## 1rwaea2019001 - Rwanda: Staff Report for the 2019 Article IV Consultation and Request for a Three-Year Policy Coordination Instrument ## Source details **Canonical URL:** [1rwaea2019001 - Rwanda: Staff Report for the 2019 Article IV Consultation and Request for a Three-Year Policy Coordination Instrument](https://www.imf.org/-/media/files/publications/cr/2019/1rwaea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1rwaea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1rwaea2019001.pdf.json) --- ### Macroeconomic outlook and key projections - Real GDP growth: - 2017: 6.1 - 2018: 8.6 - 2019: 7.8 (Proj.), 7.2 percent projected (alternate text) - 2020: 8.1 - 2021: 8.2 - 2022: 8.0 - 2023: 7.5 - Inflation and prices: - GDP deflator: 7.3 (2017), -0.8 (2018), 4.2 (2019), 5.0 (2020–2023) - CPI (period average): 4.8 (2017), 1.4 (2018), 3.5 (2019), 5.0 (2020–2023) - CPI (end period): 0.7 (2017), 1.1 (2018), 5.0 (2019–2023) - External sector and reserves: - Current account balance (incl grants, percent of GDP): -7.8 (2017), -7.9 (2018), -9.6 (2019), -9.4 (2020), -7.9 (2021), -8.1 (2022), -7.4 (2023) - Gross international reserves (US$ millions): 1,163 (2017), 1,319 (2018), 1,428 (2019), 1,566 (2020), 1,637 (2021), 1,726 (2022), 1,867 (2023) - Reserves (months of next year's imports): 4.5 (2017), 4.6 (2018), 4.7 (2019), 4.9 (2020), 4.7 (2021), 4.5 (2022), 4.5 (2023) - Outlook notes: - Short-term inflation expected to rise in H2 2019 and remain within target band thereafter. - Current account deficit expected to increase in 2019–20 due to airport construction, and decline thereafter. - Projections over the next five years revised up to around 8.0 percent based on first round effects of higher public investment spending. ### Program design, objectives, and modality - Program objective: - Support implementation of the National Strategy for Transformation (NST) while maintaining macroeconomic stability. - Four program pillars: 1. Recalibrating fiscal objectives and the medium-term fiscal stance. 2. Bolstering domestic revenues over the medium term. 3. Improving public financial management, notably fiscal risk management and transparency. 4. Supporting the new monetary policy framework, including through financial sector development. - Program modality: - IMF staff support for a three-year Policy Coordination Instrument (PCI)-supported program. - Program monitoring: semi-annual quantitative targets for fiscal deficit, net foreign assets of the central bank, domestic payment arrears, and a monetary policy consultation clause (MPCC); continuous target on non-accumulation of external debt payment arrears. - Structural reform targets (next 18 months) in PFM, revenue mobilization, monetary policy, and financial sector. ### Fiscal policy stance and public finances - Fiscal framework: - From FY2019/20 onwards, maintain overall deficit on a 5-year rolling average ceiling of 5.5 percent of GDP. - Debt anchor: keep PV of public debt below 50 percent of GDP. - Staff calculations: an annual overall fiscal deficit of -6.7 percent of GDP (all else equal) would cause PV of debt to converge gradually to 50 percent of GDP (debt-maintaining overall balance). - Alternative debt-stabilizing OB/GDP: -5.5 under Low growth (avg. nominal GDP growth = 10.0); -6.2 under Low ODA (nominal GDP growth = 12.5). - FY2018/19H1 and FY19/20: - FY19/20 overall fiscal deficit agreed: 6.0 percent. - FY18/19 vs FY19/20 (percent of GDP): Revenue and grants 23.9, 22.5; Total revenue 19.0, 18.3; Tax revenue 16.1, 16.0; Grants 4.9, 4.2; Total expenditure and net lending 29.3, 28.5; Current expenditure 15.0, 14.3; Capital expenditure 12.0, 11.7; Overall balance (incl. grants): -5.5, -6.0. - GDP (Billions of RwF), FY basis: 8,694 (FY18/19), 9,821 (FY19/20). - Selected budgetary central government indicators (percent of GDP): - Total revenue and grants: 22.9 (2017), 24.1 (2018), 23.1 (2019), 22.2 (2020), 21.6 (2021), 22.0 (2022), 22.2 (2023) - Expenditure: 27.5 (2017), 28.8 (2018), 29.2 (2019), 28.6 (2020), 27.8 (2021), 27.1 (2022), 27.0 (2023) - Primary balance: -3.6 (2017), -3.5 (2018), -4.9 (2019), -5.0 (2020), -4.8 (2021), -3.6 (2022), -3.6 (2023) - Overall balance: -4.7 (2017), -4.7 (2018), -6.1 (2019), -6.4 (2020), -6.2 (2021), -5.1 (2022), -4.8 (2023) - Net domestic borrowing: 0.2 (2017), 0.0 (2018), 2.0 (2019), 0.8 (2020), 1.1 (2021), -0.3 (2022), -0.6 (2023) ### Public debt, DSA results, and stress tests - Public debt levels (percent of GDP): - Total public debt incl. guarantees: 48.9 (2017), 53.1 (2018), 55.8 (2019), 57.3 (2020), 58.2 (2021), 57.2 (2022), 56.7 (2023) - External public debt: 37.9 (2017), 41.6 (2018), 43.4 (2019), 44.6 (2020), 45.5 (2021), 45.6 (2022), 45.8 (2023) - PV of total public debt incl. guarantees: 41.1 (2018), 42.5 (2019), 42.9 (2020), 42.7 (2021), 41.6 (2022), 41.2 (2023) - DSA assessment: - Joint Fund-Bank DSA: risk of debt distress remains low. - Baseline DSA: PV of external debt to GDP would rise gradually from 29 percent currently to under 35 percent over the next ten years. - Eurobond maturation in 2023 causes a one-year temporary breach in debt service thresholds (exempted per DSF policy); rollover risks assessed as low. - Stress-test findings: - Standardized stress tests: one-year breaches in debt service ratios in 2023 linked to Eurobond rollover; temporary and do not alter the low-risk rating per LIC-DSF guidance. - Customized scenarios (Bugesera airport liability; all additional borrowing on commercial Eurobond terms): external debt stock indicators remain below thresholds; debt service indicators show same one-year breach. ### Monetary policy, financial sector, and markets - Monetary framework and actions: - NBR moved to an interest rate-based monetary policy operational framework effective January 1, 2019. - Monetary Policy Committee reduced policy rate from 5.5 to 5.0 percent at May 6 meeting. - Monetary Policy Consultation Clause (MPCC): staff recommended evaluating a 12-month moving average of y/y inflation against inner and outer bands (inner band breaches trigger staff consultation; outer band breaches trigger Executive Board consultation; outer band is one percentage point on either side of inner band). - CPI inflation target: 5.0; inflation inner upper-bound: 8.0; inner lower-bound: 2.0; outer upper-bound: 9.0; outer lower-bound: 1.0. - Monetary aggregates (selected): - Broad money (M3) growth: 12.4 (2017), 15.6 (2018), 19.8 (2019), 20.0 (2020), 17.7 (2021), 16.9 (2022), 15.9 (2023) - Reserve money growth: 8.8 (2017), 16.1 (2018), 17.2 (2019), 17.9 (2020), 15.7 (2021), 14.9 (2022), 14.2 (2023) - Credit to non-government sector: 13.9 (2017), 10.8 (2018), 12.8 (2019), 14.3 (2020), 13.9 (2021), 13.3 (2022), 13.4 (2023) - Financial sector soundness (selected indicators): - Regulatory capital to risk-weighted assets: 19.9 (Dec. 2015) → 21.2 (Dec. 2018) - NPLs/gross loans: 6.2 (Dec. 2015), 7.6 (Dec. 2016), 8.2 (Jun. 2017), 7.6 (Dec. 2017), 6.4 (Dec. 2018) - Return on average assets: 2.1 (Dec. 2015), 1.7 (Dec. 2016), 1.9 (Dec. 2018) - Liquidity: liquid assets/total deposits around mid-40s to high-40s over 2015–2018 - Financial development priorities: - Strengthen repo market and money market to improve monetary policy transmission. - Upgrade national payments system and introduce platforms for broader participation in government securities market. - Bolster long-term savings and implement financial sector development strategy to improve lending conditions and financial inclusion. ### Revenue mobilization, tax policy, and PFM reforms - Revenue mobilization goals: - Domestic revenue collections expected to increase on average by 0.2 percentage point of GDP annually over the medium term starting in FY 2020/21. - Staff analysis: additional tax revenue potential of 2–3 ppts of GDP given Rwanda’s income level and large informal sector. - Agreed revenue measures (starting FY20/21 and RTs): - Improve corporate income tax (CIT) productivity using TA recommendations and streamline tax exemptions. - Seek TA to strengthen tax policy capacity in MINECOFIN and develop a medium-term revenue strategy. - RRA to detail options for improving VAT functioning and automate a risk-based verification process for VAT refunds (RT). - Updated TADAT conducted April 2019 to guide further administrative reforms. - Public financial management commitments: - Move program monitoring and budget execution reporting to GFSM 2014 presentation and produce quarterly reports in GFS 2014 (RT). - Expand fiscal coverage to broader central government and eventually general government (RT). - Fiscal Transparency Evaluation (FTE) undertaken May 2019 to provide recommendations; authorities commit to an action plan and comprehensive fiscal risk analysis supported by AFRITAC East (RT). - RSSB reforms: - RSSB manages about RwF900 billion (10 percent of GDP) in assets; procure IT system to automate operations (RT); contract diagnostic on optimal asset allocation (RT); produce financial and management reports (RT). ### SDG costing and structural priorities - Annex II headline finding: - Delivering on SDG agenda in education, health, roads, electricity, and water and sanitation will require additional spending in 2030 of about 20 percent of GDP (aggregate: 19.6 percent of GDP). - Sectoral additional spending needs (additional percent of GDP in the year 2030): - Education: 7.0 - Health: 2.2 - Road: 3.9 - Water (WASH): 4.5 - Electricity: 2.0 - Total: 19.6 - Electricity specifics: - Current access: 43 percent of households. - Assumptions: 60 percent of new connections on-grid; 40 percent off-grid; electricity consumption grows 9 percent annually; consumption from 238 kWh (2016) to 730 kWh (2030). - Universal access cost estimated at 2 percent of GDP. - Education and health highlights: - Education: current public spending 3.6 percent of GDP; to reach high performance by 2030 IMF estimate implies 10.7 percent of GDP (government plan: 6.3 percent). - Health: current spending US$58 per capita per year; scaling to best performers implies increase of 2.2 percentage points of GDP; authorities plan per capita public spending increase from US$38 to US$52 by 2024 (36 percent). - Roads and WASH: - Roads: regression and comparison suggest annual investment needs about 4 percent of GDP to raise Rural Access Index; authorities plan to spend 5.8 percent of GDP by 2030 for district road upgrades. - WASH: World Bank model annual cost = 4.5 percent of GDP to safely provide water and fixed-point latrines to all. ### Private sector engagement and financing strategy - Role and challenges: - Private investment rose from about 5 percent in 2000 to about 12 percent in 2018. - Economy remains public-sector dominated; constraints include land-locked location, small domestic market, high transport and energy costs. - CFTA and EAC engagement expected to expand market size over medium-long term. - Mobilizing private and blended finance: - Authorities encourage "blended finance" and "de-risking instruments" under G-20 Compact with Africa to leverage private savings without adding government liabilities. - Authorities intend to allocate new financing toward affordable housing and export promotion; IFC increasing activities. - Program financing: - Program fully financed for 12 months with good prospects for remainder. - No sovereign arrears; safeguard assessment not required under PCI. ### Risks to the outlook and policy responses - Upside risks: - Acceleration of large public and private investment projects (peat power plant, tin smelting factory, new energy distribution substations, new Special Economic Zones). - Potential productivity gains and enhanced regional trade ties. - Downside risks: - Lower-than-expected ODA, variable weather/climate change, commodity price movements, regional security issues. - Key policy responses: - Enhance domestic resource mobilization and deepen domestic debt markets. - Streamline tax exemptions, strengthen tax policy capacity, and develop medium-term revenue strategy. - Implement recommendations from the Fiscal Transparency Evaluation and conduct comprehensive fiscal risk analysis. - Maintain exchange rate flexibility and build reserve buffers (staff views reserves in 4.0–5.0 months of imports as optimal). - Prioritize high-return public investment and careful borrowing on concessional terms. ### Executive Board assessment and staff appraisal highlights - Directors' views: - Commended authorities’ strategic goal-setting, public accountability, and broad ownership of policies driving rapid and inclusive growth. - Supported the PCI as appropriate to support continued reforms. - Emphasized the need for continued ownership, donor support, and capacity building. - Emphasized the importance of DRM, PFM strengthening, and fiscal transparency. - Staff appraisal: - Welcomed the new monetary policy operational framework and recent easing; noted convergence of money market and policy rates and nascent transmission to longer-term rates. - Supported recalibrating the medium-term fiscal stance to allow priority capital investment and social spending while maintaining low debt risk. - Recommended steadfast implementation of commitments to deepen money markets (repo market), strengthen communication, and implement financial sector development strategy. - Noted financing challenges for NST and SDGs given limited fiscal space and declining ODA; encouraged innovative approaches and private-sector-led growth. *Source: Rwanda Staff Report for the 2019 Article IV Consultation and Request for a Three-Year Policy Coordination Instrument (IMF staff report, discussions held in Kigali during March 11–22, 2019).* ### 8.0 percent, based on first round effects of higher public investment spending agreed under ### 1rwaea2019001 - 8.0 percent, based on first round effects of higher public investment spending agreed under ### Macroeconomic outlook and risks - Real GDP growth projections: - 2017: 6.1 - 2018: 8.6 - 2019: 7.8 - 2020: 8.1 - 2021: 8.2 - 2022: 8.0 - 2023: 7.5 - Inflation and prices: - GDP deflator (selected years): 7.3 (2017), -0.8 (2018), 4.2 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023) - CPI (period average): 4.8 (2017), 1.4 (2018), 3.5 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023) - CPI (end period): 0.7 (2017), 1.1 (2018), 5.0 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023) - External sector and current account: - Current account balance (incl grants): -7.8 (2017), -7.9 (2018), -9.6 (2019), -9.4 (2020), -7.9 (2021), -8.1 (2022), -7.4 (2023) - Current account balance (excl grants): -11.9 (2017), -11.5 (2018), -13.1 (2019), -12.0 (2020), -10.2 (2021), -10.6 (2022), -9.4 (2023) - Current account balance (excl. large projects): -7.4 (2017), -7.4 (2018), -9.0 (2019), -8.3 (2020), -7.4 (2021) - Gross international reserves: - In millions of US$: 1,163 (2017), 1,319 (2018), 1,428 (2019), 1,566 (2020), 1,637 (2021), 1,726 (2022), 1,867 (2023) - In months of next year's imports: 4.5 (2017), 4.6 (2018), 4.7 (2019), 4.9 (2020), 4.7 (2021), 4.5 (2022), 4.5 (2023) - Risks to the outlook: - Upside: acceleration of several large public and private investment projects (including peat power plant, tin smelting factory, new energy distribution substations, construction of new Special Economic Zones), potential productivity gains, enhanced regional trade ties. - Downside: lower than expected ODA, variable weather/climate change, commodity price movements, regional security issues. - Notable near-term dynamics: - Inflation expected to rise in the second half of 2019 and remain thereafter within the target band, supported by policy easing by the National Bank of Rwanda. - Current account deficit expected to increase in 2019–20 due to airport construction, and decline thereafter. ### Program design and main policy commitments - Program objective: - Support implementation of the National Strategy for Transformation (NST) while maintaining macroeconomic stability. - Four main pillars of the program: 1. Recalibrating fiscal objectives and the medium-term fiscal stance. 2. Bolstering domestic revenues over the medium term. 3. Improving public financial management, notably fiscal risk management and transparency. 4. Supporting the new monetary policy framework, including through financial sector development. - Fiscal policy commitments: - Adopt a fiscal policy stance that accommodates spending to support NST implementation while maintaining low debt risks. - Commit to increase domestic revenue mobilization and implement PFM reforms to identify and mitigate fiscal risks and enhance fiscal transparency. - Monetary policy commitments: - Continue implementation of the new interest rate-based monetary policy operational framework. - Strengthen communication and deepen money markets, including by strengthening the repo market, to improve monetary policy transmission and credibility. - Easing undertaken to bring inflation back within the target range and steer inflation expectations. - Structural reforms and priorities: - Bolster long-term savings. - Upgrade the national payments system. - Introduce new platforms for broader participation in the government securities market and more interaction across types of financial services providers. - Renewed focus on the quality of education and private sector-led growth to support Vision 2050 and SDG achievement. ### Executive Board assessment and IMF support - Directors' views and highlights: - Commended authorities' strategic goal-setting, public accountability, and broad ownership of policies driving rapid and inclusive growth. - Supported the Policy Coordination Instrument (PCI) as appropriate to support continued reforms. - Emphasized need for continued strong ownership of the reform agenda, donor support, and capacity building. - Supported recalibrating the medium-term fiscal stance to allow priority capital investment and social spending while maintaining a low risk of debt distress; some Directors stressed consistency with EAC fiscal deficit convergence. - Emphasized domestic resource mobilization: streamlining tax exemptions, strengthening tax policy capacity, and developing a medium-term revenue strategy. - Welcomed commitment to strengthen public financial management and fiscal transparency. - Welcomed the new monetary policy operational framework and recent easing; noted convergence of money market and policy rates and nascent transmission to longer-term rates. - Welcomed NST’s focus on increasing reliance on the private sector and supportive measures to mobilize national savings and improve education; noted challenges in attracting private investment and viewed African Continental Free Trade Area and initiatives like G-20 Compact with Africa as means to leverage additional private financing. ### Key fiscal and financial indicators (selected) - Money, credit, and financial depth: - Broad money (M3): 12.4 (2017), 15.6 (2018), 19.8 (2019), 20.0 (2020), 17.7 (2021), 16.9 (2022), 15.9 (2023) - Reserve money: 8.8 (2017), 16.1 (2018), 17.2 (2019), 17.9 (2020), 15.7 (2021), 14.9 (2022), 14.2 (2023) - Credit to non-government sector: 13.9 (2017), 10.8 (2018), 12.8 (2019), 14.3 (2020), 13.9 (2021), 13.3 (2022), 13.4 (2023) - M3/GDP (percent): 23.6 (2017), 25.3 (2018), 27.0 (2019), 28.5 (2020), 29.5 (2021), 30.5 (2022), 31.3 (2023) - NPLs (percent of total gross loans): 7.6 (2017), 6.4 (2018) - Budgetary central government (percent of GDP): - Total revenue and grants: 22.9 (2017), 24.1 (2018), 23.1 (2019), 22.2 (2020), 21.6 (2021), 22.0 (2022), 22.2 (2023) - of which: tax revenue: 15.5 (2017), 16.2 (2018), 16.1 (2019), 16.3 (2020), 16.1 (2021), 16.5 (2022), 16.8 (2023) - of which: grants: 4.7 (2017), 4.9 (2018), 4.8 (2019), 3.9 (2020), 3.4 (2021), 3.6 (2022), 3.7 (2023) - Expenditure: 27.5 (2017), 28.8 (2018), 29.2 (2019), 28.6 (2020), 27.8 (2021), 27.1 (2022), 27.0 (2023) - Current: 14.7 (2017), 15.3 (2018), 14.7 (2019), 13.9 (2020), 13.7 (2021), 13.6 (2022), 13.4 (2023) - Capital: 10.7 (2017), 11.5 (2018), 12.0 (2019), 12.3 (2020), 12.1 (2021), 11.5 (2022), 11.8 (2023) - Primary balance: -3.6 (2017), -3.5 (2018), -4.9 (2019), -5.0 (2020), -4.8 (2021), -3.6 (2022), -3.6 (2023) - Overall balance: -4.7 (2017), -4.7 (2018), -6.1 (2019), -6.4 (2020), -6.2 (2021), -5.1 (2022), -4.8 (2023) - excluding grants: -9.4 (2017), -9.6 (2018), -10.9 (2019), -10.4 (2020), -9.6 (2021), -8.7 (2022), -8.5 (2023) - Net domestic borrowing: 0.2 (2017), 0.0 (2018), 2.0 (2019), 0.8 (2020), 1.1 (2021), -0.3 (2022), -0.6 (2023) - Public debt: - Total public debt incl. guarantees: 48.9 (2017), 53.1 (2018), 55.8 (2019), 57.3 (2020), 58.2 (2021), 57.2 (2022), 56.7 (2023) - of which: external public debt: 37.9 (2017), 41.6 (2018), 43.4 (2019), 44.6 (2020), 45.5 (2021), 45.6 (2022), 45.8 (2023) - PV of total public debt incl. guarantees: ... (2017), 41.1 (2018), 42.5 (2019), 42.9 (2020), 42.7 (2021), 41.6 (2022), 41.2 (2023) - Investment and savings: - Investment: 23.8 (2017), 24.4 (2018), 27.7 (2019), 28.4 (2020), 28.2 (2021), 27.6 (2022), 27.8 (2023) - Government investment: 10.7 (2017), 11.5 (2018), 12.0 (2019), 12.3 (2020), 12.1 (2021), 11.5 (2022), 11.8 (2023) - Nongovernment investment: 13.1 (2017), 12.9 (2018), 15.7 (2019), 16.1 (2020), 16.1 (2021), 16.1 (2022), 16.1 (2023) - Savings: 11.9 (2017), 12.9 (2018), 14.6 (2019), 16.4 (2020), 18.0 (2021), 17.0 (2022), 18.4 (2023) - Government savings: 3.4 (2017), 4.0 (2018), 3.6 (2019), 4.3 (2020), 4.5 (2021), 4.8 (2022), 5.2 (2023) - Nongovernment savings: 8.5 (2017), 8.9 (2018), 11.1 (2019), 12.1 (2020), 13.5 (2021), 12.3 (2022), 13.2 (2023) - External trade shares (percent of GDP): - Exports (goods and services): 21.7 (2017), 21.4 (2018), 21.2 (2019), 21.4 (2020), 22.1 (2021), 22.1 (2022), 22.7 (2023) - Imports (goods and services): 32.5 (2017), 32.7 (2018), 33.6 (2019), 32.8 (2020), 31.8 (2021), 32.0 (2022), 31.7 (2023) ### Context, strategy, and structural priorities - Context and development strategy: - Rwanda has sustained high and inclusive growth and reduced poverty; per capita income has tripled over the past 25 years but remains below the average for Low-Income Countries (LICs). - Vision 2050 and the 7-year National Strategy for Transformation (NST-1) aim to achieve upper middle-income status by 2035 and high-income status by 2050. - NST priorities include job creation, managing land and urbanization (including upgrading Kigali), improving education quality with a focus on technical and ICT skills, shifting production/export base to higher value-added goods and services, increasing domestic savings and financial access, and improving agricultural productivity. - Financing challenges: - SDG-costing indicates substantial additional annual spending needs to reach outcomes comparable to highest performing peers (Annex II). - Financing constraints include trending down ODA and limited scope; private investment is picking up but may not be sufficient alone. ### Staff recommendation and program modality - IMF staff support: - Staff support the authorities’ request for a three-year Policy Coordination Instrument (PCI)-supported program to help implement NST while preserving macro stability. - Program modalities: - The program is designed around the four pillars above with associated policy commitments, PFM reforms, and monetary framework enhancements. *Source: Rwanda Staff Report for the 2019 Article IV Consultation and Request for a Three-Year Policy Coordination Instrument (IMF staff report, discussions held in Kigali during March 11–22, 2019).* ### 7.2 percent projected, supported by activity in ### 1rwaea2019001 - 7.2 percent projected, supported by activity in ### Economic activity and growth - Growth projected at 7.2 percent, supported by activity in construction and services. - Composite indicators suggest a continued trend in early 2019. - Projected growth for 2019 remains unchanged; projections over the next five years have been revised up, to around 8.0 percent, based on first round effects of higher public investment spending agreed under the macroeconomic framework. - Rwanda’s growth rate has averaged 7.8 percent since 2000. - Reaching Vision 2050 income levels would require average real GDP growth rates of greater than 9 percent. - Growth accounting (2000–14) contributions: - Annual labor force growth (3 percent) contributed 1.8 ppt to GDP growth. - Annual investment growth (13 percent) contributed 3.2 ppt. - Total factor productivity (TFP) contributed 2.7 ppt. - TFP has declined recently as repatriation of highly-educated diaspora and ODA levels have waned; population growth is also slowing. - Strategic public investments (cargo-friendly airport, education, leveraging IT) can enhance TFP and bring growth closer to Vision 2050 ambitions. ### Fiscal developments and public finances - FY2018/19H1 fiscal developments are in line with projections; H1 budget execution indicates a lower-than-expected fiscal deficit due to delays in loan disbursements and under-execution of capital expenditure. - All informal quantitative targets set for end-December 2018 were met. - Authorities agreed a new fiscal framework that assumes a fiscal stance within a 5-year rolling average ceiling of 5.5 percent of GDP from FY19/20 onward, enabling additional spending of some 1.7 percentage points of GDP during FY19/20 directed toward NST priorities. - For the FY19/20 budget under consideration, an overall fiscal deficit of 6.0 percent was agreed. - The 6.0 percent deficit in FY19/20 partly compensates for a sharp decline in budget grants (0.7 percent of GDP) and projected declines in tax and non-tax revenues by 0.7 percent of GDP (mostly due to drop in inflows to finance UN peacekeeping operations). - To address revenue shortfalls, current and capital spending have been reduced by 0.7 and 0.3 ppts, respectively. - Selected FY18/19 versus FY19/20 (percent of GDP) figures (as presented): - Revenue and grants: 23.9, 22.5 - Total revenue: 19.0, 18.3 - Tax revenue: 16.1, 16.0 - Nontax revenue: 2.8, 2.3 - Of which: PKO 1.9, 1.4 - Grants: 4.9, 4.2 - Total expenditure and net lending: 29.3, 28.5 - Current expenditure: 15.0, 14.3 - of which: PKO 1.8, 1.7 - Capital expenditure: 12.0, 11.7 - Net lending: 2.4, 2.4 - Overall balance (incl. grants, comm. basis): -5.5, -6.0 - Memorandum: Net PKO 0.1, -0.3 - GDP (Billions of RwF), FY basis: 8,694, 9,821 ### Monetary policy and financial sector - The National Bank of Rwanda (BNR) eased policy in its May MPC meeting. - Headline inflation has remained below the lower bound of the authorities’ inflation target band since September 2018; headline inflation was 0.2 percent y/y in April 2019. - Core inflation remained below the corridor (1.2 percent) despite some increase in Q1. - The Monetary Policy Committee reduced its policy rate from 5.5 to 5.0 percent at its May 6 meeting to stimulate demand and bring headline inflation back within the corridor. - Financial sector indicators suggest the banking system is healthy and financial stability risks are low. ### External sector and balance of payments - The current account deficit was roughly unchanged in 2018: 7.9 percent of GDP in 2018, compared to 7.8 percent in 2017. - The lower-than-expected deficit primarily related to delays in airport construction and more domestic production of construction materials. - Import growth picked up, reflecting higher fuel prices, other large construction projects and growth. - The Rwandan franc depreciated by 4 percent against the US$ in 2018. - The current account deficit is expected to increase in 2019–20 due to airport construction, and decline thereafter. ### Poverty and social indicators - The 2016–17 Household Living Conditions Survey found poverty reduced to 38.2 percent, a reduction of 0.9 percentage points. - The National Institute of Statistics (NISR) attributed the slow pace of decline in poverty to the drought of 2016–17 and higher food prices on real consumption. - The survey also showed that population growth had slowed. ### Outlook, risks, and scenarios - Inflation is expected to rise in the second half of 2019 and remain thereafter within the target band. - Projections over the next five years have been revised up to around 8.0 percent, based on higher public investment spending agreed under the macroeconomic framework. - Risks to the growth outlook are balanced: - Upside risks: acceleration of large public and private investment projects (peat power plant, tin smelting factory, new energy distribution substations, new Special Economic Zones) and enhanced regional trade ties. - Downside risks: lower than expected ODA, variable weather/climate change, commodity price movements, and regional security issues. - A new joint DSA from Fund and Bank staffs suggests Rwanda’s risk of debt distress remains low. - Under the baseline DSA, the PV of external debt to GDP would rise gradually from 29 percent currently to under 35 percent over the next ten years. - Maturation of the 2013 Eurobond in 2023 causes a one-year temporary breach in debt service thresholds (exempted per DSF policy); rollover risks are low. - All stress tests remain below risk thresholds, including a customized stress test for government taking full financial responsibility for airport construction on non-concessional terms. ### Policy discussions and reform priorities - Article IV discussions identified four main policy areas to support NST goals while maintaining macroeconomic stability: - Recalibrating fiscal objectives and the medium-term fiscal stance. - Bolstering domestic revenues over the medium term. - Improving public financial management, notably fiscal risk management and transparency. - Supporting the new monetary policy framework, including through easing the policy stance in the near term and financial sector development. - Authorities agreed with staff on a new fiscal framework intended to support NST implementation while maintaining debt sustainability; staff proposed an annual operational rule linked to the EAMU debt convergence criterion (ceiling of NPV of debt-to-GDP of 50 percent). - Authorities would have preferred a debt-stabilizing deficit ceiling at 6.0 percent, but staff encouraged a cautious approach and proposed revisiting the operational rule pending results of the Fiscal Transparency Evaluation and fiscal risk analysis. ### Revenue mobilization and tax policy - Rwanda made notable progress in boosting domestic revenues over the past decade; tax revenues rose to around 16 percent of GDP by FY15/16. - Staff analysis indicates further potential tax revenue could be 2-3 ppts of GDP given Rwanda’s income level and large informal sector. - Authorities and staff agreed on measures to boost tax revenues annually by 0.2 ppt of GDP beginning in FY20/21: - Improve corporate income tax productivity using TA recommendations and refine annual tax expenditure analysis to streamline exemptions (Reform Target Table, RT). - Seek TA on strengthening tax policy capacity in MINECOFIN and develop a medium-term revenue strategy. - For VAT: RRA to detail options for improving VAT functioning (e.g., incentive schemes for consumers) and automate a risk-based verification process for VAT refunds (RT). - An updated TADAT was conducted in April 2019; its recommendations will provide a framework for additional reforms and a more ambitious revenue effort over the medium term. ### Fiscal framework technical parameters (Box 3) - Staff calculations indicate an annual overall fiscal deficit of -6.7 percent of GDP, all else equal, would cause the PV of debt to converge gradually to 50 percent of GDP (debt-maintaining overall balance). - Varying assumptions: - Under a Low growth scenario (average nominal GDP growth = 10.0), the debt-stabilizing OB/GDP = -5.5. - Under a Low ODA scenario (nominal GDP growth = 12.5), the debt-stabilizing OB/GDP = -6.2. - Memorandum items (2009-18 / 2019-28): - Nominal GDP growth (avg.): 12.2, 13.1 - Gross public debt/GDP (eop): 49.7, 42.0 - PV debt/GDP (eop): 39.6, 31.2 *Source: Rwandan authorities and IMF staff estimates and projections.* ### Box 4. Domestic Revenue Mobilization ### Box 4. Domestic Revenue Mobilization ### Overview and achievement - Rwanda’s persistent efforts in mobilizing tax revenues have paid off; a major policy objective has been mobilizing domestic revenues to reduce dependency on ODA. - By 2017, tax revenues reached slightly below lower middle-income country (LMIC) levels. - Relative to initial per capita income levels, Rwanda’s tax revenue gains were noteworthy. - Main contributors included appropriate sequencing of revenue mobilization reforms in the post-conflict environment. ### Sequencing of revenue reforms (timeline and measures) - Late 1990s: initial focus on fast gains such as high-yielding excise taxes, and customs duties at the border (less prone to evasion). - 1997: The RRA was established as the single revenue collection agency; focused on key compliance areas (registration, filing and payment), streamlined basic procedures, and established a Large Taxpayer Office. - 2001: VAT adopted, replacing the erstwhile turnover tax. - First half of 2000s: focus on broadening tax collection beyond large taxpayers. - Past decade: focus on modernizing fiscal administration through medium term revenue and expenditure strategies. ### Direct taxes and revenue administration improvements - Rwanda’s direct tax collection nearly trebled over the post-conflict period, surpassing the level for upper-middle income countries (UMICs) by 2017. - The increase was largely due to the personal income tax (PIT), characterized by progressive nominal income rate brackets unchanged for 15 years, with coverage gradually expanding as incomes rise. - RRA measures to improve compliance included income tax withholding. - A 2015 TADAT and implementation of follow up TA recommendations led to administrative gains including: - cleaning up the tax registration database; - reconciling taxpayer ledgers; - strengthening risk management; - introducing e-payments. ### Areas of underperformance relative to peers - Corporate Income Tax (CIT) productivity is lower than peer countries, reflecting system-wide incentives to encourage private investment. - Taxes on international trade are lower than comparators, except the EAC, reflecting intra-EAC trade and a lower common external tariff for the EAC customs union. - Taxes on goods and services are in line with LMICs, but VAT efficiency lags peers due to compliance problems. - (Chart indicators referenced: CIT Productivity* (percent) and VAT C-Efficiency* (percent) comparisons across Rwanda, EAC, LICs, SSALMICs, UMICs — actual chart figures preserved in original source.) ### Improving Public Financial Management (PFM), fiscal risk management, and transparency - Rwanda has a robust legal framework for fiscal management and a home-grown MINECOFIN PFM reform program. - An Integrated Financial Management Information System (IFMIS) tracks spending and supports planning, budgeting, reporting, and auditing functions. - With IMF TA, the government is implementing medium-term and performance-based budgeting and accrual accounting under International Public Sector Accounting Standards (IPSAS). - Areas for improvement include undertaking more fiscal risk analysis and management and publishing more fiscal reports. - Authorities agreed to move program monitoring and budget execution reporting to the GFSM 2014 presentation and committed to produce quarterly reports in GFS 2014 (RT). - Plans include expanding fiscal coverage from the current budgetary central government to the broader central government and eventually the general government (RT). - A Fiscal Transparency Evaluation (FTE) undertaken in May 2019 will provide specific recommendations; the authorities plan to follow up with an action plan. ### Fiscal risk management commitments - Staff have encouraged systematic assessment of potential contingent liabilities, e.g., from PPPs. - Following the FTE and its recommendations, the authorities committed to conduct a comprehensive fiscal risk analysis, to be supported by TA from AFRITAC East (RT). - Additional reform measures can be considered for the program following these exercises. ### Rwandan Social Security Board (RSSB): PFM improvements and significance - RSSB operates six schemes, covering both pensions and health insurance, and manages about RwF900 billion (10 percent of GDP) in assets. - RSSB is fully government-owned but operates autonomously (RT) and is the largest single depositor in the domestic commercial banking system. - The proposed program contains structural reform targets to automate RSSB operations to reduce losses, improve efficiency, and enhance transparency via regular financing management reporting. - RSSB is seeking outside TA to determine options for improving its current asset allocation. *Source: Box 4. Domestic Revenue Mobilization, IMF staff.* ### 30. Private sector engagement is critical for achieving good NST outcomes given current ### 30. Private sector engagement is critical for achieving good NST outcomes given current ### Private sector role and challenges - Private sector engagement is essential to achieve Vision 2050 ambitions given limited fiscal space and ODA trends. - NST focuses on interventions to enhance private sector competitiveness. - Rwanda already scores at or near the top on SSA rankings of competitiveness, the business environment, governance, and public investment and expenditure efficiency. - Private investment growth: from about 5 percent in 2000 to about 12 percent in 2018. - Economy remains dominated by the public sector; key challenge is attracting significant private investment in a land-locked country with a relatively small economy and still very high transportation and energy costs. - The Continental Free Trade Area (CFTA) and EAC regional ties can help expand market size, but only over the medium-long term. ### Blended finance and de-risking instruments - Authorities are encouraging more "blended finance" in the context of the G-20 Compact with Africa initiative to leverage private savings without adding liabilities to the government balance sheet. - Development partners are encouraged to offer more and easier-to-use ODA tools that leverage private finance, i.e., "de-risking instruments" or "blended finance". - Authorities intend to direct new financing associated with CWA toward affordable housing and export promotion, with renewed support from key development partners, notably the IFC which has significantly increased its activities in the country. - Domestic de-risking instruments have been introduced to help private commercial financing to entities (e.g., farmers) otherwise seen as too risky. ### Statistical transparency commitments - Authorities subscribed to e-GDDS and launched a National Summary Data Page in September 2017. - Committed to subscribing to SDDS by the end of the program period. - Current focus: enhancing Monetary and Financial Statistics and publishing quarterly International Investment Position statistics by early 2020. ### Program modalities, monitoring, and targets - Authorities’ policy commitments are set under a 3-year program supported by the Policy Coordination Instrument (PCI). - Rwanda meets the criteria for use of the PCI; current analysis does not indicate present, potential, or prospective balance of payments needs. - Proposed program reviews for the first 12 months are set out in the Program Statement with semi-annual quantitative targets for: - budgetary central government fiscal deficit, - net foreign assets of the central bank, - domestic payment arrears, - a monetary policy consultation clause (MPCC). - Continuous target on the non-accumulation of external debt payment arrears. - Program will monitor domestic revenues, priority spending, and external debt of nonfinancial public enterprises. - Standard continuous targets on trade and exchange rate restrictions, bilateral payments arrangements and multiple currency practices apply throughout the term of the PCI. - Structural reform targets over the next 18 months are proposed in areas of public financial management, domestic revenue mobilization, monetary policy, and financial sector. - Statistical data are adequate for surveillance and program monitoring. ### Monetary policy consultation clause (MPCC) - Authorities agreed to move to a monetary policy consultation clause for program monitoring. - Rwanda’s current monetary conditions align with those for which the MPCC is recommended: central bank independence, an understanding of the determinants of inflation, expectation surveys, and an increasing focus on an inflation objective. - The country is not prepared for inflation targeting given weak policy transmission and shallow financial markets. - Staff recommended evaluating a moving inflation average against inner and outer MPCC bands: - Inner band: breaches trigger consultation with IMF staff and conforms to the authorities’ inflation corridor. - Outer band: breaches trigger consultation with the Executive Board and is one percentage point on either side of the inner band. - Both bands evaluated against a 12-month moving average of y/y inflation. - As experience accrues, the outer band should be narrowed or eliminated and the period for calculating the moving average should be shortened. - Currently, the 12-month moving average for y/y inflation remains just inside the outer consultation band. - Staff recommended evaluating a moving inflation average against inner and outer MPCC bands; breaches of inner band trigger staff consultation, breaches of outer band trigger Executive Board consultation. ### Program financing and risks - Risks to program implementation are low given Rwanda’s strong macroeconomic and program performance track record. - Program is fully financed for 12 months with good prospects for the remainder of the program. - There are no sovereign arrears to bilateral, multilateral or commercial creditors. - A safeguard assessment is not required under the PCI. ### Staff appraisal — achievements and policy recommendations - Rwanda has achieved notable success: strategic goal-setting, public accountability, and broad ownership of policies have helped the country emerge from fragility as one of the fastest-growing economies in SSA and the world. - Growth has been inclusive and extensive investment in social safety nets has reduced poverty significantly. - Macroeconomic performance characterized by disciplined policies with flexible responses to shocks. - The new PCI-supported program aims to support NST implementation while maintaining low debt risks. - Staff welcomes adoption of a new fiscal operational rule intended to provide a more neutral fiscal stance over the medium term and more room for NST priority investments while maintaining low risk of debt distress. - Planned measures to build on domestic revenue gains include: - evaluate and streamline tax exemptions, - strengthen tax policy capacity, - develop a medium-term revenue strategy, - reforms to strengthen tax administration drawing from an updated TADAT. - Authorities committed to identify and mitigate potential fiscal risks, including improving the efficiency and transparency of RSSB’s operations. - Monetary policy operational framework changes are appropriate: progress in ensuring money market rates converge with the policy rate and nascent strengthening of transmission to longer-term rates. - Staff welcomes the MPC’s decision to ease the monetary policy stance to guide inflation expectations and bring inflation back within its targeted range. - Recommended focus: steadfast implementation of commitments to strengthen communication and deepen money markets, including strengthening the repo market. - Financial development and capital markets measures (drawing on ICT) should help improve financial inclusion, reinforce stability, and support the NST. - Implementation of the financial sector development strategy should bolster domestic savings and improve lending conditions. - Staff welcomes reforms to bolster long-term savings, upgrade the national payments system to promote a cashless economy, and introduce new platforms for broader participation in the government securities market and more interaction across types of financial services providers. - Staff supports NST policies on growth and job creation which will also support SDG achievement, but emphasizes that financing the plan will be challenging given limited fiscal space and declining ODA trends. - Going forward, Vision 2050 and SDG achievement will require new and innovative approaches, renewed focus on the quality of education, and private sector-led growth. - Staff commends authorities’ efforts to encourage development partners to use ODA more strategically to leverage private financing. *Source: 1rwaea2019001 - 30. Private sector engagement is critical for achieving good NST outcomes given current* ### 42. The PCI provides an appropriate instrument to support the authorities’ ### 1rwaea2019001 - 42. The PCI provides an appropriate instrument to support the authorities’ ### Macroeconomic assessment and program recommendation - Staff assessment: With the external position broadly consistent with fundamentals and desirable policy settings, a gradually more diversified economy, a sound and resilient financial sector and comfortable international reserves, the authorities and staff do not foresee a potential balance of payments need over the forecast horizon. - Program support: Staff supports the authorities’ request for a 3-year PCI-supported program. - Surveillance: It is proposed that the next Article IV consultation takes place within 24-months in accordance with Article IV Consultation Cycles Decision No. 14747-10/96. ### Fiscal developments (highlights) - Structural and trend observations: - "Total revenues have remained broadly stable with rising domestic revenues offsetting grants." - "Public capital spending has remained elevated, relative to regional peers." - Rising external public debt contributed to mounting external debt, which "stabilized recently." - "The fiscal deficit of the budgetary central government has remained stable." - Key fiscal indicators (selected figures from Table 1, percent of GDP unless indicated): - Total revenue and grants: 22.9 (Act.), 24.1 (Prel.), 23.1 (Proj. 2018), 22.2 (Proj. 2019), 21.6 (Proj. 2020), 22.0 (Proj. 2021), 22.2 (Proj. 2022) - Tax revenue: 15.5 (Act.), 16.2 (Prel.), 16.1 (Proj. 2018), 16.3 (Proj. 2019), 16.1 (Proj. 2020), 16.5 (Proj. 2021), 16.8 (Proj. 2022) - Grants: 4.7 (Act.), 4.9 (Prel.), 4.8 (Proj. 2018), 3.9 (Proj. 2019), 3.4 (Proj. 2020), 3.6 (Proj. 2021), 3.7 (Proj. 2022) - Expenditure: 27.5 (Act.), 28.8 (Prel.), 29.2 (Proj. 2018), 28.6 (Proj. 2019), 27.8 (Proj. 2020), 27.1 (Proj. 2021), 27.0 (Proj. 2022) - Capital expenditure: 10.7 (Act.), 11.5 (Prel.), 12.0 (Proj. 2018), 12.3 (Proj. 2019), 12.1 (Proj. 2020), 11.5 (Proj. 2021), 11.8 (Proj. 2022) - Primary balance: -3.6 (Act.), -3.5 (Prel.), -4.9 (Proj. 2018), -5.0 (Proj. 2019), -4.8 (Proj. 2020), -3.6 (Proj. 2021), -3.6 (Proj. 2022) - Overall balance: -4.7 (Act.), -4.7 (Prel.), -6.1 (Proj. 2018), -6.4 (Proj. 2019), -6.2 (Proj. 2020), -5.1 (Proj. 2021), -4.8 (Proj. 2022) - Overall balance excluding grants: -9.4 (Act.), -9.6 (Prel.), -10.9 (Proj. 2018), -10.4 (Proj. 2019), -9.6 (Proj. 2020), -8.7 (Proj. 2021), -8.5 (Proj. 2022) - Public debt (percent of GDP, Table 1): - Total public debt incl. guarantees: 48.9 (Act.), 53.1 (Prel.), 55.8 (Proj. 2018), 57.3 (Proj. 2019), 58.2 (Proj. 2020), 57.2 (Proj. 2021), 56.7 (Proj. 2022) - External public debt: 37.9 (Act.), 41.6 (Prel.), 43.4 (Proj. 2018), 44.6 (Proj. 2019), 45.5 (Proj. 2020), 45.6 (Proj. 2021), 45.8 (Proj. 2022) - PV of total public debt incl. guarantees: ... (Act.), 41.1 (Prel.), 42.5 (Proj. 2018), 42.9 (Proj. 2019), 42.7 (Proj. 2020), 41.6 (Proj. 2021), 41.2 (Proj. 2022) ### Monetary developments (highlights) - Monetary aggregates (Table 1 and Table 3): - Broad money (M3) growth: 12.4 (Act.), 15.6 (Prel.), 19.8 (Proj. 2018), 20.0 (Proj. 2019), 17.7 (Proj. 2020), 16.9 (Proj. 2021), 15.9 (Proj. 2022) - Reserve money growth: 8.8 (Act.), 16.1 (Prel.), 17.2 (Proj. 2018), 17.9 (Proj. 2019), 15.7 (Proj. 2020), 14.9 (Proj. 2021), 14.2 (Proj. 2022) - Credit to non-government sector: 13.9 (Act.), 10.8 (Prel.), 12.8 (Proj. 2018), 14.3 (Proj. 2019), 13.9 (Proj. 2020), 13.3 (Proj. 2021), 13.4 (Proj. 2022) - Monetary survey (Table 3, selected levels in Billions of Rwandan francs): - Broad money: 1,792 (2017), 2,072 (2018), 2,276 (2019), 2,481 (2020), 2,729 (2021), 2,978 (2022) - Year on year growth: Broad money 12.4 (2017), 15.6 (2018), 17.2 (2019), 19.8 (2020), 19.9 (2021), 20.0 (2022) ### External sector and reserves - External position and reserve coverage (Table 4 and figures): - Gross international reserves (millions of US$): 1,163 (Act. 2017), 1,319 (Act. 2018), 1,428 (Prel. 2019), 1,566 (Proj. 2020), 1,637 (Proj. 2021), 1,726 (Proj. 2022), 1,867 (Proj. 2023) - Reserves in months of prospective imports of G&S: 4.5 (Act. 2017), 4.6 (Act. 2018), 4.7 (Prel. 2019), 4.9 (Proj. 2020), 4.7 (Proj. 2021), 4.5 (Proj. 2022), 4.5 (Proj. 2023) - Trade and current account (Table 4, US$ millions and percent of GDP): - Current account balance (incl. official transfers): -709 (Act. 2017), -747 (Act. 2018), -975 (Prel. 2019), -1,038 (Proj. 2020), -956 (Proj. 2021), -1,058 (Proj. 2022), -1,070 (Proj. 2023) - Trade balance: -829 (Act. 2017), -907 (Act. 2018), -1,044 (Prel. 2019), -1,031 (Proj. 2020), -997 (Proj. 2021), -1,111 (Proj. 2022), -1,151 (Proj. 2023) - Exports (f.o.b.): 1,050 (Act. 2017), 1,126 (Act. 2018), 1,218 (Prel. 2019), 1,327 (Proj. 2020), 1,481 (Proj. 2021), 1,678 (Proj. 2022), 1,853 (Proj. 2023) - Coffee and tea: 148.4 (Act. 2017), 159.2 (Act. 2018), 162.0 (Prel. 2019), 175.7 (Proj. 2020), 197.6 (Proj. 2021), 218.2 (Proj. 2022), 237.9 (Proj. 2023) - Minerals: 125.0 (Act. 2017), 142.2 (Act. 2018), 170.2 (Prel. 2019), 194.1 (Proj. 2020), 226.4 (Proj. 2021), 256.8 (Proj. 2022), 291.3 (Proj. 2023) - Imports (f.o.b.): 1,879 (Act. 2017), 2,032 (Act. 2018), 2,261 (Prel. 2019), 2,357 (Proj. 2020), 2,478 (Proj. 2021), 2,789 (Proj. 2022), 3,003 (Proj. 2023) - Current account deficit as percent of GDP: -7.8 (Act. 2017), -7.9 (Act. 2018), -9.6 (Prel. 2019), -9.4 (Proj. 2020), -7.9 (Proj. 2021), -8.1 (Proj. 2022), -7.4 (Proj. 2023) - Exchange rate and reserves dynamics (figure captions): - "The real exchange rate continued its depreciation." - "Reserve accumulation continued since 2016." - "Low pressure on the nominal exchange rate since 2017." ### Growth, inflation, and key macro projections (Table 1) - Real GDP (annual percent change): 6.1 (Act. 2017), 8.6 (Prel. 2018), 7.8 (Proj. 2019), 8.1 (Proj. 2020), 8.2 (Proj. 2021), 8.0 (Proj. 2022), 7.5 (Proj. 2023) - GDP deflator: 7.3 (Act. 2017), -0.8 (Prel. 2018), 4.2 (Proj. 2019), 5.0 (Proj. 2020), 5.0 (Proj. 2021), 5.0 (Proj. 2022), 5.0 (Proj. 2023) - CPI (period average): 4.8 (Act. 2017), 1.4 (Prel. 2018), 3.5 (Proj. 2019), 5.0 (Proj. 2020), 5.0 (Proj. 2021), 5.0 (Proj. 2022), 5.0 (Proj. 2023) - CPI (end period): 0.7 (Act. 2017), 1.1 (Prel. 2018), 5.0 (Proj. 2019), 5.0 (Proj. 2020), 5.0 (Proj. 2021), 5.0 (Proj. 2022), 5.0 (Proj. 2023) ### Financial sector soundness (selected indicators, Table 5) - Capital adequacy: - Regulatory capital to risk-weighted assets: 19.9 (Dec. 2015), 20.0 (Dec. 2016), 19.2 (Jun. 2017), 20.0 (Dec. 2017), 19.5 (Mar. 2018), 19.7 (Jun. 2018), 20.8 (Sep. 2018), 21.2 (Dec. 2018) - Asset quality: - NPLs/gross loans: 6.2 (Dec. 2015), 7.6 (Dec. 2016), 8.2 (Jun. 2017), 7.6 (Dec. 2017), 6.8 (Mar. 2018), 6.9 (Jun. 2018), 7.2 (Sep. 2018), 6.4 (Dec. 2018) - Profitability: - Return on average assets: 2.1 (Dec. 2015), 1.7 (Dec. 2016), 1.7 (Jun. 2017), 1.1 (Dec. 2017), 1.3 (Mar. 2018), 1.6 (Jun. 2018), 1.7 (Sep. 2018), 1.9 (Dec. 2018) - Liquidity: - Liquid assets/total deposits: 45.8 (Dec. 2015), 42.5 (Dec. 2016), 44.0 (Jun. 2017), 46.7 (Dec. 2017), 49.4 (Mar. 2018), 44.4 (Jun. 2018), 44.2 (Sep. 2018), (Dec. 2018 value in table) ### Program implementation timetable - Schedule of Reviews Under the Policy Coordination Instrument, 2019–22 (Table 6): - Board discussion of a PCI request: June 28, 2019 - First Review: Test Date June 30, 2019; Review Date December 15, 2019 - Second Review: Test Date December 31, 2019; Review Date June 15, 2020 - Third Review: Test Date June 30, 2020; Review Date December 15, 2020 - Fourth Review: Test Date December 31, 2020; Review Date June 15, 2021 - Fifth Review: Test Date June 30, 2021; Review Date December 15, 2021 - Sixth Review: Test Date December 31, 2021; Review Date June 15, 2022 *Source: Rwandan authorities and IMF staff estimates and projections, as presented in the referenced IMF staff report excerpts.* ### Annex I. Implementation of Key Policy Recommendations from ### Annex I. Implementation of Key Policy Recommendations from the 2017 Article IV Consultation ### Improved External Position - Recommendation: Maintain exchange rate flexibility and rebuild official foreign exchange reserve buffers for a sustainable and resilient external position. - Status and key figures: - Gross reserves increased from US$1.0 billion at end-2016 to US$1.3 billion or 4.1 months of imports as of end-December 2018. - IMF’s 2017 Annual Report on Exchange Arrangements and Exchange Restrictions (published on April 30, 2018) classifies Rwanda’s franc as a “crawl-like arrangement.” - The 2019 external assessment finds that the REER is in line fundamentals, after a nominal exchange rate depreciation in 2018. ### Fiscal Policy - Recommendation: Build on progress in boosting revenue collection, to provide space for strategic public investment and reduce aid dependence; ensure tax incentives to promote domestic production are well-targeted and consistent with overall fiscal objectives. - Status and key figures: - Tax revenue collection as a share of GDP rose from 15.7 percent of GDP at end-2016 to 15.9 percent of GDP at end-2018. - VAT-C Efficiency and CIT productivities remain low, in part due to fiscal incentives to attract private sector investment. - Authorities have sought TA on tax expenditure analysis from various development partners. ### Fiscal/Monetary Policy Mix - Recommendation: Maintain agreed fiscal and monetary stance, and reconsider monetary stance in the second half of 2017 based on developments in inflation and growth projections. - Status: - Agreed fiscal and monetary quantitative program targets have been met. - Deviations from fiscal targets reflected increased availability of concessional financing for development needs. - Headline inflation has remained below authorities’ medium-term target since May 2016. ### Monetary Policy Framework - Recommendation: In the transition to an interest-based monetary policy framework, place priority on exchange rate flexibility, functioning money market tools, and providing clear signals about the policy stance to guide inflation expectations. - Status and key actions: - On December 21, 2018, the central bank formally announced its move to a new interest rate-based monetary policy framework, effective January 1, 2019. - Since June 2016, interbank rates have remained close to the policy rate. - As of January 1, 2019, the interest rate corridor was reset to 100 basis points above the policy rate and 200 basis points below. - The February 7, 2019 MPC statement indicated its inflation forecast and rationale for leaving the policy rate unchanged despite inflation remaining below the targeted corridor. --- ### Annex II. Spending Needs for Reaching the SDG Goals ### Background - Purpose: Estimate additional spending required in the year 2030 for achieving meaningful outcomes on the SDGs in education, health, roads, electricity, and water and sanitation for Rwanda. - Main finding: Delivering on the SDG agenda in these areas will require additional spending in 2030 of about 20 percent of GDP. - Collaboration: Case study produced with Rwandan authorities and development partners (UNDP, World Bank, UK DFID, Enabel, UNICEF). - Methodological note: - Estimates follow the methodology in the 2019 Staff Discussion Note “Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs.” - Estimates refer to additional spending in the year 2030 compared to current spending; they are not cumulative up to 2030. ### SDG Performance (overview) - Rwanda’s progress over 20 years places it broadly on par with, and in some instances outperforming, other Low-Income and Developing Economies (LIDCs) on SDG indicators. - Health: Rwanda outperforms median LIDC (infant and maternal mortality rates cut to 1/5th between 2000 and 2016). - Education: On par with median peer LIDC; primary gross enrollment rate reached 100 percent since 2013; secondary GER barely reaches 40 percent. - Water and sanitation: Only 13 percent of the population has access to safely managed sanitation. - Electricity: 43 percent access; goal of 100 percent access in rural areas via solar panels will be challenging. - Data and tools: - Authorities and partners working to establish baselines; examples include WHO “OneHealth” customization and UNICEF/World Bank input for infrastructure costing. ### Assessing Spending Needs — Education - Finding: To reach the median high-performing comparable peer on education, Rwanda would need to increase total education spending by 7 percent of GDP. - Current figures and comparisons (2016 baseline): - Rwanda annual public spending on education: 3.6 percent of GDP. - Student-to-teacher ratio: 46 (Rwanda) versus 15 (peers with better performance). - Teacher compensation: about 30 percent of education budget in Rwanda versus 45 percent in higher-performing comparable countries. - Spending per student (current USD): Rwanda 441. - SDG4 score: Rwanda 59. - Authorities’ NST plan: - By 2030, government plans to reach 6.3 percent of GDP on education, or US$254 per student per year. - IMF estimate to reach high performance by 2030: additional 4 percent of GDP on top of authorities’ plan, i.e., 10.7 percent of GDP or around US$440 per student. ### Assessing Spending Needs — Health - Finding: With similar per capita spending, Rwanda attains better outcomes than median peer, but scaling up is needed to reach top performers. - Current figures and comparisons: - Rwanda spending on health: US$58 per capita per year. - SDG3 index: Rwanda 62; median peer 49. - Total health spending to GDP: Rwanda 8.2 percent (table values show variation across peers). - Public spending share of total health spending: Rwanda 66%. - Needs: - To reach best-performing peers, overall number of health workers would need to increase by another 2/3, mostly doctors. - Implied scaling up of spending in health by 2.2 percentage points of GDP. - Authorities’ plan: - By 2024, government plans to increase per capita public spending on health by 36 percent, from US$38 to US$52 per capita per year. - IMF analysis suggests public per capita spending increases should double to achieve best outcomes. - Note on private spending: - 2016 private spending estimate of 2.8 percent of GDP is unanimously seen as too high by authorities and development partners; IMF estimates focus on public spending needs. ### Assessing Spending Needs — Roads - Findings: - Rural Access Index (RAI) for roads is 52 out of 100. - Only 5 percent of current road network is paved and only 10 percent reaches all-season riding quality. - Given population density, investment focus should be upgrading and maintaining existing roads. - Comparative and regression-based assessments: - Comparison with countries with GDP per capita lower than US$7,000 and RAI > 75 suggests Rwanda would need to more than triple density of high-quality roads via upgrading existing network. - Alternative regression analysis suggests current road density would need to be increased by 1.6 to achieve RAI > 75, with annual investment needs of about 4 percent of GDP. - Authorities’ NST plan: - By 2030, authorities plan to spend 5.8 percent of GDP per year to double the number of kilometers of district roads that meet “high riding quality,” which exceeds the regression-implied figure. ### Assessing Spending Needs — Water and Sanitation (WASH) - Finding: Based on the World Bank WASH costing model, Rwanda would need to spend 4.5 percent of GDP per year to safely provide water to all households and provide fixed-point latrines to all. - Service coverage gaps (2015 WASH coverage by area): - Urban: Basic water supply within 30 minutes (no water quality) 45%; Safely managed water supply at home 12%; Improved sanitation (private only) 61%; Population with Any Fixed Point Latrines 98%; Handwashing station, soap & water at home 6%. - Rural: Basic water supply within 30 minutes (no water quality) 52%; Safely managed water supply at home 0%; Improved sanitation (private only) 64%; Population with Any Fixed Point Latrines 98%; Handwashing station, soap & water at home 2%. - Cost estimates (World Bank model, selected figures): - Total cost (million USD) — Water: 464; Sanitation: 922; Hygiene: 156; Fixed Point Latrines total: 20; Total WASH: 5,728. - Annual cost (million USD) — Water: 31; Sanitation: 61; Hygiene: 10; Fixed Point Latrines: 1; Annual WASH total: 382. - Total cost (percent of GDP) — Water: 5.5%; Sanitation: 10.9%; Hygiene: 1.8%; Fixed Point Latrines: 0.2%; Total SDG WASH: 67.6%. - Annual cost (percent of GDP) — Water: 0.4%; Sanitation: 0.7%; Hygiene: 0.1%; Fixed Point Latrines: 0.0%; Annual total: 4.5%. - Alignment with authorities: - Estimate broadly in line with authorities’ costing exercise under the “Medium Green” scenario. *Source: Annex I. Implementation of Key Policy Recommendations from the 2017 Article IV Consultation (1rwaea2019001).* ### 12. Universal access to electricity would require an additional spending of 2 percent of ### 12. Universal access to electricity would require an additional spending of 2 percent of ### Universal access to electricity — cost estimate and assumptions - Current access: 43 percent of households have electricity access. - Assumptions for costing: - 60 percent of all new connections will be on-grid. - 40 percent of all new connections will be off-grid. - Electricity consumption projected to increase at an annual rate of 9 percent. - Consumption projection: from an average of 238 kWh in 2016 to 730 kWh in 2030. - Estimated cost: - Universal access cost is estimated at 2 percent of GDP. ### Summary of spending needs to achieve higher SDG index by 2030 - Aggregate estimate for selected sectors: - Total additional spending (education, health, roads, electricity, water and sanitation) = 19.6 percent of GDP. - Sectoral additional spending (Additional percent of GDP in the year 2030): - Education: 7.0 - Health: 2.2 - Road: 3.9 - Water: 4.5 - Electricity: 2.0 - Total: 19.6 - Interpretation and priorities: - Infrastructure (roads, electricity, water and sanitation) shows the largest shortfalls in SDG performance and the highest spending needs. - Education spending needs are substantial, reaching 7 percent of GDP. - Composition of spending is critical: examples of priorities include hiring better trained teachers at the primary level and upgrading to higher quality district roads connecting rural areas. - In health, granular data on spending composition to guide allocation of additional health spending is missing. - A full costing of all sectors underlying the NST and SDGs would yield a larger estimate of additional spending needs. ### Policy recommendations and implementation notes (from staff analysis) - For achieving SDG and NST objectives: - Prioritize spending composition in education and roads to align with high-performing SDG achievers (e.g., teacher quality, road upgrades). - Obtain granular data in health to guide allocation of additional health spending. - Costing of all sectors under the NST and SDGs recommended to capture full spending needs. ### Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses - Inadequate external financing and private sector growth to finance NST - Relative Likelihood: High - Time Horizon: MT, LT - Expected Impact: High — risk of missed opportunity to raise growth, structural transformation, and living standards as envisaged in Vision 2050. - Policy Response: - Further enhance DRM and deepen domestic debt markets to raise financing for the NST while preserving debt sustainability. - Continue efforts to encourage private investment, including promoting regional integration to increase market size. - Persistence of variable weather/pests - Relative Likelihood: High - Time Horizon: ST, MT, LT - Expected Impact: Medium — supply side shocks to agriculture affecting growth and inflation. - Policy Response: - Continue policies to expand irrigation, improve resilience, and increase productivity. - Continue policies to maintain food security stocks and strong safety net. - Liabilities from unidentified fiscal risks - Relative Likelihood: Medium - Time Horizon: ST, MT, LT - Expected Impact: Medium — “too big to fail” private investments and/or government involvement in strategic growth areas/PPPs could involve fiscal risks. - Policy Response: - Implement recommendations of Fiscal Transparency Evaluation. - Conduct domestic fiscal risk assessment. - External risks highlighted with policy responses (summary): - Rising protectionism and retreat from multilateralism — High likelihood, ST/MT; policy responses include maintaining exchange rate flexibility and promoting regional integration. - Weaker-than-expected global growth (U.S., Europe, China) — Medium likelihood; responses include exchange rate flexibility, diversifying external financing and exports. - Intensification of security risks — High likelihood; maintain current policies (e.g., financing UN peacekeeping ops, food security stocks). - Large swings in energy prices — Medium likelihood; responses include exchange rate flexibility and continued investments to reduce dependency on imported fuel. ### External Sector Assessment — key findings and indicators - Current account: - Current account deficit: 7.9 percent of GDP in 2018 (7.8 percent in 2017). - CA model 2018 norm for the current account deficit: 8.2 percent of GDP. - Current account gap: 0.3 percentage points (7.9 percent actual minus 8.2 percent norm). - Interpretation: current account in 2018 very close to its estimated norm; REER broadly consistent with fundamentals. - International reserves: - Reserves increased from $740 million in mid-2015 to US$1,319 million by end-2018. - Reserve coverage in months of prospective imports: increased from 2.9 to 4.6 months over the same period. - Staff considers reserves in the range of 4.0–5.0 months optimal. - Real Effective Exchange Rate (REER): - REER gap in 2018: small gap of -1.7 percent (within the range of 5.0 percentage points). - ln(REER) Actual: 4.55; ln(REER) Norm: 4.56; REER Gap: -1.4% to -1.7% (as reported). - Competitiveness indicators: - World Bank Doing Business 2019: Rwanda overall rank for 2018–19 was 29 out of 190 economies (second best in Sub-Saharan Africa after Mauritius); rank moved up 27 places since 2017. - World Economic Forum Global Competitiveness Index 2018: Rwanda ranked 29th out of 140 countries in institutional quality and 60th in business dynamism. - Main weaknesses: labor skills and innovation capability; market size constraint being addressed via Continental Free Trade Area engagement. ### Adequacy of international reserves — model-based guidance - Historical and model benchmarks: - IMF historical recommendation: 4–5 months of imports for Rwanda. - Central bank minimum target: maintain reserves at a minimum of 4 months of prospective goods and services imports. - Model-based ARA-CC optimal range: 3.5–4.5 months of imports (affected by classification as having a more flexible exchange rate). - Staff view: reserves in the range of 4.0–5.0 months optimal given vulnerabilities. ### Capacity Development priorities (FY2020) - Public Financial Management: - Improve fiscal transparency, including moving to GFS2014, and systematically identify and mitigate fiscal risks, with help of Fiscal Transparency Evaluation. - Tax Policy: - Develop a medium-term revenue strategy based on TADAT, VAT gap analysis, assessment of tax expenditures, and an overall diagnostic of the policy and legislative framework. - Monetary and Macroprudential policy: - Provide TA on FPAS and structural reforms to support the move to an interest rate-based monetary framework. - Financial supervision and regulation: - Conduct a financial stability assessment with attention to financial development objectives. *Source: IMF staff calculations.* ### 1. This program statement sets out our economic program for the next 36 months. The ### 1. This program statement sets out our economic program for the next 36 months. ### Program objectives and overall stance - Aim: support implementation of the National Strategy for Transformation (NST 1) while maintaining macroeconomic stability. - Policy focus: - Ensure a medium term fiscal path that allows for more spending to reach NST 1 goals while maintaining public debt at a sustainable level. - Regain momentum in mobilizing domestic resources, including broadening the tax base and strengthening tax compliance. - Achieve enhanced fiscal transparency. - Seamlessly implement the National Bank of Rwanda’s new forward-looking monetary policy operational framework. ### Recent economic developments and outlook - 2018 performance: - Real GDP growth accelerated to 8.6 percent year-on-year. - Services sector grew by 9 percent; trade and transport services grew by 15 percent and 18 percent, respectively. - Industry sector grew by 10 percent; construction and manufacturing grew by 14 percent and 11 percent, respectively. - Inflation: - Headline inflation remained below the target band since September 2018. - Low headline and core inflation mainly due to low food prices and base effects from 2017. - Projections: - Real GDP growth projected at average 8 percent in 2019–20 and remain at around 8 percent average over the medium term. - Headline CPI inflation projected to increase and gradually converge to the lower half of the medium-term inflation target band by 2019, remaining anchored at around 5 percent over the medium term. - Current account deficit projected to rise to 9.6 percent in 2019 and decline thereafter, reflecting frontloaded public investment spending. ### Fiscal policies (A) - Debt and fiscal targets: - Committed to keep public debt-to-GDP ratio in present value (PV) terms below 50 percent and maintain the risk of debt distress low. - Domestic revenue collections expected to increase on average by 0.2 percent of GDP over the medium term. - Public debt in PV terms is projected to remain around [41] percent on average in the medium term. - From FY2019/20 onwards, maintain the overall deficit on a 5-year rolling average basis of no more than 5.5 percent of GDP. - Expenditure priorities during the 3-year program: - Increase access to electricity: construction of generating plants and investing in distribution systems. - Increase access to sanitation and clean water: construction of treatment plants and rehabilitation of water facilities. - Improve education: infrastructure, essential supplies including books, and required qualified teachers. - Improve health services: infrastructure, equipment and qualified staff. - Accelerate facilitation of transport system: construction of new roads and rehabilitation of existing ones. - Fiscal risk management: - Will maintain adequate fiscal buffers and not accumulate public sector external debt payment arrears (continuous target). - Will refrain from accumulating domestic payment arrears (quantitative target). ### Structural fiscal policies (B) - Tax policy and administration: - Refine tax expenditure analysis and regularly report on tax expenditure (reform target). - Improve tax compliance, especially VAT, by encouraging consumers to request invoices (reform target). - Strengthen tax compliance using e-tax to enhance audit case selection, reduce cash transactions, improve access to electronic transactions, and pre-populate tax returns (reform target). - Identify and recruit unregistered taxpayers, improve registration database reliability, and cleanse taxpayer ledgers. - Automate risk-based verification for refund claims to reduce average processing-time for VAT refunds. - Redesign the Compliance Improvement Plan (CIP) tool to focus on registration, filing, accurate reporting and payment. - Fiscal transparency: - Starting FY19/20, begin producing annual and quarterly budget execution reports in GFSM-2014 format (reform target); for FY19/20 continue GFSM-86 tables; from FY20/21 use only GFSM-14 tables and terminology. - Expand fiscal reporting coverage from budgetary central government to central government by including extra budgetary entities (reform target). - Prepare a sequenced fiscal transparency actions plan guided by the Fiscal Transparency Evaluation and request IMF East AFRITAC TA to build fiscal risk assessment capacity. - RSSB (Rwanda Social Security Board): - Procure an IT system to capture all RSSB processes, contract a diagnostic study on optimal RSSB asset allocation, and produce financial and management reports from the IT system for all schemes managed by RSSB (reform targets). ### Monetary and exchange rate policies (C) - Monetary framework: - Maintain forward-looking monetary policy framework and the objective of keeping inflation within the target band (5±3 percent). - Inflation developments monitored via an inflation consultation clause; consultation bands with IMF Executive Board temporarily wider by 1 percentage points (5±4 percent). - Implemented a 50 basis points key policy rate cut on May 6 (context: subdued headline and core inflation, reduced medium-term inflation outlook, lack of exchange rate pressures). - Communication and markets: - Publish macro projections for MPC decision making in quarterly inflation reports starting May-June 2020 (reform target). - Clarify the new monetary policy framework through outreach events involving academia, think-tanks and media. - Implement true repo to develop the interbank market and improve monetary policy transmission, allowing banks to engage in safe, collateralized borrowing and lending with full ownership of collateral until loan maturity. - Exchange rate and reserves: - Maintain a market-driven exchange rate regime and supply foreign exchange to satisfy demand related to infrastructure capital projects, considering implications for financial sector and price stability. - Gross international reserves: 4.5 months of prospective imports. ### Financial sector policies (D) - Regulation and supervision: - Strengthen regulatory and supervisory frameworks to align with international standards while safeguarding private sector contribution to NST 1. - Basel II/III-compliant regulatory standards on capital, liquidity, risk management and updated disclosure/regulatory reporting implemented. - Full implementation of IFRS 9 started on January 1, 2018; guidance issued on treatment of domestic treasury bills and government bonds; allowed commercial banks to spread IFRS-9-related excess impairment equally over 4 years for core capital calculation. - AML/CFT: - Developed offsite and onsite AML/CFT supervisory tools in 2015; enacted new AML/CFT law in August 2018; in process of identifying modifications to 2015 tools. - Capital markets and development finance: - 10-year Capital Market Master Plan (CMMP) for 2018–28 to develop and deepen capital markets, improve corporate financial reporting, business planning, corporate governance, and develop domestic institutional investor capacity. ### Structural policies (E) - Business environment and structural reforms: - Continue comprehensive regulatory reforms to improve business environment, private investment climate, and job creation, consistent with NST 1. - Implement measures to diversify exports, increase agricultural productivity, improve educational attainment, and enhance urbanization, guided by the World Bank/Government study “Drivers of Growth in Rwanda”. - Statistics and data dissemination: - Subscribed to the IMF’s eGDDS in September 2017; overarching goal to subscribe to the SDDS by June 2021. - NBR to disseminate quarterly balance of payments and IIP by December 2019; prepare DTIRFCL by December 2019. - NISR to disseminate quarterly/monthly labor force statistics, monthly industrial production index, and monthly producer price index by June 2021. - Launched quarterly data collection from major entities using the Foreign Private Capital Survey questionnaire starting Q1 2018. ### Program monitoring and key quantitative targets - Monitoring instruments: Quantitative targets (QTs), continuous targets (CTs), and reform targets (RTs) as detailed in Tables 1a-b and 2; definitions in the Technical Memorandum of Understanding. - Table 1a — Quantitative Targets (Half-yearly; columns: end-Jun 2019 | end-Dec 2019 | end-Jun 2020) - Ceiling on the overall deficit, including grants: 477276589 - Floor on stock of Net Foreign Assets: 850980858 - Ceiling on flow of net accumulation of domestic arrears: 000 - Continuous Targets — Ceiling on stock of external payment arrears (US$ millions): 000 - Monetary Policy Consultation Band (CPI/Inflation) - CPI Inflation target: 5.0 5.0 5.0 - Inflation, upper inner-bound, percent: 8.0 8.0 8.0 - Inflation, lower inner-bound, percent: 2.0 2.0 2.0 - Inflation, upper bound, percent: 9.0 9.0 9.0 - Inflation, lower bound, percent: 1.0 1.0 1.0 - Memorandum items (Table 1a) - Total priority spending: 812411885 - Flow of domestic revenue collection: 15848231726 - Stock of new external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions): 700700700 - Total budget support (US$ millions): 664439617 - Budget support grants (US$ millions): 365196293 - Budget support loans (US$ millions): 299243324 - RWF/US$ program exchange rate: 879.1 879.1 879.1 - Table 1b — Standard Continuous Targets - Not to impose or intensify restrictions on payments and transfers for current international transactions. - Not to introduce or modify multiple currency practices. - Not to conclude bilateral payments agreements inconsistent with Article VIII. - Not to impose or intensify import restrictions for balance of payments reasons. - Table 2 — Selected Reform Targets (action and target dates) - Produce annual tax expenditure report with updated methodology and description of beneficiaries — end-Jun 2019. - Procure an IT system that will capture all RSSB processes — end-Jun 2019. - Produce a report outlining detailed options for improving functioning of VAT — end-Dec 2019. - Automating the risk based verification process for refund claims — end-Dec 2019. - Begin producing quarterly budget execution reports in GFS 2014 format — end-Dec 2019. - Produce a comprehensive fiscal risk analysis report — end-Jun 2020. - Contract a diagnostic study on optimal RSSB asset allocation — end-Jun 2020. - Expand coverage in fiscal reporting in GFS 2014 from budgetary central govt to central govt — end-Dec 2020. - Produce financial and management reports from IT system for all RSSB schemes — end-Dec 2020. - Improve communication for monetary policy with quarterly outreach after each MPC meeting — end-Dec 2019. - Publish macro projections for MPC decision making in quarterly inflation reports — end-Jun 2020. - Introduce a platform for issuing government securities using mobile phones — end-Jun 2020. - Produce a study on consumer payment behavior analyzing micro-level data — end-Dec 2020. - Expand industrial and market expectation surveys, begin constructing a purchasing manager's index, accelerate publication of foreign private capital survey — end-Dec 2020. - Update regulatory framework on true repo to roll out Global Master Repurchase Agreement (GMRA) — end-Jun 2021. *Source: Kigali, Rwanda, June 11, 2019 — Attachment II. Technical Memorandum of Understanding (program statement).* ### 1. This memorandum defines the quantitative targets described in the program ### 1rwaea2019001 - 1. This memorandum defines the quantitative targets described in the program ### Program exchange rates - Program exchange rates from December 31, 2018 (US$ per currency unit, unless indicated otherwise): - Rwanda Franc (per US$) 879.1 - Euro 1,004.9 - British Pound 1,115.4 - Japanese Yen (per US$) 110.4 - SDR 1,222.6 ### A. Quantitative program targets — fiscal and external anchors - Ceiling on Overall Fiscal Deficit Including Grants - A ceiling applies to the overall fiscal deficit of the budgetary central government including grants. - Measurement: - Ceiling for June 30, 2019 is cumulatively measured from June 30, 2018. - Ceilings for December 31, 2019 and June 30, 2020 are cumulatively measured from June 30, 2019. - Definition: - Overall fiscal deficit including grants is valued on a commitment basis and defined according to the GFSM 2014 as net lending/net borrowing after adjustments for transactions deemed to be for public policy purposes (policy lending). - Budgetary Central government expenditure is defined on the basis of payment orders accepted by the Treasury, as well as those executed with external resources. - Adjusters to the Overall Fiscal Deficit Including Grants: - Adjust upward by the amount of any shortfall between actual and programmed budgetary grants (as defined in Table 1a of the PS), up to a maximum of RWF 87 billion. - Adjust upward, up to a maximum of RWF87 billion, representing the amount of foreign financed net acquisition of non-financial assets financed with drawdown of accumulated government deposits. - Adjust upward by the amount of unexpected public expenditures (expenses, and/or net acquisition of non-financial assets) on food imports in the case of a food emergency. - Adjust upward (downward), up to a maximum of RWF87 billion, by any unplanned financing shortfall (surplus) from Peace Keeping Operations. - Floor on Net Foreign Assets (NFA) of the National Bank of Rwanda (NBR) - A floor applies for June 30, 2019, December 31, 2019 and June 30, 2020. - Definition: - NFA of the NBR in Rwandan francs is defined consistent with the SDDS template as external assets readily available to, or controlled by, the NBR net of its external liabilities. - Pledged or otherwise encumbered reserve assets (including swaps) are excluded. - Reserves assets corresponding to undisbursed project accounts are considered encumbered and excluded. - Foreign assets and foreign liabilities in U.S. dollars are converted to Rwandan francs by using the U.S. dollar/Rwanda franc program exchange rate; foreign assets and liabilities in other currencies are converted to U.S. dollars by using the actual end-of-period U.S. dollar/currency exchange rate. - Foreign liabilities include, inter alia, use of IMF resources. - Adjusters: - The floor on NFA will be adjusted downward by the amount of any shortfall between actual and programmed budgetary loans and grants per Table 1 of the PS, capped at RWF 87 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. - Ceiling on the Stock of External Payment Arrears - A continuous ceiling applies to non-accumulation of payment arrears on external debt contracted or guaranteed by the budgetary central government and entities that form part of the budgetary process. - Definition: - External payment arrears are overdue external debt service obligations (principal and interest) arising in respect of obligations incurred directly or guaranteed by the budgetary central government and entities that form part of the budgetary process. - A payment is overdue when it has not been paid in accordance with the contractual date (taking into account any contractual grace periods). - Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or a rescheduling agreement is sought are excluded. - Ceiling on Net Accumulation of Domestic Expenditure Arrears of the Budgetary Central Government - A ceiling applies to net accumulation of domestic expenditure arrears of the budgetary central government. - Measurement: - Ceilings for June 30, 2019 are cumulatively measured from June 30, 2018; ceilings for December 31, 2019 and June 30, 2020 are cumulatively measured from June 30, 2019. - Definition: - Domestic expenditure arrears are unpaid claims overdue by more than 90 days. - Accumulation is calculated as a cumulative change in the stock of expenditure arrears of more than 90 days at each test date from the stock at the end of the previous fiscal year (June 30). - Arrears related to claims preceding 1994 will not be counted. - Note: - A negative target thus represents a floor on net repayment. ### B. Monetary Policy Consultation Clause (MPCC) - Definition: - MPCC headline inflation is the year-on-year rate of change of monthly Consumer Price Index (CPI), averaged for the past 12-months, as measured by National Institute of Statistics Rwanda (NISR). - Consultation triggers: - If observed headline inflation falls outside the ±3 percentage point range around the mid-point of target band value for end-June 2019, end-December 2019, and end-June 2020 test dates, the authorities will conduct discussions with the Fund staff. - If observed headline inflation falls outside the ±4 percentage point range around 5 percent for end-June and end-December 2019, and end-June 2020 test dates as specified in Table 1a in the PS, the authorities will complete a consultation with the Executive Board focusing on: - (i) the stance of monetary policy and whether the Fund-supported program remains on track; - (ii) the reasons for program deviation, taking into account compensating factors; - (iii) proposed remedial actions if deemed necessary. ### C. Memorandum items and data reporting requirements - Reporting frequencies and lags: - Unless specified otherwise: - Weekly data will be provided within seven days of the end of each week; - Monthly data within five weeks of the end of each month; - Quarterly data within eight weeks. - Specific reporting commitments: - Data on priority expenditure: - Transmitted quarterly. - Priority expenditure defined as the sum of recurrent expenditures, domestically-financed capital expenditures, and policy lending identified as priority in line with the NTS. - Monitored through the Integrated Financial Management System (IFMS) at the program level at the end of each quarter. - Detailed data on domestic revenues: - Transmitted monthly. - Domestic revenue defined as total revenue (tax and non-tax revenues), per the budgetary central government statement of operations table, but including: (a) local government taxes (business licenses, property tax, and rental income tax); and (b) local government fees; and excluding receipts from Peace Keeping Operations. - Data on contracting and guaranteeing by nonfinancial public enterprises of new external borrowing with non-residents: - Transmitted on test dates. - Excludes external borrowing by Bank of Kigali and Rwanda Development Bank (BRD). - Includes private debt for which official guarantees have been extended and future swaps involving foreign currency loans guaranteed by the public sector. - Excludes external borrowing solely for refinancing existing public-sector debt that improves debt profile and excludes on-lending agreements between Government of Rwanda and public-sector enterprises. - Policy-change notification and performance reporting: - Authorities will inform IMF staff in writing prior to making any changes in economic and financial policies that could affect the outcome of the financial program (including customs and tax laws, wage policy, and financial support to public and private enterprises). - Authorities will inform IMF staff of changes affecting respect of continuous QTs. - Authorities will furnish a description of program performance according to QTs as well as reform targets within 8 weeks of a test date. - Submission modality: information to be mailed electronically to the Fund (email to the ResRep and the mission chief). ### TMU Table — summary of selected reporting items and frequencies (as listed) - Exchange Rates: Daily (D) / Weekly (W) / Daily (D) - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Weekly (W) frequency of reporting; Monthly (M) frequency of publication - Reserve/Base Money: Weekly (W) reporting; Monthly (M) publication - Broad Money: Monthly (M) reporting and publication - Central Bank Balance Sheet: Weekly (W) reporting; Monthly (M) publication - Consolidated Balance Sheet of the Banking System: Monthly (M) reporting and publication - Interest Rates: Monthly (M) reporting and publication - Volume of transactions in the interbank money market, repo operations, and foreign exchange markets; sales of foreign currencies by NBR to commercial banks and other foreign currency interventions by NBR: Daily (D) reporting; Weekly (W) frequency of reporting in table; Weekly (W) publication - Composite Index of Economic Activity (CIEA) and sub-components compiled by the NBR: Monthly (M) reporting and publication - Revenue, Expenditure, Balance and Composition of Financing — General Government: Annual (A) reporting and publication - Revenue, Expenditure, Balance and Composition of Financing — Budgetary Central Government: Quarterly (Q) reporting and publication - Comprehensive list of tax and other revenues: Monthly (M) reporting and publication - Disposal of non-financial assets and policy lending: Quarterly (Q) reporting and publication - Comprehensive list of domestic arrears of the government: Semi-annually (SA) reporting and publication - Stocks of public sector and public-guaranteed Debt as compiled by MINECOFIN and NBR: Quarterly (Q) reporting and publication - External Current Account Balance: Annual (A) reporting; Semi-annual (SA) publication - Exports and Imports of Goods and subcomponents: Monthly (M) reporting; Quarterly (Q) publication - Exports and Imports of Goods and Services and subcomponents: Annual (A) reporting and publication - Frequency key: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I). ### Debt sustainability and background findings (selected) - Public and publicly-guaranteed (PPG) external debt rose from 21.8 percent at end-2013 to 41.6 percent in 2018 (preliminary data for 2018). - PV of PPG external debt-to-GDP ratio was 29.0 in 2018. - Total nominal public debt stood at 53.1 percent of GDP in 2018. - External debt remains about two-thirds on concessional terms. - Yield on the outstanding Eurobond fell to around 5.8 percent in early-2019. - Rates on domestic T-bills and T-bonds range from 5.5 percent (28 days) to 12.9 percent (15 years). - Three large-scale projects supporting investment (Kigali Convention Center US$130 million; RwandAir expansion US$169 million debt outstanding at end-2018 plus US$86 million in aircraft leases at end-2018; Bugesera airport US$80 million) amounted to US$465 million at end-2018. - Joint Bank-Fund Debt Sustainability Analysis assessment: Overall risk of debt distress — Low; Risk of external debt distress — Low. - Principal macro risk: external shocks. Policy focus: choose highest return projects financed under most favorable terms; create a larger and more diversified export base and encourage more private investment. _Source: 1rwaea2019001 - 1. This memorandum defines the quantitative targets described in the program_ ### 3. The DSA assumes the adoption of a new fiscal framework, consisting of a debt ceiling ### 1rwaea2019001 - 3. The DSA assumes the adoption of a new fiscal framework, consisting of a debt ceiling ### Fiscal framework and operational rule - Fiscal anchor: maintain the East African Community 50 percent PV of debt to GDP ceiling. - Operational rule: introduce an operational deficit to GDP ceiling of 5.5 percent for the budgetary central government (BCG) over a 5-year rolling window. - Rationale: The BCG deficit ceiling is set well below that needed to keep the PV of debt below the ceiling to provide a buffer for unanticipated developments and debt contracted or guaranteed outside the BCG. - Purpose: Support spending for implementation of Rwanda’s National Transformation Strategy (NST) while providing operational guidance and maintaining debt at a sustainable level. - Borrowing assumption: Gross borrowing needs of the public sector increase over the DSA horizon, with the majority of additional financing assumed to be accessed on concessional terms and used for investment spending (capital and labor). ### Macroeconomic projections and growth outlook - Near-term growth: higher in the near term relative to the previous DSA due to higher investment spending and evidence of higher growth potential in agriculture and manufacturing. - Projected growth trajectory: - Almost 8.0 percent over the next five years given additional investment spending and large construction projects. - Tapers off to around 6.5 percent in 20 years, consistent with an economy where population growth could slow over time. - Role of sectors: Public sector expected to remain main driver in the near term; private sector expected to gradually play a more important role in growth and job creation over time. - Current account: expected to remain around 7.5 percent over the medium term and narrow modestly over the long term as exports in new lines expand (including horticulture, new minerals, and textiles). ### Key macroeconomic assumptions (highlights from Box 1) - Growth: maintain growth around 8 percent through 2022, declining to 7.2 percent by 2028, and to 6.5 percent by 2039. - Exports of goods and services: expected to grow 11 percent on average during 2019–39. - Current account: projected to remain in deficit and narrow to 7 percent by 2039. - Inflation: expected to remain at the authorities’ medium-term target of 5 percent over the medium- to long-run. - Reserves: reserve coverage expected to remain in the range of 4–5 months of prospective imports over 2020–22 and remain above 4.5 months of imports in the outer years. - Domestic revenue mobilization: gradual rise in domestic revenues from 19.3 percent in 2018 to 22.3 percent by 2039, reflecting tax measures already in the pipeline and additional measures under the new program. - Grants: tapering of external assistance, with grants declining from 4.9 percent of GDP in 2018 to 2.3 percent by 2029 and 1.1 percent by 2039. - Public spending and deficit: fiscal deficit assumed to average slightly below the 5.5 percent of GDP ceiling over the forecast horizon. - External borrowing: share of external financing relative to total financing declines from around 61 percent in 2019 to 55 percent by 2029 and remains around 55 percent thereafter; Eurobond assumed rolled over in 2023 and again in 2033 at an interest rate of 7 percent and a maturity of 10 years. - Domestic borrowing: new domestic borrowing contracted at an average nominal interest rate of 7.9 percent over the next five years, rising gradually to 8.3 percent in the long run as maturities lengthen. - Foreign Direct Investment (FDI): increases from 3 percent of GDP in 2018 to 4.5 percent by 2039. ### Financing mix, grant elements, and interest assumptions - Grant-equivalent external financing declines from 71 percent of total external financing in 2019 to 58 percent in 2028 to 39 percent by 2039. - Average effective real interest rates on domestic debt rise from 1.6 percent in 2009-18 to 3.4 percent in 2030–39. - Financing mix shifts over time: - 2019–2022: higher public borrowing needs met by increased disbursements of external multilateral and bilateral debt. - From 2025 onwards: gradual shift away from concessional financing to market-based financing and from external to domestic financing as local bond markets develop. ### Public investment, realism tests, and growth contribution - Recent public investment drive resulted in large accrual of public debt but managed to keep debt risks low. - Realism tests: primary fiscal deficit is 2.0 percentage points of GDP higher in 2022 compared to the previous DSA, reflecting higher investment spending for the NST and agricultural productivity. - Motor for growth: additional public investment has a direct impact on growth; Bugesera airport direct growth contribution unchanged from previous DSA (Bugesera effect calculated with fiscal multiplier of 0.3 applied to US$397.5 million over 2019–21). ### Debt carrying capacity and debt management - Debt carrying capacity assessment: composite index (CI) for Rwanda stands at 3.24, above the cut-off value of 3.05 for strong capacity countries. - CI drivers: high CPIA score and adequate reserve coverage. - Medium-term debt strategy (MTDS) for FY18/19–FY20/21: - Examines risks to debt sustainability, including rolling over the Eurobond in 2023. - Emphasizes contingency planning and alternative debt management strategies. - Notes mitigation from a large average time-to-maturity of 12 years for the entire portfolio, large share of concessional external borrowing, increasing average maturity of domestic debt, and relatively small size of the Eurobond. - States that non-concessional borrowing will be contracted only on an exceptional basis, cognizant of debt limits in the IMF-supported program and based on careful consideration of economic rate of return. ### External debt indicators and stress scenarios - Baseline projection: PV of PPG external debt peaks at 34.6 percent of GDP in 2039. - PVDY and PVDE performance: PVDY and PVDE remain well below thresholds of 55 and 240 percent, respectively, throughout the projection period and under standardized shocks. - Specific ratios: - PVDY rises gradually to 33.0 percent by 2029. - PVDE declines to 126.2 percent (by 2029). - Most severe shocks: - PVDE: export shock is most severe. - PVDY: combination shock is most severe. - Historical scenario: PVDY and PVDE increase sharply under historical scenario due to large current account deficit and negative GDP deflator calibrated on historical averages covering several large shocks (donor withdrawal, commodity prices, drought) and large external imbalances corrected over 2015–17 primarily through a large exchange rate adjustment. *Source: Excerpts from the DSA chapter titled "The DSA assumes the adoption of a new fiscal framework, consisting of a debt ceiling" (IMF staff analysis and projections).* ### 12. The standardized stress tests confirm that risks related to the debt service burden and ### 12. The standardized stress tests confirm that risks related to the debt service burden and market financing are low ### Standardized stress-test findings - The servicing spike in external debt service in 2023 (due to rolling over the Eurobond) causes breaches to both the debt service-to-exports (DSE) ratio and the debt service-to-revenue (DSR) ratio under the stress tests (and baseline). - The breaches are temporary in nature (lasting one year), and thus, according to the LIC DSF guidance note, are assumed not to affect the risk rating. - The standardized shock to gross market financing needs does not materially alter the debt indicators. - The new LIC-DSF lowered the threshold for the external debt service-to-exports (DSE) ratio from 25 to 21, which partly contributes to the one-period breach in this indicator. - The DSA focuses on gross debt flows. With expectations that the Eurobond will be rolled over, there is a spike down in the grant element of new borrowing in 2023, and no anticipated net effect on the debt stock. ### Customized alternate scenarios (additional stress testing) - Scenario 1: Government required to take on the full financial liability for Bugesera airport in 2023. - Scenario 2: All additional borrowing required by the proposed fiscal framework is contracted on commercial Eurobond terms, assuming a maturity of 10 years and an interest rate of 7 percent, compared to 5.8 percent currently. - Under both alternate scenarios: - External debt stock indicators remain well below their respective thresholds. - Debt service indicators show the same one period breach as before (one-year breach in 2023). ### Public debt: levels and resilience - Public debt remains significantly below the LIC DSA benchmark of 70 percent (in PV terms) for countries with strong debt carrying capacity. - Public debt dynamics: - PV of public debt-to-GDP ratio (selected years shown): ......41.1 42.5 42.9 42.7 41.6 41.2 41.0 42.2 47.2 - PV of public debt-to-revenue and grants ratio (selected years shown): ......170.2 184.3 193.7 197.6 189.0 185.4 185.0 185.2 186.5 188.0 189.7 191.6 - Debt service-to-revenue and grants ratio (selected years shown): 28.6 29.3 29.5 17.5 23.1 32.1 30.7 26.3 24.7 25.0 25.8 26.8 - Public debt remains sustainable even under the most extreme shock scenarios (real GDP growth and export growth shocks). - The PV of public debt-to-revenue ratio (PVDR) remains broadly stable despite a steady real decline in grants (which are included in the ratio). - The debt service-to-revenue (DSR) ratio increases steadily over the forecast horizon, due to a greater reliance on domestic debt. ### Key baseline external DSA indicators and macro assumptions (selected series) - External debt (nominal) 1/ (percent of GDP): 2016–2029 excerpt: 43.8 46.4 50.0 51.3 53.0 54.3 54.8 55.3 56.6 61.8 69.9 29.6 56.7 - of which: public and publicly guaranteed (PPG) (percent of GDP): 35.0 37.9 41.6 43.4 44.6 45.5 45.6 45.8 46.7 49.6 50.7 24.7 46.8 - Identified net debt-creating flows (percent of GDP): 12.7 1.8 3.0 3.0 2.7 1.8 2.3 1.8 1.5 0.2 -1.6 5.5 1.6 - PV of PPG external debt-to-GDP ratio (selected series): ......29.0 29.4 29.6 29.4 29.6 29.9 30.7 33.0 34.6 - PV of PPG external debt-to-exports ratio (selected series): ......135.2 138.4 138.0 132.9 133.6 132.1 133.4 126.2 106.1 - PPG debt service-to-exports ratio (selected series): 6.3 7.2 7.8 9.0 10.5 13.0 8.4 19.3 7.2 7.0 11.3 - PPG debt service-to-revenue ratio (selected series): 6.2 8.6 8.6 10.5 12.3 15.8 10.1 23.6 8.9 9.3 16.6 - Gross external financing need (Billion of U.S. dollars): 1.2 0.6 0.6 0.9 1.0 1.1 1.1 1.5 1.2 1.7 4.4 - Real GDP growth (in percent) (selected years): 6.0 6.1 8.6 7.8 8.1 8.2 8.0 7.5 7.5 7.2 6.5 7.1 7.6 - Growth of exports of G&S (US dollar terms, in percent) (selected series): 4.4 29.0 3.0 6.2 9.3 12.4 9.3 12.3 11.3 11.6 11.6 14.0 11.1 - Grant element of new public sector borrowing (in percent): .........46.4 44.4 42.7 40.4 24.4 36.7 38.7 28.7 28.9 ... 39.6 - Government revenues (excluding grants, in percent of GDP) (selected years): 18.4 18.1 19.3 18.3 18.2 18.2 18.4 18.6 18.8 19.7 22.3 16.1 18.8 - Aid flows (in Billion of US dollars): 0.7 0.8 1.1 0.9 0.8 0.9 0.8 0.8 0.9 1.3 2.1 - Grant-equivalent financing (in percent of GDP) (selected series): .........7.3 6.6 6.2 5.8 5.6 5.5 4.5 3.1 ... 5.6 - Nominal dollar GDP growth (selected series): 2.2 7.8 4.1 7.4 8.3 8.7 9.4 9.6 9.6 9.3 8.6 6.9 9.1 - Memorandum: PV of external debt (selected series): ......37.4 37.3 37.9 38.2 38.7 39.4 40.6 45.2 53.8 - Memorandum: Total external debt service-to-exports ratio (selected series): 12.7 13.2 15.4 16.6 17.5 20.1 15.9 26.9 15.0 15.4 21.9 ### Sensitivity analysis and stress-test results (summarized) - Sensitivity analysis (Table 3) shows baseline and alternative scenarios for PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, and debt service-to-revenue for 2019–2029 with numerous bound tests and tailored tests. - Tailored tests include combined contingent liabilities, natural disaster (n.a.), commodity price (n.a.), and market financing (selected entries showing "138.4" or "29.4" where applicable). - Bound tests include: - One-time 30 percent nominal depreciation results (example entries): PV of debt-to-GDP series shows increases such as 29.4 37.4 34.0 34.4 35.0 36.1 36.7 37.5 38.3 39.1 39.8 (for B6). - Combination of B1–B5 and other bound tests are reported with series in Table 3. ### Assessment and risks - Assessment: Rwanda’s debt is assessed to be sustainable with continued low risk of debt distress. - The risk of PPG external debt distress in Rwanda is low, and public debt remains well below its benchmark. - A temporary breach in the debt service ratios reflects refinancing of the Eurobond. - Given the relatively small size of the Eurobond and the low sovereign risk premium, rollover risks are limited. - A forthcoming Fiscal Transparency Evaluation and subsequent fiscal risk analysis will help evaluate whether there could be additional contingent liabilities not captured in this analysis. - Main risks to debt sustainability and the macroeconomic outlook: - External shocks to growth and/or exports. - Lower-than-expected concessional financing. - Worse-than-expected external financing conditions. - The debt sustainability analysis shows that these risks do not have a material impact on the overall assessment of Rwanda’s debt sustainability. ### Authorities’ views and policy posture - The government is in broad agreement with the DSF results on Rwanda’s debt portfolio. - The government intends to keep the low-risk status unchanged through a prudent borrowing strategy. - The government will maximize concessional loans to avoid pressure on its debt repayment profile, which shows a temporary breach in 2023 due to the repayment of the Eurobond. - The medium-term debt strategy will also be characterized by a domestic debt issuance plan which will continue to play an essential role in domestic capital development. *Source: IMF staff estimates and projections as presented in the Rwanda Debt Sustainability Analysis excerpt.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### RWANDA: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR POLICY COORDINATION INSTRUMENT—INFORMATIONAL ANNEX ### Market financing risk indicators and fiscal adjustment illustrations - Figure caption: "Fiscal Adjustment and Possible Growth Paths" - 3-Year Adjustment in Primary Balance (Percentage points of GDP): horizontal axis shows sizes from -4 .5 to 8.0 (labels in source: "-4 .5-4 .0-3 .5-3 .0-2 .5 -2 .0-1 .5-1 .0-0 .5 0. 00. 51. 01. 52. 02. 53. 03. 54. 04. 55. 05. 56. 06. 57. 07. 58. 0") - Percent of sample (vertical axis) with projected 3-yr adjustment highlighted - "3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile" - Baseline and multipliers plotted with exact labels: "Multiplier = 0.2", "Multiplier = 0.4", "Multiplier = 0.6", "Multiplier = 0.8" - Time series axis labels preserved as presented: "2013 2014 2015 2016 2017 2018 2019 2020" and "2015 2016 2017 2018 2019 2020 2021 2022 2023 2024" - Figure 5 title: "Rwanda: Market Financing Risk Indicators" - Notes: - "1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon." - "2/ EMBI spreads correspond to the latest available data." - "Sources: Country authorities; and staff estimates and projections." - Benchmarks and indicators shown in figure (labels retained): - "Baseline", "Market financing", "Threshold" - "Potential heightened liquidity needs" - "Low", "Breach of benchmark", "No GFN Benchmarks", "No EMBI" - Specific series referenced in figures (labels preserved): - "Debt service-to-revenue ratio" - "PV of debt-to-exports ratio" - "PV of debt-to GDP ratio" - "Debt service-to-exports ratio" - Axis and value labels as in source for projection horizons: "2019 2021 2023 2025 2027 2029" (and similar series with those year labels) ### Public and publicly guaranteed external debt under customized scenarios - Figure 6 title: "Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Customized Scenarios" - Scenario definitions (verbatim): - "Bugesera shock assumes the government is required to take on the remaining financial liability for the Bugesera airport (total $397.5m) in 2024." - "NCB (Non-Concessionary Borrowing) shock constitutes a scenario in which all additional external borrowing due to the new fiscal anchor is financing on commercial Eurobond terms." - Plotted series (labels preserved): - "Bugesera shock", "NCB shock", "Baseline" - Same indicator panels as Figure 5: "Debt service-to-revenue ratio", "PV of debt-to-exports ratio", "PV of debt-to GDP ratio", "Debt service-to-exports ratio" - Time axis labels retained: "2019 2021 2023 2025 2027 2029" ### Fund relations, exchange rate, and safeguards - "Rwanda and the IMF: https://www.imf.org/en/Countries/RWA" (as listed in source) - "Rwanda’s Financial Position in the Fund: https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberKey1=820&date1key=2099-12-31" (as listed) - Exchange rate arrangement details (verbatim): - "The currency of Rwanda is the Rwandan franc." - "On December 1998, Rwanda accepted the obligations under Article VIII, Sections 2, 3, and 4 of the IMF and maintains a system free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions." - "As of April 30, 2019, the exchange rate against the US dollar was RWF 892." - "From end-July 2017 to end-April 2019, the exchange rate has depreciated 7.2 percent against the US dollar, appreciated 5.1 percent in NEER terms, and depreciated 13 percent in REER terms." - "Based on the 2018 Annual Report on Exchange Arrangements and Exchange Restrictions, the de facto exchange rate regime has been classified as a “crawl-like” arrangement while the de jure exchange rate regime is floating." - Safeguards Assessment (verbatim highlights): - "The most recent safeguards assessment of the Banque Nationale du Rwanda (BNR) was finalized in 2016." - "The 2016 update assessment found that the BNR had strengthened its safeguards framework and all safeguards recommendations have since been implemented." - "The BNR Act was amended in 2017 with enhanced provisions on personal autonomy of Board members." - "External audit arrangements have been strengthened and transparency of the IFRS financial statements improved." - "The composition of the Audit and Risk Committee was reinforced, and the internal audit and risk management functions enhanced." ### Data adequacy, statistical issues, and standards - Overall assessment: - "Data provision has some shortcomings; but is broadly adequate for surveillance (case B)." - National accounts and price statistics (verbatim points): - "Annual and quarterly GDP estimates in current and 2014 constant prices are compiled and disseminated by NISR, based on the 2008 System of National Accounts concepts." - "NISR has been disseminating quarterly GDP estimates from 2010 and released the latest estimates consistent with the 2014 base year revision in March 2017." - "Preparatory work has already begun to rebase to 2017 by March 2020." - "The latest Integrated Household Living Conditions Survey (EICV 5) data from October 2016 to October 2017 was released on December 2018." - "The absence of a comprehensive economy-wide business survey precludes a reliable benchmark of economic activities in the private sector." - "On the expenditure side, estimates of government consumption, gross capital formation, and trade in goods and services are compiled from data sources including government budget reports and balance of payment estimates, but private consumption and changes in inventories are estimated as the gap between the sum of these components and a total GDP estimate from the production approach." - "Recent East AFRITAC TA has helped to broaden national accounts outputs by developing experimental institutional sector accounts for production and the generation of income." - "Timelines of the Producer Price Index (PPI) needs improvement. The authorities also need to progress on the coverage and methodology of the production index." - Government finance statistics: - "Rwanda is transitioning to GFSM 2014 to meet EAC requirements." - "The authorities’ nearly complete efforts to automate IFMS to produce annual and high-frequency GFSM 2014-compliant data for all Budgetary Central Government (BCG), most Extra-Budgetary Units (EBUs), and all Local Governments (LGs) on a timely basis." - "However, efforts should continue to add remaining EBUs, Social Security Funds (SSFs), and development projects to IFMS, and to finalize bridging from a GFSM 1986 to a GMFS 2014 framework." - Monetary and financial statistics: - "The balance sheet of the BNR and detailed data on money market transactions are transmitted to AFR on a weekly basis with a lag of one week, while the monetary survey and the consolidated balance sheet of commercial banks are transmitted on a monthly basis with a lag of about five weeks." - "The BNR reports to STA monthly monetary data, using Standardized Report Forms for the central bank and Other Depository Corporations (ODCs), which are published in the International Financial Statistics." - "Rwanda reports data on several key series and indicators of the Financial Access Survey (FAS), including mobile money and the two indicators adopted by the UN to monitor Target 8.10.1 of the Sustainable Development Goals (SDGs)." - "The BNR reports quarterly Financial Soundness Indicators (FSIs) to STA for publication on the IMF’s FSI webpage, including all core indicators and 8 encouraged indicators for deposit takers. However, reporting is not timely, as the latest data refer to 2018Q2." - Balance of payments and external statistics: - "The BNR compiles annual balance of payments statistics based on the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) presentation." - "The Foreign Private Capital Survey (FPC) is used to collect flows, positions, and income data in an integrated survey instrument for both financial assets and liabilities." - "On remittances, data are available for formal transfers through banks and Money Transfer Operators (MTOs) but informal estimates are less reliable and are being cross-checked with the 2011 Integrated Living Costs Survey." - "The coverage of external aid remains a cause of concern. Data produced by the CEPEX does not include offshore payments, direct payments to contractors, and technical assistants, nor does it capture aid from important UN agencies and from certain countries." - "Databases on external public debt are maintained by both MINECOFIN and the NBR." - Data standards: - "Rwanda has subscribed to the GDDS since 2009 and e-GDDS on September 22, 2017. The authorities aim to subscribe to SDDS by 2021." - "The quality of the national accounts data in Rwanda is one of the highest in Sub-Saharan Africa with annual agricultural surveys now well integrated into the calculation of output." ### Tables and data-frequency inventory (selected items preserved) - Table title: "Table of Common Indicators Required for Surveillance, May 28, 2019" - Selected exact entries (date formatting and frequency preserved): - "Exchange rate 4/30/19 5/1/19 D,M D,M D,M" - "International Reserve Assets and Reserve Liabilities of the Monetary Authorities 4/30/19 5/3/19 D,M D,M M" - "Reserve/Base Money 4/30/19 5/3/19 D,M D,M M" - "Broad Money 3/31/19 5/9/19 M M M" - "Central Bank Balance Sheet 3/31/19 5/9/19 D D D" - "Consolidated Balance Sheet of the Banking System 3/31/19 5/9/19 M M M" - "Interest Rates 3/31/19 5/9/19 M M M" - "Consumer Price Index 4/30/19 5/10/19 M M M" - "Revenue, Expenditure, Balance and Composition of Financing—General Government 12/31/18 3/9/19 Q Q Q" - "Revenue, Expenditure, Balance and Composition of Financing—Central Government 12/31/18 3/9/19 Q Q Q" - "Stocks of Central Government and Central Government—Guaranteed Debt 12/31/18 3/12/19 Q Q Q" - "External Current Account Balance 12/31/18 3/11/19 A A A" - "Exports and Imports of Goods and Services 3/31/19 5/9/19 M M M" - "GDP/GNP March 19 (A) 3/15/19 (Q) March 19 03/15/19 Q,A Q,A Q,A" - "Gross External Debt 12/31/18 3/13/19 M M M" - "International Investment Position 12/31/17 5/9/18 A A A" ### Executive summary points, recent developments, outlook, and policy priorities - Statement from authorities (verbatim highlights): - "Our Rwandan authorities would like to express their gratitude to Staff, Management and the Executive Board for the Fund’s continued support to their policy and reform agenda." - "They value the close cooperation with the Fund and appreciate the constructive discussions held with staff in Kigali in the context of the 2019 Article IV Consultation and the negotiations for the Policy Coordination Instrument (PCI)." - "The PCI is intended to support progress towards the NST1 objectives, including by helping to preserve fiscal discipline, improve domestic revenue mobilization and maintain debt sustainability." - Recent developments and outlook (exact figures and phrases preserved): - "Real GDP growth accelerated to 8.6 percent in 2018, exceeding projections, mainly driven by activity in construction, manufacturing and trade and transport services." - "Inflation stood at 1.4 percent on average in 2018, well below the authorities’ medium-term target of 5 percent." - "It fell further to 0.2 percent y-o-y in April 2019." - "The National Bank of Rwanda (NBR) lowered its policy rate from 5.5 percent to 5.0 percent last May." - "The fiscal position in 2018, with an overall deficit of 4.7 percent of GDP, was broadly similar to the previous year and in line with expectations." - "The current account deficit of 7.9 percent of GDP was broadly unchanged from 2017." - "Gross international reserves improved slightly from 4.5 to 4.6 months of prospective imports." - "The medium-term outlook remains favorable. Growth is projected to stand around 8 percent over the medium-term while inflation is expected to be within the target band." - "The current account deficit would rise to 9.6 percent in 2019 and decline thereafter, reflecting frontloaded public investment spending, consistent with meeting NST1 targets." - "Its financing will continue to rely on private direct investment and bilateral and multilateral infrastructure project loans." - Policy and reform commitments (verbatim): - "The authorities will further enhance economic resilience and build up buffers to mitigate the effects of downside risks, notably lower-than-projected official development assistance (ODA), adverse commodity price shocks and difficult weather conditions—if they came to materialize." - "Building on the progress achieved thus far, the Rwandan authorities will pursue sound and supportive macroeconomic policies and implement key reforms for 2019 and the medium term." - "They have adopted new fiscal and monetary policy frameworks and put in place an ambitious reform agenda to strengthen public financial management (PFM), foster financial sector development, and buttress private sector development." - Fiscal policy targets and limits (exact phrasing and figures preserved): - "The authorities’ fiscal policy will be geared towards promoting higher and inclusive growth while ensuring fiscal and debt sustainability." - "They will strive to maintain the public debt-to-GDP ratio in present value below 50 percent over the medium term and to preserve the country’s low risk of debt distress." - "Fiscal policy beginning FY 2019/20 onwards will target an overall fiscal deficit of no more than 5.5 percent of GDP on a five-year rolling basis." - "This will create fiscal space to contribute to the financing of the NST1." - "The authorities fully understand the criticality of boosting domestic revenue to support their transformation agenda. They will make steps to raise domestic revenue on average by" (text in source cuts off at this point) *Prepared by The African Department (in consultation with other departments).* ### 0.2 percentage point of GDP annually over the medium term starting in FY 2020/21. In this ### 1rwaea2019001 - 0.2 percentage point of GDP annually over the medium term starting in FY 2020/21. In this ### Fiscal policy and tax measures - Authorities commit to refine their tax expenditure framework, including streamlining tax exemptions and improving tax compliance. - Measures to strengthen tax administration: - Leverage various digital technologies to reinforce risk-based audits. - Enhance VAT refunds processing. - Fiscal consolidation plan: - Implicit target referenced as "0.2 percentage point of GDP annually over the medium term starting in FY 2020/21." ### Public financial management (PFM) - Reforms being implemented to enhance fiscal transparency and public investment management. - Commitments to further reduce fiscal risks and improve transparency: - Move to the GFSM 2014 fiscal reporting framework. - Develop internal capacity to start conducting fiscal risk analyses with IMF technical assistance. ### Monetary and exchange rate policies - National Bank of Rwanda (NBR) has transitioned to a new interest rate-based monetary policy framework. - Framework is supplemented by new infrastructure and efforts to bolster liquidity management, enhance communication and deepen money and financial markets. - NBR will strive to keep inflation within the target band to prevent the entrenchment of low inflation expectations. - Measures introduced to develop interbank markets and to supplement NBR’s forecasting capacity and market expectation surveys. - Exchange rate policy: - Authorities will maintain a flexible exchange rate regime as the first line of defense against external shocks. - Authorities will continue supplying foreign exchange to the market to satisfy demand reflecting mostly the execution of infrastructure projects, while considering implications for financial sector and price stability. - Current level of gross international reserves is 4.5 months of prospective imports. ### Financial sector policies - Financial sector assessment: - Sector remains sound and stable, with adequate liquidity, profitability and capitalization. - Regulatory and supervisory frameworks are broadly aligned with international standards. - Updated standards on disclosure and regulatory reporting have been implemented. - Anti‑money laundering and countering the financing of terrorism (AML/CFT): - Authorities will endeavor to further strengthen the AML/CFT framework along the lines recommended by an IMF technical assistance mission. - Several offsite and onsite AML/CFT supervisory tools have been developed and will be strengthened based on a new law adopted in August 2018. - Authorities continue to collect data on institutions presenting money laundering/terrorist financing risks. ### Structural reforms and competitiveness - Authorities committed to advancing economic diversification and structural transformation to realize growth potential. - Objective: promote private sector-led, job-rich and inclusive growth central to the NTS1. - Priorities and measures: - Continue improving the business environment; noted achievements over the past decade. - World Bank’s 2019 Doing Business report ranks Rwanda 29th out of 190 countries globally and 2nd in Africa. - Step up efforts to reduce costs of financing, energy and transportation. - Strengthen competitiveness, increase efficiency in delivery of public and private services, advance human capital and gender equality, reform the labor market, and promote regional integration. - Leverage the Continental Free Trade Area (CFTA) to boost trade and spur broad-based growth. - Utilize participation in the G-20 Compact with Africa initiative and call on development partners to avail “blended finance”. ### Conclusion and financing instrument request - Authorities have achieved impressive results in strengthening macroeconomic stability and reforming the economy over the past decade. - Remaining challenges highlighted: - Further improving domestic revenue mobilization. - Creating fiscal space to meet economic transformation ambitions. - Authorities committed to continue implementing policies and reforms to boost long-term inclusive growth while sustaining macroeconomic stability. - Authorities are confident that a PCI would help reach these objectives, including as a signaling tool and by catalyzing partners’ support. - Authorities request the Executive Board support for a PCI. *Source: IMF content unit 1rwaea2019001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1rwaea2019001.pdf_