fixed highlights the need to secure assumed revenue gains. ### Authorities’ views and agreed actions - Authorities broadly agree with the DSA results and the overall conclusion of a low risk of external debt distress. - Authorities remain committed to a debt management strategy that seeks to maximize external concessional funding and develop domestic capital markets. - Authorities agree on the importance of a prudent medium-term debt management strategy and careful prioritization of future projects to contain public debt vulnerabilities, including potential liquidity pressures when the 2013 Eurobond is set to mature. - Authorities have agreed to a Fiscal Transparency Evaluation in Fall 2018 to help better identify areas of potential fiscal risks. ### Policy implications and recommendations (as stated) - Focus on sources of financing that do not burden the public balance sheet, including domestic revenue mobilization. - Carefully prioritize future public investment projects to contain public debt vulnerabilities and potential liquidity pressures. - Continue to maximize external concessional funding while developing the domestic capital markets. - Undertake a Fiscal Transparency Evaluation to better identify areas of potential fiscal risks. *Prepared jointly by IMF and World Bank staff; Approved by Michael Atingi-Ego and Yan Sun (IMF) and Paloma Anos-Casero (IDA). May 22, 2018.* ### 8. Continued implementation of prudent policy is needed to maintain Rwanda’s low risk of ### 8. Continued implementation of prudent policy is needed to maintain Rwanda’s low risk of debt distress ### Debt-distress assessment and outlook - External debt burden indicators remain below “risk” thresholds, except for a temporary breach in the debt service-to-revenue ratio under the baseline scenario. That breach highlights risks around the refinancing of the Eurobond coming due in 2023 and the need for the authorities to maintain sound macro and fiscal policies of the last two decades. - Public debt, though increasing, remains comparatively low. - The profile of Rwanda’s external debt burden is expected to improve over time given: - expected strong growth, - measures to expand and diversify traditional and non-traditional exports and tourism, - domestic revenue mobilization efforts. - Main risks to the outlook: - external shocks to growth and/or exports, - realization of potential contingent liabilities from PPPs, - evolution of official development assistance. - Policy priority: Prudent monitoring and management of fiscal risks will be important for safeguarding debt sustainability. ### Key indicators (selected, as reported) - External debt (nominal): 30.3; 38.1; 40.6; 42.2; 42.6; 41.5; 40.1; 40.0; 39.2; 37.4; 34.4 (series across 2015–2025/averages as in table). - Public and publicly guaranteed (PPG) external debt: 27.2; 34.9; 37.5; 39.2; 39.7; 38.5; 37.0; 36.8; 35.9; 33.3; 28.5 (series across 2015–2025/averages as in table). - Change in external debt: 3.1; 7.8; 2.5; 1.6; 0.4; -1.1; -1.4; -0.1; -0.8; -0.2; -0.2. - Identified net debt-creating flows: 10.9; 12.6; 1.4; 3.0; 2.8; 2.1; 1.3; 1.0; 0.3; -0.7; -0.7. - PV of external debt (percent of GDP): 32.0; 32.4; 32.1; 30.9; 29.5; 29.1; 28.9; 27.4; 26.0 (reported under projections). - PV of PPG external debt (percent of GDP): 28.9; 29.4; 29.3; 27.9; 26.4; 25.9; 25.6; 23.4; 20.1. - PV of external debt (percent of exports): 142.9; 144.1; 133.2; 127.7; 119.3; 115.4; 111.4; 88.7; 59.4. - PV of PPG external debt (percent of exports): 129.0; 130.9; 121.3; 115.4; 106.7; 102.6; 98.5; 75.7; 45.9. - PV of PPG external debt (percent of government revenues): 159.5; 159.0; 162.6; 153.1; 140.9; 135.7; 134.8; 112.4; 84.0. - Debt service-to-exports ratio (percent): 9.7; 11.0; 10.7; 9.9; 10.1; 12.4; 13.9; 10.6; 20.9; 7.9; 7.2. - PPG debt service-to-exports ratio (percent): 4.1; 6.4; 7.1; 6.4; 6.8; 9.2; 10.6; 7.4; 17.6; 4.7; 4.1. - PPG debt service-to-revenue ratio (percent): 4.0; 6.4; 8.7; 7.8; 9.2; 12.2; 14.0; 9.8; 24.1; 6.9; 7.5. - Total gross financing need (Billions of U.S. dollars): 1.1; 1.3; 0.5; 0.7; 0.8; 0.9; 0.9; 0.8; 1.2; 1.0; 2.8 (series across table). - Nominal GDP (Billions of US dollars): 8.3; 8.5; 9.1; 9.9; 10.5; 11.6; 12.6; 13.8; 15.2; 24.0; 60.1 (series as reported). - PV of PPG external debt (in Billions of US dollars): 2.6; 2.8; 3.0; 3.2; 3.3; 3.5; 3.8; 5.5; 11.9. - Grant-equivalent financing (in percent of GDP, selected): 7.1; 6.0; 5.4; 5.0; 4.8; 3.7; 2.8; 1.4; 2.4 (reported under projections). ### Sensitivity and stress tests (high-level results) - Stress tests and sensitivity analysis show vulnerability primarily to: - one-time nominal depreciation shocks (e.g., B6 One-time 30 percent nominal depreciation), - export shocks, - lower real GDP growth scenarios, - less favorable borrowing terms. - Examples from sensitivity tables: - PV of debt-to-GDP ratio under baseline and alternatives (selected values across 2018–2038): baseline series include 29; 29; 28; 26; 26; 26; 25; 24; 24; 24; 24; 24; alternative scenarios and bound tests produce higher ratios in many shock cases. - PV of debt-to-exports and PV of debt-to-revenue ratios, and debt service ratios, increase materially under depreciation and export shocks (tables report series showing significant jumps under B6 and export shocks). - The most extreme stress test is defined as the test that yields the highest ratio on or before 2028; examples cited in figures: One-time depreciation shock and Exports shock are among most extreme. ### Policy implications and recommendations - Maintain sound macro and fiscal policies that have been in place over the last two decades to address refinancing risks (notably the Eurobond due in 2023). - Continue measures to: - expand and diversify traditional and non-traditional exports and tourism, - strengthen domestic revenue mobilization. - Prudent monitoring and management of fiscal risks, including: - close oversight of PPP-related contingent liabilities, - careful management of borrowing terms and grant-equivalent financing, - contingency planning for potential external shocks to growth or exports, - preparation for Eurobond refinancing to avoid temporary breaches in debt service ratios. *Source: IMF staff estimates and projections as presented in the Rwanda DSA (tables and figures reproduced in the provided content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18167.pdf_