## cr18335

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---

### Recent developments
- Growth and inflation
  - Real GDP rose by 8.6 percent y/y in the first half of 2018.
  - Headline inflation was 1.2 percent y/y in September; core inflation was 1.6 percent y/y in September.
  - Growth recovery began in mid-2017 and was broad-based: notable increases in clothing production, food processing, and public construction works.
  - Flooding in Q2 2018 led to a deceleration; leading indicators suggest the agricultural slowdown was temporary.

- Fiscal outturn FY17/18 (selected figures, percent of GDP unless noted)
  - Headline FY17/18 fiscal deficit: 4.6 percent of GDP (unchanged from previous year).
  - Primary deficit excluding grants and UN PKO: reduced from 8.2 to 8.0 percent of GDP.
  - Total revenue reported as 18.0, 18.4, 18.3 (percent of GDP) across listed columns.
  - Total grants reported as 4.6, 4.3, 4.5 (percent of GDP) across listed columns.
  - Total expenditure and net lending reported as 27.3, 26.6, 27.4 (percent of GDP).
  - Capital expenditure: 10.7, 9.9, 10.6 (percent of GDP).
  - Deposit drawdown: 0.5, 0.0, 0.6 (percent of GDP).
  - Overall balance (commitment basis): -4.6, -3.8, -4.6 (percent of GDP).
  - Adjusted QAC deficit ceiling: 5.0, 4.6 (percent of GDP).
  - GDP figures listed: 7,125; 7,993; 7,993.

- Monetary conditions
  - Money supply growth: 9.6 percent y/y in August 2018.
  - Policy rate maintained at 5.5 percent in 2018 after a cumulative 100 basis point reduction in 2017.
  - Private sector credit growth: 7.2 percent y/y at end-September 2018.
  - Central bank maintained neutral stance despite rising international fuel prices.

- External sector and balance of payments
  - Trade deficit declined by 6 percent (US$ terms) from October 2017–September 2018.
  - Strong export volume growth driven by value-added policies, re-export hub efforts, and new exports (gemstones, horticultural products).
  - Current account deficit revised up to 8.3 percent of GDP in 2017 (from 6.8 percent at ninth review) due to revised net travel services estimates.

- Banking sector
  - Capital adequacy ratio at end-June 2018: 21 percent (regulatory minimum: 15 percent).
  - NPL ratio at end-June 2018: 6.9 percent.
  - Banks implemented IFRS 9 provisioning effective January 2018, increasing provisions.

- Program monitoring
  - For the tenth review: all continuous and end-June quantitative targets and all structural benchmarks were met.

### Economic outlook and risks
- Projections and drivers
  - Growth projections for 2018 and the medium term remain unchanged; resilience supported by exports, mining commencement, business conferences pipeline, irrigation, and new airport construction over 2019–20.
  - Inflation expectations anchored within a ±3 percentage points range of the medium-term target of 5 percent.
  - Current account deficit projections revised modestly upward due to changed travel expenditure methodology.

- Staff macro projections (selected figures)
  - Real GDP growth (percent): Prog. 6.1, Act. 6.1, Prog. 7.2, Proj. 7.2, Prog. 7.8, Proj. 7.8.
  - CPI inflation, average (percent): 4.8, 4.8, 2.8, 2.8, 5.0, 5.0.
  - CPI inflation, eop (percent): 0.7, 0.7, 5.0, 5.0, 5.0, 5.0.
  - Current account balance (percent of GDP): -6.8, -8.3, -8.8, -10.0, -9.0, -10.0.
  - Overall fiscal balance (commitment basis, percent of GDP): -4.7, -4.7, -4.1, -5.8, -4.2, -4.1.
  - Gross international reserves (in millions of US$): 1,163; 1,163; 1,240; 1,284; 1,332; 1,319.
  - Reserves in months of imports: 4.1, 4.1, 4.0, 4.1, 4.0, 4.0.
  - Memorandum — Overall fiscal balance (commitment basis, percent of GDP, FY): Prog. -3.8, Prelim. -4.6, Prog. -4.6, Proj. -5.1, Prog. -4.4, Proj. -4.6.
  - Memorandum — Overall fiscal balance (excl. PKO, percent of GDP, FY): Prog. -3.9, Prelim. -4.2, Prog. -4.0, Proj. -4.7, Prog. -3.9, Proj. -4.0.

- Risks
  - Downside risks: unpredictable weather, pests, Ebola outbreak in the region, regional political issues, adverse movements in international commodity prices.
  - Upside risks: greater construction activity from the new airport, stronger tourism, mining, and emerging export performance.
  - Box 2 scenarios:
    - (i) Lower global growth by a cumulative of 0.4 percentage points from 2018Q3–2019Q2 and 0.5 percentage points over 2019Q3–2020Q2.
    - (ii) A rise in oil prices by a cumulative 40 percent over 2018Q3–2020Q2.
  - Model outcomes: growth remains mostly unaffected; higher oil prices pass through to headline inflation by 0.5 percentage points; headline inflation slightly above authorities’ target but within the EAC-recommended +3 ppt band.

### Policy discussions and program evaluation
- Program status and transition
  - The PSI-supported program (approved December 2, 2013) reaches its five-year maximum on December 1, 2018.
  - Authorities agreed with staff recommendation to have a short gap before successor program negotiations to engage stakeholders and conduct TA diagnostics (tax expenditure analysis and Fiscal Transparency Evaluation).
  - Tentative plan to engage in successor program negotiations in Q1 2019, concurrent with the 2019 Article IV consultation.
  - Authorities provided informal end-December 2018 quantitative targets as interim policy signals.

- Objectives of the expiring PSI-supported program
  - Four priority areas: (i) sustainable fiscal position via DRM and PFM reforms; (ii) stable and low inflation via modernization of monetary policy framework; (iii) financial inclusion and reduced vulnerabilities via stronger supervision; (iv) preserving external stability and debt sustainability.

- Historical shocks and adaptation
  - Rwanda faced three serious external shocks during the program: large donor shock in 2013; declines in international commodity prices in 2015; severe drought in 2016.
  - Program adapted through exchange rate adjustment, containment of public spending, prudent monetary policy, and IMF SCF arrangement during 2016.

- Overall assessment
  - Policies restored external sustainability with modest and temporary growth impact.
  - Exchange rate adjustment and policies to increase value-added and diversify exports were notable successes.
  - Financial supervision was enhanced and steps taken toward an interest-rate based monetary policy framework.

### Achievements under the expiring PSI-supported program (Box 3 highlights)
- Growth and social indicators
  - Y/y quarterly growth averaged 7.1 percent since Q4 2013.
  - Per capita GDP: $772 in 2017 (up from $688 in 2012).
  - UNDP Human Development Index: 0.50 in 2017 (up from 0.48 in 2012).

- Program performance and capacity development
  - Most quantitative targets and structural benchmarks were met, with some delays.
  - Domestic revenues increased to 18.5 percent of GDP in 2017 from 15.0 percent of GDP in 2012.
  - Tax revenues fell short of the FY17/18 original program target of 18.6 percent, reaching 15.7 percent due to delayed Fixed Asset Tax Law implementation and tax incentives.

- Monetary policy modernization and financial markets
  - Monetary operations to establish interbank rate as operational target; introduction of longer-term government bonds and bond re-openings; use of horizontal repos to deepen markets.
  - Average interbank rates remained within a 100-basis point corridor around the key repo rate since June 2016.
  - Monetary transmission remains weak; interbank markets are shallow.

- External stability and public debt
  - External position improved and gross international reserves rebuilt.
  - Public debt below 50 percent of GDP and around 38 percent of GDP on NPV terms; assessed sustainable with continued low-risk of debt distress.

### IMF engagement and forward commitments
- Staff and the authorities are brainstorming topics for a potential successor program supported by the IMF.
- Staff preparing internal discussion notes to sharpen how future engagement can support NST implementation and the SDGs while maintaining macroeconomic sustainability.
- IMF capacity development underway will support structural reform priorities, focusing on:
  - domestic revenue mobilization;
  - transition to the interest rate-based monetary policy operational framework;
  - improving the coverage, timeliness and transparency of fiscal reporting;
  - improving fiscal risk statements;
  - harmonizing BOP and national account price statistics;
  - strengthening financial sector supervision.

### Fiscal policy — recent decisions, rationale, and implications
- FY18/19 investment spending will be increased, financed by concessional borrowing.
- For FY18/19, compared to the original budget, the overall fiscal deficit will increase from 4.6 to 5.1 percent of GDP to accommodate higher investment spending financed through highly concessional loans.
- Increased investment spending priorities: energy distribution, rural roads, irrigation and adding more special economic zones.
- Staff view: minor and temporary impact on the nominal debt stock in the short term; no impact over the medium term since additional concessional loans were already assumed in the DSA.
- Emerging tension: increasing investment spending raises questions about the medium-term fiscal anchor that has maintained a low risk of debt distress; successor program debate will cover an appropriate fiscal anchor given NST investment needs.
- Possible policy tools: public support to “de-risk” financial intermediation to attract international private investment; authorities hope G20 Compact with Africa will provide de-risking facilities.
- Authorities remain committed to fiscal sustainability and transparency and to regaining momentum for domestic revenue mobilization.
- Ongoing and planned TA and diagnostics:
  - Revenue mobilization and tax expenditure analysis: TA ongoing since Fall 2017; completion of analysis in Fall 2018 expected to provide policy recommendations.
  - Improving fiscal transparency: FTE pre-assessment mission scheduled for January 2019; main mission scheduled for March 2019; move to GFS 2014 reporting of public sector accounts being finalized.

### Monetary policy — stance, framework transition, and operational issues
- Monetary stance judged appropriate; policy rate unchanged at 5.5 percent.
- Staff projections: headline inflation should remain below the 5 percent target through to the first half of 2019; rising demand and international fuel prices could push it higher; core inflation projected to remain well below the authorities’ medium-term target.
- Policy approach: “wait-and-see” stance, with possibility for tightening should second-round effects from fuel price increases materialize.
- Authorities moving toward an interest rate-based operational framework with a medium-term objective of formal inflation targeting.
- Preparatory reforms: support for forward-looking policy analysis, deepen money and capital markets, enhance communication.
- Structural challenges: structural liquidity overhang; banks’ limited use of the interbank market contributing to weak interest rate transmission.
- Ongoing reforms: introduction of an electronic interbank trading platform and enhanced communication between BNR and market players.
- NBR analysis recommends 5.9 percent headline inflation as an appropriate trigger for policy tightening and identifies an optimal inflation band of +300 basis points (consistent with the EAC inflation ceiling of 8 percent) when interest-rate based regime is adopted.

### Financial sector and savings
- Financial sector broadly healthy with implementation of new prudential requirements.
  - Basel II/III and IFRS 9 prudential requirements implemented; banks began fully implementing Basel II/III capital requirements in 2018 after a parallel run in 2017.
  - IFRS 9 led to increased provisioning; BNR issued guidance in August including a 4-year transitional window and regulatory provisioning set at zero for government securities.
- Initiatives to bolster domestic savings and capital accumulation:
  - New pension law enacted in 2015; emergence of private and voluntary pension scheme providers.
  - Government established a Long-Term Saving Scheme in 2018, aiming to sign up one half a million households in the first year; government provides a small matching grant for informal sector/unsalaried households.
  - Government intends a 10-year plan to develop capital markets.

### Exchange rate policy
- Exchange rate flexibility will continue to cushion adverse external shocks and safeguard external sustainability while supporting the transition to interest-rate based monetary policy; authorities reaffirmed commitment to flexibility.

### Program modalities, debt sustainability, and SDG costing
- Discussions for a potential successor program tentatively scheduled for Q1 2019 and to be combined with the 2019 Article IV consultation.
- Staff and authorities do not project an actual or potential balance of payments need indicating use of Fund resources.
- Authorities considering a request for a PSI or PCI-supported program to signal Fund endorsement to development partners, private investors and markets.
- A new debt sustainability analysis using the joint World Bank-IMF framework will be prepared with the authorities in early 2019.
- SDG costing draft case study finds Rwanda would need to spend around 19 percent of 2030 GDP per year in selected SDG sectors (education, health, roads, electricity, and water) — well beyond NST costs where public and private financing already fall short.

### Safeguards and central bank governance
- Safeguards framework strengthened since the updated assessment completed in November 2016.
- NBR Act amended in 2017 with enhanced provisions on personal autonomy.
- External audit arrangements strengthened and transparency of the IFRS financial statements improved; audited financial statements continue to be published in a timely manner.

### Staff appraisal — achievements, challenges, and policy guidance
- Achievements:
  - Economic reforms broadly achieved program objectives supported by the PSI.
  - Rapid, inclusive growth resulted in sustained poverty reduction.
  - Revenue mobilization efforts increased resilience to declining aid flows.
  - Headline inflation remained low and anchored within the authorities’ medium-term target range.
  - Reforms modernized monetary policy framework and restored external stability despite shocks; public debt remained sustainable while fiscal policy targeted prioritized development needs.
- Challenges and risks:
  - External risks: unpredictable weather, pests, Ebola outbreak, regional political issues, adverse commodity price movements.
  - Policy tradeoffs: preserve low inflation, increase external buffers, maintain low risk of debt distress, and meet NST and SDG targets; continue structural reforms to encourage private investment and leverage guarantee schemes from development partners.
- Fiscal guidance:
  - Continue fiscal discipline while scaling up investment for Vision 2050 and NST.
  - Scope remains for additional progress in domestic revenue mobilization and fiscal transparency.
- Monetary and exchange rate guidance:
  - Monetary policy has credibility, delivering inflation within the authorities’ medium-term target range for nineteen consecutive months.
  - BNR has improved analytical capacity for forward-looking monetary policy.
  - Exchange rate flexibility should remain first line of defense against external shocks.

### Program performance and quantitative targets (end-June 2018)
- Program performance: all continuous and end-June quantitative targets and structural benchmarks were met; staff supports completion of the tenth and final review under the PSI.
- Selected quantitative target outcomes (Assessment criteria / Adjusted / Actual / Status):
  - Ceiling on overall fiscal deficit, including grants: 325 / 401 / 367 — Met.
  - Net foreign assets of the NBR at program exchange rate (floor on stock): 530 / 705 — Met.
  - Reserve money (ceiling on stock) (upper bound): 365 / 338 — Met.
  - External payment arrears (US$ millions) (ceiling on stock): 0 / 0 — Met.
- Indicative targets (Status: Met):
  - Net domestic financing (ceiling on flow): 78 / 3.4 / 36 — Met.
  - Domestic revenue collection (floor on flow): 1,300 / 1,312 — Met.
  - Net accumulation of domestic arrears (ceiling on flow): 0 / -1 — Met.
  - Total priority spending (floor on flow): 745 / 746 — Met.
  - New external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions) (ceiling on stock): 800 / 647 — Met.
- Memorandum items:
  - Total budget support (US$ millions): 475 / 475.
  - Budget support grants (US$ millions): 216 / 223.
  - Budget support loans (US$ millions): 258 / 253.
  - RWF/US$ program exchange rate: 845 / 845.

### Key fiscal and monetary targets for end-December 2018 (Billions of Rwandan francs, unless otherwise indicated)
- Targets:
  - Ceiling on the overall fiscal deficit, including grants: 315
  - Domestic revenue collection (floor on flow): 670
  - Total priority spending (floor on flow): 377
  - Net accumulation of domestic arrears (ceiling on flow): 0
  - Net foreign assets of the NBR at program exchange rate (floor on stock): 797
  - Reserve money (ceiling on stock) (upper bound): 382
- Memorandum items:
  - Total budget support (US$ millions): 444
  - Budget support grants (US$ millions): 154
  - Budget support loans (US$ millions): 290
  - RWF/US$ program exchange rate: 860

### Annex I — Capacity Development Strategy for FY2019 (selected priorities and findings)
- Forward-looking policy priorities:
  - Improve fiscal transparency.
  - Improve domestic revenue collection.
  - Transition to an interest rate-based monetary policy framework.
  - Improve and harmonize statistical reporting.
  - Promote private investment.
- Assessment of TA and recent support (areas covered):
  - Tax policy and tax expenditure analysis; revenue administration; Public Financial Management; Government Finance Statistics; data standardization (e-GDDS); real sector statistics; money and FX market operations; financial sector supervision and regulation.
- Recent economic developments and outlook (selected figures)
  - Real GDP growth: 6.1 percent in 2017.
  - Real GDP growth averaged 8.6 percent in the first half of 2018.
  - Projected growth for 2018: 7.2 percent; expected to strengthen to 7.8 percent in 2019.
  - Agriculture growth: 6 percent; Industry growth: 10 percent.
  - Headline inflation: 1.2 percent in September 2018; medium-term benchmark for inflation: 5 percent.
  - Policy rate: 5.5 percent since December 2017.
  - Banking sector capital adequacy ratio: 21.4 percent at end-June 2018; Basel II minimum ratio: 15 percent.
  - NPL ratios: 8.2 percent last June to 6.9 percent in June 2018.
- Program achievements since 2013:
  - Growth averaged 7.2 percent.
  - Poverty outcomes (EICV 4): national headcount rate from 45 percent in 2011 to 39 percent in 2014; extreme poverty from 24 percent to 16 percent in same period.
  - Tax to GDP increased on average by 0.4 percentage points every year, from 13.7 percent in FY 2012/2013 to 15.9 percent in 2017/2018.

*Source: cr18335*

### 2018. The mission comprised E. Alper (head), S. Kwalingana (all AFR),

### cr18335 - 2018. The mission comprised E. Alper (head), S. Kwalingana (all AFR),

### Recent Developments
- Growth and inflation
  - Real GDP rose by 8.6 percent y/y in the first half of 2018.
  - Headline inflation was 1.2 percent y/y in September; core inflation was 1.6 percent y/y in September.
  - Growth recovery began in mid-2017 and was broad-based: notable increases in clothing production, food processing, and public construction works.
  - Flooding in Q2 2018 led to a deceleration; leading indicators suggest the agricultural slowdown was temporary.

- Fiscal outturn FY17/18
  - Headline FY17/18 fiscal deficit: 4.6 percent of GDP (unchanged from previous year).
  - Primary deficit excluding grants and UN PKO: reduced from 8.2 to 8.0 percent of GDP.
  - Total revenues increased; total revenue reported as 18.0, 18.4, 18.3 (percent of GDP) across listed columns.
  - Total grants reported as 4.6, 4.3, 4.5 (percent of GDP) across listed columns.
  - Total expenditure and net lending reported as 27.3, 26.6, 27.4 (percent of GDP) across listed columns.
  - Capital expenditure: 10.7, 9.9, 10.6 (percent of GDP) across listed columns.
  - Deposit drawdown: 0.5, 0.0, 0.6 (percent of GDP) across listed columns.
  - Overall balance (commitment basis): -4.6, -3.8, -4.6 (percent of GDP) across listed columns.
  - Primary balance (excl. grants and PKO): -8.2, -7.4, -8.0 (percent of GDP) across listed columns.
  - Adjusted QAC deficit ceiling: 5.0, 4.6 (percent of GDP) across listed columns.
  - GDP figures listed: 7,125; 7,993; 7,993.

- Monetary conditions
  - Money supply growth: 9.6 percent y/y in August 2018.
  - Policy rate maintained at 5.5 percent in 2018 after a cumulative 100 basis point reduction in 2017.
  - Private sector credit growth: 7.2 percent y/y at end-September 2018.
  - Central bank maintained neutral stance despite rising international fuel prices.

- External sector and balance of payments
  - Trade deficit declined by 6 percent (US$ terms) from October 2017–September 2018.
  - Continued strong export volume growth driven by value-added policies, re-export hub efforts, and new exports (gemstones, horticultural products).
  - Box 1 revision: current account deficit revised up to 8.3 percent of GDP in 2017 (from 6.8 percent at ninth review) due to revised net travel services estimates.

- Banking sector
  - Capital adequacy ratio at end-June 2018: 21 percent (regulatory minimum: 15 percent).
  - NPL ratio at end-June 2018: 6.9 percent.
  - Banks implemented IFRS 9 provisioning effective January 2018, increasing provisions.

- Program monitoring
  - For the tenth review: all continuous and end-June quantitative targets and all structural benchmarks were met.

### Economic Outlook and Risks
- Projections and drivers
  - Growth projections for 2018 and the medium term remain unchanged; resilience supported by exports, mining commencement, business conferences pipeline, irrigation, and new airport construction over 2019–20.
  - Inflation expectations anchored within a ±3 percentage points range of the medium-term target of 5 percent.
  - Current account deficit projections revised modestly upward due to changed travel expenditure methodology.

- Staff macro projections (selected figures)
  - Real GDP growth (percent): Prog. 6.1, Act. 6.1, Prog. 7.2, Proj. 7.2, Prog. 7.8, Proj. 7.8 (presented across years).
  - CPI inflation, average (percent): 4.8, 4.8, 2.8, 2.8, 5.0, 5.0 (presented across years).
  - CPI inflation, eop (percent): 0.7, 0.7, 5.0, 5.0, 5.0, 5.0 (presented across years).
  - Current account balance (percent of GDP): -6.8, -8.3, -8.8, -10.0, -9.0, -10.0 (presented across years).
  - Overall fiscal balance (commitment basis, percent of GDP): -4.7, -4.7, -4.1, -5.8, -4.2, -4.1 (presented across years).
  - Gross international reserves (in millions of US$): 1,163; 1,163; 1,240; 1,284; 1,332; 1,319 (presented across years).
  - Reserves in months of imports: 4.1, 4.1, 4.0, 4.1, 4.0, 4.0 (presented across years).
  - Memorandum: Overall fiscal balance (commitment basis, percent of GDP, FY): Prog. -3.8, Prelim. -4.6, Prog. -4.6, Proj. -5.1, Prog. -4.4, Proj. -4.6.
  - Overall fiscal balance (excl. PKO, percent of GDP, FY): Prog. -3.9, Prelim. -4.2, Prog. -4.0, Proj. -4.7, Prog. -3.9, Proj. -4.0.

- Risks
  - Downside risks: unpredictable weather, pests, Ebola outbreak in the region, regional political issues, adverse movements in international commodity prices.
  - Upside risks: greater construction activity from the new airport, stronger tourism, mining, and emerging export performance.
  - Box 2 scenarios examined two shocks:
    - (i) Lower global growth by a cumulative of 0.4 percentage points from 2018Q3–2019Q2 and 0.5 percentage points over 2019Q3–2020Q2.
    - (ii) A rise in oil prices by a cumulative 40 percent over 2018Q3–2020Q2.
  - Model outcomes: growth remains mostly unaffected under these scenarios; higher oil prices pass through to headline inflation by 0.5 percentage points; headline inflation slightly above authorities’ target but within the EAC-recommended +3 ppt band.

### Policy Discussions and Program Evaluation
- Program status and transition
  - The PSI-supported program (approved December 2, 2013) reaches its five-year maximum on December 1, 2018.
  - Authorities agreed with staff recommendation to have a short gap before successor program negotiations to engage stakeholders and conduct TA diagnostics (tax expenditure analysis and forthcoming Fiscal Transparency Evaluation).
  - Tentative plan to engage in successor program negotiations in Q1 2019, concurrent with the 2019 Article IV consultation.
  - Authorities provided informal end-December 2018 quantitative targets as interim policy signals.

- Objectives of the expiring PSI-supported program
  - Four priority areas: (i) sustainable fiscal position via DRM and PFM reforms; (ii) stable and low inflation via modernization of monetary policy framework; (iii) financial inclusion and reduced vulnerabilities via stronger supervision; (iv) preserving external stability and debt sustainability.

- Historical shocks and program adaptation
  - Rwanda faced three serious external shocks during the program period: large donor shock in 2013, declines in international commodity prices in 2015, and a severe drought in 2016.
  - Program adapted through exchange rate adjustment, containment of public spending, prudent monetary policy, and IMF SCF arrangement during 2016.

- Overall assessment
  - Policies restored external sustainability with modest and temporary growth impact.
  - Exchange rate adjustment and policies to increase value-added and diversify exports were notable successes.
  - Financial supervision was enhanced and steps were taken toward an interest-rate based monetary policy framework.

### Achievements Under the Expiring PSI-Supported Program (Box 3 highlights)
- Growth and social indicators
  - Y/y quarterly growth averaged 7.1 percent since Q4 2013.
  - Per capita GDP: $772 in 2017 (up from $688 in 2012).
  - UNDP Human Development Index: 0.50 in 2017 (up from 0.48 in 2012).

- Program performance and capacity development
  - Most quantitative targets and structural benchmarks were met, with some delays.
  - Domestic revenues increased to 18.5 percent of GDP in 2017 from 15.0 percent of GDP in 2012.
  - Tax revenues fell short of the FY17/18 original program target of 18.6 percent, reaching 15.7 percent due to delayed Fixed Asset Tax Law implementation and tax incentives.

- Fiscal transparency and PFM
  - Introduced quarterly budget execution reports and reporting in GFS 2014 format; initial studies of fiscal risks undertaken.

- Monetary policy modernization
  - Conducted monetary operations to establish interbank rate as operational target; introduced longer-term government bonds and bond re-openings; used horizontal repos to deepen markets.
  - Average interbank rates remained within a 100-basis point corridor around the key repo rate since June 2016.
  - Monetary transmission remains weak; interbank markets are shallow.

- External stability and public debt
  - External position improved and gross international reserves rebuilt.
  - Public debt rose in support of development projects; debt below 50 percent of GDP and around 38 percent of GDP on NPV terms; assessed sustainable with continued low-risk of debt distress.

### Forward-Looking Policy Commitments (introductory points)
- Authorities intend to negotiate a successor program in Q1 2019 after interim stakeholder engagement and TA diagnostics (tax expenditure analysis and Fiscal Transparency Evaluation).
- In the interim, authorities provided informal quantitative targets for end-December 2018 to signal near-term commitments.

*International Monetary Fund. Country Report No. cr18335 - 2018.*

### 13. The authorities reaffirmed forward-looking policy commitments, and staff and the

### 13. The authorities reaffirmed forward-looking policy commitments, and staff and the

### IMF engagement and forward-looking commitments
- Staff and the authorities are brainstorming topics for a potential successor program supported by the IMF.
- Staff are preparing internal discussion notes to sharpen how future engagement can support implementation of the NST and achievement of the Sustainable Development Goals (SDGs) while maintaining macroeconomic sustainability.
- IMF capacity development underway will support structural reform priorities listed below; the capacity development strategy will continue to focus on:
  - domestic revenue mobilization;
  - transition to the interest rate-based monetary policy operational framework;
  - improving the coverage, timeliness and transparency of fiscal reporting;
  - improving fiscal risk statements;
  - harmonizing BOP and national account price statistics;
  - strengthening financial sector supervision.

### Fiscal policy — recent decisions, rationale, and implications
- FY18/19 investment spending will be increased, financed by concessional borrowing.
- For FY18/19, compared to the original budget, the overall fiscal deficit will increase from 4.6 to 5.1 percent of GDP, to accommodate higher investment spending financed through highly concessional loans.
- Increased investment spending will be used for improving energy distribution, rural roads, irrigation and adding more special economic zones.
- Staff view: the financing has a minor and temporary impact on the nominal debt stock in the short term, but no impact over the medium term since additional concessional loans to support the NST had already been assumed in the DSA.
- Staff agreed that this additional priority spending to achieve NST targets is justified, given no signs of overheating and an unaffected medium-term debt profile.
- Emerging tension: increasing investment spending raises questions about the medium-term fiscal anchor that has maintained a low risk of debt distress; debate for a successor program will cover an appropriate fiscal anchor given the investment needs to implement the NST.
- Possible policy tools to be discussed: public support to “de-risk” financial intermediation for private activities to attract international private investment and alleviate pressure on the public balance sheet; authorities hope G20 Compact with Africa will provide easier-to-use de-risking facilities.
- Authorities remain committed to fiscal sustainability and transparency and to regaining momentum for domestic revenue mobilization.
- Ongoing and planned technical assistance and diagnostics relevant to a successor program:
  - Revenue mobilization and tax expenditure analysis: TA ongoing since Fall 2017; early results suggest scope for enhancing VAT and corporate income tax efficiency; completion of analysis in Fall 2018 should provide tangible policy recommendations for a successor program.
  - Improving fiscal transparency: an FTE pre-assessment mission is scheduled for January 2019, with the main mission scheduled for March 2019; these diagnostics should provide useful material for program conditionality that can be added in the second half of 2019. Authorities are finalizing a move to GFS 2014 reporting of public sector accounts.

### Monetary policy — stance, framework transition, and operational issues
- The monetary policy stance remains unchanged and is judged appropriate.
- Staff projections: headline inflation should remain below the 5 percent target through to the first half of 2019, but rising demand and international fuel prices could push it higher; core inflation is projected to remain well below the authorities’ medium-term target.
- Policy approach: agreed “wait-and-see” stance, with possibility for policy tightening should risks of second-round effects from international fuel price increases materialize.
- Authorities continue gradual adoption of a forward-looking monetary policy framework and are moving toward an interest rate-based operational framework with a medium-term objective of adopting a formal inflation targeting framework.
- Preparatory reforms undertaken to support forward-looking policy analysis, deepen money and capital markets, and enhance communication (Box 4).
- Structural challenges:
  - structural liquidity overhang;
  - banks’ limited use of the interbank market for liquidity management, contributing to weak interest rate transmission.
- Ongoing reforms to improve transmission: introduction of an electronic interbank trading platform and enhanced communication between BNR and market players to improve transparency and price discovery.
- For a successor program, discussions will cover monitoring arrangements, including the possible introduction of a monetary policy consultation clause given the still weak—albeit gradually improving—monetary policy transmission.
- Specific analytical note: when an interest-rate based operational regime is formally adopted, recent NBR analysis recommends 5.9 percent headline inflation as an appropriate trigger for policy tightening and identifies an optimal inflation band of +300 basis points (consistent with the EAC inflation ceiling of 8 percent).

### Financial sector and savings
- Financial sector indicators point to a broadly healthy system with implementation of new prudential requirements.
- Authorities have implemented Basel II/III and IFRS 9 prudential requirements, which became fully operational earlier this year; banks began fully implementing Basel II/III capital requirements in 2018 after a parallel run in 2017, with a smooth transition so far.
- IFRS 9 implementation has led to increased provisioning and in some cases unintentionally high provisioning due to unclear bank understanding; BNR issued guidance in August, including granting a 4-year transitional window for banks to smooth implications on regulatory capital and treatment of government securities (regulatory provisioning set at zero).
- Staff advice: engage banks and monitor implications of new regulatory requirements on intermediation.
- Initiatives to bolster domestic savings and capital accumulation:
  - New pension law enacted in 2015 led to emergence of private and voluntary pension scheme providers.
  - Government established a Long-Term Saving Scheme in 2018, aiming to sign up one half a million households in the first year; government provides a small matching grant for savings by the informal sector/unsalaried households.
  - Government intends a 10-year plan to develop capital markets, focusing on deepening domestic financial markets and linking them with EAC markets, and supporting intermediation among small household savers, investors and SMEs.

### Exchange rate policy
- Exchange rate flexibility will continue to be important to cushion adverse external shocks and safeguard external sustainability while supporting the transition to interest-rate based monetary policy; the authorities reaffirmed commitment to flexibility.

### Program modalities, debt sustainability, and SDG costing
- Discussions for a potential successor program are tentatively scheduled for the first quarter of 2019.
- Staff and authorities do not project an actual or potential balance of payments need or external vulnerabilities that would indicate need for use of Fund resources.
- Authorities are considering a request for a PSI or PCI-supported program to signal Fund endorsement to development partners, private investors and markets.
- Discussions on a successor program are expected to be combined with the 2019 Article IV consultation; schedule allows time to identify and sharpen medium-term policy priorities.
- To cover the inter-program period, the authorities set out policy intentions in a Letter of Intent and volunteered informal fiscal and monetary policy targets for end-December 2018.
- Debt sustainability: a new debt sustainability analysis, using the joint World Bank-IMF framework, will be prepared together with the authorities as part of the combined program negotiation and Article IV consultation in early 2019; a key input will be assessment of sustainability of high rates of growth over the medium term.
- Costing of the SDGs: Rwanda was one of five case study countries for a UN General Assembly exercise in September 2018; the draft case study (awaiting authorities’ comments) finds that to achieve high outcomes in selected SDG sectors (education, health, roads, electricity, and water), Rwanda would need to spend around 19 percent of 2030 GDP per year — well beyond NST costs where public and private financing already fall short. The case study will be presented in more detail in the 2019 Article IV report.

### Safeguards and central bank governance
- Safeguards framework of the central bank strengthened since the updated assessment completed in November 2016.
- NBR Act amended in 2017 with enhanced provisions on personal autonomy.
- External audit arrangements strengthened and transparency of the IFRS financial statements improved; audited financial statements continue to be published in a timely manner.

### Staff appraisal — achievements, challenges, and policy guidance
- Achievements:
  - Economic reforms broadly achieved program objectives supported by the PSI.
  - Rapid, inclusive growth resulted in sustained poverty reduction.
  - Revenue mobilization efforts increased resilience to declining aid flows.
  - Headline inflation remained low and anchored within the authorities’ medium-term target range.
  - Reforms modernized monetary policy framework and restored external stability despite shocks; public debt remained sustainable while fiscal policy targeted prioritized development needs.
- Challenges and risks:
  - External risks include unpredictable weather, pests, Ebola outbreak, regional political issues, and adverse movements in international commodity prices.
  - Policy tradeoffs: preserve low inflation, increase external buffers, maintain low risk of debt distress, and meet NST and SDG targets; continue structural reforms to encourage private investment, leverage guarantee schemes from development partners, and minimize government exposure to additional liabilities.
- Fiscal policy guidance:
  - Authorities demonstrated strong commitment to fiscal discipline while scaling up investment for development plans (Vision 2050 and NST).
  - Available resources fall far short of longer-term development objectives; scope remains for additional progress in domestic revenue mobilization and fiscal transparency.
- Monetary and exchange rate policy guidance:
  - Monetary policy has credibility, delivering inflation within the authorities’ medium-term target range for nineteen consecutive months.
  - BNR has improved analytical capacity for forward-looking monetary policy.
  - Exchange rate flexibility should remain the first line of defense against external shocks.

*Source: cr18335*

### 30. Program performance: Program performance has remained strong with all targets met as

### 30. Program performance: Program performance has remained strong with all targets met as

### Program summary and IMF staff view
- Program performance has remained strong with all targets met as well as all structural benchmarks.
- Staff supports the completion of the tenth and final review under the PSI.

*Major observations from macroeconomic developments, fiscal, monetary, and external sectors are summarized below.*

### Output, activity, and inflation
- Growth was broad-based, with pronounced strength in industry and services (Quarterly GDP Growth decomposition, percent, y/y).
- Short-term indicators point to a continued pick up (Composite Indicators of Economic Activity, indices, March 2013=100).
- Inflation has remained muted despite a rise in international fuel prices (Inflation monthly, y/y; headline, food, energy series shown).
- Trade: strong exports have contained the trade deficit, but imports are picking up (Growth of Exports and Imports Volumes, 3-mo rolling avg).
- Overall fiscal deficit evolved in line with program objectives (Overall Fiscal Deficit, RwF billions).

### Fiscal developments and composition
- Domestic revenues were buoyed by one-off receipts (Total Revenues, percent of GDP).
- Spending remained contained (Capital Expenditures, Current Expenditures, percent of GDP).
- Composition of ODA shifted away from grants towards loans in recent years (External Support, percent of GDP).
- This shift contributed to higher public and publicly guaranteed external debt (PV of Public and Publicly Guaranteed External Debt, percent of GDP).
- Fiscal deficit remained stable in 2017/18 (Overall Deficit percent of GDP).

Key fiscal figures (selected, as reported in the source tables)
- Total revenue and grants: 22.9, 22.9, 23.4, 23.6, 22.0, 22.6, 22.1, 22.7 (percent of GDP).
- Tax revenue: 15.5, 15.5, 15.8, 15.8, 15.8, 15.6, 16.0, 15.9 (percent of GDP).
- Grants: 4.7, 4.7, 4.9, 5.1, 4.0, 4.5, 3.9, 4.3 (percent of GDP).
- Expenditure: 27.6, 27.6, 27.5, 29.4, 26.2, 26.7, 25.6, 26.1 (percent of GDP).
- Current expenditure: 14.7, 14.7, 14.9, 15.2, 14.1, 13.8, 13.8, 13.5 (percent of GDP).
- Capital expenditure: 10.7, 10.7, 10.5, 12.2, 10.0, 10.8, 9.8, 10.6 (percent of GDP).
- Primary balance: -3.6, -3.6, -3.0, -4.6, -3.2, -3.1, -2.5, -2.4 (percent of GDP).
- Overall balance: -4.7, -4.7, -4.1, -5.8, -4.2, -4.1, -3.4, -3.4 (percent of GDP).
- Total public debt incl. guarantees: 48.3, 47.1, 49.0, 49.7, 49.0, 49.5, 47.3, 47.9 (percent of GDP).
- External public debt: 37.5, 37.5, 39.2, 39.9, 39.7, 40.1, 38.6, 39.1 (percent of GDP).
- Investment: 23.4, 23.4, 25.0, 25.6, 25.9, 26.3, 25.9, 26.6 (percent of GDP).
- Savings: 12.5, 10.9, 12.4, 11.7, 13.8, 13.0, 14.6, 14.7 (percent of GDP).
- Gross international reserves (millions of US$): 1,163; 1,163; 1,240; 1,284; 1,332; 1,319; 1,460; 1,461 (levels shown across period).

(Refer to the reported Table 1 series for additional annual sequences.)

### Budgetary central government flows (selected figures)
- FY figures (billions of RwF, selected rows):
  - Revenue and grants: 1,616; 1,821; 1,820; 1,997; 2,061; 2,242; 2,252.
  - Total revenue: 1,286; 1,473; 1,462; 1,601; 1,636; 1,837; 1,836.
  - Tax revenue: 1,104; 1,267; 1,253; 1,395; 1,397; 1,613; 1,614.
  - Grants: 330.2; 347.4; 358.9; 396.3; 425.4; 404.7; 416.7.
  - Total expenditure and net lending: 1,943; 2,125; 2,188; 2,407; 2,519; 2,687; 2,721.
  - Current expenditure: 1,070; 1,159; 1,177; 1,320; 1,301; 1,446; 1,440.
  - Capital expenditure: 759; 788; 850; 897; 1,028; 1,032; 1,069.
  - Overall balance (incl. grants, commitment basis): -327.1; -304.6; -367.1; -409.6; -457.6; -445.4; -468.9 (billions of RwF).
  - Overall balance (incl. grants, cash basis): -347.2; -328.8; -392.2; -436.8; -484.8; -476.0; -499.5 (billions of RwF).
  - Foreign financing (net): 322.7; 326.7; 356.0; 372.4; 435.7; 377.6; 380.8 (billions of RwF).
  - Net domestic financing: 48.9; 2.0; 43.0; 64.4; 49.1; 98.4; 118.7 (billions of RwF).

- Fiscal year runs from July to June; PKO denotes peacekeeping operations and related receipts/spending (PKO figures reported in non-tax revenue and current expenditure lines).

### Monetary developments
- Private sector credit growth remains muted (Nominal private sector credit, percent change, y/y).
- Policy rate: central bank left the policy rate unchanged (Policy Rate and Short Term Rates, in percent).
- Reserve money growth remained in line with targets (Reserve Money, billions of RwF).
- Monetary transmission to longer-term lending rates remained weak (Policy transmission to lending rates, in percent).
- Structural excess reserves persist despite efforts to deepen markets for government credit (Excess Reserves, RwF bils., and Excess Reserves/BNR deposits percent).

Selected monetary statistics (from Monetary Survey Table)
- Broad money (levels, billions of RwF): 1,595; 1,772; 1,791; 1,941; 2,086; 2,110; 2,477; 2,423; 2,884.
- Year-on-year growth:
  - Broad money: 7.6, 12.7, 12.3, 9.5, 16.5, 17.8, 18.8, 14.8, 19.0 (percent).
  - Reserve money: 5.5, -2.7, 8.8, 21.2, 12.3, 13.4, 14.1, 12.8, 16.9 (percent).
  - Credit to the private sector: 9.1, 8.0, 13.9, 7.3, 15.1, 11.0, 15.2, 14.0, 17.0 (percent).

### External sector developments
- Current account deficit narrowed sharply in 2017 (Current Account Deficit, percent of GDP).
- Import demand is picking up while export growth decelerated but remains strong (Trade Deficit and Imports/Exports growth series).
- The real exchange rate appreciated slightly this year (EAC Real Effective Exchange Rates, indexed, March 2013=100).
- Reserve accumulation has continued apace (International reserves in US$ and months of imports).
- Pressure on the nominal exchange rate remains low (RwF/US$ and annualized depreciation series).

Selected balance of payments figures (millions of US$)
- Current account balance (incl. official transfers): -622; -761; -857; -972; -951; -1,052; -960; -1,042 (series across years).
- Trade balance: -872; -872; -962; -975; -1,012; -1,002; -1,035; -945.
- Exports (f.o.b.): 1,050; 1,050; 1,207; 1,213; 1,396; 1,419; 1,562; 1,597.
- Imports (f.o.b.): 1,922; 1,922; 2,169; 2,188; 2,408; 2,421; 2,597; 2,542.
- Gross official reserves (US$ millions): 1,163; 1,163; 1,240; 1,284; 1,332; 1,319; 1,460; 1,461.
- Months of prospective imports of G&S: 4.1; 4.1; 4.0; 4.1; 4.0; 4.0; 4.1; 4.1.

### Financial sector soundness (selected indicators)
- NPLs / gross loans: 6.3; 6.2; 6.2; 7.0; 7.5; 7.6; 8.1; 8.2 (percent across dates).
- Regulatory capital to risk-weighted assets: 21.3; 19.9; 22.3; 20.7; 20.4; 19.9; 19.6; 19.1; 20.4; 20.0; 19.5; 19.7 (series).
- Return on average assets: 2.3; 2.1; 1.9; 1.7; 1.9; 1.7; 1.8; 1.7; 1.6; 1.1; 1.3 (series).
- Net interest margin and cost metrics reported in table (series preserved in source).

### Quantitative program targets and status (end-June 2018)
- Assessment criteria (Program / Adjusted / Actual / Status):
  - Ceiling on the overall fiscal deficit, including grants: 325 / 401 / 367 — Met.
  - Net foreign assets of the NBR at program exchange rate (floor on stock): 530 / 705 — Met.
  - Reserve money (ceiling on stock) (upper bound): 365 / 338 — Met.
  - External payment arrears (US$ millions) (ceiling on stock): 0 / 0 — Met.
- Indicative targets (Status: Met):
  - Net domestic financing (ceiling on flow): 78 / 3.4 / 36 — Met.
  - Domestic revenue collection (floor on flow): 1,300 / 1,312 — Met.
  - Net accumulation of domestic arrears (ceiling on flow): 0 / -1 — Met.
  - Total priority spending (floor on flow): 745 / 746 — Met.
  - New external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions) (ceiling on stock): 800 / 647 — Met.
- Memorandum:
  - Total budget support (US$ millions): 475 / 475.
  - Budget support grants (US$ millions): 216 / 223.
  - Budget support loans (US$ millions): 258 / 253.
  - RWF/US$ program exchange rate: 845 / 845.

### Structural benchmarks through end-June 2018 (status)
- Monetary:
  - Establish an optimal level of headline or core inflation target range for monetary policy — Met (10th PSI Review).
  - Develop and adopt a communication strategy on the objectives and operations of the monetary policy framework to enhance BNR transparency and accountability — Met (10th PSI Review).
- Financial markets:
  - Establish an electronic interbank trading platform — Met (10th PSI Review).
- 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 — Met (Quarterly).
  - Begin publishing in GFS 2014 format for the quarter ending September 2018 — Met (10th PSI Review).
- Fiscal revenues:
  - Initiate rollout of “EBM version 2” pilot, with intent of reaching 1,000 new EBM users — Ongoing (10th PSI Review).

*Source: Rwandan authorities and IMF staff estimates.*

### Annex I. Capacity Development Strategy for FY2019

### Annex I. Capacity Development Strategy for FY2019

### Forward-looking policy priorities
- Improve fiscal transparency.
- Improve domestic revenue collection.
- Transition to an interest rate-based monetary policy framework.
- Improve and harmonize statistical reporting (real statistics; budget preparation; external sector statistics).
- Promote private investment.

### Assessment of capacity development needs and recent Technical Assistance (TA)
- Rwanda is a high-intensity TA recipient with a good track record for use of IMF technical assistance.
- Continued success requires close coordination between the authorities, TA providers, and the AFR team.
- In the most recent fiscal year, TA was provided in the following areas:
  - Tax policy: An initial mission to estimate and assess tax expenditures and a model-building workshop.
  - Revenue administration: A mission to improve the Integrity of Taxpayer Register; assistance with the Revenue forecasting tool.
  - Public Financial Management: Review of the blueprint on the move to accrual accounting, with recommendations on phasing, defining intermediate milestone, and a monitoring system; cash management and budget execution missions.
  - Government Finance Statistics: Compilation and dissemination of high frequency fiscal and debt data and moving to GFS-2014 format reporting.
  - Data standardization: An e-GDDS mission to improve adherence to the data standards initiative.
  - Real sector statistics: Refinements to quarterly indicators and quarterly GDP estimates.
  - Money and FX Market Operations: Further measures to facilitate the development of the repo market.
  - Financial sector supervision and regulation: Training on risk-based supervision; formalizing macroprudential policy framework; strengthening Basel II implementations and corporate governance; supervisory framework for forex bureau sectors.

### Recent economic developments and outlook
- Growth and composition:
  - Real GDP growth: 6.1 percent in 2017.
  - Real GDP growth averaged 8.6 percent in the first half of 2018.
  - Projected growth for 2018: 7.2 percent.
  - Agriculture growth: 6 percent.
  - Industry growth: 10 percent.
  - Growth expected to strengthen to 7.8 percent in 2019.
  - On the demand side, Investment accounts for the highest contribution, followed by private consumption.
- Inflation and monetary stance:
  - Headline inflation: 1.2 percent in September 2018.
  - Medium-term benchmark for inflation: 5 percent.
  - Policy rate: 5.5 percent since December 2017.
  - Headline inflation expected to remain close to the 5 percent benchmark through 2019.
  - Credit growth characterized as subdued.
- Fiscal developments:
  - Overall deficit for FY17/18: 0.8 percent of GDP, higher than the revised budget.
  - Drivers: accelerated implementation of infrastructure projects financed by drawdown of government deposits at the NBR and higher-than-expected disbursement of committed concessional loans.
  - Specific project spending in FY17/18 cited: rural and urban road access (0.5 percent of GDP), power distribution networks (0.2 percent of GDP), infrastructure for vocational training (0.1 percent of GDP).
  - Fiscal deficit for FY18/19 raised by 0.5 percent of GDP to allow spending of new concessional budgetary loans (0.6 of GDP) and project loans (of 0.2 percent of GDP).
  - Additional resource allocation by sector for FY18/19: urban and rural access roads (0.2 percent of GDP), power supply reliability/on and off grid access (0.5 percent of GDP), agriculture/irrigation (0.1 percent of GDP).
- External position:
  - 2017 current account deficit narrowed reflecting higher export growth and lower imports.
  - 2018: export growth expected to remain robust; construction of Bugesera airport and pickup in foreign-financed investment will drive imports and increase the trade deficit.
  - Reserve buffers expected to increase reflecting higher official flows.
- Financial sector and inclusion:
  - Banking sector capital adequacy ratio: 21.4 percent at end-June 2018.
  - Basel II minimum ratio: 15 percent.
  - NPL ratios: 8.2 percent last June to 6.9 percent in June 2018.
  - Microfinance institutions (MFIs): deposits increased by 17 percent year on year to June 2018; loan book increased by 12 percent over the same period.

### Program performance under the PSI and achievements
- Since 2013, growth has averaged 7.2 percent.
- Poverty outcomes (EICV 4):
  - National headcount rate: from 45 percent in 2011 to 39 percent in 2014.
  - Extreme poverty: from 24 percent to 16 percent over the same period.
- Key achievements:
  a. Fiscal sustainability and domestic resource mobilization:
     - Introduction of a new Income tax law.
     - Strengthened revenue compliance: National Invoicing System; improved IT capacity; RRA support to Local government in tax and fees collections; revision of the fixed asset tax.
     - Tax to GDP increased on average by 0.4 percentage points every year, from 13.7 percent in FY 2012/2013 to 15.9 percent in 2017/2018.
  b. Monetary framework and inflation anchoring:
     - Steps taken to implement preconditions for moving to an interest-based monetary policy framework: support for interbank market development; strengthened communications; improved forecasting and policy analysis; reduced excess reserves via improved liquidity management and forecasting.
     - NBR developed a forecasting and policy analysis system (FPAS) with IMF TA.
     - Monetary policy reports restructured to be more forward-looking; price expectations surveys conducted.
     - NBR enhanced communication to anchor price expectations and educate target groups (financial sector players, think tanks, media, youths, academia, public policy makers, international organizations).
     - Liquidity management: Financial Markets Operations Committee (FMOC) formed and strengthened; regular discussions with commercial bank treasurers initiated; interbank market activity grew and interbank rate kept close to the Key Repo Rate for two consecutive years.
  c. Financial inclusion and market deepening:
     - Completed banking sector legal, regulatory and supervisory reforms.
     - Instituted deposit guarantee fund for deposit-taking financial institutions including banks, MFIs and SACCOs.
     - Consolidation of SACCOs at district level adopted; procurement of a shared core banking system ongoing.
     - Insurance law review initiated; regulation on micro-insurance developed; Risk Based capital supervision planned.
     - Pension law review started; regulations governing private pension sector put in place.
     - Initiatives to deepen financial markets: issuance of long-term government bonds; bond reopening on the secondary market; introduction of true repos on the money market.
  d. External stability and debt sustainability:
     - Used exchange rate adjustment as principal adjustment tool, supported by tighter fiscal policy to curb import demand.
     - Policy interventions such as Made in Rwanda to diversify production and promote exports.

### Near-term fiscal and monetary policy stance
- Commitment to maintain macroeconomic stability until a successor program is in place (expected in the first half of 2019).
- Fiscal policy:
  - Continue fiscal restraint and prudent borrowing.
  - Progress on revenue mobilization and public financial management while protecting priority spending for inclusive growth.
  - Commitment to stay within the agreed fiscal program in relation to domestic financing for end-2018.
- Monetary policy:
  - Aligned to keeping inflation low and stable.
  - Advance transition to forward-looking, interest rate-based operational framework by end-2018.
  - NBR committed to revising MPC decision-making process, including forming a forecasting team.
  - Communication measures considered: publish MPC calendar at the beginning of each financial year; publish the inflation report one week after the MPC meeting.
  - Continue to use exchange rate flexibility as first line of defense against external shocks.

### Concluding requests and program intentions
- Request that the Executive Board complete the tenth and final review under the PSI Arrangement given strong program performance.
- Authorities wish to start discussions on a successor arrangement in early 2019.
- Authorities consent to publication of the letter and its attachments, as well as the related staff report.

### Key fiscal and monetary targets for end-December 2018 (Billions of Rwandan francs, unless otherwise indicated)
- Targets:
  - Ceiling on the overall fiscal deficit, including grants: 315
  - Domestic revenue collection (floor on flow): 670
  - Total priority spending (floor on flow): 377
  - Net accumulation of domestic arrears (ceiling on flow): 0
  - Net foreign assets of the NBR at program exchange rate (floor on stock): 797
  - Reserve money (ceiling on stock) (upper bound): 382
- Memorandum items:
  - Total budget support (US$ millions): 444
  - Budget support grants (US$ millions): 154
  - Budget support loans (US$ millions): 290
  - RWF/US$ program exchange rate: 860

*Source: Annex I. Capacity Development Strategy for FY2019, Letter of Intent, and Table 1 as provided in the content unit.*

### 7.2 percent on average since 2013 and poverty has declined from 45 percent in 2011 to

### cr18335 - 7.2 percent on average since 2013 and poverty has declined from 45 percent in 2011 to

### Growth, poverty, and near-term outlook
- Growth averaged 7.2 percent on average since 2013.
- Poverty declined from 45 percent in 2011 to 39 percent in 2014.
- Real GDP rose by 8.6 percent y/y in the first half of 2018, driven by:
  - robust performance in agriculture,
  - increased activity in the manufacturing sector,
  - public construction work.
- Strong growth momentum has continued over the recent period.
- Inflation has been low due to a decline in food prices offsetting an increase in energy prices.
- Inflation is projected to remain within the authorities’ medium-term target of 5 percent.
- Authorities have maintained a broadly neutral monetary policy stance in view of recent price developments and slow private sector credit growth.

### Fiscal performance and medium-term fiscal framework
- The fiscal deficit for FY17/18 stood at 4.6 percent, unchanged from the previous year.
  - The deficit reflected higher investment spending to meet the National Strategy for Transformation priorities and was financed by official development assistance.
  - This fiscal performance was broadly in line with the objectives set in the budget.
- FY18/19 and medium-term budget frameworks remain in line with the authorities’ commitment to fiscal prudence and debt sustainability while making room for development-related expenditures to achieve the SDGs.
- Authorities are stepping up reforms to enhance revenue mobilization and public financial management.
  - Actions to ensure tax incentives for private sector investment are well targeted to avoid jeopardizing revenue mobilization.
  - Appreciation of the tax expenditure analysis provided by Fund technical assistance.
  - Steps underway to improve timeliness, frequency and coverage of fiscal reporting.
- Authorities will pursue fiscal objectives while remaining committed to their domestic financing target and a prudent borrowing strategy to preserve public debt sustainability.

### Monetary and financial sector policies
- Authorities will pursue prudent monetary policy to maintain price stability and keep inflation expectations well-anchored.
- Commitment to a flexible exchange rate as the main shock absorber.
- Transition to an interest rate-based monetary policy framework with a medium-term objective of adopting a formal inflation targeting framework.
  - Reforms include revising the monetary policy committee’s decision-making process, strengthening communication tools, reducing structural excess reserves, and deepening money and capital markets.
- Financial sector soundness:
  - Banks are well-capitalized; the banking sector’s capital adequacy ratio exceeds the minimum requirement under Basel II.
  - Non-Performing Loans (NPLs) ratio has continued to decline.
  - Rising bank provisions and improved banks' profitability.
  - Increased activity of Micro-Finance Institutions (MFIs) and expansion of Savings and Credit Cooperatives (SACCOs) have contributed to greater financial inclusion.
  - Important reforms to banking sector legal, regulatory, and supervisory frameworks.
  - Establishment of a deposit guarantee fund for banks and microfinance institutions.
- Money and capital markets continued to deepen, supporting effective monetary operations and liquidity management.

### External position and sustainability
- External position has strengthened due to higher export growth, improved terms of trade, and policies enhancing value-added of exports and re-exports.
- Reserve buffers have strengthened and are expected to increase further due to higher official flows and higher net exports growth.
- In 2018, robust export growth is expected to continue, but:
  - Construction of the new airport and a pickup in foreign-financed investment are driving imports up, increasing the trade deficit and temporarily increasing the current account deficit.
- Medium-term projection: current account balance is projected to further improve as measures under the “Made in Rwanda” policy, new and diversified export products, and investments in the services sector bear fruit.
- Rwanda’s external debt remains sustainable and the country continues to rank in the category of low-risk of debt distress.
- To preserve debt sustainability, authorities will continue to resort to prudent borrowing to finance development projects amid a significant decrease in development assistance.

### Structural transformation and private sector development
- Vision 2050 aims for structural transformation to achieve middle income status by 2035.
- Implementation of the 2017–24 National Strategy for Transformation (NST) structured around three pillars: economic transformation, social transformation, and transformative governance.
- NST sectoral strategies are aligned with Rwanda’s SDGs.
- Authorities committed to greater private sector involvement to sustain growth while ensuring debt sustainability:
  - Efforts to improve the business climate; World Bank’s 2019 Doing Business report ranked Rwanda 29th, moving 11 places up.
  - Pursuit of foreign investment benefits through the G20’s Compact with Africa initiative.
  - Development of Special Economic Zones (SEZs) and support for innovative Small and Medium-Sized Enterprises (SMEs) to attract more Foreign Direct Investment (FDI).

### Conclusion and program context
- Rwanda’s sound economic policies continue to support macroeconomic stability, robust growth, and improved living conditions.
- The PSI policy framework has been useful for signaling policies and coping with shocks.
- Authorities are committed to sustaining reform momentum and implementing the National Strategy for Transformation aimed at turning Rwanda into a middle-income economy.
- Request for Executive Directors’ support for the completion of the tenth and final review in view of strong program performance and authorities’ commitment to sound macroeconomic policies and reforms.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18335.pdf_